Noncompete Ban’s First Legal Challenge Filed by Texas Tax Firm

A Texas tax services company beat the US Chamber of Commerce in filing the first legal challenge to the US Federal Trade Commission’s ban on noncompete agreements in employment contracts.

The FTC voted Tuesday to adopt a near-total ban on noncompete provisions that prohibit workers from switching jobs within an industry for a certain period of time. Such agreements affect roughly one in five American workers and are commonly used by businesses to protect trade secrets and other confidential information. Ryan LLC, a Dallas-based tax services provider, sued the FTC in the US District Court for the Northern District of Texas just hours after the commission’s vote, arguing the FTC lacks authority to issue rules related to unfair methods of competition.

“To promulgate such sweeping rules, an agency must have clear and unmistakable authority,” Ryan argues in its complaint. The powers granted to the FTC under the FTC Act “do not come close to that standard,” the complaint adds. Nullifying noncompetes would put Ryan’s confidential business information at risk, the company argues. The Chamber of Commerce filed a separate suit against the rule on Wednesday.

See also: Chamber of Commerce Sues to Block FTC’s Non-Compete Ban

Ryan’s legal team includes Eugene Scalia, former US Secretary of Labor during the Trump administration and a Gibson Dunn attorney. The case is assigned to Judge Ada Brown, an appointee of former President Donald Trump.

The complaint mirrors arguments made by the FTC’s Republican commissioners Andrew Ferguson and Melissa Holyoak in opposing the rule. Holyoak, the former solicitor general of Utah who joined the agency last month, said she was opposed to the rule because there was “no clear congressional authorization” for the FTC to issue it.

The agency’s Democrats argue the FTC does have authority to issue rules defining unfair methods of competition. The final noncompete ban cites a 1973 case that upheld the agency’s rulemaking authority, rejecting claims that the rule represents a “major question.”

“Arguing that the FTC lacks this authority ignores the most straightforward reading of the text,” Chair Lina Khan said at the commission’s open meeting, referring to the 1914 FTC Act.

The FTC estimates the noncompete ban would increase US earnings by at least $400 billion over the next 10 years.

The case is Ryan LLC v. Federal Trade Commission, N.D. Tex., No. 24-cv-00986, 4/23/24.