A federal judge in Pennsylvania has denied a small business’ request to temporarily block the Federal Trade Commission’s new rule banning employers from imposing non-compete clauses on their employees.

• Earlier this month, a federal judge in Texas partially blocked the FTC’s rule, vowing to issue a final ruling by August 30, with the rule set to take effect on September 4.

‘Empowered…To Prevent Unfair Methods Of Competition’

Perkasie, Pennsylvania-based ATS Tree Services, which has 12 employees, argued that it would be “irreparably harmed” by the rule, which the company claims the FTC “lacks the authority to issue.”

On Tuesday, U.S. District Judge Kelley Hodge in Philadelphia disagreed, saying that the “FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition” under Section 5 of the FTC Act.

• Furthermore, ATS Tree Services didn’t demonstrate how it will incur “nonrecoverable efforts to comply” with the rule and lose “the contractual benefits from its existing non-compete agreements,” according to Hodge.

“The Court finds Plaintiff has failed to establish a reasonable likelihood that it will succeed on the merits of its claims that the FTC lacks substantive rulemaking authority under its enabling statute, that the FTC exceeded its authority, and that Congress unconstitutionally delegated legislative power to the FTC,” Hodge wrote in her opinion.

Josh Robbins, an attorney for ATS at the Pacific Legal Foundation, said he and his clients were “disappointed” by the judge’s decision and vowed to “continue to fight the FTC’s power-grab.”

“The FTC does not have the statutory authority to rewrite millions of employment contracts by banning non-compete agreements. ATS, a small tree care business, relies on its non-compete agreements to enable it to provide valuable training to its employees. Banning these agreements will significantly harm ATS’s business,” Robbins told The Hill.

Meanwhile, FTC spokesperson Douglas Farrar tweeted: “The judge’s decision fully vindicates that precedent and the plain text of the FTC Act clearly provide us rulemaking authority to ban noncompete clauses, which harm competition by inhibiting workers’ freedom and mobility while stunting economic growth.”

Partially Blocked

Hodge’s decision conflicts with that of U.S. District Judge Ada Brown in Dallas, who said in a written decision on July 3 that the FTC “lacks the substantive rulemaking authority with respect to unfair methods of competition.”

As a result, Brown granted a motion for a preliminary injunction preventing the rule from taking effect in September while the court considers if the FTC actually has the power to issue the ban.

• The motion was requested by tax preparation company Ryan LLC and the U.S. Chamber of Commerce, which filed a lawsuit just one day after the FTC’s 3-2 vote.
• The order prevents the rule from being enforced specifically against Ryan and the Chamber – Brown denied their request to block the rule nationwide.

Appeals appear likely in both cases, regardless of the outcome, according to Law360. If the Third Circuit, which reviews decisions in Pennsylvania, and the Fifth Circuit, which reviews decisions in Texas, issue split decisions, the U.S. Supreme Court may get involved.

Meanwhile, a third case is underway in Florida federal court with retirement community Properties of the Villages challenging the FTC’s rule.

Breaking Down The FTC Ruling

Non-compete clauses are a contractual term between an employer and a worker that blocks the worker from working for a competing employer or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends.

• About 30 million people (20% of U.S. workers) have signed non-competes, according to the FTC.
• The FTC’s ruling leaves existing non-competes with senior executives intact while banning future non-competes for top corporate officials.

In February, PPAI Media listed non-compete clauses as one of the key employment areas to watch in 2024 after the FTC proposed the legislation that this ban initially stemmed from in January.

Last year, Joshua White – then the head of strategy and general counsel at BAMKO and a member of the PPAI Board of Directors – wrote a column for PPAI Media arguing against non-compete contracts as a practice in promo and predicting the FTC’s decision.

“The point here is not to challenge your opinion on non-competes,” White wrote. “I expect the FTC will take that issue out of your hands soon enough. My point is to challenge the way you think about people, culture and the role you play in shaping both.”

• California, Minnesota, Oklahoma and North Dakota have already banned noncompete agreements, and at least a dozen other states have passed laws limiting their use, Reuters reported.
• The FTC’s rule would be the first nationwide prohibition of non-competes.

Written by: John Corrigan

Published with Permission from PPAI