On July 23, 2024 a Federal District Court in Pennsylvania denied an employer plaintiff’s efforts to temporarily halt implementation and enforcement of the FTC’s final rule banning “non-compete clauses” (the “Final Rule”). The Pennsylvania court’s ruling contrasts with the July 3, 2024 ruling from a Federal District Court in Texas, which granted the same relief to employers in that action. Given these conflicting rulings, employers should be cautious until the courts provide further clarification about the enforceability of the Final Rule.

Background of Legal Challenges to the Final Rule

On Tuesday, April 23, the FTC issued the Final Rule banning most non-compete agreements between an employer and its workers. The FTC’s rule would prohibit employers from entering into or otherwise enforcing non-compete clauses and some similar agreements beginning on September 4, 2024. It would also require employers to notify workers subject to such agreements that their agreements are no longer enforceable. A broader discussion of the FTC’s Final Rule can be accessed here.

Legal challenges to the Final Rule began immediately, with suits being filed in federal courts in Texas and Pennsylvania shortly after the Final Rule was released. In both cases, plaintiff employers sought to halt enforcement and implementation of the Final Rule, arguing on various bases that the Final Rule was unlawful.

On July 3, 2024, the Texas court granted the employer’s request, finding that “the FTC lacks statutory authority to promulgate the [Final Rule], and that the [Final] Rule is arbitrary and capricious.” However, that ruling applied only to those parties to the Texas action, thus leaving open the question of whether the Final Rule is enforceable beyond those parties. A broader discussion of the Texas court’s decision can be accessed here.

The Pennsylvania plaintiffs did not enjoy the same success as the Texas plaintiffs. 

The Pennsylvania Action

The Pennsylvania court denied the plaintiff’s request to halt implementation or enforcement of the Final Rule. The Pennsylvania employer advanced similar arguments to those of the employer in the Texas action—including that its claims were likely to succeed because the FTC did not have the statutory authority to promulgate the Final Rule, and that even if it did, Congress’s delegation of that authority was unconstitutional. 

Nevertheless, the court disagreed, finding that the employer failed to establish the elements necessary to halt enforcement and implementation of the Final Rule—namely, that the employer would suffer irreparable harm if the implementation and enforcement of the Final Rule was not halted, and that the employer was likely to succeed in its claims that the Final Rule was unlawful. 

Instead, the court noted that the FTC likely does possess the authority to promulgate the Final Rule. In particular, the Court noted that the FTC’s power to prevent unfair methods of competition requires that the FTC “take action to avoid or avert a future occurrence in addition to remediating or stopping past harm” and that the Final Rule “falls squarely within the FTC’s core mandate.” 

Implications of These Rulings

While the Texas and Pennsylvania cases involve different employers with different circumstances, employers cannot square the decisions of the two rulings. The Texas court’s decision specifically stated “that the FTC lacks statutory authority to promulgate the [Final] Rule,” yet the Pennsylvania court reached a contrary conclusion. Moreover, the Pennsylvania court did not address the Texas court’s decision, despite being presented with it by the employer.

Regardless, the key takeaway from these cases is that the enforceability of the Final Rule is still very much in limbo, with courts disagreeing as to whether the Final Rule is lawful. These decisions are only preliminary, and the Texas court is expected to release its final decision on or before August 30, 2024. Ultimately, it may take the input of the Supreme Court to provide final clarity on the lawfulness of the Final Rule.

For now, employers should continue to monitor updates from the courts on the status of the Final Rule. Unless a court finds that implementation of the Final Rule should be halted nationwide, employers should be prepared to comply with the Final Rule by the effective date of September 4, 2024.