On July 23, 2024, the United States District Court for the Eastern District of Pennsylvania (Hodge, J.) declined to enjoin the Federal Trade Commission’s noncompete ban (“Rule”) in a ruling in the matter of ATS Tree Services, LLC v. Federal Trade Commission. This decision directly conflicts with the decision made by the United States District Court for the Northern District of Texas on July 3, 2024, to issue a preliminary injunction to the FTC’s enforcement of the Rule. Our Firm previously published articles summarizing that decision and the ban itself.
The Pennsylvania Decision
On April 25, 2024, ATS Tree Services, LLC (“Plaintiff”), filed a complaint challenging the FTC’s Rule effective September 4, 2024, which bans all employment noncompete agreements in the United States. Plaintiff moved for a stay of the FTC’s Rule and a preliminary injunction preventing enforcement of the Rule. In making its ruling, the Court considered whether Plaintiff would be irreparably harmed by the denial of the relief and whether Plaintiff established a reasonable probability of success on the merits.[1]
Irreparable harm
Plaintiff contended it would suffer immediate and irreparable injury if the Court declined to enjoin the FTC’s Rule. Specifically, Plaintiff argued it would incur nonrecoverable efforts to comply with the Rule and would lose the contractual benefits of its existing noncompete agreements.
Consistent with the Third Circuit, the Court held that “nonrecoverable compliance costs are not a valid basis for a finding of irreparable harm.” Not only this, but the Court also held that Plaintiff’s asserted costs were too attenuated and unsubstantiated. As to Plaintiff’s argument concerning the potential loss of contractual benefits, the Court held the risk of losing employees, without more was insufficient to support a finding of irreparable, immediate harm. Further, as Plaintiff’s contention stemmed from a fear of losing proprietary training information, the Court stated the Rule provided less harmful alternatives to noncompetes, such as non-disclosure agreements.
For these reasons, the Court held that Plaintiff failed to establish irreparable harm—a necessary showing to attain a preliminary injunction.
Likelihood of success on the merits
Despite the Court’s finding that Plaintiff failed to establish irreparable harm, the Court addressed Plaintiff’s argument as to its likelihood of success on the merits. Plaintiff argued the FTC lacked statutory authority for substantive rulemaking or, in the alternative, the Rule was too broad as it outlaws all noncompete clauses.
The Court first addressed whether the FTC maintained statutory authority to enact the Rule, examining Sections 5 and 6 of the FTC Act. In analyzing the plain meaning of the text, the Court found Sections 5 and 6 to be complementary in that Section 5 creates a comprehensive scheme to prevent unfair methods of competition while Section 6 enumerates additional powers that the FTC may employ in carrying out its directive. Specifically, Section 6(g) includes the power of the FTC to “make rules and regulations.” The Court stated, when read together Sections 5 and 6 “authorize the FTC to promulgate ‘rules and regulations’ as one of its tools to prevent unfair methods of competition.” The Court emphasized the use of the word “prevent” in Section 5. The Court explained that to “cabin the FTC’s power” as solely adjudicative would effectively bar the FTC from acting to prevent unfair methods of competition as it would be limited to remediating harms that had already occurred. Moreover, the Court recognized, that nothing within Section 6 limited the FTC’s rulemaking power to only procedural rules. In support of its reading of Section 6(g), the Court examined the D.C. Circuit’s 1973 decision in National Petroleum along with Congress’s subsequent amendments to the FTC Act. Upon doing so, the Court held that had Congress wanted to limit the FTC to substantive rulemaking power, it would have done so. Thus, the Court held the FTC maintained statutory authority to enact the Rule.
The Court then addressed Plaintiff’s four alternative arguments concerning the breadth of the FTC’s Rule and rejected each for the reasons explained in turn. First, the Court denied Plaintiff’s plea to implement the rule of reason test and held the FTC was authorized to designate all noncompete clauses as unfair where the FTC determined the clauses were “not justified by legitimate business purposes” but rather “exploitative and coercive.” Next, the Court held that although both states and the federal government can regulate noncompetes, state laws are preempted, and therefore the Rule does not raise issues of federalism due to its potential overlap with state laws. Then, the Court declined Plaintiff’s request to apply the Major Question Doctrine, holding it was not applicable where the FTC previously used Section 6(g) to enact rules and regulations, and where the Rule is within the FTC’s directive. Finally, the Court refused Plaintiff’s argument that “unfair methods of competition” is an unconstitutional delegation when Section 6(g) is used for substantive rulemaking and held Congress properly delegated authority to the FTC under the FTC Act.
What’s Next?
The FTC’s Rule will come into effect on September 4, 2024. As of that date, those not shielded by an injunction will be subject to the Rule. The Texas Court, which previously issued a preliminary injunction to the FTC’s enforcement of the Rule, is expected to issue its final decision on the merits by August 30, 2024. If the Court issues a permanent injunction, the FTC may appeal that decision to the Fifth Circuit. Just as ATS Tree Services may appeal the Pennsylvania Court’s denial of a preliminary injunction to the Third Circuit. We will monitor any appeals.
[1] The Court declined to address the final two prongs of the preliminary injunction analysis—the balance of the equities and the public interest—as Plaintiff failed to establish the threshold factors of irreparable harm and likelihood of success on the merits.
