Yesterday, the Court in the ATS Tree Services v. FTC case denied Plaintiff ATS Tree's Motion to Stay and Enjoin the FTC's recent ban on non-compete agreements (the "Final Rule"), because, the Court held, ATS Tree failed to establish irreparable harm and a likelihood of success on the merits. This puts this court's ruling in direct conflict with the July 3, 2024 ruling in the Northern District of Texas on the same topic in Ryan, LLC v. FTC (enjoining the FTC ban and holding that the FTC exceeded its authority in promulgating a ban on non-compete agreements nationwide), setting up a potential circuit split (once appeals arelikely taken to the Fifth and Third Circuit Courts of Appeal) that could see this dispute ultimately heading to the United States Supreme Court.
The Pennsylvania federal court found first that the lack of irreparable harm alone was sufficient to deny the Motion. Specifically, the court found that the interim costs of compliance with the notice provision of the Final Rule were de minimis, around $27.78 per employer, the costs to revise existing contracts were ordinary business expenses, and the alleged costs to revise its training program to protect against departing employees were speculative. In contrast to the reasoning of the Texas federal court finding irreparable harm, the Pennsylvania federal court noted that the Third Circuit has not adopted the Fifth Circuit's rule that nonrecoverable costs to come into compliance with government rules and regulations are a valid basis for a finding of irreparable harm.
But the Pennsylvania federal court did not stop there. As to the likelihood of success, the court found that ATS failed to establish "a reasonable chance, or probability, of winning." Specifically, the Court found, that taking into consideration the goal of the FTC Act and the FTC's purpose, the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition. The court added that "[n]either the word 'procedural' nor the word 'substantive' appears in the text of Section 6(g), and the Court will not infer meaning from that absence, particularly as the ordinary meaning of the text speaks for itself."
Particularly, and once again contrary to what the Texas federal court held in Ryan, the Court found that the FTC's mandate to "prevent" unfair methods of competition inherently contemplates substantive rulemaking authority which could extend to a nationwide ban on non-compete agreements, and the FTC's substantive rulemaking authority has been confirmed by circuit courts as well as Congress in amendments to the FTC Act.
The Court further dismissed ATS's remaining arguments by also finding that the Final Rule is authorized under the FTC Act and that the FTC is not required to follow a rule-of-reason analysis to individual non-competes. The Pennsylvania federal court also went further than the Texas federal court in its analysis of the challenges to the Final Rule. Specifically, the Pennsylvania federal court held that the Major Questions Doctrine (which the Texas federal court did not specifically address) was not implicated because the Final Rule falls squarely within the FTC's core mandate, and that regulating "unfair methods of competition" is a sufficiently intelligible principle and, therefore, is not an unconstitutional delegation of legislative authority (despite concluding elsewhere in the opinion that Congress's use of the phrase "unfair methods of competition" was "deliberately vague").
With its starkly different ruling to the earlier case in Texas, the Pennsylvania federal court's ruling is likely to set up a possible circuit split that will only create further uncertainty as to the applicability of the Final Rule to employers, even as the effective date of September 4 approaches. As previously reported here, the Texas federal court in Ryan already indicated it intends to rule on cross-motions for summary judgment by no later than August 30, 2024, and it appears likely poised to vacate the Final Rule.
Once again, employers and employees are left with unreasonable uncertainty: complying with a rule one court indicated is improper, voiding employee non-competes only to find out later that the FTC lacked authority after a likely trip to the U.S. Supreme Court, relying on a good faith exception in the FTC Rule, or doing nothing, only to face a premature prosecution by an FTC looking for ways to flex its might for a rule likely to be invalidated based on current Supreme Court precedent as it ascends to higher courts.
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