FTC Files Opening Brief in Noncompete Rule Appeal

On Jan. 2, 2025, the Federal Trade Commission (FTC or Commission) filed its opening brief with the Fifth Circuit Court of Appeals in Ryan LLC et.al. v. Federal Trade Commission, the case in which the plaintiffs are challenging the validity of the FTC’s rule (Rule) banning most noncompete agreements. (A summary of the arguments set forth in the brief is presented below.)

At the outset, however, it is important to note, as more fully explained below, that there is a substantial likelihood that with the new administration the FTC will ultimately withdraw the Rule and drop its appeal.

The FTC issued the Rule on April 23, 2024, scheduled to take effect on Sept. 4. As has been widely reported, on Aug. 20, Judge Ada E. Brown in the U.S. District Court for the Northern District of Texas granted summary judgment in favor of the plaintiffs and issued a nationwide injunction blocking the Rule from taking effect. That injunction remains in effect pending the appeal by the FTC to the Fifth Circuit Court of Appeals, which was filed on Oct. 18. 

Judge Brown’s decision was predicated on her concluding that the FTC lacked statutory authority to issue the Rule and that the Rule was arbitrary and capricious because it is “unreasonably overbroad without a reasonable explanation” and therefore constitutes unlawful agency action which must be set aside under the Administrative Procedure Act (APA).

In its brief, the FTC asserts that the Federal Trade Commission Act (Act) grants it authority to issue substantive rules (in addition to procedural/administrative rules) defining unfair methods of competition, including the Rule. According to the Commission, that conclusion flows directly from the Act’s plain text and is supported by decades of Supreme Court precedent construing similar statutory language to confer similar authority. The Commission further argues that its statutory authority to issue rules defining unfair methods of competition is also confirmed by statutory history and context.

Among other things, the Commission cites Section 6(g) of the Act which authorizes the Commission “to make rules and regulations for the purpose of carrying out the provisions of this Act,” along with the D.C. Circuit Court of Appeals decision in National Petroleum Refiners Ass’n v. FTC, and certain provisions in the Magnuson-Moss Act of 1975 and in 1980 amendments to the Act.

As to whether the Rule is arbitrary and capricious, the FTC asserts, among other things, that it reasonably concluded that noncompetes are restrictive and tend to negatively affect competitive conditions, that the Rule is supported by the record and that the District Court disregarded its analysis of alternatives.

Finally, it argues that the District Court improperly concluded that a nationwide injunction was compelled by the APA and it failed to consider constitutional and equitable principles that preclude issuance of a nationwide injunction.

As to the future of the Rule and the pending appeal, the Rule was adopted by a 3-2 vote with the three Democratic Commissioners voting in favor and the two Republican Commissioners (Andrew Ferguson and Melissa Holyoak) voting against it. With President-elect Trump taking office later this month and with his having recently named Ferguson to replace Commissioner Lina Khan as Commission Chair and his naming Mark Meador to replace Chairperson Khan, the composition of the Commission will change once the nominees are confirmed, and it is very likely that the Commission will end its pending appeals[1] and withdraw the Rule.

Parenthetically, the Rule and the issues it presents are discussed in our recently published white paper that focuses on the FCC v. Consumers’ Research case that is now set for consideration by the U.S. Supreme Court.  

[1] There is a second case on appeal in the Eleventh Circuit. In Properties of the Villages, Inc. v. FTC, No. 5:24-cv-000316-TJC-PRL, 2024 WL 3870380 (M.D. Fl. Aug. 15, 2024), a district court judge in the Middle District of Florida issued a preliminary injunction prohibiting the FTC from enforcing the Rule as to the named plaintiff, Properties of the Villages, Inc. On September 24, the FTC filed an appeal to the Eleventh Circuit.