Yesterday, a court did block the FTC’s noncompete rule. But, here’s the thing…

Since my homeowner’s insurance may not cover multitasking blog-related accidents around a lit Fourth-of-July grill, I’m not taking any chances. So, let’s address yesterday’s decision by a Texas federal judge to block the Federal Trade Commission‘s blunderbuss Noncompete Rule, which imposes a comprehensive ban on new noncompetes with all workers, including senior executives.

Why did the Judge block the Rule?

When parties seek the type of equitable relief sought here, they must establish that they are likely to succeed on the merits, irreparable harm will result without the issuance of injunctive relief, and the balance of harms and public interest weigh in favor of granting injunctive relief.

Here, the court concluded that the plaintiffs in the lawsuit, a Texas business and various employer associations, successfully established all three.

On the merits, the court reasoned that the FTC has “some authority” to create “housekeeping rules” to preclude unfair methods of competition. However, Congress did not afford the FTC statutory authority to create substantive rules, like one that effectively bans most non-competes:

Agencies do not have unlimited power to accomplish their policy preferences until Congress stops them; they have only the powers that Congress grants through a textual commitment of authority…The Court concludes the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition [and] has exceeded its statutory authority in promulgating the Non-Compete Rule, and thus Plaintiffs are likely to succeed on the merits. (cleaned up).

Notwithstanding, the Court also blocked the Rule because it is “arbitrary and capricious.”  An agency rule is arbitrary and capricious if it “offered an explanation for its decision that runs counter to the evidence before the agency.” Here, the Court concluded that the Rule, which “imposes a one-size-fits-all approach with no end date” without sufficient consideration of reasonable alternatives, was “unreasonably overbroad without a reasonable explanation.”

Additionally, “the Commission’s lack of evidence as to why they chose to impose such a sweeping prohibition—that prohibits entering or enforcing virtually all non-competes—instead of targeting specific, harmful non-competes, renders the Rule arbitrary and capricious.”

The court blocked the rule because, otherwise, the plaintiff would endure nonrecoverable costs of complying with a putatively invalid regulation and, thus, endure irreparable harm. “Further, the Rule makes unenforceable long-standing contractual agreements that have been judicially recognized as lawful and beneficial to the public interest.”

An injunction for me, but not for thee.

Maybe you were hoping to read that the judge blocked the FTC’s Rule for everyone. She didn’t. Judge Brown passed on entering a nationwide injunction. Instead, she limited the relief to the plaintiffs themselves—not even the associated members of the plaintiff-employer organizations.

What’s next?

This is a “preliminary” injunction. The next milestone involves the court ruling on the merits of the case by August 30. Perhaps the judge will expand the scope of the relief she afforded. In the meantime, another case like this one is pending in the Eastern District of Pennsylvania, where the judge will rule on a similar injunction request this month.

The net-net is that the FTC Rule, which takes effect on September 4, 2024, still breathes.

But barely.