FTC Noncompete Ban Could Be Blocked by Summer’s End

A Texas federal court has postponed the effective date of the Federal Trade Commission (FTC) rule banning noncompete agreements.

The judge said she would issue a decision about whether to permanently enjoin the rule on or before August 30.

Businesses had challenged the rule in a lawsuit, arguing that the rule exceeds the FTC’s authority under the Federal Trade Commission Act and seeking to have it permanently enjoined. In a highly anticipated ruling, the United States District Court for the Eastern District of Texas postponed the effective date of the rule, saying the plaintiffs were likely to succeed on the merits. But the preliminary injunction applies only to the named plaintiffs of the case, including the US Chamber of Commerce but not any associated members of the organization.

The court’s reasoning signals the FTC’s ban may be halted before it takes effect on September 4. It noted that a preliminary injunction is “an extraordinary remedy” and in some respects the criteria to issue a permanent injunction are “less demanding than [for] the preliminary injunction.”

To obtain a preliminary injunction, the party seeking it must establish that:

• They are substantially likely to succeed on the merits;
• There is a substantial threat irreparable harm will result without injunctive relief; and
• The balance of harms and public interest weigh in favor of granting injunctive relief.

The court found that the businesses met all three criteria.

Agencies do not have unlimited power to accomplish their policy preferences until Congress moves to stop them, the court said (citing the Supreme Court’s recent ruling in Loper Bright Enterprises v. Raimondo that eliminated Chevron deference to federal agencies); they have only the powers that Congress grants through the text of the statute. Furthermore, the court found that the text, structure and history of the FTC Act showed that the agency lacks substantive rulemaking authority with respect to unfair methods of competition.

The court also held that the rule was arbitrary and capricious, saying that the rule “imposes a one-size-fits-all approach with no end date” and was “unreasonably overbroad without a reasonable explanation.”

“The [FTC’s] lack of evidence as to why they chose to impose such a sweeping prohibition — that prohibits entering or enforcing virtually all non-competes — instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious,” the court wrote.

Finally, the court found that the rule would make unenforceable long-standing contracts and agreements that have been judicially recognized as lawful and beneficial to the public interest. This would result in businesses having to endure nonrecoverable costs to comply with a putatively invalid regulation and, thus, suffer irreparable harm.