ALERT: FTC Non-Compete Rule Remains Undisturbed in Pennsylvania
Since it was issued in April 2024, the Federal Trade Commission’s (“FTC”) ban on non-competes (“Final Rule”) has been under attack in multiple court actions in multiple jurisdictions. However, on July 23, 2024, the Honorable Kelley Brisbon Hodge of the U.S. District Court for the Eastern District of Pennsylvania gave the FTC a lifeline, denying a motion to stay and preliminarily enjoin enforcement of the Final Rule.
Plaintiff ATS Tree Services (“ATS”), a small, local tree removal company, challenged the Final Rule under the Administrative Procedures Act and the U.S. Constitution, arguing that the FTC and its Commissioners exceeded their authority and violated the Constitution by issuing it. ATS explained to the court that it uses non-competes to “provide its employees with necessary and valuable specialized training while minimizing the risk that employees will leave and immediately use that specialized training and ATS’s confidential information to benefit a competitor.”
Following an extensive hearing, the court held that ATS did not prove that it would suffer irreparable harm were the Final Rule to take effect, and its employees were no longer restricted from competing. The court could have stopped its analysis there, but went further and also concluded that ATS was unlikely to prevail on the merits of its claims. Critically, Judge Hodge explained that the FTC likely had sufficient authority to promulgate the Final Rule and that Congress’s delegation of authority to the FTC was not unconstitutional.
The ATS ruling directly conflicts with the decision issued earlier this month in Ryan LLC by Judge Ada Brown of the U.S. District Court for the Northern District of Texas, granting a preliminary injunction prohibiting the FTC from enforcing the Final Rule against the plaintiffs in that case – Ryan, a Texas tax service firm, and several intervenor plaintiffs including the U.S. Chamber of Commerce – though not the broad, nationwide relief initially sought. Judge Brown found the plaintiffs met all the requirements for issuance of preliminary injunction: likelihood of success on the merits, immediate and irreparable harm, the balance of harms weighs in the plaintiffs’ favor, and the injunction serves the public interest.
Judge Brown’s injunction is narrow and only preliminary, but she has indicated that she will issue a final ruling on the merits by August 30th – 5 days before the Final Rule is scheduled to take effect. It is possible that her forthcoming ruling could be narrower than the preliminary injunction granted – should she adopt any of Judge Hodge’s analysis – or broader and nationwide in scope. Only time will tell.
Ultimately, these rulings are likely headed to appeals in the U.S. Circuit Courts for the Third and Fifth Circuit Court of Appeals – and potentially to the U.S. Supreme Court, particularly if the split in analysis continues. A third case, Properties of the Villages, Inc. v. FTC, is pending in the U.S. District Court for the Middle District of Florida, but no injunction ruling has been issued there.
What is an employer to do now?
Since the Ryan court did not issue a nationwide injunction, employers in Pennsylvania and beyond must look to the ATS decision as currently controlling and prepare for compliance with the Final Rule. This means cataloging what current and former employees are subject to non-competes, preparing notices to issue to them on September 4th if the Final Rule is not enjoined, and strategizing with counsel as to appropriate steps to take to ensure critical business interests are protected on a going-forward basis.
If you have any questions, please contact Marjorie Obod, Jennifer Platzkere Snyder, or another member of the Dilworth labor and employment practice to assist you.