Texas court blocks FTC noncompete ban, and you can blame SCOTUS

Regulatory dominoes have begun to fall in the wake of the US Supreme Court's gutting of federal agency rulemaking authority, with the Federal Trade Commission's ban on noncompete agreements the first to be stayed using the SCOTUS decision as justification.

A Texas federal judge issued an order [PDF] this week barring the FTC from enforcing its noncompete ban against tax prep firm Ryan LLC, the US Chamber of Commerce, and several other Texas business associations that sued the FTC over the matter in April, shortly after the Commission approved it. The rule is set to go into enforcement in September.

Judge Ada Brown ruled that the FTC overstepped its rulemaking authority by banning noncompetes. While her decision is temporary, pending continued litigation, the preliminary injunction [PDF] is likely to become permanent. The plaintiffs "are substantially likely to prevail on the merits of their challenge," Brown said, namely that the FTC's ban on noncompete agreements exceeds the agency's authority, is unconstitutional, and "arbitrary and capricious." Brown concluded the plaintiffs had proven all three complaints. 

Noncompete agreements, for those lucky enough never to have been subjected to one, are clauses included in employment contracts that ban an individual from going to work at a competitor, usually for a specified period of time. Employees have classically hated noncompetes, which many see as making it harder for unhappy people to find jobs elsewhere.

Judge Brown, naturally, will also be the final deciding voice in the Texas case, which she intends to do by the end of August. It's not looking good for the FTC.

"The court concludes the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition," Brown said in her order, and the plaintiffs are thrilled.

"The FTC's blanket ban on noncompetes is an unlawful power grab that defies the agency's constitutional and statutory authority and sets a dangerous precedent where the government knows better than the markets," US Chamber of Commerce EVP and chief counsel Daryl Joseffer said of the decision. "This ruling is a big win in the Chamber's fight against government micromanagement of business decisions."

Ryan, whose website advertises itself to corporate clients as "liberating [them] from the burden of being overtaxed," expressed its gratitude toward the US Chamber of Commerce for backing its lawsuit, and it's here we get our first clue that this win was aided by the Supreme Court's recent gutting of federal regulatory authority. 

"Ryan will pursue a final decision on the merits that strikes down the FTC's unlawful ban," said John Smith, Ryan's chief legal officer and general counsel. "In the same spirit, the US Supreme Court in recent days has reasserted constitutional and statutory constraints to reverse overreach by the administrative state."

"Non-compete agreements predate the American Revolution, and our lawsuit seeks to preserve a robust freedom of contract for generations of enterprising Americans to come," Smith added. This vulture isn't a lawyer, but it seems one could argue that a noncompete agreement between a village blacksmith and his newly graduated apprentice are a bit different than those barring college-educated accountants from hopping between corporate jobs. We put that question to Ryan but didn't hear back by publication. Its office is closed for an extended July 4 holiday, we're told.

Regulators have lost their stripes

"We will keep fighting to free hardworking Americans from unlawful noncompetes, which reduce innovation, inhibit economic growth, trap workers, and undermine Americans' economic liberty," FTC spokesperson Douglas Farrar told us. "The FTC stands by our clear authority, supported by statute and precedent, to issue this rule."

Given recent Supreme Court elimination of the Chevron deference – which gave federal agencies the freedom to interpret ambiguous legislative terms for the purposes of enacting legislation, provided they were trying to apply laws passed by Congress – it's not clear the FTC's authority is still what it believes it is. 

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It's not speculation to conclude that the Texas noncompete stay is linked to that SCOTUS decision either. The Chevron deference challenge is mentioned right in Judge Brown's decision.

According to Brown's opinion, Ryan filed its suit under the basis that the FTC's noncompete ban violated the US Administrative Procedures Act (APA), which determines how agencies develop and issue regulations.

The SCOTUS majority in Loper Bright Enterprises v Raimondo, which scrapped Chevron, determined that "the [APA] requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority," and that "the deference that Chevron requires of courts reviewing agency action cannot be squared with the APA."

Based on that reasoning, Brown determined that the FTC has no authority to make substantive rules – just those that involve organization, practice, and procedure.

"Agencies are creatures of Congress," Brown determined. "The role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do."

Legal tech expert and lawyer Colin Levy told The Register that the FTC noncompete injunction is a herald of a new era of "protracted rulemaking processes" that will only be made worse by another recent SCOTUS decision that greatly expanded the challenge period for federal regulations.

The recent SCOTUS decisions "significantly complicate rule implementation, particularly for contentious issues like the non-compete clause ban," Levy said. "Concurrently, we may witness attempts to curb this expanded judicial power, though the form of such efforts remains uncertain."

The FTC, meanwhile, reminded us that the ban on noncompetes hasn't been entirely overturned, and only applies to Ryan, the US Chamber of Commerce, and the other co-plaintiffs on the suit. We're told the Commission is actively evaluating its next steps. Judge Brown has set a deadline of Tuesday, July 9, for the parties to file a status update in the case. ®