Less than two months after the Federal Trade Commission (“FTC”) published its final rule banning Non-Compete agreements[1] (the “Non-Compete Rule”), a federal district court in Dallas, Texas has entered a preliminary injunction enjoining the FTC’s enforcement of its Non-Compete Rule. Currently, the FTC’s Non-Compete Rule is scheduled to become effective on a nationwide basis on September 4, 2024.
In its July 3rd Memorandum Opinion and Order, the Dallas federal district court found, among other things, that plaintiff Ryan LLC and the other plaintiff intervenors challenging the Non-Compete Rule, had demonstrated likelihood of success on the merits of their claims.[2] In particular, Ryan LLC, a tax services and software provider and the other plaintiff intervenors argued that their claims have merit because (1) Congress did not grant authority to the FTC to implement the rule, (2) the Major Questions Doctrine confirms the lack of such authority, and (3) even if Congress had granted authority to the FTC to implement the rule, such grant would constitute an unconstitutional delegation of Congressional power.[3] Both Ryan LLC and the Chamber of Commerce argued that the FTC Non-Compete Rule would cause them irreparable harm.[4]
The FTC countered, arguing that Ryan LLC is unlikely to prevail on the merits of its claims because (1) the FTC properly determined that non-compete agreements are unfair methods of competition, (2) it has statutory authority to promulgate the rule, (3) the Major Questions Doctrine is not implicated, and (4) the FTC Non-Compete Rule is not arbitrary and capricious.[5]
The federal district court agreed with Ryan’s position and found that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under applicable federal law and that the FTC’s Non-Compete Rule is arbitrary and capricious.[6] Notably, the federal district court cited the U.S. Supreme Court’s recent decision overturning a long-standing decision known as Chevron, which required federal courts to defer to a federal agency’s interpretation of applicable laws.
The federal district court did not side with Ryan’s request for a nationwide injunction, declining to grant such sweeping relief. Rather, the federal district court’s Preliminary Injunction is limited to enjoining the FTC from implementing or enforcing the Noncompete Rule against Ryan and the other plaintiff intervenors: Chamber of Commerce of the United States of America; Business Roundtable; Texas Association of Business; and Longview Chamber of Commerce.[7]
The Dallas federal district court expects to enter a ruling on the merits of Ryan’s claims by August 30, 2024.
The enforceability of the FTC’s Rule banning Non-Competes remains a hot topic in both the legal and business communities. The lack of a nationwide ban on implementation of the FTC’s Rule certainly will generate more lawsuits by companies seeking to preserve their existing non-competes. Stay tuned for further developments as the FTC Rule works its way through the federal district and appellate courts.
You can read the July 3rd Memorandum Opinion and Order and the Preliminary Injunction issued by the Dallas federal district court in the Ryan LLC case below.
[1] The FTC’s rule banning non-competes is located at 89 FR 38342.
[2] Preliminary Injunction (Doc. 154), Ryan, LLC v. Federal Trade Commission, No. 3:24-cv-00986-E, currently pending in the United States District Court for the Northern District of Texas.
[3] See Ryan LLC’s Brief in Support of Motion for Stay of Effective Date and Preliminary Injunction (Doc. 24), at pp 12-23, Ryan, LLC v. Federal Trade Commission, No. 3:24-cv-00986-E, currently pending in the United States District Court for the Northern District of Texas; see also Plaintiff-Intervenors’ Reply Brief in Support of Motion for Stay of Effective Date and Preliminary Injunction (Doc. 147), at 6-10, Ryan, LLC v. Federal Trade Commission, No. 3:24-cv-00986-E, currently pending in the United States District Court for the Northern District of Texas.
[4] Id., at 11; Doc. 82, at pp 25-27.
[5] See Defendant’s Consolidated Brief in Response to Plaintiffs’ Motions for Stay of Effective Date and Preliminary Injunction (Doc. 82), at pp 14-38, Ryan, LLC v. Federal Trade Commission, No. 3:24-cv-00986-E, currently pending in the United States District Court for the Northern District of Texas.
[6] Memorandum Opinion and Order (Doc. 153), at pp 1, 23, Ryan, LLC v. Federal Trade Commission, No. 3:24-cv-00986-E, currently pending in the United States District Court for the Northern District of Texas.
[7] Preliminary Injunction (Doc. 154), Ryan, LLC v. Federal Trade Commission, No. 3:24-cv-00986-E, currently pending in the United States District Court for the Northern District of Texas.
