FTC: The Northern District of Texas Rules That the FTC Has No Authority to Issue a Ban on Non-Compete Clauses

Read online here: https://federalcourtreview.com/2024/08/21/ftc-the-northern-district-of-texas-rules-that-the-ftc-has-no-authority-to-issue-a-ban-on-non-compete-clauses/

I. Introduction and Background

In April 2024, the Federal Trade Commission (“FTC”) issued a final rule (hereinafter, “the Non-Compete Clause Rule”) that banned employers from implementing non-compete clauses in employment contracts.[1] In relevant part, the Non-Compete Clause Rule declares that “it is an unfair method of competition for a person . . . to enter into . . . enforce . . . [or] represent that [a] worker is subject to [. . .] a non-compete clause.”[2] This rule also extends to existing non-compete clauses, forcing employers to “provide clear and conspicuous notice to the worker . . . that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker.”[3] Business leaders quickly filed several lawsuits against the FTC, the most notable of which is a lawsuit by Ryan LLC, a tax firm, in the Northern District of Texas.[4]

II. Ryan LLC v. FTC

In its complaint, Ryan LLC alleged that: (1) “[n]o provision in the FTC Act authorizes the FTC to promulgate rules to outlaw unfair methods of competition”;[5] (2) assuming, arguendo, that Congress did grant the FTC authority to promulgate substantive rules outlawing unfair methods of competition, “that grant [of power] is an unconstitutional delegation of legislative power in violation of Article I of the Constitution”;[6] and (3) the FTC Act, as a whole, is unconstitutional under the Vesting Clause of Article II of the Constitution because the Act “restricts the President’s ability to remove Commissioners by granting them fixed terms and providing that they can be removed only for ‘inefficiency, neglect of duty, or malfeasance in office.’”[7]

On August 20, 2024, the Northern District of Texas granted a motion for summary judgment in favor of Ryan LLC, holding that the FTC “exceeded its statutory authority” when promulgating the Non-Compete Clause Rule.[8] Since the Court determined that the resolution of this issue was sufficient to resolve the matter, it declined to rule on the second and third arguments raised in Ryan LLC’s complaint.[9]

As the Court explained, “[t]he role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do.”[10] Thus, while the FTC asserts at Section 6(g)[11] and Section 18[12] of the FTC Act empower the agency to issue substantive rules regarding unfair methods of competition, the Court countered that the “plain reading” of Sections 6(g) and 18 only provide the FTC with “some authority to promulgate rules to preclude unfair methods of competition,” which does not include “authority to create substantive rules . . . .”[13] The Court distinguished between the FTC’s permissible statutory authority to “make rules dealing with unfair or deceptive practices,” from the FTC’s impermissible attempt to “make rules dealing with . . . unfair methods of competition.”[14] This meaning, the FTC Act constrains the FTC’s power, allowing only for the agency to promulgate “rules of agency organization procedure or practice as opposed to substantive rules.”[15] Since the Court classified the Non-Compete Clause Rule as a substantive rule which impermissibly regulates “unfair methods,” the Court concluded that the FTC exceeded its statutory authority and set aside the Non-Compete Clause Rule.[16]

III. Updates

As of August 21, 2024, no further activity has occurred in the Ryan LLC v. FTC matter in the Northern District of Texas. There are likewise no current updates on other cases pending against the FTC.

[1] Dave Michaels & Lindsay Ellis, FTC Bans Noncompete Agreements That Restrict Job Switching, Wall St. J. (Apr. 23, 2024, 5:07 PM), https://www.wsj.com/politics/policy/ftc-bans-noncompete-clauses-that-restrict-job-switching-984d2187; FTC Non-Compete Clause Rule, 16 C.F.R. §§ 910.1-.6 (2024).

[2] FTC Non-Compete Clause Rule, 16 C.F.R. § 910.2(a)(i)-(iii) (2024).

[3] Id. § 910.2(b).

[4] Dave Michaels, Business Groups Race to Block FTC’s Ban on Noncompete Agreements, Wall St. J. (Apr. 24, 2024, 4:57 PM), https://www.wsj.com/politics/policy/big-business-groups-sue-to-block-ftcs-ban-on-noncompete-agreements-1bc8bcbb.

[5] Complaint at 6 ¶ 20, 15 ¶ 52, Ryan LLC v. FTC, No. 3:24-cv-00986-E (N.D.T.X. Apr. 23, 2024).

[6] Id. at 17 ¶ 60.

[7] Id. at 19 ¶¶ 66, 68.

[8] Memorandum Opinion and Order at 1, 22, Ryan LLC v. FTC, No. 3:24-cv-00986-E (N.D.T.X. Apr. 23, 2024).

[9] Id. at 22 (“Having determined the FTC exceeded its statutory authority, the Court pretermits further discussion of statutory bases.”).

[10] Id.

[11] 15 U.S.C. § 46(g). Section 6 of the FTC Act gives the FTC authority “to make rules and regulations for the purpose of carrying out the provisions of this subchapter.” Id.

[12] Id. § 57a(a)(1)(A). Section 18 of the FTC Act gives the FTC authority to “prescribe . . . interpretive rules and general statements of policy with respect to unfair or deceptive acts or practices in or affecting commerce . . . .” Id.

[13] Memorandum Opinion and Order, supra note 8, at 16-17.

[14] Id. (emphasis in original).

[15] Id. at 17 (internal quotations omitted) (quoting Chrysler Corp. v. Brown, 441 U.S. 281, 310 (1979)).

[16] Id. at 17, 27.