FTC Takes Next-Step Actions in Noncompete Rule Appeal Case

The U.S. Federal Trade Commission (FTC) has activated its appeals strategy in an attempt to overturn court decisions that prevented implementation of the agency’s ban on most worker noncompete agreements.

The FTC submitted a 75-page brief on Thursday, Jan. 2, in the U.S. Court of Appeals for the Fifth Circuit that outlines its reasoning to challenge the Aug. 20 decision by the U.S. District Court for the Northern District of Texas in the case Ryan LLC v. Federal Trade Commission. The filing also called into question the Aug. 14 ruling by the Eleventh Circuit in the related case Properties of the Villages, Inc. v. Federal Trade Commission. The U.S. Department of Justice is representing the FTC in both appeals.

In addition, on Dec. 31, the FTC filed a 21-page statement by chair Lina M. Khan, in conjunction with commissioners Rebecca Kelly Slaughter and Alvaro M. Bedoya, that affirms the legality behind the agency’s April 23 final rule on noncompetes.

Submittal of the Jan. 2 brief occurred just weeks before the inauguration of President-elect Donald Trump, who has vowed to substantively change the FTC’s leadership and focus. Trump has identified Andrew Ferguson, one of two Republicans on the current five-member commission, as his choice to replace Khan as chair. Ferguson and fellow Republican commission member Melissa Holyoak dissented when the agency first issued the noncompete rule.

Ferguson and Holyoak are a prime target in the Dec. 31 document by the three Democratic commissioners, with Khan as primary writer stating, “We appreciate their engagement on this matter and write to explain why we disagree with their arguments.”

The recent FTC legal moves are the next steps after initially appealing on Oct. 18 the decision by Judge Ada Brown in Ryan that barred the final rule’s nationwide implementation and determined:

The FTC does not have the statutory authority to engage in competition-related rulemaking, and
The noncompete rule is “arbitrary” and “capricious.”

Brief Points to Misinterpretations, Missteps

The FTC posited in its Jan. 2 appellate brief that Brown and the district court in Texas incorrectly determined the commission overstepped its legal authority in issuing a rule banning noncompete agreements. It also believes Brown misinterpreted the text of the Federal Trade Commission Act and “improperly disregarded” the evidence it put forth to support its rule.

In Ryan and in two related cases — Properties of the Villages and ATS Tree Services LLC v. FTC — the FTC pointed to Section 6 of the Act, which it said grants “additional powers to support the adjudicatory scheme” — in effect, enabling the agency to issue legislative rules (that have the force of law) “to prevent unfair methods of competition.”

In the Properties of the Villages case, the Eleventh Circuit determined the FTC lacked clear authorization from Congress to create and enact the rule, concluding such an action likely fell under the “major questions doctrine,” which requires agencies to “point to clear congressional authorization” when they issue regulations of “extraordinary … economic and political significance.” The Florida court found “the sweep and breadth” of the noncompete ban presented a “major question” that necessitated such clear, specific authorization.

The FTC estimates 30 million Americans — or 1 in 5 workers — are subject to noncompete agreements and related employment contracts and believes eliminating them would bolster opportunities, level the playing field for talent and increase wages. Opponents, including the U.S. Chamber of Commerce, the Business Roundtable and the Society for Human Resource Management, categorized the rule as government micromanagement of employers’ business decisions.

The agency also intimated in the appellate brief that Brown’s order in Ryan — applying the ruling nationally vs. to simply the case plaintiffs — was an overreach, stating, “Had the district court considered the relevant constitutional and equitable principles, it would have been a clear abuse of discretion to conclude that universal vacatur was justified.” It argued nothing in the case warranted relief beyond the specific parties that brought the challenge, including the plaintiff (a tax software and services firm) and the plaintiff-intervenors (the U.S. Chamber of Commerce, the Business Roundtable, the Texas Association of Business and the Longview Chamber of Commerce).

FTC States Its Case, Calls Out Fellow Commissioners

In the Dec. 31 statement document by Khan, Slaughter and Bedoya, these Democratic commissioners laid out five primary reasons why the agency’s rulemaking on noncompetes was valid and legal. According to the document:

The commission has the authority to promulgate the rule, based on the plain text of the FTC Act, case law and statutory history.
The legislative history confirms this reading.
This rule does not raise a “major question.”
This rule reflects a lawful delegation by Congress.
This rule complies with the Administrative Procedure Act.

Each section includes commentary that takes issue with the divergent interpretations of Ferguson and/or Holyoak.

“Free and fair competition is a key pillar of our free enterprise system,” Khan stated within the document’s conclusion. “Noncompetes undermine this basic premise, locking workers in place and depriving our economy of the full benefits that competition delivers. By freeing millions of Americans from noncompetes, this rule will help restore core economic liberties and ensure that a worker seeking a better opportunity, an entrepreneur with a good idea or a business looking to grow are no longer constrained by these clogs on competition.”

FTC Girds for a Prolonged, Uphill Battle

So, where does the appeal go from here? Law website JD Supra stated in late October that the Fifth Circuit could take “at least six months” before issuing a decision in the matter. That would put an outcome somewhere in April, at the earliest.

Most legal experts, though, believe the chances of the FTC successfully overturning the Ryan verdict and lifting the injunction on the noncompete ban are slim, basing their opinion on:

The U.S. Supreme Court’s June 28 ruling in two adjoined cases (Loper Bright Enterprises v. Raimondo and Relentless v. Department of Commerce) that voided the so-called Chevron doctrine, a decades-old standard that required courts to give substantial deference to agencies like the FTC.
The Fifth Circuit’s conservative bent and decision-reflective opposition in recent years to federal government regulatory power.

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