Written by: Bianca Lindau

In a recent article, we explored the final rule issued by the Federal Trade Commission (“FTC” or “Commission”) banning non-competes throughout the United States (the “Rule”), its effect on existing non-competes, and alternative means of protection available to employers and business owners. The US District Court for the Northern District of Texas, with its July 3, 2024 decision in Ryan LLC v. Federal Trade Commission, issued a preliminary injunction postponing the effective date of the Rule with respect to the plaintiffs.[1] By contrast, on July 23, 2024, the District Court for the Eastern District of Pennsylvania denied a request for a preliminary injunction to stay the Rule.[2]

In Texas, the plaintiffs alleged that the Rule is unlawful and unenforceable under the Administrative Procedures Act (“APA”) and the Declaratory Judgment Act. The court granted the requested preliminary injunction. It held that the plaintiffs are likely to succeed on the merits, failing to issue injunctive relief would result in irreparable harm, and the balance of harms and public interest weigh in favor of granting injunctive relief.

Of particular interest is the court’s analysis regarding the likelihood of success on the merits of the plaintiffs’ claim that the Rule violated the APA. The APA requires courts to find that, among other things, agency actions are unlawful if they are either: (a) arbitrary, capricious, an abuse of discretion, or not in accordance with the law; (b) contrary to constitutional right, power, privilege, or immunity; or (c) in excess of statutory jurisdiction, authority, or limitations, or short of statutory right.

The Texas court held that the FTC exceeded its statutory authority in issuing the Rule and that the Rule was an arbitrary and capricious exercise of power. Regarding the former, the court held that, in view of Congressional intent, the construction of the relevant statute (the FTC Act), and the position of the statutory provision the Commission relied on to issue the Rule within the FTC Act, the FTC was merely authorized to make rules of procedure or practice and not substantive rules. The Pennsylvania court, by contrast, found that the FTC has the authority under the FTC Act to promulgate rules to prevent unfair methods of competition based on the historical context of the act and the relevant statutory language. Regarding the latter, the Texas court held that the Rule must be deemed to be arbitrary and capricious as it found the FTC’s evidence insufficient to support the Rule’s expansive ban. In support of its findings, the court reasoned that the Rule offers only one approach and has no end date; the FTC provided no evidence to support issuing the Rule banning all non-competes instead of specific, harmful non-competes; the Rule fails to consider the benefits of non-compete agreements and disregards evidence in support of non-compete agreements; and the FTC failed to sufficiently consider alternatives to the Rule. The court thus held that the Rule is unreasonably overbroad and without reasonable explanation.

The court also held that compliance with the Rule would result in financial injury to the plaintiffs that could not be recovered and thus result in irreparable harm. It further found that a preliminary injunction serves the public interest and weighs in favor of the plaintiffs concerning the balance of harms, as it maintains the status quo, protects the public from the Rule’s economic impact, and inflicts no harm on the FTC. The court also noted that the Rule would nullify longstanding contracts that contain non-compete provisions that, to date, are deemed to be in the public interest. By contrast, the Pennsylvania court found the alleged harm to the plaintiff to be too speculative and noted that the plaintiff was unlikely to succeed on the merits.

It should be noted that the preliminary injunction is limited in scope to the named plaintiffs. Nationwide relief was not granted. The court intends to issue an order on the merits of the case on or before August 30, 2024, shortly before the Rule is supposed to take effect. Both the Texas and Pennsylvania cases will likely be appealed. For now, employers should assume that the Rule will be effective as of September 4, 2024, and take steps to prepare for compliance.

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[1] 2024 WL 3297524 (N.D. Tex. July 3, 2024).

[2] ATS Tree Servs. LLC v. FTC, No. 2:24-cv-01743 (E.D. Pa.).