Blog
BFV Perspectives, Noncompete & Trade Secrets, | Aug 01, 2024

Federal Court in Pennsylvania Rules That FTC’s Noncompete Rule Is Valid, Creating Split With Federal Court in Texas

If you’ve been following this blog, then you know that a federal district court in Texas issued a preliminary ruling on July 3 holding that the FTC’s noncompete ban is invalid. Adding to the confusion, last week a federal district court in Pennsylvania reached the opposite conclusion and entered an order holding that the FTC’s rule is likely valid. Let’s try to make sense of the ruling.

What’s the case about?

The case is ATS Tree Services, LLC v. Federal Trade Commission. ATS is a small tree-care company that requires its employees to sign noncompetes that prohibit them from working for competing tree-care companies following their separation from ATS. ATS filed the case to challenge the validity of the FTC’s new rule banning nearly all noncompetes in employment contracts. ATS claims that it provides “specialized training” to its employees, so its business model is contingent on the enforceability of its noncompetes. It therefore argues that the FTC’s noncompete ban will cause it to lose the return on its investment in training its employees.

What are ATS’s challenges to the FTC’s noncompete ban?

 ATS filed the case asserting four reasons the FTC’s rule is invalid:

  1. The FTC lacks statutory authority to promulgate substantive rules to prevent unfair methods of competition;
  2. If the FTC has substantive rulemaking power, the FTC’s ban on all noncompete agreements exceeds its statutory authority to prevent methods of unfair competition;
  3. Rendering existing non-compete agreements for non-senior executives unenforceable is arbitrary and capricious; and
  4. The FTC Act unconstitutionally delegates legislative power to the FTC.
What did the Court rule?

 ATS filed a motion for preliminary injunction to stay enforcement of the FTC’s rule while the litigation played out. To obtain a preliminary injunction, a plaintiff must show more than that it is likely to prevail in the case. Additionally, a plaintiff seeking a preliminary injunction must show that it will be “irreparably harmed” without the injunction, that not issuing the injunction will cause greater harm to the plaintiff than issuing the injunction would cause the defendant, and the injunction will not disserve the public interest.

The court denied ATS’s motion for a preliminary injunction because ATS failed to establish that it would suffer “irreparable harm” without an injunction. The court rejected ATS’s argument that its costs of complying with the FTC’s rule, which would be less than $1,250, constituted irreparable harm. It also rejected ATS’s argument that it would lose employees and would have to engage in efforts to “scale back” its specialized training program to avoid losing its return on the investment of that training. The court held that ATS’s concerns were too speculative and that ATS failed to back them up with sufficient evidence. The court also found that ATS’s concerns about employees leaving and sharing confidential information with competitors could be addressed with nondisclosure agreements or other alternatives to noncompetes.

Having found that ATS failed to satisfy the “irreparable harm” requirement, the court could have (and arguably should have) stopped there and denied the motion on that basis alone. But instead, the court went out of its way to also address the requirement of a likelihood of success on the merits. And directly contrary to the decision in the Texas case, the court held that ATS was not likely to succeed on any of its challenges to the FTC’s rule.

The court first addressed the FTC’s statutory authority and rejected ATS’s argument that the FTC lacks statutory authority to promulgate substantive rules to prevent unfair methods of competition. Analyzing the text of the FTC Act, the court held that Congress gave the FTC the power to promulgate substantive rules to prevent unfair methods of competition. This was the opposite of what the court in the Texas case held.

The court next addressed ATS’s alternative argument that, even if the FTC has substantive rulemaking power, the FTC’s ban on all noncompete agreements exceeds its statutory authority to prevent methods of unfair competition. ATS’s primary argument was that the FTC’s rule violates the so-called “major questions doctrine,” which is a legal doctrine that requires administrative agencies to identify a “clear congressional authorization” to regulate in a certain manner in certain circumstances, such as where the challenged regulation has “vast economic and political significance.” The court held that the “major questions doctrine” did not apply because the FTC’s noncompete rule “falls squarely within its core mandate” to promulgate substantive rules to prevent unfair methods of competition and the FTC had previously used that rulemaking power “in similar ways.” Notably, the court in the Texas case did not address the “major questions doctrine” because it held that the FTC lacked the statutory authority to promulgate any substantive rules to prevent unfair methods of competition.

Finally, skipping over the “arbitrary and capricious” argument because ATS did not argue it in its motion, the court addressed ATS’s argument that the FTC Act unconstitutionally delegates legislative power to the FTC. Under the “nondelegation doctrine,” Congress cannot empower an agency to make substantive rules unless it articulates an “intelligible principle” to guide the agency. The court held that Congress’s directive to prevent “unfair methods of competition” satisfied the “intelligible principle” requirement. Again, the court in the Texas case did not reach this issue because it held the rule was invalid on other grounds.

What’s next?

Given that the court went out of its way to address the merits of ATS’s challenge even though the court could have simply denied the motion for failure to show “irreparable harm,” the writing is on the wall that ATS is going to lose its case, at least at the district court level. The court in ATS’s case made clear that it fully rejects ATS’s arguments for why the FTC’s noncompete ban is invalid.

Eventually, the U.S. Court of Appeals for the Fifth Circuit will address the issues in the Texas case and U.S. Court of Appeals for the Third Circuit will address the issues in ATS’s case in Pennsylvania. It is unclear whether those appellate courts will split in the same way the district courts have. But either way, it is almost certain that the Supreme Court will eventually need to step in to decide the validity of the FTC’s rule.

While the FTC’s noncompete ban appears to be in a legal limbo, businesses must understand that the rulings in these cases affect only the litigants in those cases (at least for now), so the FTC rule remains for the rest of us. The rule’s effective date of September 4, 2024, is quickly approaching. As always, please feel free to contact us to navigate the rule’s requirements and the divergent legal decisions as various cases consider challenges to the rule.

BFV Perspectives, Noncompete & Trade Secrets, | Aug 01, 2024
Jeremy L. Kahn
Jeremy L. Kahn

Jeremy L. Kahn is a thoughtful and strategic litigator, with a creative approach. He enjoys crafting strategies to resolve difficult and legally challenging problems, always seeking to achieve his clients’ desired results in an efficient manner.