Philadelphia Federal Court Refuses to Enjoin FTC Non-Compete Rule

As we have previously reported, on July 3, 2024, a federal district court in Ryan LLC v. Federal Trade Commission¹ issued a preliminary injunction prohibiting the Federal Trade Commission's implementation of its April 2024 Final Rule banning worker non-compete agreements (the "Final Rule") with respect to the parties in that case-though the court stopped short of issuing a broader injunction.² Now, a federal district court in Pennsylvania has reached the opposite conclusion and refused to preliminarily enjoin the Final Rule.

If not enjoined nationwide, the Final Rule will prohibit nearly all existing and future non-compete agreements between employers and workers, subject to specified exceptions for "senior executives."³

In ATS Tree Services, LLC v. Federal Trade Commission, et al., the court in Pennsylvania found that the plaintiff in that case had not established irreparable harm or a likelihood of success on the merits of its claim that the Final Rule is invalid.⁴ The decision is a victory for the FTC, but does not trump pending court challenges to the Final Rule in other cases. Most notably, the court in Ryan will likely issue a decision by the end of August barring the Final Rule permanently, pending appeal, and may do so for everyone nationwide, not just the parties to the Texas case.

I. Background of the Pennsylvania Case

ATS is a tree care company located outside of Philadelphia that employs 12 employees. Like the plaintiffs in the Ryan case, the plaintiff in ATS challenged the validity of the Final Rule, claiming that the FTC exceeded its statutory authority in issuing the Final Rule and that the Final Rule is otherwise invalid and unconstitutional. ATS claimed that it would suffer irreparable harm if the Rule takes effect, including "nonrecoverable costs" in complying with the Rule's notice provisions and the loss of "the contractual benefits from its existing non-compete agreements."

The ATS case was filed two days after the announcement of the Final Rule and was assigned to District Court Judge Kelley B. Hodge. The parties submitted briefing and written evidence in support of their positions and waived an evidentiary hearing on ATS's motion for a preliminary injunction. The court held oral argument on ATS's motion on July 10, 2024.

II. The Court's Decision in the Pennsylvania Case

In the Ryan case, the Texas court found both that the Final Rule was likely an invalid exercise of the FTC's authority under the Federal Trade Commission Act (the "FTC Act") and that the plaintiffs in the case would suffer irreparable harm if required to comply with the Final Rule. In ATS, however, the Pennsylvania court found that neither of these elements had been established.

The court in ATS held that "[w]hen taken in the context of the goal of the Act and the FTC's purpose, the Court finds it clear that the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition." Judge Hodge also rejected ATS's arguments that: (1) a "rule-of-reason" analysis should be applied to non-compete agreements; (2) the Final Rule violates federalism principles since states have adopted varying rules concerning the enforceability of non-competes; (3) the Final Rule is impermissible under the "Major Questions Doctrine"; and (4) the FTC's rulemaking authority under the FTC Act represented an unconstitutional delegation of legislative authority.

With regard to irreparable harm, Judge Hodge found "nonrecoverable compliance costs are not a valid basis for a finding of irreparable harm" in the Third Circuit. The court also rejected ATS's argument that "it will suffer the loss of employees, and the 'non-quantifiable' efforts of having to scale back its specialized training program to avoid losing its return on the investment of training its staff if it is unable to enforce its non-compete agreements," finding that "the possibility that ATS would need to scale back its training program to an unknown extent is too attenuated to constitute an immediate, irreparable harm."

Finally, the court found that ATS had not established that it faced irreparable harm in the form of loss of the "contractual benefits" of its non-competes. The court concluded that harm had not been shown, because "ATS is not required to terminate its own employees, nor has it provided any evidence that its employees would quit if the Rule went into effect."

The court noted that its finding of the absence of irreparable harm alone compelled denial of ATS's motion. Nevertheless, the court went on to address the question of whether ATS was likely to succeed on the merits of its challenge to the Final Rule, and found that it was not.

The ATS court's decision does not alter the status of the Final Rule, which currently remains scheduled to take effect on September 4, 2024, for everyone except the parties in the Ryan case. However, challenges to the Final Rule are pending in other courts and could still prevent the Final Rule from ever going into effect against anyone.

III. Status of Other Court Challenges

The court in Ryan will likely issue a decision by August 30 barring implementation of the Final Rule nationwide and permanently, pending appeal. The court is considering whether a nationwide injunction and/or an injunction applicable to at least members of the Chamber of Commerce and the other business organizations that are plaintiffs in the case is warranted.

A federal court in Florida is also considering a challenge to the Final Rule. That challenge will be fully briefed and ready for decision well before the Final Rule's scheduled effective date.

Any final injunction, especially if applicable beyond the parties to the case, is likely to be appealed and would likely remain in place during the appeal.

Accordingly, there is a good chance that implementation of the Final Rule will be enjoined, at least temporarily, as one or more of these cases make their way through the appellate system.

IV. Action Items

As previously advised, employers should monitor future developments while preparing for the possibility that the Final Rule will go into effect on September 4. Employers should determine which agreements they have with current and former employees may be invalidated by the Final Rule and prepare a contingency plan for giving the required notice to those individuals by September 4. Employers considering entering into non-competes with "senior executives" should consider doing so before September 4.

Given the uncertainty surrounding the Final Rule and the clear trend at the state level toward closely scrutinizing the use of non-competes, employers (including those engaged in sale transactions) should consider whether their interests can adequately be protected using narrower restrictive covenants or covenants other than non-competes, such as robust non-solicits and non-disclosure agreements, modified incentive vesting structures, and garden leave clauses.

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