July 24, 2024 Written by: Erik Derr, Esq.
In contrast to the July 3, 2024 decision issued in a federal court in Texas in Ryan v. FTC, Judge Kelly Brisbon Hodge, sitting in the Eastern District of Pennsylvania, ruled on Tuesday in TS Tree Services, LLC v. The Federal Trade Commission, 2:2024-CV-01743 that the Federal Trade Commission (“FTC”) did not exceed its authority by issuing the April 23, 2024, non-compete ban on non-compete agreements (the “FTC Rule”). In doing so, Judge Hodge denied Plaintiff, ATS Tree Service, LLC’s (“ATS”) motion for a preliminary injunction staying the nationwide September 4, 2024 effective date of the FTC Rule.
In a thirty-nine page Opinion, the Court recounted the history of the FTC and its rule-making powers and found that ATS failed to establish the irreparable harm necessary to grant the injunctive relief it sought. Notwithstanding this finding, the Court continued its analysis and, again inconsistent with the Northern District of Texas’s recent holding in Ryan, found that ATS was not likely to succeed on the merits of its case because the FTC was within its grant of power to ban non-competes.
The Court ruled that ATS could not establish the level of irreparable harm necessary to obtain an injunction because 1) the costs of compliance with the FTC non-compete ban represent monetary loss, which is insufficient to grant injunctive relief, and 2) the ATS’s argued loss of contractual rights associated with the non-compete ban were speculative, at best. Essentially, the Court found that the threat of employee mobility, on its own, is speculative harm and not immediate harm.
After concluding that ATS could not demonstrate the irreparable harm necessary to obtain an injunction, the Court continued by discussing the FTC’s statutory right to make procedural and substantive rules, such as the FTC Rule. Focusing on the term “prevent” in the congressional mandate to the FTC to “prevent persons, partnerships, or corporations… from using unfair methods of competition”, the Court ruled that the FTC is vested with prospective, forward-looking rule making authority, such as FTC Rule.
The Court also discussed the shared role between the states and federal government to regulate and prevent unfair competition and pointed out that states can enact laws that do not conflict with the final FTC Rule. Therefore, while states can enact laws to unfair methods of competition, to the extent they conflict with the FTC Rule, they are preempted.
Practical Guidance for Employers
After seemingly finding reprieve from the looming September 4, 2024 deadline after the Northern District of Texas’s Opinion in Ryan (though the order in that case was limited to the plaintiffs at issue), employers now face a more uncertain landscape given the conflicting federal rulings.
Though a final decision on the merits is expected in Ryan by August 30, 2024, just five days before the effective date of the FTC ban, that decision may not have wide-reaching implications applicable nationwide. Moreover, while there are other legal challenges to the FTC ban still on the horizon, the best practice for employers is to prepare, but not yet send, the notices required under the Rule, if applicable. Employers would also be wise to consider non-solicitation agreements or confidentiality agreements/non-disclosure agreements with their employees, where appropriate and supported by the necessary consideration.
Be sure to follow along with Becker’s Staffing Practice for more insights as the battle for clarity on the FTC Rule continues in the courts.