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On August 20, 2024, the United States District Court for the Northern District of Texas (Dallas Division) rendered its opinion in Ryan LLC v. Federal Trade Commission, No. 3:24-CV-00986-E (N.D. Tx. Aug. 20, 2024).[1]  By way of background, non-compete “agreements are restrictive covenants that prohibit an employee from competing against the employer.”[2] According to the FTC, approximately 30 million workers in the United States are subject to a non-compete agreement.[3] Historically, states (including Florida) have “regulated non-competes through caselaw and statute.”[4] There is no federal law regarding the enforceability of non-compete agreements.[5] On January 19, 2023, after conducting a study of non-compete agreements, “the FTC proposed the Non-Compete Rule—which would ‘prohibit employers from entering into non-compete clauses with workers starting on the rule’s compliance date’ and ‘require employers to rescind existing non-compete clauses no later than the rule’s compliance date.’”[6] The FTC adopted the final version of the rule on April 23, 2024, with a scheduled effective date of September 4, 2024.[7]

Ryan LLC initiated the lawsuit on April 23 challenging the Non-Compete Rule.[8] Ryan asserted that “the FTC’s actions were unlawful because (i) the FTC acted without statutory authority; (ii) the Rule is the product of an unconstitutional exercise of power; and (iii) the FTC’s acts, findings, and conclusions were arbitrary and capricious.”[9] Ryan sought an order staying the effective date of the Non-Compete Rule and sought to enjoin the FTC from enforcing the rule.[10] On July 3, 2024, the court granted the motion and stayed the effective date.[11] The opinion at issue addressed the subsequent motions for summary judgment filed by the parties.[12]

In granting the plaintiffs’ motion for summary judgment and setting aside the FTC’s non-compete rule, the court first examined whether the FTC had the statutory authority to implement the rule.[13] The court carefully examined the pertinent statutory framework and determined that the FTC exceeded its statutory authority.[14]  The court noted that the pertinent statutory provision lacked a penalty provision, demonstrating that it “encompasses only housekeeping rules—not substantive rulemaking power.”[15]  In reviewing the historical context of the Federal Trade Commission Act of 1914 (“FTC Act”) and subsequent amendments, the court observed that “for the first forty-eight years of its existence, the [FTC] explicitly disclaimed substantive rulemaking authority.”[16] It was not until 1962 that the FTC relied upon a provision in the FTC Act to issue regulations related to trade.[17] Subsequently, the FTC issued several rules after the 1962 rule was upheld by the D.C. Circuit Court, but the agency did not promulgate a single substantive rule under the pertinent statutory provision between 1978 and the non-compete rule.[18] The court concluded its statutory analysis by stating, “the Court concludes the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, under [the pertinent statutory provision].”[19]

The court further determined that the non-compete rule was “arbitrary and capricious.”[20] As the Supreme Court has explained, “‘[t]he [Administrative Procedure Act’s] arbitrary-and-capricious standard requires that agency action be reasonable and reasonably explained.  . . . A court simply ensures that the agency has acted within a zone of reasonableness and, in particular, has reasonably considered the relevant issues and reasonably explained the decision.’”[21] Generally, a court will find an agency rule to be arbitrary and capricious if:

“[T]he agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.”[22]

The court determined that the non-compete rule was arbitrary and capricious “because it is unreasonably overbroad without a reasonable explanation.”[23] The court further held that “[t]he Rule imposes a one-size-fits-all approach with no end date, which fails to establish a ‘rational connection between the facts found and the choice made.’”[24] The court noted that in developing the rule, the FTC relied on a handful of studies and emphasized that no state has adopted a non-compete rule as broad as the FTC’s.[25] According to the court, “the Rule is based on inconsistent and flawed empirical evidence, fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting those agreements.”[26]

In further support of its opinion, the court also noted that the FTC did not “sufficiently address alternatives to issuing the Rule.”[27] The FTC maintained that it did not need to address alternatives because “‘case-by-case adjudication of the enforceability of non-competes has an in terrorem [i.e., warning] effect that would significantly undermine the Commission’s objective to address non-competes’ tendency to negatively affect competitive conditions in a final rule.’”[28] The court rejected the FTC’s justification and its conclusory dismissal of other alternatives.[29]

After concluding its analysis, the court reiterated that it was holding that the non-compete rule was not authorized under the pertinent statutory provisions and that the rule is arbitrary and capricious.[30] The court granted summary judgment in favor of the plaintiffs and set aside the rule, thus preventing it from taking effect on September 4.[31] As of this writing, the FTC has not announced if it will appeal the decision.

The laws regarding non-compete agreements vary by state. It is important to seek legal counsel when either drafting such agreements or trying to determine if such an agreement is valid.  If you have any questions or concerns regarding this topic, or any topic related to labor and employment law, please contact us.

[1] The opinion is available at https://www.uschamber.com/assets/documents/Order-Granting-SJ-Setting-Aside-Rule-Ryan-v.-FTC-N.D.-Tex.pdf (last visited Sept. 25, 2024).

[2] Ryan LLC v. Fed. Trade Comm’n, No. 3:24-CV-00986-E (N.D. Tx. Aug. 20, 2024), at *4.

[3] Id.

[4] Id., at *5.  See § 542.335, Fla. Stat. (2024), for Florida’s non-compete statute.

[5] Ryan LLC, at *5.

[6] Id.

[7] Id., at *2, 5.

[8] Id., at *7.

[9] Id., at *7-8.

[10] Id., at *8.

[11] Id.

[12] Id., at *8-9.

[13] Id., at *14.

[14] Id., at *17-22.

[15] Id., at *18.

[16] Id., at *19.

[17] Id.

[18] Id., at *20.

[19] Id., at *22.

[20] Id.

[21] Id., at *22-23 (quoting FCC v. Prometheus Radio Project, 592 U.S. 414, 423 (2021)).

[22] Id., at *23 (quoting Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)).

[23] Id., at *23-24.

[24] Id., at *24 (quoting State Farm Mut. Auto. Ins. Co., 464 U.S. at 43 (other citation omitted)).

[25] Id.

[26] Id.

[27] Id., at *25.

[28] Id.

[29] Id.

[30] Id., at *26.

[31] Id., at *26-27.

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