The FTC and Non-Compete Agreements: A Second Court Rules

This is the third article from Strauss Troy in a series on the Federal Trade Commission’s (“FTC”) recent rule on post-employment non-competition agreements. If you missed the first article, which discusses the scope and practical realities of the FTC’s non-compete ban, you can read it here.

If you missed the second article, which discusses the Northern District of Texas court’s grant of a preliminary injunction postponing the effective date of the rule as it applies to the plaintiffs in that case, you can read it here.

Just weeks after the U.S. District Court for the Northern District of Texas issues a preliminary injunction against the FTC’s non-compete ban, on July 23, 2024, the U.S. District Court for the Eastern District of Pennsylvania declined to stay the September 4, 2024, effective date of the FTC’s new rule. In declining to issue a preliminary injunction against the FTC’s rule, the court found that the plaintiff, ATS Tree Services LLC (“ATS”), failed to establish that it would suffer “irreparable harm” if the rule went into effect and denied the preliminary injunction on that basis alone. Specifically, the court found that ATS’s claimed non-recoverable costs of complying with the rule and the “speculative” costs associated with “scal[ing] 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” did not establish “irreparable harm.”

Second, and more interesting for the purposes of discerning whether the ban will ultimately be held to be a valid exercise of the FTC’s power, the court held that the FTC did indeed have the power under its statute to issue substantive rules regarding unfair methods of competition.  The court noted that the FTC Act did not distinguish between “procedural” and “substantive” regulations.  Further, the court determined that the FTC Act, which gives the FTC the power to “prevent” unfair methods of competition, implies the power to issue substantive regulations in the area.  The court also rejected several other of the plaintiff’s arguments – that the federal government shouldn’t step in where states have already issued their own laws, that the Major Questions Doctrine prevented the agency from issuing the rule without clear legislative authorization, and that Congress could not constitutionally delegate such broad authority to an agency. The court concluded that the rule “falls squarely within the FTC’s core mandate” and is similar to previous FTC rulemaking.

This ruling sharply contrasts with the preliminary injunction ruling issued by the Northern District of Texas court in Ryan, LLC v. FTC, with a final merits decision in that case expected by August 30, 2024.  The rule is slated to go into effect on September 4, 2024. Companies not covered by an injunction issued by a federal judge will be subject to the rule. ATS is able to appeal the denial of the preliminary injunction to the US Court of Appeals for the Third Circuit, while the losing party in the Ryan, LLC case may appeal that decision to the US Court of Appeals for the Fifth Circuit. We anticipate that the outcome of these two cases at the federal appellate level, as well as others as more challenges are brought, may be reviewed by the US Supreme Court in its next term.

Companies and individuals should stay informed about any updates or changes related to this case and the rule’s effective date. In the meantime, companies should continue to consult with counsel to assess their existing use of non-competes and other restrictive covenants to prepare for the rule’s pending effective date and its implications. Our team at Strauss Troy will continue to provide updates on the challenges to the FTC’s new rule, and are here to answer any questions or concerns you may have.

Stephen S. Schmidt: ssschmidt@strausstroy.com or 513.629.9422
Andrew D. White: adwhite@strausstroy.com or 513.629.9466