Dive Brief:
- In a blow to the Biden administration’s antitrust agenda, Ada Brown of the federal district court in Dallas temporarily halted the Federal Trade Commission’s noncompete ban set to take effect September 4 and committed to ruling by the end of August on the merits of the plaintiffs’ request that the ban be permanently enjoined.
- The preliminary injunction applies only to the plaintiffs in the case, Dallas-based global tax services provider Ryan LLC, and a handful of business groups led by the U.S. Chamber of Commerce, which had filed a separate lawsuit blocking the FTC rule but were instructed to join the Ryan lawsuit in May.
- “This ruling is a big win in the chamber’s fight against government micromanagement of business decisions,” Daryl Joseffer, chief counsel at the Chamber, said in a statement.
Dive Insight:
Ryan and the business groups argued the FTC under Chair Lina Khan had exceeded its statutory authority in issuing the rule, which would ban noncompetes nationwide and require employers to notify employees currently subject to them that their noncompetes couldn’t be enforced. The ban would apply to senior executives as well, but only going forward. Their existing noncompetes could stay in force. Other types of agreements, like non-disclosures, could also be banned to the extent they’re found to be functioning as noncompetes.
In her order granting the temporary injunction, Brown said the plaintiffs were likely to succeed on the merits in their argument that the agency had acted outside the scope of its authority.
The agency was relying on its rulemaking authority under Section 6(g) of the FTC Act, but that provision only allows it to issue procedural rules to help it investigate and take action against an organization it thinks is engaging in an unfair act or practice; it doesn’t authorize the agency to issue a substantive rule like the noncompete ban.
“The Court concludes the structure and the location of Section 6(g) show that Congress did not explicitly give the Commission substantive rulemaking authority under Section 6(g),” Brown said.
The rule is also likely to be found to be arbitrary and capricious in violation of the Administrative Procedure Act, Brown said. The agency failed to do the kind of analysis needed to justify such a sweeping, consequential rule, and it never sufficiently addressed alternative ways to get at the problems it’s trying to solve with the rule.
“The FTC dismissed any possible alternatives, merely concluding that either the pro-competitive justifications outweighed the harms, or that employers had other avenues to protect their interests,” she said.
The plaintiffs also made a good case that the rule would cause them irreparable harm and that the balance of equities favors stopping the rule.
“Granting the preliminary injunction serves the public interest by maintaining the status quo and preventing the substantial economic impact of the Rule, while simultaneously inflicting no harm on the FTC,” Brown said.
The judge delayed until next week a meeting with the parties to work out filing deadlines with the goal of ruling on the merits by August 30, a few days before the rule’s effective date.
The FTC said in a statement it stands by its authority to issue the ban.
“We will keep fighting to free hardworking Americans from unlawful noncompetes, which reduce innovation, inhibit economic growth, trap workers, and undermine Americans’ economic liberty,” agency spokesperson Douglas Farrar said.