Pennsylvania Court Refuses to Enjoin Enforcement of FTC’s Non-Compete Rule

On April 23, 2024, the U.S. Federal Trade Commission (“FTC”) voted in favor of a Final Rule banning nearly all post-employment non-compete agreements, with limited exceptions related to the sale of a business and certain pre-existing agreements with senior executives. As expected, the Final Rule has been subject to a number of legal challenges. Earlier this month, in Ryan LLC v. Federal Trade Commission, the Federal court for the Northern District of Texas granted a motion for preliminary injunction and postposed the effective date of the Final Rule as applied only to the plaintiffs in that matter, on the basis that the FTC lacked the substantive rule-making authority to issue the non-compete ban. This week, in ATS Tree Services, LLC v. Federal Trade Commission, the Federal court for the Eastern District of Pennsylvania ruled in the opposite direction, denying plaintiff’s motion for a preliminary injunction and stay of enforcement of the Final Rule.

The ruling in ATS is directly at odds with the ruling in Ryan. Whereas the court in Ryan found that the FTC lacked the substantive rule-making authority to promulgate the broad non-compete ban, the court in ATS took a friendlier view of the agency’s rulemaking authority, finding it “clear that the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition.” While the Ryan decision is not binding on federal courts in Pennsylvania, the judge issuing the ATS decision interestingly did not pay any credence to, distinguish, or reference the decision of its sister court, despite the wide publicity and potential impact of the rule. The divergent rulings may indeed set the stage for a split between the Third and Fifth Circuits on the FTC’s rulemaking authority and the enforceability of the Final Rule.

The FTC is still preparing to enforce the Final Rule, slated to take effect on September 4, 2024, and has issued a Compliance Guide with advice for small businesses on how to comply with the Final Rule. One question that remains open is the extent to which the Final Rule prohibits other forms of restrictive covenant agreements, such as non-solicit and non-disclosure agreements. While the Final Rule only explicitly prohibits non-competes, it also broadly defines a non-compete clause as a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from seeking or accepting work in the United States with a different employer. The Final Rule states that non-disclosure clauses may be non-competes under the Final Rule “where they span such a large scope of information that they function to prevent workers from seeking or accepting other work or starting a business after they leave their job.” The Compliance Guide also explains that other forms of restrictive covenants may be considered non-competes when they are “so restrictive that they effectively prevent a worker from getting a new job or starting a business.” 

The judge in Ryan has stated that they intend to resolve the case on the merits by August 30, 2024, just days before the Final Rule is set to take effect; however, it is unclear how far any such ruling will reach. Given that there is no nationwide injunction in place, and that the ATS ruling upholds the validity of the Final Rule as well as the FTC’s authority to issue it, employers would do well to start preparing for potential enforcement of the Final Rule. For instance, the FTC has issued model notices in several languages, now available on its website, which would need to be issued to employees with unenforceable non-competes prior to September 4th, should the Final Rule remain in effect. Employers may want to start preparing to provide these notices in the coming weeks and taking stock of their existing non-compete agreements and other restrictive covenants to determine which current and former employees may need to receive these notices.  Employers should also consult with counsel to consider what other steps they may want to take to ensure their proprietary information and goodwill is as protected as possible. Employers may also wish to consider entering into non-competes with workers who qualify as senior executives under the Final Rule before September 4, 2024. Existing non-competes with senior executives will remain enforceable after the effective date of the Final Rule, but employers will no longer be able to enter into such agreements after the Final Rule goes into effect.

We will continue to monitor the status of the legal challenges to the FTC’s non-compete ban. Employers with questions about the Final Rule or their non-compete agreements should contact Kate Townley at ktownley@fglawllc.com or any other attorney at the Firm.

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