Remember this article from January 23, 2024? Do Non-Compete Agreements Really Reduce Workers' Wages, Stifle New Businesses and New Ideas, Exploit Workers and Hinder Economic Liberty? The FTC had put out a fact sheet to pave the way for its rule change anticipated a few months later in April. Then I posted on April 25, 2024, Non-Competes are Illegal Now?  Discussing the FTC rule change, by a slim 3-2 vote, banning non-compete agreements pursuant to Sections 5 and 6(g) to issue rules. 15 U.S.C. §§ 45-46. It was set to take effect in 180 days. However, now the soft peaceful “all is well” music playing has been interrupted by loud dissonance with a fearful small voice blurting out “they're back”. Quote from Poltergeist II.

In Ryan LLC v. Fed. Trade Comm'n, Civil Action 3:24-CV-00986-E (N.D. Tex. Aug. 20, 2024) the court found the still ineffective no non-compete rule unlawful and arbitrary. The Rule found at 16 C.F.R. § 910.1-.6, was “SET ASIDE” and would not “be enforced or otherwise take effect on September 4, 2024, or thereafter.”  Id. at 27.  The recently filed case was decided on cross-motions for summary judgment.

The FTC asserted that it had the power to make the rule under the “unfair methods of competition” provision found at 15 U.S.C. §§ 45-46 as noted above.  More particularly it argued that the Rule bars “an unfair method of competition-and therefore a violation of Section 5-for persons to enter or enforce non-compete agreements.” (Emphasis added) Id. at *7. The Plaintiffs argued that the Non-Compete Rule was beyond the FTC's statutory authority; is unconstitutional; and arbitrary and capricious. Specifically, Ryan and others siding with Ryan joining in the litigation, such as the U.S. Chamber of Commerce, asserted that the Non-Compete Rule violated the APA (Administrative Procedure Act).

The court opened its analysis citing Loper Bright Enters. v. Raimondo, 144 S.Ct. 2244, 2261 (2024) inclusive of its quote of United States v. Morton Salt Co., 338 U.S. 632, 644, 70 S.Ct. 357, 364, 94 L.Ed. 401 (1950). “In addition to prescribing procedures for agency action, the APA delineates the basic contours of judicial review of such action.” Loper Bright Enters., 144 S.Ct. at 2261. It was clear at that point where the court was going. Here the main points I took from this case:

1. The APA is a check on agency action giving the courts the power to review and decide all relevant questions of law including the meaning or applicability of the terms of an agency action." This review allows the court to determine if the agency action is arbitrary, capricious, an abuse of discretion, or contrary to the law, and if so set aside that action. 5 U.S.C. § 706

2. The court's review led it to conclude, “the FTC lacks the authority to create substantive rules through this method.” (Emphasis added) Section 6(g) is “indeed a ‘housekeeping statute,' authorizing what the APA terms ‘rules of agency organization procedure or practice' as opposed to ‘substantive rules.'” Chrysler Corp. v. Brown, 441 U.S. 281, 310, 99 S.Ct. 1705, 1722, 60 L.Ed.2d 208 (1979). Here the rule was seen as substantive rule making rather than just procedural.

3. The court agreed with the plaintiff that the lack of a statutory penalty demonstrated a lack of substantial rulemaking power.

4. The court noted that when it viewed the statute as a whole, the location of the provision relied on in the statute was not in primary independent place. Thus, there was no explicit Congressional authority. Section 6(g) was the 7^th of 12 items that “are almost entirely investigative powers”. Id. at 18-19.

5. The court also noted that the Magnuson Moss act required the FTC “to comply with certain procedural requirements before issuing substantive rules on unfair or deceptive acts or practices.” Id at 21. Further that requirement pertained to substantive rules regarding unfair or deceptive acts or practices and not unfair methods of competition. (Emphasis added again).

6. Last of all the court criticized the commission for relying on a handful of studies and further noted that no state had a non-compete rule as broad as the FTC's rule. The lack of a significant body of evidence reflecting a compelling need for the rule, rendered the rule “arbitrary and capricious”. Id. at *24.

And just like that, “They're back”.