In April 23, 2024, the United States Federal Trade Commission (“FTC”) announced it was banning the enforcement of nearly all work restriction agreements in the USA. If the FTC gets its way, an employee who signs an agreement — specifically promising to avoid working for a competitor of his employer — can ignore the agreement.
The reasoning? The FTC argues that employers don’t need to bind employees via restrictive covenants, baring competition because, allegedly, trade secret law — including the Defense of Trade Secret Act (DTSA) — provides adequate protection to employers.
Of course, this is debatable.
But more fundamentally, the question becomes: can the FTC — within the executive branch of government — effectively “pass a new law” that bans non-compete clause enforcement?
Isn’t passing “new law” the job of Congress and Congress alone?
Checks and Balances – Three Branches of Government
The FTC’s actions can make one wonder: do we still have “separation of powers” in our federal government? In particular, is it still true that the three (3) branches of our federal government — the executive branch (the president and his/her administration), Congress, and the judiciary — exist as co-equals, and keep the others in check? (Click here to learn more about the separation of powers.)
And if so, isn’t it the job of Congress to pass laws, for the executive branch — including FTC — to enforce the laws passed by Congress? And, isn’t it the judiciary’s job to keep the other two branches in “check?” As such, shouldn’t a judge refuse to enforce the FTC’s new “law” in the above scenario?
The answer to all of the above questions is: yes.
Enter the Parties in Ryan LLC v. FTC
Ryan LLC, a Dallas, Texas based tax service firm, filed suit against the FTC, expressly challenging the FTC’s authority to ban non-compete agreements, nationally. Moreover, the United States Chamber of Commerce, a non-profit, joined int the suit. There, Plaintiffs sought an injunction to prevent the FTC ban from going into effect in the fall of 2024. Specifically, Plaintiffs sought bought both a preliminary (emergency) injunction — which is nearly impossible to get, requiring proof — with every little discovery taking place — that prevailing on the merits would be “likely.” Plaintiffs also sought a “permanent” injunction, which the judge can issue, but only after the parties exchange information through the discovery process.
The early result?
Judge Ada Brown, a Trump-appointed federal judge in Texas, ruled in favor of the Plaintiffs on their requested preliminary injunction. Click here for the opinion and order. This means two things. One, the court agreed the FTC lacks authority to make wholesale changes to noncompete law. Secondly, and perhaps most importantly, it also means the plaintiffs are likely to succeed on the merits of the case even without more evidence, before this judge at least.
Separation of Powers – Consequences For Non-Compete Law
With Ryan LLC v. FTC, we are reminded: a federal judge can strike down a law — by Congress or passed improperly by FTC. And, it can have national implications, meaning the law is dead, nationwide. Here, however, in Ryan LLC, it’s different. Judge Ada Brown’s above opinion is limited to the parties in that case, because to get a preliminary (or emergency) injunction, you need to also show the plaintiff will sustain “irreparable harm” if not granted. The same goes for the Chamber of Commerce, a non-profit, which was also a Plaintiff, it’s covered by the order, but not its individual members, because they were not parties to the suit. However, this is only the beginning. The ruling on the “permanent” injunction will have further reaching consequences. But even then, the FTC will remain free to appeal Judge Ada Brown’s decisions.
But this case serves as a stark reminder that the concept of “separation of powers” remains alive and well in our judicial system.
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