Overview
WHAT HAPPENED
On July 23, 2024, US District Court for the Eastern District of Pennsylvania declined to stay the September 4, 2024, effective date of the Federal Trade Commission’s (FTC) Final Rule that bans all new noncompete agreements nationwide and renders existing noncompete agreements binding most workers unenforceable. This ruling comes 20 days after a federal court in Texas – presented with the same legal arguments – preliminarily enjoined the FTC from enforcing the Final Rule against the parties in that case.
In Depth
THE PLAINTIFF COULD NOT ESTABLISH IRREPARABLE HARM
The court found that the plaintiff – ATS Tree Services LLC (ATS) – failed to establish that it would suffer “irreparable harm” if the Final Rule went into effect and denied its motion for injunctive relief “[o]n that finding alone.”
Specifically, ATS’s proffered nonrecoverable costs of complying with the Final 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.”
THE PLAINTIFF COULD NOT ESTABLISH THAT THE FTC LACKED THE AUTHORITY TO ISSUE THE FINAL RULE
Even if ATS could establish “irreparable harm,” the court observed that ATS still could not prevail on its motion for injunctive relief because it could not establish the likelihood of success on the merits of its claim that the FTC lacked the authority to issue the Final Rule.
The court rejected ATS’s argument that the FTC lacks “substantive rulemaking authority” – as opposed to “procedural rulemaking” – under Section 6(g) of the FTC Act.
The court also rejected ATS’s alternative arguments that the Final Rule should be barred under (1) the “rule-of-reason” antitrust analysis that counsels against categorical prohibitions, (2) federalism principles, (3) the so-called “major questions doctrine” and (4) the nondelegation doctrine.
WHAT ABOUT OTHER NONCOMPETE LITIGATION?
This ruling sharply contrasts with the preliminary injunction ruling issued in Ryan LLC v. FTC on July 3, 2024, by the US District Court for the Northern District of Texas. That ruling provided that the plaintiffs were likely to succeed on the merits of their claim that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under the FTC Act. A final merits decision in Ryan LLC is expected by August 30, 2024.
NEXT STEPS AND ANTICIPATED LITIGATION STRATEGIES
The Final 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 Final Rule.
We anticipate that ATS will appeal this preliminary injunction ruling to the US Court of Appeals for the Third Circuit. We also anticipate that the parties in Ryan LLC v. FTC will prevail at the district court level and that the FTC will appeal the court’s final injunction decision to the US Court of Appeals for the Fifth Circuit. The outcome of these two cases at the federal court of appeals level – and likely others as more challenges are brought – will likely be reviewed by the US Supreme Court in the coming months.
Companies should stay informed about any updates or changes related to this case and the Final Rule’s effective date. In the meantime, companies should continue to consult with counsel to assess their existing use of noncompetes and other restrictive covenants to prepare for the Final Rule’s pending effective date and its implications. For any questions about the Final Rule, please contact your regular McDermott lawyer or one of the authors.
