Split in the Courts: Federal Court in Pennsylvania Rules in Favor of FTC's Non-Compete Rule
July 24, 2024 – Legal Alerts
Three months ago, the Federal Trade Commission (FTC) adopted a final rule to broadly ban employers from enforcing non-compete clauses against employees. In the weeks following the announcement, three lawsuits have been filed contesting the agency's authority to enact and enforce its ban on non-compete agreements. As things stand, federal courts are split and there is no nationwide injunction in place. Accordingly, the FTC’s final rule banning enforcement of non-compete agreements is still scheduled to go into effect on September 4, 2024.
This week, a federal judge in Pennsylvania denied a motion for preliminary injunction filed by ATS Tree Services, LLC, a small Pennsylvania company, and one of three plaintiffs pursuing a nationwide injunction preventing the FTC from implementing its rule. The decision in ATS Tree Services, LLC v. Federal Trade Commission, et al., No. 2:24-CD-01743, and a recent development in Texas, highlights a judicial divide over the agency's authority to enact and enforce the ban.
In this week’s decision, Judge Kelley B. Hodge from the Eastern District of Pennsylvania found ATS did not prove that it would suffer irreparable harm if the FTC’s final rule were permitted to go into effect. The court also found that ATS failed to establish its substantive challenge to the FTC’s rule (i.e., that the rule exceeded legal authority for the agency to act) and was likely to succeed on its merits. Relying on the historical background of the FTC’s statutory authority, Judge Hodge opined “the intent of Congress was to retain the existing authority empowering the FTC to prevent unfair methods of competition, and the discretion to determine the appropriate mechanisms to accomplish that directive, including … Section 6’s rulemaking authority.”
As Dinsmore reported earlier this month, the U.S. District Court for the Northern District of Texas, in Ryan LLC v. Federal Trade Commission, et al., No. 3:24-CV-00986, granted Ryan, LLC’s motion for a preliminary injunction prohibiting enforcement of the non-compete ban against the plaintiff employer, but the court did not issue a nationwide injunction to stop the FTC’s enforcement against other companies. A decision on the merits of this case, which still may include a nationwide injunction, is expected on or before August 30, 2024.
A third case pending in the U.S. District Court for the Middle District of Florida (Properties of the Villages, Inc. v. Federal Trade Commission, No. 5:24-CV-00316) also challenges whether the FTC can lawfully prohibit employers from enforcing non-compete restrictions, but there have not yet been any rulings issued in this case.
This dispute between the FTC and employers is still far from over. The Pennsylvania plaintiff will likely appeal Judge Hodge’s ruling and we are waiting for the Northern District of Texas to issue its final ruling on the merits of its case late next month. The ambiguity leaves employers in limbo for now. However, because no nationwide injunction is in place, the best practice is for employers to prepare now for the final rule to go into effect on September 4th.
Our team will continue to monitor and update you with developments on this and other legal matters affecting employers. We are available to answer any questions and position your company for compliance.
