A Texas district court has ruled that a challenge to the Federal Trade Commission’s (FTC’s) almost total ban of noncompete agreements will likely succeed, and as a result has issued a limited preliminary injunction for the plaintiffs only, blocking the rule’s September 4 effective date. The court rejected the plaintiff’s request that the injunction apply nationwide.
The court found that the FTC lacks the statutory authority required for the agency to promulgate the rule. The court said that the FTC’s arguments about the history and scope of the Federal Trade Commission Act do not support the agency’s claim to statutory authority.
In addition, the FTC rule “appears to be” arbitrary and capricious under the terms of the Administrative Procedure Act (APA),” the court continued, noting that it found no rational connection between the facts and the regulatory decision. The court cited two failures by the FTC: the lack of a detailed explanation of its finding of statutory authority, and evidence of consideration of less disruptive (than an almost complete ban of noncompete agreements) alternatives.
The preliminary injunction applies only to the plaintiffs—the US and Longview Chambers of Commerce, Business Roundtable, and Texas Association of Business—and not their members, just the associations themselves.
Prospects: The court’s reasoning in granting the preliminary injunction suggests that there is a good chance the court will strike down the rule on its merits. It is unclear whether the court will extend its ruling beyond its own jurisdiction to apply nationwide. But the court did say its intention is to issue its ruling on the merits of the case by the end of August, before the September 4 date on which the FTC rule is scheduled to take effect.
In addition, there is a case pending before a federal district court in Pennsylvania, which is scheduled for a ruling by July 23, 2024. That case, ATS Tree Services, LLC v. Federal Trade Commission could also strike down the rule, either broadly (nationwide) or narrowly (just within its own jurisdiction).
Both cases are, of course, subject to appeal—to the Fifth Circuit Court of Appeals in the case of the Texas case and to the Third Circuit Court of Appeals in the case of the Pennsylvania case. An appeal to the Supreme Court is also possible, especially if the Fifth and Third Circuits reach different results.
NAIFA Staff Contacts: Diane Boyle – Senior Vice President – Government Relations, at dboyle@naifa.org; or Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org; or Michael Hedge – Senior Director – Government Relations, at mhedge@naifa.org.