Did Judge Brown Punt the Ball on the FTC Ban, or Did the Challengers Win? It May Be Too Soon To Tell.

On April 23, 2024, the Federal Trade Commission (FTC) voted to publish its final rule banning noncompete provisions in employment agreements. 

Within hours, Texas-based company Ryan LLC sued the FTC in Texas federal court for preliminary injunctive relief and to block the Rule; and the U.S. Chamber of Commerce later joined that suit. In the weeks and months that followed, dozens of interested parties filed briefs in the lawsuit—some favoring injunctions and some backing the FTC. 

On May 7, 2024, Judge Ada Brown, the presiding judge, confirmed that she would rule by July 3, 2024—and she did, just before the close of business.  

In sum, Judge Brown granted the plaintiffs’ preliminary injunction against the FTC ban—but only as to Ryan, LLC and the Chamber of Commerce of the United States of America, Business Roundtable, the Texas Association of Business, and the Longview Chamber of Commerce as employers themselves. The court noted that while this order is preliminary, the court would rule on the ultimate merits of the action on or before August 30, 2024.

Obtaining Preliminary Injunctive Relief

To obtain preliminary injunctive relief, the plaintiffs had to show that they were likely to succeed on the merits.

The court agreed with the plaintiffs’ argument that the FTC’s statutory authority for promulgating the Rule— Section 6(g) of the FTC Act—did not authorize substantive rulemaking, which is what the FTC ban purported to do. The court reasoned that a plain reading of the FTC Act did not grant the FTC the authority to issue substantive rules regarding unfair methods of competition. And, a different section limits the FTC’s ability to make rules dealing with unfair or deceptive practices—not unfair methods of competition.  

Thus, the court concluded that while the FTC had some authority to promulgate rules to preclude unfair methods of competition, but not enough—it lacked the authority to create substantive rules through this method. So, plaintiff was likely to prevail on the merits.

Moreover, because the FTC is an administrative agency, the Administrative Procedure Act’s “arbitrary and capricious” standard limits the FTC ban. The court deemed the ban to be “unreasonably overbroad without a reasonable explanation. It 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.’” 

Because the FTC could not demonstrate why they needed such a broad prohibition on noncompetes, rather than targeting specific ones, the Rule was arbitrary and capricious.

Turning to the irreparable harm element to determine if injunctive relief is warranted, the Court concluded that compliance with the Rule would result in financial injury – because the rule is invalid.

The third and fourth elements required for preliminary injunctive relief combine (because the Federal Government is the opposing party) the balance of harms and whether the requested injunction will serve the public interest.

Like many courts, Judge Brown determined that she should maintain the status quo and prevent the substantial economic impact of the Rule, while simultaneously inflicting no harm on the FTC. 

Photo by Campaign Creators on Unsplash

The Scope of the Ruling

That said, Judge Brown limited the scope of the injunction. 

First, she refused to consider the facts before her as an “appropriate circumstance” that would merit nationwide relief. This is especially so when the parties agreed that 46 states have varied case law and statutory schemes to address non-competes! 

Second, Judge Brown determined that recent precedent supported limiting injunctive relief to only the “plaintiffs” before the Court and not “universal” or “nationwide” injunctive relief. She reasoned that Plaintiffs offered no briefs detailing how or why nationwide injunctive relief would be necessary for these plaintiffs at this preliminary stage. 

To the extent that the U.S. Chamber of Commerce appeared to argue it had “associational standing” on behalf of its members, it failed to brief that argument. 

The court granted preliminary injunctive relief to a very few entities. The injunction does not even extend to the member company of the U.S. Chamber and other associations that intervened in the case. It only protects (1) Ryan, LLC and (2) Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce as employers themselves.

Meanwhile, ATS Tree Services, LLC v. FTC is currently pending in the Eastern District of Pennsylvania.  A third lawsuit, filed by the United States Chamber of Commerce and other organizations in the Eastern District of Texas, was stayed in favor of the Ryan action.

Unless the parties amend their pleadings, it seems that Judge Brown’s final merits ruling by August 30, 2024 will block the rule only in the Northern District of Texas.