The Federal Trade Commission (FTC) filed a notice of appeal in the Fifth Circuit of the Northern District of Texas, challenging the court’s decision to set aside the agency’s rule banning most non-compete clauses in contracts between employers and employees.
The FTC adopted the rule on April 23 in a 3-2 vote. It would have prohibited employers from entering into non-compete clauses with workers and rescinded existing non-compete clauses. In making the rule, the FTC asserted non-compete clauses are “unfair methods of competition” under the FTC Act and the rule supersedes state laws that would permit non-compete agreements.
The rule initially was to take effect in early September.
Ryan LLC filed suit against the FTC on April 23, arguing the rule was unlawful because the FTC acted without statutory authority; the rule was the product of an unconstitutional exercise of power; and the FTC’s acts, findings, and conclusions were arbitrary and capricious.
On May 1, Ryan filed a motion for stay of effective date and preliminary injunction. On May 8, the U.S. Chamber of Commerce, Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce filed a motion to intervene, which the court granted on May 9.
The court in July granted Ryan’s motion for a preliminary injunction, concluding there was a likelihood the court would find the FTC exceeded its statutory authority and that the rule was arbitrary and capricious.
The parties filed cross-motions for summary judgment.
On Sept. 4, U.S. District Judge Ada Brown granted the plaintiffs’ motion for summary judgment and denied the FTC’s cross-motion for summary judgment. Brown concluded the FTC exceeded its authority in implementing the rule, and that rule was arbitrary and capricious.
“The court concludes the FTC has some authority to promulgate rules to preclude unfair methods of competition. Indeed, the act alludes to this power in Section 18,” Brown stated. “However, after reviewing the text, structure, and history of the act, the court concludes the FTC lacks the authority to create substantive rules through this method. Section 6(g) is indeed a ‘housekeeping statute,’ authorizing what the Administrative Procedure Act (APA) terms ‘rules of agency organization procedure or practice’ as opposed to ‘substantive rules.’”
Brown also agreed with the plaintiffs’ argument that the lack of a statutory penalty for violating rules promulgated under Section 6(g) demonstrates its lack of substantive rulemaking power.
Additionally, Brown found the rule is arbitrary and capricious “because it is unreasonably overbroad without a reasonable explanation. The rule 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.’”
Brown also found 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,” she stated. “Thus, the FTC’s promulgation of the rule is an unlawful agency action. The court grants summary judgment as to the plaintiff’s and plaintiff intervenors’ corresponding claims under the APA. The court denies the FTC’s motion for summary judgment. The court pretermits further discussion of all parties’ remaining arguments as unnecessary.”