Pencils Down on Those Notices, Employers: A Federal Judge Just Set Aside FTC Noncompete Rule

Earlier this summer, Winstead’s Labor & Employment team reported that Judge Ada Brown in the U.S. District Court for the Northern District of Texas issued a preliminary injunction as applied only to the plaintiffs in Ryan LLC V. Federal Trade Commission. At the time, the memorandum opinion Judge Brown issued alongside the injunction suggested that she leaned in favor of vacating the Federal Trade Commission’s (“FTC”) Noncompete Rule (“FTC Rule”) entirely. Judge Brown set a briefing schedule on Ryan LLC’s motion for summary judgment, which signaled a decision on the merits of Ryan LLC’s claims would be made by August 30, 2024. Yesterday, ten days prior to her stated timeline—and just four days after briefing closed—Judge Brown issued her memorandum opinion and order setting aside the FTC Rule and holding that the FTC Rule “shall not be enforced or otherwise take effect on its effective date of September 4, 2024, or thereafter.”

Judge Brown’s opinion made two key findings. First, she found that the FTC did not have the authority under the Federal Trade Commission Act (“FTC Act”) to promulgate the FTC Rule. Section 6, 15 U.S.C. § 46(g), gives the FTC the power “to make rules and regulations for the purpose of carrying out the provisions of [the FTC Act].” Specifically, Judge Brown reasoned that the text and the structure of Section 6(g) of the FTC Act do not grant the FTC substantive rulemaking authority with respect to unfair methods of competition. She noted the U.S. Supreme Court’s recent decision in Loper Bright Enters. v. Raimondo, which observed that “‘Congress in 1946 enacted the [Administrative Procedure Act (APA)] ‘as a check upon administrators whose zeal might otherwise have carried them to excesses not contemplated in legislation creating their offices.’” Second, utilizing the APA’s arbitrary-and-capricious standard, Judge Brown found that “the [FTC Rule] is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation.” That is, Judge Brown observed that “[t]he [FTC 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.’”

In its briefing, the FTC attempted to limit the Court’s ruling on the merits to the named plaintiffs in Ryan LLC’s lawsuit. However, Judge Brown reasoned that setting aside agency action under § 706 of the APA has “nationwide effect,” is “not party-restricted,” and “affects persons in all judicial districts equally.” As such, Judge Brown concluded that the FTC Rule will not be enforced or otherwise take effect—on a nationwide basis—on its effective date of September 4, 2024, or thereafter.

Employers that were gearing up to rapidly prepare and distribute the FTC Rule’s required notices to workers can take a collective breath. Judge Brown’s order, coupled with the conflicting ruling in the Pennsylvania district court, poises the FTC Rule for a possible circuit split that the U.S. Supreme Court may ultimately have to resolve. For now, employers should continue to monitor legal proceedings in the various pending cases related to the FTC Rule, but, per Judge Brown’s order, they are not required to provide the FTC Rule’s required notice by September 4.

Contacts:

Taylor E. White
twhite@winstead.com I 214.745.5175