If September 4, 2024, was circled on your calendar as the start of the federal government’s anti-restrictive covenant push into private employment contracts, hopefully it was in pencil. Last week, Judge Ada E. Brown of the Northern District of Texas granted summary judgment in favor of plaintiff Ryan, LLC, and in so, doing struck down the Federal Trade Commission’s (FTC) Noncompete Rule, which sought to outlaw noncompetition agreements nationwide and was set to go into effect shortly after Labor Day.
Judge Brown’s ruling in Ryan, LLC v. FTC goes a significant step further than her July 3, 2024 ruling, where the former Texas Court of Appeals judge and 2019 appointee to the Northern District of Texas granted Ryan’s motion for preliminary injunction. That ruling, while significant, only enjoined enforcement of the Noncompete Rule as against Ryan, but had no effect on the other approximately 30,000,000 Americans (as estimated by the FTC) whose employment is subject to some form of restrictive covenant. In contrast, Judge Brown’s August 20, 2024 order – just two weeks from when the Noncompete Rule was set to go into effect – wholly vacates on a nationwide basis the FTC’s controversial rule, which it first proposed in January of 2023 and announced in April of this year.
“Congress in 1964 enacted the APA as a check upon administrators whose zeal might otherwise have carried them into excess not contemplated in legislation creating their offices,” reads the first line of the Court’s analysis – quoting the Supreme Court’s recent Loper decision – and quickly sets the stage for the analysis that followed. (Memorandum Opinion, 12) (citing Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, 2247 (2024)). With the primary legal issue being whether the FTC could promulgate substantive (and not just procedural) rules to prohibit “unfair methods of competition,” at which the Noncompete Rule is directed, the Court focused on the text of the FTC Act (15 U.S.C. § 41). Section 6 (15 U.S.C. § 46) of the Act authorizes the FTC “to make rules and regulations for the purpose of carrying out the Act,” which purposes include, as relevant here, Section 5’s language restricting persons from (a) using unfair methods of competition in or affecting commerce, and engaging in (b) unfair or deceptive acts or practices. 15 U.S.C. § 45.
Concluding Section 6 was not itself an affirmative grant of substantive rulemaking authority (both expressly and because it did not impose penalties for its violations, a typical characteristic found when Congress grants substantive rulemaking authority), the Court noted that in Section 18 (15 U.S.C. § 57a) of the Act, Congress expressly granted the FTC rulemaking authority over “unfair or deceptive acts,” but not the “methods of competition,” and therefore, extending this same rulemaking authority to the “methods of competition” would impermissibly render the language in Section 18 superfluous. (Memorandum Opinion, 16).
Citing Loper throughout, the Court concluded the Noncompete Rule “must be set aside,” precluding it from taking effect on September 4, 2024. Judge Brown thus prevented nationwide rollout of the Noncompete Rule, echoing a trend that the Northern District of Texas does not shy away from rulings that have widespread implications; just a few days prior and down the road in Fort Worth, Judge Pittman ruled in favor hospital-litigants represented by King and Spalding in Baylor All Saints Medical Center, et al. v. Becerra. Appointed contemporaneously with Judge Brown in 2019, Judge Pittman vacated a Medicare regulation that sought to cut Medicare DSH payments to those hospitals, a decision with significant impact not only on this group of clients, on but hospitals throughout the country.
It is uncertain whether the FTC will appeal the decision to the Fifth Circuit Court of Appeals. The constraints on administrative authority and a shifting political landscape in light of the Loper decision could give the agency pause as it considers its next steps.
Nonetheless, while the FTC considers the future of its Noncompete Rule, employers can breathe easy knowing that any restrictive covenants contained in agreements with their employees, otherwise governed by and recognized as valuable protections of legitimate business interests under applicable state law, will not vanish on September 4, 2024.
