On August 20, 2024, United States District Judge Ada Brown (Northern District of Texas) issued an order that the Federal Trade Commission’s controversial noncompete ban “shall not be enforced or otherwise take effect on September 4, 2024.” The Court agreed with the U.S. Chamber of Commerce and other challengers that the FTC exceeded its statutory authority in promulgating the ban and that the ban was arbitrary and capricious. Our Firm has previously written about the ban, the Texas parties’ challenge, Judge Brown’s preliminary injunction, and a Pennsylvania federal judge’s contrary decision that the FTC’s ban was enforceable.
Statutory Authority
The Court held that, “[b]y a plain reading,” Section 6(g) of the Federal Trade Commission Act, on which the FTC grounded its authority to ban noncompete agreements, “does not expressly grant the Commission authority to promulgate substantive rules regarding unfair methods of competition.” That Section, according to the Court, instead authorizes the FTC to promulgate “rules of agency organization procedure or practice.” The Court drew these conclusions after making various observations about Section 6(g): (1) it contains no sanctions for violating rules promulgated under that Section; (2) it begins by authorizing the FTC to “classify corporations” and then to issue rules—an odd sequence if the latter authorization contained broad substantive power; (3) it is “the seventh in a list of twelve almost entirely investigative powers”; and (4) it never references Section 5 of the FTC Act, which authorizes the FTC to “prevent . . . unfair methods of competition.”
According to the Court, the structure and history of the FTC Act supported its reading of Section 6(g). For one thing, the FTC itself disclaimed substantive rulemaking authority under Section 6(g) until 1962 and then refrained from promulgating any substantive rule under that Section from 1978 until it issued its noncompete ban. Congress also amended the Act in 1967 and 1968 to “allow[] force of law rulemaking related to specific subjects,” excluding unfair methods of competition. Those amendments would have been superfluous if the FTC already had substantive rulemaking power under Section 6(g).
Arbitrary and Capricious
The Court also held that the FTC’s noncompete ban was arbitrary and capricious. This was because “the Commission relied on a handful of studies” to enact a “sweeping prohibition” that “no state has enacted.” The FTC’s empirical evidence was “inconsistent and flawed,” and in relying on that evidence, the FTC “disregard[ed] the substantial body of evidence supporting [noncompete] agreements.” The FTC also failed to explain its rejection of narrower possible alternatives to its far-reaching rule.
Nationwide Ruling
Judge Brown intentionally and expressly limited the scope of a July preliminary injunction to the parties in the lawsuit. She held then that the challengers had not provided any compelling reason to grant their request for a nationwide injunction.
The result was different this time. Judge Brown held that, because of her conclusions about the noncompete ban’s illegality, the Administrative Procedure Act required her to “hold unlawful and set aside” the ban. Doing so necessarily “has ‘nationwide effect.’”
The FTC is reportedly considering an appeal to the United States Court of Appeals for the Fifth Circuit. But unless and until that Court says otherwise, on September 4, 2024, employers across the country will continue to operate under their respective states’ laws as before.
