A federal judge in Pennsylvania has rejected a challenge to the Federal Trade Commission's ("FTC") ban on noncompete contracts, creating a split between federal courts.

Judge Kelly Brisbon Hodge of the U.S. District Court for the Eastern District of Pennsylvania ruled that the FTC has clear legal authority to issue “procedural and substantive rules as is necessary to prevent unfair methods of competition" under the FTC Act. Judge Hodge concluded that the FTC Act expressly empowers the FTC “to make rules and regulations for the purpose of carrying out the provisions” of the statute, which include “preventing…unfair methods of competition.” 

The plaintiff in the case is ATS Tree Services, a small tree trimming company that employs approximately 12 people. ATS argued the FTC went beyond its constitutional powers when it banned noncompete agreements. ATS also argued that noncompetes were important for its business model due to the training and skills provided for employees that could be used if an employee went to work for a competitor. However, Judge Hodge did not find this argument credible and ruled that ATS had not demonstrated they would suffer any irreparable harm if the FTC rule were to go into effect. 

Judge Hodge's decision is in direct contrast to a recent decision in a Texas federal court, which found that the FTC lacked rulemaking authority regarding unfair methods of competition. (See our previous article “New FTC Noncompete Ban Temporarily Blocked.”) However, Judge Ada Brown in the Northern District of Texas only granted a preliminary injunction for the specific plaintiffs in that case. Judge Brown did not issue a nationwide injunction. 

These inconsistent rulings complicate matters for employers trying to determine their compliance obligations before September 4, 2024, when the FTC rule goes into effect. Judge Brown in Texas has stated she will rule on the merits of the case by August 30, 2024, which may still include a nationwide injunction. 

The Pennsylvania case is ATS Tree Servs. LLC v. FTC, E.D. Pa., 2:24-cv-01743-KBH, 7/23/24.