July 26, 2024 – On Tuesday, July 23, 2024, the U.S. District Court for the Eastern District of Pennsylvania upheld the Federal Trade Commission’s (“FTC’s”) April 2024 final rule banning non-compete agreements, creating a split among federal district courts.

In April, the FTC issued a groundbreaking final rule that effectively banned all non-compete agreements between employers and employees. See our prior alert on that final rule: The FTC Bans Non-Compete Agreements. Since the FTC’s publication in April, federal district courts have split in response to legal challenges to the final rule.

Earlier this month, the U.S. District Court for the Northern District of Texas in Ryan, LLC v. Federal Trade Commission issued a stay and preliminary injunction regarding the final rule’s effective date of September 4, 2024. There, the court took issue with the FTC’s substantive rulemaking authority under 6(g) of the FTC Act. The court also agreed with the plaintiff’s argument that the FTC’s final rule is likely “arbitrary and capricious,” in violation of the Administrative Procedure Act. However, the ruling was only to be applicable to the parties in this specific case, with a ruling on the merits expected before the end of August this year. For more information on this decision, see Texas Federal District Court Grants Preliminary Injunction Against FTC Rule Banning Non-Competes – But Only Applicable to Parties in This Specific Lawsuit.

In this Tuesday’s decision in ATS Tree Servs., LLC v. FTC, the federal court for the Eastern District of Pennsylvania rejected the plaintiff’s request for preliminary injunction and its motion for stay of the September 4th effective date. The court dismissed ATS Tree Services’ claims, holding that the company could not show that it would suffer irreparable harm due to the implementation of the FTC ban, nor could it show a likelihood of success on the merits.

Additionally, the court directly rejected arguments that the Texas district court had accepted in its decision earlier this month. The Pennsylvania district court found that the FTC did have rulemaking authority to ban non-compete agreements under Section 6(g) of the FTC Act. The Pennsylvania court stated that it “finds it clear the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition.” However, because the plaintiff did not claim the final rule was “arbitrary and capricious” under the Administrative Procedure Act, the Pennsylvania court did not address this issue as the Texas court had.

Notably, both cases were argued and briefed before the recent U.S. Supreme Court opinion in Loper Bright Enters. v. Raimondo, which effectively eliminated the long-standing Chevron deference standard followed by courts to federal agency rulemaking. Potential future challenges to the FTC’s action may include arguments in line with the recent holding in Loper, which requires that courts exercise their own independent judgment when deciding whether an agency has acted within its statutory authority.

Employers now face further uncertainty as to the enforceability of non-compete agreements, with no clearer resolution in sight at least until the expected next ruling in the Texas litigation on August 30, 2024, mere days before the final rule’s effective date of September 4, 2024. Given the importance and breadth of this issue, we suspect that these district court cases will likely be appealed to each of their respective circuit courts.

As always, the Kullman attorney with whom you regularly work is available to discuss this most recent development with you.