On August 20, 2024, United States District Court Judge Ada E. Brown of the Northern District of Texas, Dallas Division, issued a ruling in the case of Ryan LLC v. FTC. In the ruling, Judge Brown stated, “The Court concludes that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious. Thus, the FTC’s promulgation of the Rule is an unlawful agency action.” Ryan LLC v. FTC, Civil Action No. 3:24-CV-00986-E, 2024 U.S. Dist. LEXIS 148488 (N.D. Tex. Aug. 20, 2024). In this article, we will go over the specifics of this decision and what it means for business owners.
The FTC Banned Non-Compete Clauses from Being Used by Employers
On April 23, 2024, the Federal Trade Commission issued a new rule that effectively banned employers from creating or enforcing non-compete clauses against their workers. The ban provides that “it is an unfair method of competition—and therefore a violation of Section 5 [of the FTC Act]—for employers to, inter alia, enter into non-compete clauses with workers on or after the final rule’s effective date.” The effective date of this ban was set for September 4, 2024, and it was to take effect immediately thereafter. To comply with the ban, all employers would have had to notify all of their workers who were or had been under a non-compete clause that they were no longer bound by those clauses. However, following the ruling on August 20, 2024, by the United States District Court for the Northern District of Texas, the ban will not proceed as planned by the FTC. See FTC Non-compete Clause Ban: What is it and What Does it Mean?
Ryan LLC Filed Suit Against the FTC’s Ban
In Ryan LLC v. FTC, Ryan LLC, a tax services company based in Dallas, Texas, filed a lawsuit against the Federal Trade Commission, asking the court to stay the effective date of the rule and to overturn the rule as unlawful. Ryan LLC argued that the Non-Compete Clause rule was unlawful because “(i) the FTC acted without statutory authority; (ii) the Rule is the product of an unconstitutional exercise of power; and (iii) the FTC’s acts, findings, and conclusions were arbitrary and capricious.” Essentially, Ryan argued that Congress had not given the FTC the power to create a rule such as the Non-Compete Clause ban, and because the FTC decided to create the rule, Ryan LLC contended that the rule was both arbitrary and capricious. Both Ryan LLC and the FTC filed Motions for Summary Judgment, as both sides believed their arguments were correct, which led to this hearing.
USDC Judge Ada E. Brown Ruled that the FTC Ban is Unlawful
In her ruling, United States District Court Judge Ada E. Brown ruled in favor of Ryan LLC, finding that the FTC’s non-compete clause rule was unlawful because the FTC did not have the statutory authority to create the rule, and the rule itself was both arbitrary and capricious. Judge Brown stated that although the Federal Trade Commission Act grants the FTC some powers to create rules related to “unfair or deceptive acts or practices,” those powers do “not affirmatively grant substantive rulemaking authority to the FTC in the ‘unfair methods of competition’ context.” Regarding why the rule was arbitrary and capricious, Judge Brown argued that the ban was based on “flawed empirical evidence that fails to consider the positive benefits of non-compete clauses,” and that the FTC “failed to sufficiently address alternatives to issuing the rule.” The FTC’s lack of statutory authority, combined with the rule being arbitrary and capricious, led Judge Brown to rule that the ban was an unlawful agency action, and that Ryan LLC’s Motion for Summary Judgment was granted.
What the USDC Ruling Means for Business Owners
Now that the Non-Compete Clause ban has been overturned by the United States District Court, small business owners who have non-compete clauses can keep their clauses in effect. Business owners can continue to use their existing non-compete clauses and can create new non-compete clauses if they choose to do so. However, this case is not over, as the Federal Trade Commission will most likely file an appeal of this ruling. Business owners should keep up with the case as it continues to move through the court system.
Finally, please consult with your business attorney on the issues, to make sure you are up to date with what is happening with Ryan LLC v. FTC and the FTC’s Non-Compete Clause ban in general. See How to Solve Issues Relating to the Waiving of Non-Compete Clauses Following Potential FTC Ban Reversal for more details.
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