October 2024
FTC’s Rule Restricting Non-Compete Clauses Suspended by Court
October 2024
Aaron Chen and Julian Lai
In our previous article "The US Federal Trade Commission Adopted Rule Restricting Non-Compete Clauses," we introduced the rule passed by the Federal Trade Commission (hereinafter, “FTC”) on April 23, 2024, and compared it with the proposed rule that issued by the FTC in January 2023. At that time, we mentioned that this rule had resulted in widespread attention across the United States, with organizations and companies such as the U.S. Chamber of Commerce and Ryan LLC immediately filing lawsuits against the FTC seeking preliminary injunction to prevent the rule from taking effect. The court (Northern District of Texas) made a preliminary decision on July 4, 2024, preventing the FTC rule from taking effect "between the parties to the case." Now, there has been a significant development in the case, with the court issuing a nationwide injunction through Summary Judgment, preventing the Rule from taking effect nationwide on its effective date of September 4, 2024[1].
1. Court Suspends the FTC’s Non-Compete Rule
The court found that regarding FTC's claimed statutory authority for issuing this rule - Section 6(g) of the Federal Trade Commission Act - based on the text, structure, and history, this section only grants FTC the power to make procedural rules, not substantive rules. The court pointed out that if Congress had intended to grant FTC such broad legislative power, it would not have placed it merely within a provision primarily concerning investigative powers. Furthermore, the court found that there were multiple deficiencies in FTC's rulemaking process - it relied on limited research and adopted a "one-size-fits-all" approach to broadly restrict non-compete clauses without adequately considering alternatives, such as restrictions for specific industries or circumstances, and failed to provide sufficient evidence supporting its choice of a comprehensive ban rather than targeted prohibitions. Therefore, the court ruled that the rule exceeded its statutory authority and was arbitrary and capricious, thus issuing a nationwide order setting aside the rule from taking effect on September 4, 2024.[2]
2. Conclusion
Given the significance and broad implications of this case, it may ultimately require Supreme Court review before reaching a final resolution. Meanwhile, future political changes will also influence FTC's policy direction. After the U.S. election results come out on November 5, it is possible that a new administration might choose to withdraw or substantially modify this rule. Therefore, the development of this case demands sustained focus.
[1] As part of the federal district court system, the court has authority under Section 706(2) of the Administrative Procedure Act (APA) to issue nationwide orders setting aside agency actions.
[2] See Ryan LLC v. Federal Trade Commission, Civil Action No. 3:24-CV-00986-E (N.D. Tex. Aug. 20, 2024), available at: https://www.uschamber.com/assets/documents/Order-Granting-SJ-Setting-Aside-Rule-Ryan-v.-FTC-N.D.-Tex.pdf (last visited: October 18, 2024)
The contents of all materials (Content) available on the website belong to and remain with Lee, Tsai & Partners. All rights are reserved by Lee, Tsai & Partners, and the Content may not be reproduced, downloaded, disseminated, published, or transferred in any form or by any means, except with the prior permission of Lee, Tsai & Partners.
The Content is for informational purposes only and is not offered as legal or professional advice on any particular issue or case. The Content may not reflect the most current legal and regulatory developments. Lee, Tsai & Partners and the editors do not guarantee the accuracy of the Content and expressly disclaim any and all liability to any person in respect of the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or any part of the Content. The contributing authors' opinions do not represent the position of Lee, Tsai & Partners. If the reader has any suggestions or questions, please do not hesitate to contact Lee, Tsai & Partners.
Aaron Chen and Julian Lai
In our previous article "The US Federal Trade Commission Adopted Rule Restricting Non-Compete Clauses," we introduced the rule passed by the Federal Trade Commission (hereinafter, “FTC”) on April 23, 2024, and compared it with the proposed rule that issued by the FTC in January 2023. At that time, we mentioned that this rule had resulted in widespread attention across the United States, with organizations and companies such as the U.S. Chamber of Commerce and Ryan LLC immediately filing lawsuits against the FTC seeking preliminary injunction to prevent the rule from taking effect. The court (Northern District of Texas) made a preliminary decision on July 4, 2024, preventing the FTC rule from taking effect "between the parties to the case." Now, there has been a significant development in the case, with the court issuing a nationwide injunction through Summary Judgment, preventing the Rule from taking effect nationwide on its effective date of September 4, 2024[1].
1. Court Suspends the FTC’s Non-Compete Rule
The court found that regarding FTC's claimed statutory authority for issuing this rule - Section 6(g) of the Federal Trade Commission Act - based on the text, structure, and history, this section only grants FTC the power to make procedural rules, not substantive rules. The court pointed out that if Congress had intended to grant FTC such broad legislative power, it would not have placed it merely within a provision primarily concerning investigative powers. Furthermore, the court found that there were multiple deficiencies in FTC's rulemaking process - it relied on limited research and adopted a "one-size-fits-all" approach to broadly restrict non-compete clauses without adequately considering alternatives, such as restrictions for specific industries or circumstances, and failed to provide sufficient evidence supporting its choice of a comprehensive ban rather than targeted prohibitions. Therefore, the court ruled that the rule exceeded its statutory authority and was arbitrary and capricious, thus issuing a nationwide order setting aside the rule from taking effect on September 4, 2024.[2]
2. Conclusion
Given the significance and broad implications of this case, it may ultimately require Supreme Court review before reaching a final resolution. Meanwhile, future political changes will also influence FTC's policy direction. After the U.S. election results come out on November 5, it is possible that a new administration might choose to withdraw or substantially modify this rule. Therefore, the development of this case demands sustained focus.
[1] As part of the federal district court system, the court has authority under Section 706(2) of the Administrative Procedure Act (APA) to issue nationwide orders setting aside agency actions.
[2] See Ryan LLC v. Federal Trade Commission, Civil Action No. 3:24-CV-00986-E (N.D. Tex. Aug. 20, 2024), available at: https://www.uschamber.com/assets/documents/Order-Granting-SJ-Setting-Aside-Rule-Ryan-v.-FTC-N.D.-Tex.pdf (last visited: October 18, 2024)
The contents of all materials (Content) available on the website belong to and remain with Lee, Tsai & Partners. All rights are reserved by Lee, Tsai & Partners, and the Content may not be reproduced, downloaded, disseminated, published, or transferred in any form or by any means, except with the prior permission of Lee, Tsai & Partners.
The Content is for informational purposes only and is not offered as legal or professional advice on any particular issue or case. The Content may not reflect the most current legal and regulatory developments. Lee, Tsai & Partners and the editors do not guarantee the accuracy of the Content and expressly disclaim any and all liability to any person in respect of the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or any part of the Content. The contributing authors' opinions do not represent the position of Lee, Tsai & Partners. If the reader has any suggestions or questions, please do not hesitate to contact Lee, Tsai & Partners.
