In the second federal district court ruling to date on the Federal Trade Commission’s rule banning nearly all noncompete agreements, a Pennsylvania court upheld the FTC rule as a legitimate exercise of the FTC’s substantive rulemaking authority under the FTC Act.
The July 23 Eastern District of Pennsylvania decision rejected a request for a preliminary injunction seeking to stay the effective date of the FTC noncompete rule and conflicts directly with a earlier ruling from a Northern District of Texas court on the core issue of whether the FTC Act empowers the Commission to enact a nationwide rule which renders unenforceable existing noncompete provisions for most workers, except senior executives, and stops employers from entering into new ones for most workers.
According to the Pennsylvania court, “[w]hen taken in the context of the goal of the Act and the FTC’s purpose, [it is] clear that the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition.”1
By contrast, the Texas court held that “the text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g).”2
The conflicting rulings (and another decision pending in Florida) set the stage for appeals to the federal circuit courts and likely to the Supreme Court.
As a result, the FTC noncompete rule is still scheduled to go into effect on September 4, 2024, except for the handful of plaintiffs in the Texas case.
In the interim, employers are still well advised to review any noncompete agreements in the event the noncompete rule survives and notices to affected employees are required.
ATS Tree Services, LLC v. FTC
In ATS Tree Services, LLC v. FTC, ATS Tree Services, LLC (“ATS”), a Pennsylvania tree care company that uses noncompete agreements, filed a complaint challenging the FTC noncompete rule under the Administrative Procedure Act (“APA”), 5 U.S.C. § 706(2), and under Article I of the United States Constitution, on nondelegation grounds.3
ATS moved to stay the September 4, 2024, effective date of the noncompete rule and requested a preliminary injunction to stop it from taking effect, proceeding under three of the four claims in its Complaint, specifically that:
- “the FTC lacks statutory authority to promulgate substantive rules to prevent unfair methods of competition (pursuant to 5 U.S.C. § 706(2))”;
- “if the FTC has substantive rulemaking power, the FTC’s ban on all non-compete agreements exceeds its statutory authority to prevent methods of unfair competition (pursuant to 5 U.S.C. § 706(2))”; and
- “the FTC Act unconstitutionally delegates legislative power to the FTC (pursuant to U.S. Const. art. 1 § 1; and 5 U.S.C. § 706(2)(B)).”4
Assessing these arguments, the Court denied ATS’s request for a preliminary injunction on the finding that ATS failed to prove that the rule would cause irreparable harm.5 In addition to its dispositive finding, the Court also found that ATS failed to establish a likelihood of success on the merits of its claims.6
Cost of Compliance with the Noncompete Rule is Not Irreparable Harm
First, as to irreparable harm, the Court rejected ATS’ argument that its (i) nonrecoverable costs of compliance with the rule and (ii) loss of contractual benefits under its noncompete agreements can support an irreparable harm finding.7 Regarding nonrecoverable costs of compliance, the Court stated that, under Third Circuit case law, “monetary loss and business expenses are insufficient bases for injunctive relief,” and that “the possibility that ATS would need to scale back its training program to an unknown extent” in response to the noncompete rule “is too attenuated to constitute an immediate, irreparable harm.”8 Similarly, the Court rejected the loss-of-contractual-benefits argument as speculative, given that “no employee of ATS has quit or even indicated an intention to resign” in response to the noncompete rule.9
The FTC Has Legislative Authority to Issue Substantive Rules under the FTC Act
Second, as to likelihood of success on the merits, the Court rejected ATS’ statutory and constitutional arguments against the FTC’s authority to enact the noncompete rule.10 Interpreting the FTC Act “in the context of the goal of the Act and the FTC’s purpose,” and in light of its legislative history, the Court determined that “the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition,” rejecting the argument that the FTC must only use its adjudicative powers to prevent unfair competition under Section 5 of the Act.11
Proceeding through ATS’s alternative arguments, the Court first determined that “the basis for the FTC’s Final Rule is authorized under the Act, and that a rule-of-reason analysis is not proper in this context,” given that “the FTC has determined through an extensive and thorough research and rule-making process . . . that non-compete clauses are ‘not justified by legitimate business purposes.’”12
Next, the court accepted the FTC’s argument “that the states and federal government have shared jurisdiction” in regulating non-competes, “and that the existence of state regulations of non-competes does not preclude the FTC from issuing rules to prevent unfair methods of competition.”13 The Court then rejected ATS’s contention that the Major Questions Doctrine should apply to its analysis of the FTC’s authority to issue the noncompete rule, “[b]ecause the FTC’s Rule falls squarely within its core mandate, and it has previously used its Section 6(g) rulemaking power in similar ways.”14
Finally, the Court rejected ATS’s “novel argument that ‘unfair methods of competition’ is an unconstitutional delegation when the FTC is utilizing its Section 6(g) substantive rulemaking authority but is a constitutional delegation when the FTC employs its adjudicative authority,” concluding instead that “Congress properly delegated authority to the FTC under the Act.”15
Next Stop: Appeals Court
The district court decisions in the Texas and Pennsylvania cases are likely to be appealed to the Third and Fifth Circuit Courts of Appeal, respectively. Supreme Court review will likely be on the docket.
In the interim, the FTC’s noncompete rule may apply to employment agreements nationwide starting in early September. Assessment of those agreements—and the notices that are required to covered employees—is well advised for all employers who will need to comply with the FTC’s rule.
1 ATS Tree Servs., LLC v. FTC, No. 24-1743, 2024 WL 3511630, at *13 (E.D. Pa. July 23, 2024).
2 Ryan LLC v. FTC, No. 3:24-CV-00986-E, 2024 WL 3297524, at *1 (N.D. Tex. July 3, 2024).
3 ATS Tree Servs., LLC v. FTC, 2024 WL 3511630, at *1–2.
4 Id., at *2.
5 Id., at *8.
6 Id. The court did not reach a decision on the balance-of-the-equities or public-interest factors for a preliminary injunction.
7 Id., at *8–11.
8 Id., at *9–10.
9 Id., at *10.
10 Id., at *11–19.
11 Id., at *12–16.
12 Id., at *17.
13 Id.
14 Id., at *18.
15 Id., at *19.