FTC Non-Compete Rule Struck Down

AI Regulation Compliance

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‍TopicLake Insights

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Briefing Document: Ryan LLC, et al. v. FTC

This case concerns a legal challenge to the Federal Trade Commission's (FTC) Non-Compete Rule, which sought to prohibit most non-compete agreements between employers and workers. The plaintiffs, Ryan LLC and several intervenors, argued that the FTC exceeded its statutory authority in issuing the rule and that the rule was arbitrary and capricious. The U.S. District Court for the Northern District of Texas agreed with the plaintiffs and set aside the rule, preventing it from going into effect.

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Here's a breakdown of the key aspects of the case:

• Background: Non-compete agreements are clauses that restrict employees from working for competitors or starting competing businesses after their employment ends. These agreements are widespread and governed by a patchwork of state laws. The FTC, aiming to protect competition and worker mobility, proposed a rule in 2023 that would effectively ban most non-competes.
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• The FTC Act: The crux of the case revolved around the FTC's authority under the FTC Act. Section 5 of the Act empowers the FTC to prevent "unfair methods of competition." Section 6(g) grants the FTC the power to "make rules and regulations" to carry out the Act's provisions. The FTC argued that these sections combined gave it the authority to issue the Non-Compete Rule.

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The Court's Analysis: The court engaged in a thorough analysis of the FTC Act's text, structure, and legislative history. It found that:

No Explicit Authority for Substantive Rulemaking: Section 6(g) did not explicitly grant the FTC the power to create substantive rules on unfair competition; it primarily dealt with procedural and organizational matters.
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Section 18 Focused on Unfair or Deceptive Practices: While Section 18 allowed for substantive rulemaking regarding "unfair or deceptive acts or practices," it did not extend this power to "unfair methods of competition."
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Historical Context: The FTC's own historical interpretation and subsequent amendments to the Act further supported the court's conclusion. For instance, Congress enacted specific amendments to grant force of law rulemaking power on certain topics, implying that Section 6(g) did not already confer such broad authority.

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Arbitrary and Capricious: The court also found the Non-Compete Rule to be arbitrary and capricious for these reasons:

Overly Broad: The rule employed a one-size-fits-all approach, banning almost all non-competes without considering potentially legitimate uses or tailoring exceptions.
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Insufficient Evidence: The FTC relied on studies that examined different state policies, not on a categorical ban like the one it sought to implement.
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Failure to Consider Alternatives: The FTC did not adequately assess less disruptive alternatives or consider the potential reliance interests of parties bound by existing agreements.
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Remedy: The court ultimately decided to "set aside" the Non-Compete Rule, preventing its enforcement and declaring the FTC's action unlawful under the Administrative Procedure Act (APA). The court emphasized that its decision applied nationwide, not just to the specific plaintiffs in the case.

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Key Takeaways:

• The case underscores the principle that administrative agencies have only those powers explicitly granted to them by Congress. The court's decision reined in the FTC's attempt to assert broader rulemaking authority than Congress intended.
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• The case highlights the importance of judicial review in ensuring that agency actions are not arbitrary and capricious. The court scrutinized the FTC's reasoning and found it lacking in terms of evidence, consideration of alternatives, and reasoned decision-making.

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Court Ruling * Noncompete Rule Impact Assessment * Noncompete Rule AI Analysis

TopicLake Insights Publication. AI Assisted ✎

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TopicLake Insights

AI Assisted Publication ✎

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