MIAMI BUSINESS LITIGATION: FTC CANNOT ENFORCE RULE AGAINST NON-COMPETE AGREEMENTS

Non-compete agreements have been a standard business practice for many years. Businesses use non-compete agreements to protect their interests like proprietary business information, trade secrets, customer, goodwill, staff, and others. However, on April 23, 2024, the Federal Trade Commission (FTC) upended this long-standing business practice by issuing a rule banning most non-compete agreements. See 16 C.F.R. § 910. The FTC’s new rule was recently challenged in Ryan LLC et. al v. FTC, and the court enjoined the FTC from enforcing its ban. Ryan LLC et. al. v. FTC, Case No. 3:24-CV-00986-E, 2024 WL 3297524 (N.D. Tex. July 3, 2024). Peter Mavrick is a Miami business litigation attorney, and represents clients in Fort Lauderdale, Boca Raton, and Palm Beach. The Mavrick Law Firm represents businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment litigation, and other legal disputes in federal and state courts and in arbitration.

The court prohibited the FTC from enforcing its non-compete ban because the FTC exceeded its statutory authority. See Am. Fin. Services Ass’n v. F.T.C., 767 F.2d 957 (D.C. Cir. 1985) (“The judiciary remains the final authority with respect to questions of statutory construction and must reject administrative agency actions which exceed the agency’s statutory mandate or frustrate congressional intent.”). The court based its decision on the plain meaning of the FTC Act, which only grants the FTC procedural rulemaking authority for rules regarding unfair methods of competition as opposed to substantive rulemaking authority. 15 U.S.C. § 46; see also W. Virginia v. Envtl. Prot. Agency, 597 U.S. 697 (2022) (“It is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.”). The applicable statute allows the FTC to “make rules and regulations for the purpose of carrying out the provisions of this subchapter.” 15 U.S.C. § 46. The Ryan LLC court interpreted this statute as a “housekeeping” statute because it lacks penalty provisions and was historically for procedural rulemaking. Ryan LLC, 2024 WL 3297524 (citing Chrysler Corp. v. Brown, 441 U.S. 281 (1979) (“It is indeed a “housekeeping statute,” authorizing what the APA terms “rules of agency organization procedure or practice” as opposed to “substantive rules.”)).

The court also issued a preliminary injunction because it was substantially likely the FTC’s non-compete ban was arbitrary and capricious. Ryan LLC, 2024 WL 3297524 (“[B]ecause the FTC is an administrative agency, the Commission’s actions are constrained by the APA’s arbitrary-and-capricious standard.”); see also Fed. Communications Comm’n v. Prometheus Radio Project, 592 U.S. 414 (2021) (“The APA’s arbitrary-and-capricious standard requires that agency action be reasonable and reasonably explained.”). The FTC lacked evidence demonstrating why it chose a sweeping ban against most non-competes instead of targeting specific non-competes, failed to consider the positive benefits of non-compete agreements, and insufficiently addressed rule alternatives. Ryan LLC, 2024 WL 3297524.

The impact of the Ryan LLC ruling is limited. The court declined to issue a national injunction and limited the injunction only to the plaintiff and plaintiff-intervenors in that case. Ryan LLC, 2024 WL 3297524. For now, the FTC rule is still in effect with respect to all other non-compete agreements. However, more challenges will probably come. Businesses should monitor the legal developments so they know whether, and to what extent, their non-compete agreements are enforceable. Only time will tell us whether the FTC’s non-compete ban will survive as this issue may eventually end up before the Supreme Court.

Peter Mavrick is a Miami business litigation lawyer, and represents clients in Fort Lauderdale, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.