A federal judge in Texas has issued a preliminary injunction against a Final Rule issued by the Federal Trade Commission that would ban virtually all noncompetition agreements between employers and employees.
The judge said that she intends to issue a final ruling in the case by August 30, only a few days before the effective date of the Final Rule, which is September 4. The preliminary injunction applies only to the parties to the lawsuit. Whether the judge’s final decision will apply to all employers remains to be seen.
Background
On April 23, the Federal Trade Commission voted 3-2 to issue a Final Rule banning virtually all noncompetition agreements between employers and employees. On the same day, Ryan LLC, a global software and services company, filed suit in the U.S. District Court for the Northern District of Texas seeking to have the effective date of the Rule stayed and an injunction issued to block the FTC from enforcing the Rule.
On May 9, the U.S. Chamber of Commerce, the Business Roundtable, the Texas Association of Business, and the Longview Chamber of Commerce were allowed to intervene in the suit on the side of Ryan LLC. Motions were filed and briefed, and on July 3, Judge Ada Brown, a Trump appointee, granted the motion to stay and issued a preliminary injunction. The court’s ruling is “preliminary” with a “rul[ing] on the ultimate merits of [the] action” expected by August 30.
Judge Brown’s opinion
In her opinion, Judge Brown addressed the four requirements for preliminary injunctive relief:
- That the plaintiffs have a substantial likelihood of success on the merits of their lawsuit.
- That the plaintiffs would suffer “irreparable harm” if an injunction were not granted.
- That the “balance of equities” weighs in favor of the plaintiffs.
- That the requested injunction serves the public interest.
Judge Brown found that the plaintiffs satisfied each of these requirements.
According to Judge Brown, Section 6(g) of the Federal Trade Commission Act did not give the FTC the power to engage in substantive rulemaking. Rather, Judge Brown held that the Administrative Procedure Act only conferred on the FTC the power to make “housekeeping” rules (that is, “rules of agency organization procedure or practice.”)
Judge Brown also found a substantial likelihood that the Rule was arbitrary and capricious, given its breadth and the absence of any evidence or reasoned basis by the FTC for prohibiting virtually all noncompetition agreements. She also pointed to the FTC’s failure to address less-restrictive alternatives to the nearly complete ban in the Rule.
As to the issue of irreparable harm, Judge Brown found that compliance with the Rule would result in financial injury to the plaintiffs. Among other things, the Rule requires that employers provide written notice to workers with existing noncompete clauses made unenforceable by the Rule. This would be a cost that could not be recovered, and under Fifth Circuit precedent, unrecoverable costs associated with complying with a putatively invalid requirement constitute irreparable harm. Judge Brown also said that the FTC failed to make a “developed responsive argument” on the issue of irreparable harm.
Because the party opposing the preliminary injunction—the FTC—is a government agency, Judge Brown found it appropriate to combine the third and fourth requirements of balancing the equities and the public interest. She held that denying the injunction would injure the plaintiffs and the public but granting the injunction would cause no harm to the FTC. She also held that allowing the Rule to take effect would invalidate longstanding agreed-upon contracts that have been judicially recognized as lawful and in the public interest.
It is important to note that Judge Brown declined to extend the injunctive relief beyond the parties involved in the Ryan litigation. In other words, she declined to issue a nationwide injunction, finding that doing so would be inappropriate because of “standing and redressability concerns” that had not been sufficiently briefed.
Implications for employers
What should employers do in light of the limited ruling in the Ryan case? Although it is impossible to predict, we believe that Judge Brown’s final decision, expected by the end of August, will invalidate the Rule as a matter of law. But even if that prediction is accurate, it is unclear whether her final decision will have nationwide effect or, again, be limited to the parties in the case.
In the meantime, employers should continue to monitor developments in this and other similar litigation, and evaluate what steps need to be taken. The Rule will take effect on September 4 if a court does not issue a decision that applies to all covered employers.