Judge Orders Partial Suspension of FTC’s Non-Compete Order

Brief description of the dive:

• In response to the Biden administration’s antitrust agenda, Ada Brown of the federal district court in Dallas temporarily stayed the Federal Trade Commission’s ban on competition that was set to go into effect on September 4 and pledged to rule by the end of August on the merits of the plaintiffs’ motion to permanently lift the ban.
• The temporary injunction applies only to the plaintiffs in the case, Dallas-based global tax services provider Ryan LLC and several business groups led by the U.S. Chamber of Commerce, which filed a separate lawsuit blocking the FTC’s rule but were ordered to join Ryan’s lawsuit in May.
• “This ruling is a major victory for the Chamber in the fight against government micromanagement of business decisions,” Daryl Joseffer, general counsel of the Chamber, said in a statement.

Diving Insight:

Ryan and the business groups argued that the FTC, under Lina Khan, exceeded its statutory authority by issuing a rule that would ban noncompetes nationwide and require employers to notify employees currently subject to the noncompetes that their noncompetes cannot be enforced. The ban would also apply to senior executives, but only in the future. Their existing noncompetes could remain in effect. Other types of agreements, such as nondisclosure agreements, could also be banned to the extent they are found to function as noncompetes.

In her order seeking the temporary injunction, Brown said the plaintiffs would likely succeed in arguing that the agency acted outside the scope of its authority.

The agency has relied on its regulatory authority under Section 6(g) of the FTC Act, but that provision only allows it to issue procedural regulations that assist it in investigating and taking action against an organization that it believes is engaging in unfair acts or practices; it does not authorize the agency to issue substantive regulations, such as non-competes.

“The court finds that the structure and location of section 6(g) indicate that Congress has not expressly granted the Commission the authority to make substantive rulemaking under section 6(g),” Brown said.

Brown said the rule would likely be found to be arbitrary and capricious, violating the Administrative Procedure Act. The agency failed to conduct the analysis needed to justify such a sweeping, consistent rule and never adequately addressed alternative ways to address the problems it is trying to address.

“The FTC has rejected all possible alternatives, finding only that either the pro-competitive concerns outweigh the harm or employers have other ways to protect their interests,” she said.

The plaintiffs also made convincing arguments that the new regulation would cause them irreparable harm and that the overall balance of justice favoured its abolition.

“The issuance of a preliminary injunction serves the public interest by preserving the status quo and preventing the Rules from having a serious economic impact, while causing no harm to the FTC,” Brown said.

The judge adjourned until next week a meeting with the parties to set deadlines for filing motions, with the aim of issuing a ruling on the merits of the case by Aug. 30, days before the new rule comes into force.

The FTC said in a statement that it maintains its authority to issue the ban.

“We will continue to fight to free hard-working Americans from unlawful noncompetes that stifle innovation, stifle economic growth, lock out workers and undermine Americans’ economic freedom,” agency spokesman Douglas Farrar said.