In response to the Federal Trade Commission’s promulgation of the Non-Compete Rule (16 C.F.R. § 910) on April 23, 2024, Ryan LLC initiated a lawsuit against the FTC on the same day in the United States District Court for the Northern District of Texas Dallas Division.

Ryan and the Plaintiff-Intervenors filed motions to stay and preliminary enjoin the FTC from enforcing the Rule. Because the Court concluded that there was a substantial likelihood that Plaintiffs would succeed on the merits – including the conclusions that (i) the FTC exceeded its statutory authority and (ii) the Rule is arbitrary and capricious – and that the Rule would cause irreparable harm, the Court preliminarily enjoined implementation and enforcement of the Rule as to the named Plaintiffs on July 3, 2024.

Both Plaintiffs and the FTC then moved for summary judgment. Ryan and Plaintiff-Intervenors’ Motions for Summary Judgment were granted on August 20, 2024. Additionally, for the reasons the Court granted Plaintiffs’ Motions for Summary Judgment, the Court denied the FTC’s Motion for Summary Judgment. The Non-Compete Rule, 16 C.F.R. § 910.1-.6, was set aside “and shall not be enforced or otherwise take effect on September 4, 2024, or thereafter” in the closely watched case of Ryan LLC v Federal Trade Commission filed in the United States District Court for the Northern District of Texas Dallas Division – Civil Action No. 3:24-CV-00986-E.

This is a dispute over the FTC’s rulemaking authority concerning the enforceability of employer/employee non-compete agreements. These agreements are restrictive covenants that prohibit an employee from competing against the employer. Ryan, LLC was the first party to challenge the lawfulness of the Non-Compete Rule. A group of trade associations led by the United States Chamber of Commerce intervened in the case to challenge the Rule as well.

Regarding the prevalence of non-compete agreements, the Parties’ joint appendix provides: [T]he Commission finds that non-competes are in widespread use throughout the economy and pervasive across industries and demographic groups, albeit with some differences in the magnitude of the prevalence based on industries and demographics. The Commission estimates that approximately one in five American workers – or approximately 30 million workers – is subject to a non-compete.

In 2018, the FTC began to study non-competes through public hearings and workshops; invitations for public comment; and a review of academic studies. Three years later, the FTC initiated several investigations into the use of non-competes to determine whether they constitute unfair methods of competition. On January 19, 2023, 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.” On April 23, 2024, the FTC adopted the final Non-Compete Rule.

Plaintiffs assert the Commission’s claimed statutory authority in promulgating the Rule – Section 6(g) of the FTC Act – does not authorize substantive rulemaking. The question to be answered is not what the Commission thinks it should do but what Congress has said it can do.

“The judiciary remains the final authority with respect to questions of statutory construction and must reject administrative agency actions which exceed the agency’s statutory mandate or frustrate congressional intent.”

The Court concluded that “the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, under Section 6(g).”

Also a court must “hold unlawful and set aside agency action, findings and conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A).

“The record does not support the Rule. In enacting the Rule, the Commission relied on a handful of studies that examined the economic effects of various state policies toward non-competes. The record shows no state has enacted a non-compete rule as broad as the FTC’s Rule.” Second, “the record shows the FTC failed to sufficiently address alternatives to issuing the Rule.”

“In sum, the Court concludes that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious. Thus, the FTC’s promulgation of the Rule is an unlawful agency action. See 5 U.S.C. § 706(2).”

The court’s summary judgment order applies nationwide. Attorneys representing Ryan LLC said that the FTC may appeal the ruling to the Fifth Circuit. The FTC has not yet indicated whether or when it may appeal.

Court Ends New FTC Rule Banning Employer Non-Compete Agreements