Recent Court Ruling Signals a Split in Authority Regarding the Validity and Enforceability of the FTC’s Final Rule Banning Nearly All Noncompete Agreements

Gina Glatt, Associate

As previously discussed in The Rocky Mountain Employer, since the Federal Trade Commission (“FTC”) issued its final Non-Compete Clause Rule (the “Rule”) on April 23, 2024,[1] the Rule has been the subject of multiple legal challenges across the country, including within the U.S. District Court for the Northern District of Texas where the court enjoined the application and enforcement of the Rule as against the named plaintiffs because it found that the FTC lacked the authority to issues “substantive” rules like the Rule at issue.[2]  On July 23, 2024, however, the U.S. District Court for the Eastern District of Pennsylvania reached the opposite conclusion in ATS Tree Services, LLC v. Federal Trade Commission,[3] setting the stage for future legal challenges and possible resolution by the U.S. Supreme Court.

ATS Tree Services, LLC v. Federal Trade Commission – Request to Enjoin the FTC’s Rule Denied

On July 23, 2024, the U.S. District Court for the Eastern District of Pennsylvania denied Plaintiff ATS Tree Service, LLC’s (“ATS”) motion to stay the effective date of the Rule and to preliminarily enjoin the Rule.  This decision directly conflicts with the Northern District of Texas’ findings and conclusions in Ryan LLC.

The court first determined that ATS failed to satisfy that it and others like it would be irreparably harmed in the absence of the requested injunctive relief.  For example, the court noted that, unlike in the Fifth Circuit (where Ryan LLC was decided), a showing of economic loss in the form of nonrecoverable costs to comply with the Rule could not satisfy the irreparable harm factor for preliminary injunctions based on Third Circuit precedent (where the Eastern District of Pennsylvania is located).  The court likewise found that ATS’ assertions that it would lose employees to competitors because of the Rule was too speculative to satisfy a showing of irreparable harm.

In theory, the court could have stopped its analysis there, since a showing of irreparable harm is an essential element that must be satisfied for preliminary injunctive relief.  Instead, it took the opportunity to thoroughly discuss the FTC’s rulemaking authority,  finding that ATS lacked a reasonable likelihood of success on the merits of its challenge to the Rule’s validity. 

The court’s findings in ATS Tree Service significantly differ from the court’s findings in Ryan LLC, specifically regarding the FTC’s purview to enact the Rule. For example, in ATS Tree Service, the court found that the FTC is empowered to make procedural and substantive rules to prevent unfair methods of competition. The court reasoned that nothing in either Section 5 or Section 6 of the FTC Act limits the FTC’s power to issue only procedural rules. In other words, the court found the FTC does have authority to promulgate rules and regulations, like the Rule at issue, in order to prevent unfair competition in the marketplace. This is starkly contrasted with the court in Ryan LLC, which found that Section 6 of the FTC Act does not expressly grant the FTC authority to promulgate substantive rules; instead, that court viewed Section 6 as a housekeeping statute which generally pertains to the FTC’s ability to implement procedural rules and practices and does not encompass substantive rulemaking power.

Notably, when ATS Tree serviced filed its initial complaint challenging the Rule, it argued that the Rule itself was arbitrary and capricious due to its sheer scope. However, when ATS filed its motion requesting a stay of the Rule, the motion itself lacked any argument on the Rule being arbitrary and capricious.  Because of this, the court did not perform a further analysis beyond its mention of the arbitrary and capricious standard itself.  Conversely, the court in Ryan LLC analyzed this issue and found that there is a substantial likelihood the Rule is arbitrary and capricious because it is overbroad and unsupported by any reasonable explanation by the FTC for its scope.

Employer Considerations

Interestingly, the court in ATS Tree Service never discussed the Ryan LLC decision when reaching its conclusions.  As more companies challenge the Rule through judiciary proceedings, other U.S. District Courts will inevitably weigh-in on the validity and enforceability of the Rule. However, the ATS Tree Service decision, as contrasted with Ryan LLC, signals that the rift between the courts regarding the Rule is only likely to grow and may require an ultimate resolution by the Supreme Court.  In the meantime, the Rule is still set to go into effect on September 4, 2024. Campbell Litigation, P.C. is available to answer questions about the best preparations employers can make concerning their existing non-compete agreements.

[1]See https://www.rockymountainemployersblog.com/blog/2024/5/2/ftcs-final-rule-banning-most-noncompete-agreements-already-under-fire-in-federal-court for our discussion of the FTC’s Rule, generally.

[2]See https://www.rockymountainemployersblog.com/blog/2024/7/11/federal-district-court-enjoins-the-ftcs-rule-banning-nearly-all-non-compete-agreements for our discussion of the Northern District of Texas’ decision in Ryan LLC v. Federal Trade Commission.

[3]ATS Tree Services, LLC v. Federal Trade Commission, 2024 WL 3511630 (E.D. Pa. July 23, 2024).