Following on the heels of the United States District Court for the Northern District of Texas preliminarily enjoining enforcement of the FTC’s Non-Compete Ban Rule, in another challenge to the rule, the United States District Court for the Eastern District of Pennsylvania refused to enjoin enforcement of the FTC’s Non-Compete Ban Rule, creating uncertainty for employers given the Rule’s approaching effective date.
The FTC’s Non-Compete Ban and the Pending Challenges
On April 23, 2024, the FTC adopted a Final Rule banning most non-compete clauses, with limited exceptions. The rule is scheduled to take effect on September 4, 2024. There are at least three pending lawsuits challenging the FTC’s Non-Compete Ban, filed in Texas, Pennsylvania, and Florida.
On July 3, 2024, in Ryan, LLC v. FTC, the United States District Court for the Northern District of Texas entered a preliminary injunction preventing the FTC from enforcing the Rule against the plaintiffs in that lawsuit.
On July 23 ,2024, in ATS Tree Services, LLV v. FTC, the United States District Court for the Eastern District denied plaintiff’s application for a preliminary injunction.
There have not been any rulings to date in the lawsuit filed in the United States District Court for the Middle District of Florida, Properties of the Villages v. FTC.
The Pennsylvania Court’s Decision
The Pennsylvania court in ATS Tree Services held that the plain language of FTC Act authorizes the FTC to issue substantive rules to prevent unfair methods of competition. Thus, the Pennsylvania court reasoned that FTC had clear statutory authority to issue the Final Rule banning most non-compete clauses.
The Pennsylvania court’s ruling is in direct contrast to the ruling of the Texas court, which found, relying upon the same statutory language, that the FTC did not have substantive rule making authority. The conflicting decisions highlight the inherent risk and uncertainty of litigation.
Steps Businesses Can Take Now
Given the conflicting rulings between the Texas and Pennsylvania courts, employers should prepare for the possibility that the validity of the FTC’s Non-Compete Ban Rule will not be settled by the Rule’s September 4, 2024, effective date. Nevertheless, the Texas court has said that it will make a final determination by August 30, 2024, in advance of the FTC’s Non-Compete Ban Rule’s effective date.
While employers that use non-competition agreements continue to await a final resolution of the Rule’s validity, employers could join one of the business organizations, such as the Chamber of Commerce of the United States or Business Roundtable, which intervened in the Texas lawsuit and arguably obtain the protections of the preliminary injunction entered in that action.
Also, as we have previously recommended, employers should review their existing non-solicitation and confidentiality agreements to ensure they provide adequate protection of employer intellectual property and customer relationships in the even the FTC’s Non-Compete Ban Rule becomes effective. A review of such agreements should also assess whether they are overbroad, because regardless of the outcome of the Rule, overbroad post-employment restrictions risk being held unenforceable by courts.
If you have questions about your business’s non-competition, or other agreements, please schedule a complimentary consultation with us through our online scheduling system.
Information contained in this blog is provided for informational purposes and does not constitute legal advice or opinion. You should consult with an attorney about the specifics of your matter or legal issue.