On July 23, 2024, Judge Kelley Brisbon Hodge of the United States District Court for the Eastern District of Pennsylvania denied plaintiff’s motion for a preliminary injunction seeking to enjoin the Federal Trade Commission (FTC)’s Non-Compete Clause Rule (the “Rule”), which bans the use of most non-compete clauses in employment contracts and is set to go into effect on September 4, 2024. ATS Tree Services, LLC v. Federal Trade Commission, No. 2:24-CV-01743, ECF No. 80 (E.D. Pa. July 23, 2024). A diverging opinion out of the Northern District of Texas granting plaintiffs’ motion for a preliminary injunction in that case, and a pending case in the Middle District of Florida, sets up a likely challenge of the Rule up to the Supreme Court. SeeRyan v. Federal Trade Commission, No. 3:24-CV-00986, ECF No. 153 (N.D. Tex. July 3, 2024); Properties of the Villages, Inc. v. Federal Trade Commission, No. 5:24-CV-00316 (M.D. Fla.).
In the instant case, plaintiff sought a preliminary injunction to enjoin the FTC’s implementation of the Rule arguing that (1) the FTC lacked statutory authority to promulgate substantive rules to prevent unfair methods of competition; (2) if the FTC has substantive rulemaking power, the Rule exceeds its statutory authority to prevent methods of unfair competition; and (3) the FTC Act unconstitutionally delegates legislative power to the FTC. In seeking a preliminary injunction, a plaintiff must prove that (1) plaintiff is likely to succeed on the merits of the underlying action; (2) plaintiff will suffer irreparable harm if the action is not enjoined pending the court’s final decision on the merits; (3) the balance of the equities favors implementation of the preliminary injunction; and (4) preliminarily enjoining the action is in the public’s interest. See, e.g., ATS Tree Services, ECF No. 80, at 14.
As an initial matter, the court found that plaintiff failed to show that it would suffer irreparable harm if the Rule were to go into effect because it did not show that any of its employees would leave if it were not for their noncompete contracts and potentially having to scale back training to avoid losing return on investment is too attenuated to constitute immediate, irreparable harm. Seeid. at 15 – 22. Still, the court assessed the likelihood of success on the underlying merits. To establish likelihood of success on the merits, plaintiff was required to establish a reasonable probability that the FTC lacked authority under the FTC Act to issue the Rule or that delegation of this authority to the FTC under the FTC Act was unconstitutional. Id. at 22.
Plaintiff’s primary contention was that the FTC lacked substantive rulemaking authority under Sections 5 and 6 of the FTC Act to regulate “unfair methods of competition.” The court disagreed with plaintiff’s arguments and found that the FTC had clear legal authority to issue “procedural and substantive rules as is necessary to prevent unfair methods of competition” because nothing in Section 5 or 6 expressly limits FTC rulemaking power to procedural rules or enforcement power to adjudications. Id. at 26. In fact, the court viewed FTC Act Section 5’s directive to “prevent” unfair methods of competition as being an “inherently forward-looking directive, requiring the FTC to take action to avoid or avert a future occurrence in addition to remediating or stopping past harm.” Id. at 28.
The court next disagreed with plaintiff’s three arguments that the Rule exceeded the FTC Act’s authority, finding that (1) the Rule falls within the conduct described in the FTC Act’s Section 5 Policy Statement; (2) there is no federalism concern because federal and state antitrust laws overlap and operate in parallel; and (3) the Major Question Doctrine is inapplicable because the Rule falls squarely within the FTC’s core mandate and is similar to prior rules enacted by the FTC. Id. at 32 – 37. Lastly, the court quickly dispensed with plaintiff’s argument that Congress unconstitutionally delegated legislative authority to the FTC, noting that the nondelegation doctrine’s “intelligible principle” standard is not particularly demanding. As such, the court concluded that plaintiff failed to establish a reasonable likelihood that it would eventually succeed on the merits. Id. at 37 – 38.
In contrast to this decision, earlier on July 3, 2024, Judge Ada Brown of the United States District Court for the Northern District of Texas concluded that the “FTC lack[ed] substantive rulemaking authority with respect to unfair methods of competition” under the FTC Act. Ryan, ECF No. 153 at 15 – 17. Judge Brown notably diverged from this court in its interpretation of FTC Act Section 6(g), which it viewed as a “housekeeping statute” only authorizing procedural rulemaking due to the absence of penalty provisions. Id. As such, Judge Brown preliminarily enjoined the FTC’s implementation of the Rule, but denied the request for a nationwide injunction. Id. at 28 – 31. Judge Brown will issue her final ruling on the merits of the underlying actions by August 30, 2024. For our prior discussion of Judge Brown’s decision, please see the litigation newsletter here.
There is also another case challenging the legality of the Rule and seeking a preliminary injunction currently pending in the United States District Court for the Middle District of Florida, setting up for a further split among the courts. See Properties of the Villages, Inc., No. 5:24-CV-00316. Barring the implementation of a nationwide injunction and pending further appeals—likely up to the Supreme Court—the Rule is set to go into effect on September 4, 2024.
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