DALLAS – Just two weeks before a Federal Trade Commission ban on non-compete agreements is scheduled to go into effect, a federal judge in Texas ruled the FTC overstepped its power when it announced the ban.
On Aug. 20, U.S. District Court for the Northern District of Texas Judge Ada Brown found in Ryan LLC v. FTC that under the tenets of the Administrative Procedure Act, the FTC exceeded its statutory authority and lacked the power to create substantive rules when it moved to prohibit employers from enforcing non-compete agreements.
The Court further found that the ban was “arbitrary and capricious” because (1) the FTC supplied no evidence supporting the categorical ban of non-competes, as opposed to targeting specific harmful and overly broad non-competes; and (2) the FTC failed to sufficiently address alternatives to a complete ban on non-compete agreements.
Ryan LLC was joined by the U.S. Chamber of Commerce, Business Roundtable, the Texas Association of Business and the Longview Chamber of Commerce, which each acted as intervenor plaintiffs in the case.
The ban on the practice (albeit in very limited circumstances) which is scheduled to be enacted on Sept. 4, will affect about 30 million Americans.
It is expected that Brown’s ruling will be appealed by the FTC to the U.S. Court of Appeals for the Fifth Circuit.
The Texas federal court’s finding has not been the only one to find issues with the ban – in Properties of the Villages v. FTC, the U.S. District Court for the Middle District of Florida granted a preliminary injunction for the plaintiff-employer, delaying the ban from going into effect against it.
The Court in Florida further found the ban most likely violated the Major Questions Doctrine due to its “unprecedented nature and significant legal issues.”
However, not all judges have opted to reject the FTC’s ban on non-compete agreements.
In a ruling handed down last month, U.S. District Court for the Eastern District of Pennsylvania Judge Kelly B. Hodge found in ATS Tree Services, LLC v. FTC Et.Al that “ATS Tree Services failed to show a likelihood of success on claims the FTC lacks rulemaking authority, exceeded any authority it does have and was unconstitutionally delegated legislative power by Congress.”
As a result, Hodge denied the granting of an injunction to ATS Tree Services, affirming that the ban falls within the FTC’s authority and promotes fair competition.
“When taken in the context of the goal of the [FTC] Act and the FTC’s purpose, the Court finds it clear that the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition. Thus, the Court rejects ATS’s argument that it should read the word ‘procedural’ but not the word ‘substantive’ into the statutory text defining the FTC’s rulemaking authority. This argument is inherently inconsistent and therefore untenable,” Hodge said.
U.S. District Court for the Northern District of Texas case 3:24-cv-00986
From the Southeast Texas Record: Reach Courts Reporter Nicholas Malfitano at nick.malfitano@therecordinc.com