Today, July 23, 2024, a federal court in Pennsylvania denied the plaintiff’s request for an injunction blocking the Federal Trade Commission’s new Rule generally prohibiting most employment-based non-compete agreements. For now, the new Rule will take effect on September 4, 2024, unless further court decisions are released prior to this date.
As explained in our April 26, 2024, Client Alert, in April, the Federal Trade Commission issued an administrative Rule generally prohibiting most employment-based non-compete agreements. This brought about numerous lawsuits challenging the FTC’s ability to issue the non-compete ban. The first decision was issued on July 3. As noted in our July 10, 2024 Client Alert, the Texas court issued a preliminary injunction blocking the new Rule, but the injunction only applied to the parties involved in that case.
As also explained in our prior Client Alert, a similar case was pending in the Eastern District of Pennsylvania in the case ATS Tree Services v. Federal Trade Commission. Judge Kelley B. Hodge, a 2022 appointee of President Joe Biden, promised a decision on plaintiff’s motion for a preliminary injunction on or before July 23, 2024. Today, Judge Hodge issued her decision denying the motion.
The plaintiff in this case, ATS Tree Services, is a tree care company with twelve employees operating out of Bucks County, Pennsylvania. ATS requires all employees to sign non-compete agreements as a condition of employment. ATS argued the FTC lacks statutory authority to promulgate substantive rules to prevent unfair methods of competition; the FTC exceeded its authority in promulgating the rule; and the rule itself was arbitrary and capricious.
In denying the motion for preliminary injunction Judge Hodge found ATS was unable to satisfy its burden of demonstrating it would suffer irreparable harm in the absence of injunctive relief. Judge Hodge noted this alone was grounds for denying the motion without considering the other factors, such as likelihood of success on the merits. Nevertheless, Judge Hodge rendered a decision on this factor, finding ATS “failed to establish a reasonable chance, or probability, of winning.”
The Pennsylvania court’s analysis of the merits of the case stands in stark opposition to the July 3, 2024, decision by Judge Ada Brown of the Northern District of Texas in the case Ryan, LLC v. Financial Trade Commission.
The Texas court found the FTC does not have the power to engage in “substantive rulemaking,” and instead only has the power to issue “housekeeping rules” to prevent unfair methods of competition. In analyzing the FTC’s history, the Texas court also found the FTC had not promulgated substantive rulemaking since 1978, and therefore the plaintiff was likely correct that the FTC’s nationwide non-compete ban exceeds the agency’s powers. The Texas court also found the rule to be arbitrary and capricious because the FTC provided a “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…” The FTC attempted to rely on studies from individual states banning non-competes, but Judge Brown indicated no state has ever issued a ban as broad as the FTC’s rule.
In the current case, the Pennsylvania court found nothing in the FTC Act “limits the FTC’s rulemaking power to issuing exclusively procedural rules.” The Pennsylvania court went on to state, “the Court finds it clear that the FTC is empowered to make both procedural and substantive rules as necessary to prevent unfair methods of competition.”
This means the Rule remains in effect, for now. Focus now returns to the Texas court where Judge Brown indicated she intends to issue a full ruling for a nationwide injunction on or before August 30, 2024, just days before the FTC rule was set to take effect on September 4, 2024. Stay tuned to Buelow Vetter for the latest updates on this issue.
If you have any questions about this Legal Update, please contact:
Attorney Joel S. Aziere, 262-853-0600, jaziere@buelowvetter.com
Attorney Benjamin B. Bauman, 262-364-0264, bbauman@buelowvetter.com
or your Buelow Vetter attorney
