Judges in TX and PA Split Over FTC Non-Compete Clauses Rule – Technologist

By Helen Zhang and Greg Care

After the Federal Trade Commission (FTC) first voted to impose a near-total ban on employment non-competition clauses (i.e., non-competes) on April 23, 2024, federal lawsuits in Texas and Pennsylvania quickly followed. This month, judges in the Northern District of Texas and the Eastern District of Pennsylvania issued divergent opinions on the plaintiffs’ requests to preliminarily prevent the FTC’s rule from going into effect, signaling how they may rule in their final decisions. There is also relatively new litigation regarding the rule that will add another layer of complexity to whether and how the FTC’s significant curtailment of non-competes will be enforced.

July 3, 2024: Northern District of Texas delays FTC enforcement of the non-compete ban against the plaintiffs in that case only but signals a likely ultimate ruling against the FTC.

On July 3, 2024, Judge Ada Brown issued a preliminary injunction and stay that prevents the FTC from enforcing its non-compete rule against the plaintiffs in the case: Ryan, LLC, a Texas-based global tax firm, and several business associations who had sued separately but then merged their claims with Ryan, LLC’s as intervenors. In the opinion granting the injunction, the Court found that the plaintiffs are likely to succeed on their claims that the FTC’s rule is invalid and would face injuries that are “irreparable” and outweigh the government’s interests in enforcing the rule.

First, the opinion stated that “the text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority” to issue the rule. At bottom, Judge Brown reasoned that Congress empowered the FTC to promulgate rules regarding unfair methods of competition that are procedural (i.e., how the agency does its adjudicative function), but not substantive (i.e., what companies regulated by the FTC can’t do). The opinion noted an appellate court’s 1973 holding to the contrary, but was persuaded that because the FTC had not utilized that authority since 1978, the agency’s substantive rulemaking authority was somehow lost. On another argument against the rule, Judge Brown further described the rule as “unreasonably overbroad without reasonable explanation.” She critiqued the FTC’s reasons for a permanent, “one-size-fits-all” ban, declared the FTC’s underlying data to be “inconsistent and flawed,” faulted the FTC for not considering the positives of non-competes, and stated that the FTC did not sufficiently consider alternatives to the ban.

Second, the opinion held that the plaintiffs would face “irreparable” injury without an injunction due to the “nonrecoverable costs of complying” with the rule. Specifically, the Court pointed to the cost of giving notice to employees subject to existing noncompete clauses. Finally, the Court held that preventing the “substantial economic impact” of the rule would “serve[] the public interest . . . while simultaneously inflicting no harm on the FTC.” In sum, the Court found it better to preserve the status quo until a final determination could be made.

Judge Brown is due to issue a final ruling by August 30, 2024, just a few days before the FTC’s rule is scheduled to go into effect on September 4, 2024. In the meantime, the preliminary injunction effectively excused Ryan, LLC from giving its employees notice of the pending rule and how it may impact their employment contracts. The injunction signaled that Judge Brown will likely rule against the FTC, delaying the applicability of the non-compete ban against at least the plaintiffs. It is unclear if the Judge will ultimately expand her ruling to a nationwide effect. In her opinion, she explained that “the Court declines to view the circumstances of this proceeding as an ‘appropriate circumstance’ that would merit nationwide relief” and noted that no plaintiff had yet made the case otherwise. Judge Brown also denied a subsequent request to expand the injunction beyond the plaintiffs.

July 23, 2024: Eastern District of Pennsylvania declined to curtail FTC enforcement of the non-compete ban, indicating that it may withstand the attempt to invalidate it.

On July 23, 2024, Judge Kelley Brisbon Hodge denied a similar motion for a preliminary injunction and stay by ATS Tree Service, LLC, a 12-person tree care company in Bucks County, Pennsylvania. Her opinion held that ATS did not demonstrate it has “a reasonable chance, or probability, of winning their case” and would face no “irreparable” injury while awaiting the Court’s final ruling.

The lack of irreparable injury was the primary basis for the Court’s decision. Judge Hodge noted that, in the Third Circuit (the appellate court above the federal courts in Pennsylvania), the ordinary business costs of complying with a government regulation are not an “irreparable harm” justifying a preliminary injunction. Furthermore, because “no employee of ATS has quit or even indicated an intention to resign,” ATS’ speculation that employees would break their non-compete agreements “remains inadequate to . . . substantiate a finding of immediate and irreparable harm.” Further, because the FTC’s rule allows for alternatives to protect employers’ interests, such as non-disclosure agreements, there was not a sufficient, non-hypothetical harm to ATS.

Judge Hodge next held that, even if the requisite harm existed, ATS is unlikely to succeed on its claims because the FTC Act empowers the FTC to issue the non-compete ban. The Court reasoned that, through the FTC Act, Congress charged the agency with “prevent[ing] . . . unfair methods of competition” via “rules and regulations,” and that Congress’ amendments to the FTC Act have only confirmed this intent. Contrary to Judge Brown’s decision, Judge Hodge saw no statutory basis to limit the FTC to making only procedural rules and noted two appellate courts’ vindication of the FTC making substantive rules.

The opinion further states that the regulation of non-competes falls within the FTC’s authority for four reasons. First, the FTC exercised its “broad and flexible authority” appropriately through an “extensive and thorough research and rule-making process.” Second, the FTC Act empowers the agency to regulate non-competes regardless of current state regulations. Third, the non-compete ban “falls squarely within” the FTC’s core mandate and the FTC has previously used this rulemaking authority in similar ways. Finally, Congress constitutionally stated an “intelligible principle” in the FTC Act that directs the agency to issue rules like the non-compete ban.

The parties will be submitting, by August 6, a joint report to the Court regarding how the rest of the case should proceed.

What Now?

Judge Hodges’ ruling is a win for the FTC (and employees subject to non-competes). On the other hand, Judge Brown’s opinion indicates that the FTC’s non-compete ban may be limited to some extent; right now, the pause on the ban applies only to Ryan, LLC and the business associations that were plaintiff-intervenors in that case, but her final decision could still impact a larger swath of the country.

There is also additional litigation brewing on this issue. In yet another case, in the Middle District of Florida, a real estate company called Property of the Villages, Inc. similarly requested a preliminary injunction for which the parties submitted memoranda supporting and opposing earlier this week. The case has been assigned to Chief Judge Timothy Corrigan, who has not yet entered a scheduling order or otherwise indicated when a ruling can be expected.

If no judge issues a nationwide injunction to block the FTC’s rule, many employees (i.e., those who are not “senior executives”) currently bound by a non-compete clause will have new grounds to seek release from such clauses once the rule goes into effect on September 4, 2024. However, the diverging opinions out of Pennsylvania and Texas and other challenges in the works suggest that employees who have concerns about non-competes should seek competent guidance from counsel monitoring this dynamic situation.

In the meantime, non-competes may still be challenged on a case-by-case basis. Over the last few years in Maryland, the state has banned non-competes for workers earning less than 150% of the state minimum wage ($22.50 per hour/$46,800 annually) and significantly limited non-competes for healthcare workers and veterinarians.

If you have questions regarding a non-compete, please contact us today to see if we can assist with your circumstances.

* This blog post was primarily authored by BGL summer associate, Helen Zhang. At the time of publication, Helen is a rising fourth-year dual-degree student pursuing a JD at New York University School of Law and a master’s in public policy at the Harvard Kennedy School. She serves as executive editor and quantitative editor for the NYU Law Review and holds a co-chair position in the Public Interest Law Students Association. In the summer of 2023, Helen completed an internship at the Civil Rights Division of the United States Department of Justice, where she rotated between the Office of the Assistant Attorney General and the Housing & Civil Enforcement Section.

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