Is the FTC’s Non-Compete Ban Valid? Another Court Weighs in

A new ruling from a federal court in Pennsylvania neutralizes the pendulum on the question of whether the Federal Trade Commission (FTC) has the power to implement its broad ban on non-compete agreements – and whether the ban will take effect in September as scheduled.

A federal district judge declined to issue a preliminary injunction to block the non-compete rule, rejecting a Pennsylvania employer’s argument that the FTC lacked the authority to create it.

The decision counteracts a contrary ruling issued earlier this month by a federal district court in Texas, which concluded that the agency lacks the authority to promulgate the non-compete rule. That decision limited preliminary injunctive relief to the plaintiffs in the case and does not apply on a national level.

The rule, although still under attack in other forums, currently remains set to take effect on September 4, 2024.

Pennsylvania Case Challenges Non-Compete Ban

The Pennsylvania case was filed by ATS Tree Services, LLC, a Pennsylvania tree care company with 12 employees.

ATS requires employees to sign non-compete agreements that ban them from doing the same kind of work for a competitor after leaving. It essentially argued that it needs these non-compete agreements to survive, saying that without them it would lose the return on its investment of specialized training it provides to all employees.

Its complaint against the FTC alleged that the agency does not have the authority to make substantive rules to prevent unfair methods of competition; that even if it does have that authority, its ban on all non-compete agreements exceeds that authority; and that the FTC Act unconstitutionally delegates legislative power to the agency.

It asked the court to issue a preliminary injunction to block the rule’s enforcement.

Federal Court Denies Request for Injunction

The court rejected the request.

It explained that when it comes to deciding whether a preliminary injunction should be issued, courts are to examine whether:

• The party seeking the injunction is likely to succeed on the merits
• The party seeking the injunction will be irreparably harmed if its request is denied
• Granting the request would result in greater harm to the other party
• Granting the request would serve the public interest.

The court decided that the injunction should not issue because the first two factors weighed against the employer.

Taking the second factor first, it said the employer did not show it would be irreparably harmed if its request was denied.

The employer asserted that if the rule takes effect, it will incur “nonrecoverable efforts to comply” with it and will lose the contractual benefits gained from its existing agreements.

Monetary Loss Is Not Enough

But monetary losses and business expenses alone do not justify the relief sought, the court said.

The employer also said that if the ban takes effect, it will have to scale back its specialized training to avoid losing the return on investment that the training provides. That possibility is “too attenuated” to constitute irreparable harm, the court said.

In addition, the employer did not show it is likely to succeed on the merits, the court ruled. It said the employer is not likely to show that the FTC lacked the authority to make the rule or that Congress’s delegation of that authority to the agency was unconstitutional.

“[T]he 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,” the court decided.

The agency has the power to prevent unfair methods of competition – and not just the power to remediate past harm, the court explained.

The court denied the employer’s request for preliminary injunctive relief.

FTC Non-Compete Ban: What’s Next?

For the moment, this ruling evens the scorecard with respect to court rulings addressing the legitimacy of the FTC rule. It stands in direct conflict to the Texas federal district court ruling, which said the FTC lacks the authority to implement the rule.

A third court challenge is currently pending in Florida, where a real estate firm has sued to block the rule. The federal district court hearing that case is currently considering yet another motion for preliminary injunction.

Right now, the rule is set to take effect on schedule – but employers should continue to monitor the status of efforts to block the rule’s enforcement.

ATS Tree Services, LLC v. Federal Trade Commission, No. 24-1743 (E.D. Pa. 7/23/24).