- FTC gets a district court victory. On July 23, a federal judge in Philadelphia rejected a bid by a Pennsylvania tree-trimming company to block the Federal Trade Commission’s recent final rule on noncompetes from taking effect.
- Previous case went against the agency. The Pennsylvania ruling came less than a month after a federal judge in Dallas took the opposing side on this argument.
- What is the FTC’s power? At the heart of these court cases is the rulemaking authority of the FTC under its enabling statute.
(Editor’s note: Workspan Daily is actively covering news surrounding the noncompete final rule. Please check back to this article for updates. ... Last update: 1:30 p.m. Central on July 24.)
In her 1966 hit song, Joni Mitchell wrote about viewing aspects of importance “from both sides now” — from “up and down,” “give and take” and “win and lose.”
The "Both Sides Now" song lyrics seem apropos when applied to the latest legal turn in the U.S. Federal Trade Commission’s attempt to ban noncompete agreements. And, the results likely have the heads of employers, workers and legal experts spinning like a vinyl record.
On July 23, a federal judge in Philadelphia rejected a bid by a Pennsylvania tree-trimming company to block the FTC’s recent final rule on noncompetes from taking effect. This came less than a month after a federal judge in Dallas took the opposing side on this argument, issuing a temporary injunction that was applied, for the time being, to the Texas employers that served as the plaintiffs in that case.
In the latest decision, in the case ATS Tree Services LLC v. Federal Trade Commission before the U.S. District Court for the Eastern District of Pennsylvania, Judge Kelley Brisbon Hodge sided with the FTC that it had clear legal authority to issue “procedural and substantive rules as is necessary to prevent unfair methods of competition.” The plaintiff, ATS Tree Services, had argued that the agency lacks such power and that noncompete contracts are a common tool to protect businesses such as itself by preventing workers, for a set time period, from joining rival companies or launching a competing business.
“The court finds [the] plaintiff has failed to establish a reasonable likelihood that it will succeed on the merits of its claims that the FTC lacks substantive rulemaking authority under its enabling statute, that the FTC exceeded its authority and that Congress unconstitutionally delegated legislative power to the FTC,” Hodge wrote in her opinion.
Hodge also stated the tree-trimming company, which employs less than 20 workers, most of whom are subject to noncompete agreements, failed to demonstrate it would suffer irreparable harm in the absence of such a contractual mechanism.
“On that finding alone, the court must deny [the] plaintiff’s motion,” she said, rejecting the company’s push for a preliminary injunction.
ATS Verdict Counters Ryan Verdict
Hodge’s take is in stark contrast to that of Judge Ada Brown, who presided over the case Ryan LLC v. Federal Trade Commission before the U.S. District Court for the Northern District of Texas. In her July 3 ruling, Brown wrote, “Congress must have ‘understood rules issued under Section 6 [of the FTC Act] to include legislative rules prohibiting unfair methods of competition.’ ... Again, the court rejects such reasoning as a piecemeal attempt to confer rulemaking authority that Congress has not affirmatively granted to the FTC. The role of an administrative agency is to do as told by Congress, not to do what the agency think it should do.”
Brown later added, “The court concludes the text and the structure of the FTC Act reveal the FTC lacks substantive rulemaking authority with respect to unfair methods of competition, under Section 6(g). ... Thus, when considering the text, Section 6(g) specifically, the court concludes the commission has exceeded its statutory authority in promulgating the [noncompete rule].”
Not surprisingly, the FTC celebrated the decision in ATS Tree Services.
“The [Hodge] decision fully vindicates that precedent [from the Ryan case] and the plain text of [the] FTC Act clearly provide[s] us rulemaking authority to ban noncompete clauses, which harm competition by inhibiting workers’ freedom and mobility while stunting economic growth,” FTC spokesman Douglas Farrar stated in a post on his X social media account.
The FTC estimates roughly 30 million Americans — or 1 in 5 workers — are subject to such employment contracts and believes that eliminating them would bolster opportunities and increase wages.
Not surprisingly, the attorney group representing ATS felt differently about the decision.
“Despite [the judge’s] ruling, we will continue to fight the FTC’s power-grab,” Josh Robbins, an attorney for the Pacific Legal Foundation, said in a statement.
What Now?
Given the split verdicts, what does the future hold for the noncompete final rule?
An additional legal challenge sits at the district court level. Properties of the Villages Inc., a real estate and residential housing company in Florida, filed a lawsuit against the FTC on June 21. The case is being heard in the U.S. District Court for the Middle District of Florida.
Timing is of the essence, given the FTC final rule at the center of the court cases stipulates a national effective date of Wednesday, Sept. 4. Given that deadline, Judge Brown, who presided over the Ryan case in Texas, said she expects to issue her final decision by the end of August.
In her July 3 “preliminary” decision, Brown wrote, “The court intends to rule on the ultimate merits of this action on or before August 30, 2024.”
If Brown decides against issuing a broader ruling, the ban on noncompete agreements will go into effect for the majority of companies in the U.S. If she determines a broader blockage is appropriate, the ruling likely will generate greater confusion as to applicability at the national level.
If you are scoring at home, Brown was appointed by former President Donald Trump, Hodge was appointed by President Joe Biden and Timothy J. Corrigan, the judge in the Properties of the Villages case, was appointed by former President George W. Bush.
As participants and onlookers on all sides spin the court rulings and wait for what comes next, law firms have advised employers to examine their current restrictive covenants (in particular, their noncompetes) and limit actual usage to what is actually needed to protect legitimate business interests (i.e., confidential information, trade secrets, unfair competition).
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