Federal Court Decision Creates Greater Uncertainty as to Future of FTC Final Rule on Noncompete Clauses

At a Glance

• In ATS Tree Services v. Federal Trade Commission, the Eastern District of Pennsylvania found that even if the plaintiff employer could show irreparable harm, injunctive relief would still be inappropriate because the plaintiff was unlikely to prevail on its argument that the FTC did not have authority to promulgate the Noncompete Rule.
• With the issuance of the ATS decision, all eyes now turn back to the Northern District of Texas, where the Ryan LLC v. Federal Trade Commission court has promised a final decision on or before August 30. Most expect that the Ryan court’s final decision will continue to hold that the FTC did not have authority to issue the Final Rule, creating a split of authority.

In what some view to be a surprise development, the U.S. District Court for the Eastern District of Pennsylvania issued a decision on July 23, 2024, affirming enforceability of the FTC’s Noncompete Rule, which designates most noncompete clauses as unenforceable after September 4, 2024. ATS Tree Services, LLC v. Federal Trade Commission, et al., Civ. No., 24-1743 (E.D. Pa. July 23, 2024). The opinion was issued by Judge Kelley Brisbon Hodge, a Biden appointee.

Judge Hodge denied the plaintiff employer’s motion for a preliminary injunction seeking to prevent enforcement of the FTC’s Noncompete Rule for two reasons. First, the court found that the plaintiff employer had failed to establish irreparable harm sufficient to justify imposition of injunctive relief. Specifically, the court found that nonrecoverable regulatory compliance costs are not a valid basis for finding irreparable harm, and that the other irreparable harm articulated by the plaintiff employer (e.g., reduction of specialized training for employees who may leave for a competitor and the potential loss of existing employees) was too speculative.

Second, and more concerning to employers hoping for a judicial rejection of the FTC’s Noncompete Rule, Judge Hodge also found that even if the plaintiff employer could show irreparable harm, injunctive relief would still be inappropriate because the plaintiff was unlikely to prevail on its argument that the FTC did not have authority to promulgate the Noncompete Rule. The court found that the FTC had authority to promulgate the rule, given that Section 5 of the Act empowers and directs the FTC to “prevent persons, partnerships, or corporations . . . from using unfair methods of competition in or affecting commerce….” 15 U.S.C. § 45(a)(2). 

The court was apparently unpersuaded that the Supreme Court’s opinion in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024) leads to a different outcome, noting that the Loper decision was issued after the motion had been fully briefed, and citing that case only for the proposition that courts are required to exercise their independent judgment in deciding whether an agency has acted within its statutory authority. In addition, the ATS opinion did not address the Northern District of Texas’s July 3, 2024, order in Ryan LLC v. Federal Trade Commission, which preliminarily enjoined the FTC from enforcing the Final Rule against the plaintiffs in that case on the grounds that the FTC did not have authority to issue the Final Rule.

With the issuance of the ATS decision, all eyes now turn back to the Northern District of Texas, where the Ryan court has promised a final decision on or before August 30. Most expect that the Ryan court’s final decision will continue to hold that the FTC did not have authority to issue the Final Rule, creating a split of authority. 

While it is possible the FTC may postpone the September 4 enforcement date of the Final Rule in light of these developments, there has been no indication as of yet from the FTC that it will do so.