*William Cellitto
In 1914, Congress enacted the Federal Trade Commission Act (the Act).[1] The Act established the Federal Trade Commission (the FTC)[2] and vested the FTC with the power to prevent the use of “unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce.”[3] On April 23, 2024, the FTC adopted a Non-Compete Rule (the Rule) that prohibits employers from entering into non-compete agreements with employees and requires them to rescind existing non-compete agreements by the Rule’s compliance date.[4]
Non-compete agreements (non-competes) are restrictive covenants that prohibit employees from competing against former employers.[5] According to the FTC, “approximately one in five American workers—or approximately 30 million workers—is subject to a non-compete.”[6] Historically, states regulate non-compete agreements, with 46 states limiting or banning them through statutory provisions and case law,[7] and courts across the nation generally disfavor non-compete covenants as restraints on trade.[8]
The Rule states that non-compete agreements constitute an unfair method of competition,[9] which the FTC has authorization to regulate under Section 5 of the Act.[10] The FTC further asserts it acted within its authority under Section 6(g) of the Act, permitting the Commission “to make rules and regulations for the purpose of carrying out the provisions of [the] Act.”[11]
The Rule does not unequivocally ban non-compete agreements.[12] Rather, it includes exceptions for senior executives, bona fide sales of businesses, circumstances where there is an existing cause of action “prior to the effective date[,]” and circumstances where a person has a good-faith belief that the rule is inapplicable.[13]
I. Loper Bright Enterprises V. Raimondo
After the FTC implemented the Rule banning non-compete agreements, the United States Supreme Court overturned precedent justifying the Rule in Loper Bright Enterprises v. Raimondo.[14] Loper Bright overturned Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc.,[15] which established a two-step approach for interpreting ambiguous statutes involving federal agencies and required courts to defer to the agency’s interpretation of such statutes.[16] Under Chevron,if a statute was “silent or ambiguous with respect to the specific issue” at hand, the reviewing court was required to defer to the administrative agency’s interpretation if it was “based on a permissible construction of the statute.”[17] Loper Bright invalidated the precedential deference by allowing courts to interpret ambiguous statutes independent of the agency’s interpretation.[18]
II. Ryan LLC v. FTC
Following the implementation of the Rule, the FTC’s expanded authority faced a challenge in the United States District Court for the Northern District of Texas in the case of Ryan LLC v. FTC.[19] The plaintiffs sought summary judgment, arguing the Rule exceeded the FTC’s authority and claiming it was “arbitrary and capricious” and “patently unconstitutional.”[20]
Section 706 of the Administrative Procedure Act allows courts to determine whether an agency’s actions comply with constitutional and statutory requirements.[21] Courts must “hold unlawful and set aside agency action, findings, and conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”[22]
In review of the Rule, the court found that the plaintiffs were entitled to summary judgment on all claims, stating “the FTC exceeded its statutory authority in implementing the Rule, and the Rule is arbitrary and capricious.”[23] Consequently, the court set aside the Rule under Section 706.[24] The court then cited Loper Bright to support its choice to invalidate the Rule entirely, rather than limiting relief to the named plaintiffs.[25]
Ryan LLC demonstrates the challenges the FTC faces in defending the Rule, especially since the FTC can no longer argue that the court should defer to its interpretation of Section 5 based on the ambiguity of the phrase “unfair methods of competition.”[26]
III. ATS Tree Servs., LLC v. FTC
In ATS Tree Services, the Pennsylvania Eastern District Court denied the plaintiff’s request for a preliminary injunction to prevent enforcement of the Rule.[27] In light of Loper Bright,[28] the court found the plaintiffs did not show irreparable harm or a likelihood of success on the merits;[29] however, the court acknowledged Loper Bright’s new precedent.[30] While the court denied the preliminary injunction, the court also recognized the FTC can no longer argue that ambiguous statutory language justifies deference to its interpretations and the upholding of its ban on non-compete agreements.[31]
IV. Conclusion
Ultimately, Ryan and ATS Tree Services highlight the legal challenges the FTC faces to enforce its ban on non-compete agreements in the post-Chevron era.[32] Without clear statutory support[33] or Chevron deference,[34] arguments presented in cases like Ryan can jeopardize the FTC’s Non-Compete Rule.[35] Even in cases where courts side with the FTC,[36]it is evident the FTC has lost a fundamental argument for justifying its expanded authority.[37]
The future of the Rule remains in jeopardy, as ongoing legal challenges risk depriving the FTC of its authority to ban non-compete agreements and leave both employers and employees uncertain about their rights and legal standing.[38]
*William Cellitto is a second-year day student at the University of Baltimore School of Law, where he is a Staff Editor for Volume 54 of Law Review, a Civil Procedure Law Scholar for Professor Dionne Koller, and a Distinguished Scholar of the Royal Graham Shannonhouse III Honor Society. In addition to being a law student, William works part-time at Silverman Thompson Slutkin White.
[1] See 15 U.S.C. § 41.
[2] See id.
[3] Id. § 45(a)(2).
[4] See generally 16 C.F.R. § 910 (2024).
[5] See Outsource Int’l, Inc. v. Barton & Barton Staffing Sols., 192 F.3d 662, 665 (7th Cir. 1999).
[6] See Ryan LLC v. FTC, No. 3:24-CV-00986-E, 2024 U.S. Dist. LEXIS 148488, at *8 (N.D. Tex. Aug. 20, 2024) (citation omitted).
[7] Id.
[8] See, e.g., Navarre Chevrolet, Inc. v. Begnaud, 205 So. 3d 973, 975 (La. Ct. App. 3d 2016); Eastman Kodak Co. v. Carmosino, 77 A.D.3d 1434, 1435 (N.Y. App. Div. 4th 2010); Access Organics, Inc. v. Hernandez, 175 P.3d 899, 904 (Mont. 2008); Bybee v. Isaac, 178 P.3d 616, 621 (Idaho 2008); Softchoice, Inc. v. Schmidt, 763 N.W.2d 660, 666 (Minn. Ct. App. 2009).
[9] See 16 C.F.R. § 910.4 (2024).
[10] See 15 U.S.C. § 45(a)(2).
[11] See id. § 45(g).
[12] See 16 C.F.R. § 910.3(a)–(c) (2024).
[13] See id.
[14] See Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, 2273 (2024).
[15] Id.
[16] See id. at 2254.
[17] Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 843 (1984), overruled by Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024).
[18] Loper Bright, 144 S. Ct. at 2273.
[19] See Ryan LLC v. FTC, No. 3:24-CV-00986-E, 2024 U.S. Dist. LEXIS 148488, at *12–13 (N.D. Tex. Aug. 20, 2024).
[20] Id. at *19–20.
[21] See 5 U.S.C. § 706.
[22] See id. § 706(2)(A).
[23] Ryan LLC, 2024 U.S. Dist. LEXIS 148488, at *22.
[24] Id. at *38.
[25] Id.
[26] See id. at *8–14.
[27] ATS Tree Servs., LLC v. FTC, No. 24-1743, 2024 U.S. Dist. LEXIS 129398, at *5, 56–57 (E.D. Pa. July 23, 2024).
[28] Id. at *36.
[29] Id. at *56.
[30] Id. at *36 n.16. The Supreme Court issued Loper Bright before the ATS Tree Services parties submitted their fully briefed motions to the district court. Id.
[31] See id. at *56–57.
[32] See Ryan LLC v. FTC, No. 3:24-CV-00986-E, 2024 U.S. Dist. LEXIS 148488 (N.D. Tex. Aug. 20, 2024).
[33] See 15 U.S.C. § 45(a)(2); 15 U.S.C. § 45(g).
[34] See Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, 2273 (2024).
[35] See discussion supra Section II.
[36] See discussion supra Section III.
[37] See supra note 31 and accompanying text; see also ATS Tree Servs., LLC v. FTC, No. 24-1743, 2024 U.S. Dist. LEXIS 129398, at *36 n.16 (E.D. Pa. July 23, 2024).
[38] See discussion supra Sections I–III.
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