In Ryan LLC v. FTC, decided on August 20, the U.S. District Court for the Northern District of Texas set aside a rule promulgated by the Federal Trade Commission (FTC) that banned non-compete agreements, granting summary judgment in favor of the plaintiffs and against the FTC. In contrast to an earlier injunction that was limited to the State of Texas, this is a nationwide invalidation of the FTC’s rule. In the court’s own words, “Consequently, the Rule shall not be enforced or otherwise take effect on its effective date of September 4, 2024 or thereafter.”
The court began its analysis by examining the remit of the FTC, noting that it was created to protect consumers and promote competition by preventing companies from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce. Thus, “whether a particular practice amounts to an ‘unfair method of competition’ or an ‘unfair or deceptive act’ typically is decided through case-by-case administrative adjudication.” Historically, the states have regulated non-competes through case law and statutes.
On January 19, 2023, the FTC proposed a new rule to “‘prohibit employers from entering into non-compete clauses with workers starting on the rule’s compliance date’ and ‘require employers to rescind existing non-compete clauses no later than the rule’s compliance date.’” Only workers who qualified as “senior executives” and restrictions related to the sale of a business would be excepted from this ban.
Ryan LLC and others challenged the rule, arguing that the FTC lacked statutory authority; that the rule was the product of an unconstitutional exercise of power; and that the FTC’s acts, findings, and conclusions were arbitrary and capricious. After the court granted their request for a stay and preliminary injunction, they (and the FTC) moved for summary judgment.
Invoking Loper Bright Enterprises v. Raimondo and the Administrative Procedure Act (APA), the court agreed with the plaintiffs that “the FTC Act does not authorize the Commission to issue substantive unfair-competition rules” or to categorically prohibit “all worker non-compete agreements as ‘unfair methods of competition,’” and that “the Commission lacks statutory authority to retroactively invalidate millions of existing contracts.”
The court framed the issue as “whether the FTC’s ability to promulgate rules concerning unfair methods of competition include[s] the authority to create substantive rules regarding unfair methods of competition.” It concluded that, while the FTC has some authority to create rules, that authority does not extend to enacting a prohibition on non-compete agreements between employers and their employees. This conclusion was supported by a lack of any penalty provisions in the Act for rule violations. Nor did the FTC itself attempt to exercise substantive rulemaking power for the first forty-eight years of its existence. And in amendments adopted in 1975, “Congress vested the Commission with the power to promulgate substantive rules regarding only unfair or deceptive acts or practices, not unfair methods of competition.” In sum, the Court concluded that the text and structure of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, and thus that “the Commission exceeded its statutory authority in promulgating the Non-Compete Rule.”
The court also concluded that the rule was arbitrary and capricious because it was unreasonably overbroad without a reasonable explanation—imposing “a one-size-fits-all approach with no end date”—and thus failed “to establish ‘a rational connection between the facts found and the choice made.’” The court found that the FTC’s evidence did not support the ban, as it mainly compared different states’ approaches to enforcing non-competes, and no state has adopted a categorical ban such as the one the FTC proposed. Finally, the court noted that the FTC had utterly failed to explore any less draconian alternatives.
As to the decision to set aside rather than enjoin the rule, the court returned to the APA, which explicitly authorizes courts to “‘hold unlawful and set aside agency action, findings, and conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law; . . . contrary to constitutional right, power, privilege, or immunity; [or] in excess of statutory jurisdiction, authority, or limitations, or short of statutory right.’ The court invoked Loper Bright again: if the Supreme Court did anything this past term, it was to command renewed respect for the APA.
Here’s the moral of the story: Agencies do not have unlimited power to accomplish their policy preferences until Congress stops them; they have only the powers that Congress grants through a textual commitment of authority. The APA authorizes courts to set aside agency actions that they lack the statutory authority to perform or that are arbitrary and capricious. The non-compete rule was both, and so it had to go.
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