The Second Decision Is In: PA Court Finds FTC Noncompete Rule Enforceable, Creating Conflicting Decisions and Uncertainty

07/24/2024|3 minute read

Key Takeaways

• The Eastern District of Pennsylvania declined to block the FTC's Noncompete Rule banning most employment-based noncompetes, finding the plaintiff had not shown it would be irreparably harmed if the Rule went into effect and that the FTC has the authority to issue the Rule.
• The decision diverges meaningfully from an earlier ruling by the Northern District of Texas, which found that the FTC lacked the authority to issue the Rule.
• The divergent rulings create significant uncertainty as to the validity of the FTC's Rule, leaving businesses and workers without guidance as to whether the Rule will go into effect on Sept. 4, 2024, as scheduled.

What Happened?

On July 23, 2024, the United States District Court for the Eastern District of Pennsylvania issued a decision in ATS Tree Services, LLC v. FTC, which held that the Federal Trade Commission (FTC) had the authority to issue its rule banning most employment-based noncompete agreements (the Noncompete Rule or Rule). This ruling followed a challenge by ATS Tree Services LLC (ATS), a Pennsylvania-based tree care company, which argued, among other things, that the FTC Act did not authorize the FTC to enact the Rule.

In reaching its decision to deny the motion to stay the Rule's Sept. 4 effective date and for a preliminary injunction, the court initially found that ATS did not make the showing of irreparable harm needed for an injunction because the Noncompete Rule did not have "peculiar" nonrecoverable compliance costs. The court also found that ATS did not provide any evidence that its employees planned to leave ATS if the Noncompete Rule went into effect. In a declaration, ATS only claimed that its employees would be in "high demand" and that they could leave. However, perhaps anticipating this shortcoming in their initial filing, ATS sought leave to file a supplemental declaration, which would have addressed some of these points, but the court denied the application earlier in the day before issuing its ruling.

Beyond the lack of showing of irreparable harm by ATS, the court went on to find that ATS failed to show a likelihood of success on the merits regarding its challenge to the FTC's authority to promulgate the Noncompete Rule. Specifically, the court found "it [is] clear that the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition," which the FTC correctly relied on in banning nearly all noncompete agreements. The court also rejected ATS's argument that the issue of noncompete agreements should be left exclusively to the states. The court held that while states could still regulate these agreements, any laws that conflicted with the Noncompete Rule would be preempted. Notably, the court also found that the "major questions doctrine" did not apply because Congress expressed its clear intent in the FTC Act to charge the FTC with the authority to regulate "unfair competition." The court rejected the challenge to the FTC's power to conduct a rulemaking proceeding regarding this competition issue, finding that the FTC had engaged in such conduct previously.

Critically for companies and workers who use or are subject to noncompetition agreements, the Eastern District of Pennsylvania's ruling is the exact opposite of the ruling from the Northern District of Texas. On July 3, 2024, in Ryan, LLC v. Federal Trade Commission, the Northern District of Texas held it was likely the FTC exceeded its authority when it issued the Noncompete Rule. The Northern District of Texas issued an injunction, but the relief from the Noncompete Rule is - for the time being - limited to the parties in the case. The conflicting holdings now between the Eastern District of Pennsylvania and the Northern District of Texas concerning the fundamental issue of the FTC's authority to promulgate the Noncompete Rule only add to the uncertainty for employers and employees.

How Did We Get Here?

On April 23, 2024, the FTC published its final Noncompete Rule. The Noncompete Rule is scheduled to go into effect on Sept. 4, 2024. Within hours of the FTC publishing the Rule, several parties filed lawsuits seeking to block the its implementation. ATS filed its complaint on April 25, 2024, and moved for a preliminary injunction on May 14, 2024. Following briefing by the parties and amici, as well as oral argument, District Judge Kelley Hodge (nominated by President Biden in 2022) split with the Northern District of Texas, holding that the FTC had the authority to issue the Noncompete Rule and that even if it did not ATS could not show it would be irreparably harmed if the Noncompete Rule went into effect.

Next Steps

The Eastern District of Pennsylvania's holding that the FTC had the authority to issue the Noncompete Rule creates a split among federal courts. Until the enforceability of the Noncompete Rule is settled, entities and individuals that use or are subjected to noncompetes will continue to remain without guidance as to whether those agreements will be enforceable. Although the Noncompete Rule is set to go into effect on Sept. 4, 2024, there are additional lawsuits challenging the FTC's decision to implement this Rule, and the Northern District of Texas stated it will issue a final ruling on the merits by Aug. 30. Appeals of these decisions are anticipated.

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