Just weeks after a federal court in Texas held that the Federal Trade Commission (“FTC”) exceeded its authority in issuing a rule banning nearly all non-compete agreement (and, therefore, the plaintiffs challenging that rule were not bound by it), a federal court in Pennsylvania has reached the opposite conclusion. This heightens uncertainty around the question of whether the FTC’s rule is valid, and it increases the likelihood that this question will ultimately land at the Supreme Court.

In the meantime, employers must decide whether to comply with the rule, and workers who are—on paper—bound to non-competes must decide whether to widen their job searches. (The rule is scheduled to go into effect on September 4, 2024, and employers planning to comply must provide written notices to affected employees by that date.)

Further Discussion

The federal case in Pennsylvania was brought by ATS Tree Services, LLC (“ATS”), a small tree care business with just 12 employees. ATS argued that the FTC Act does not give the FTC the authority to issue rules defining certain practices as unfair methods of competition and that, even if it does, a blanket ban on non-competes exceeded its authority (among other arguments).

The court first found that ATS had not established irreparable harm from the ban (because money damages could fix its alleged future harms). While that finding alone could have ended the analysis, the Court recognized the importance of the issue and continued to provide a substantive analysis of the merits of the case. The court concluded that the contested section of the FTC Act, which gives the FTC rulemaking authority, gives the FTC authority to issue substantive (and not just procedural) rules. The court found that the FTC’s mandate to “prevent” unfair methods of competition naturally includes setting rules about corporate behavior, that the FTC had relied on this section in issuing substantive rules in the past, and that Congress’s amendments to the FTC Act over the years indicate agreement with this substantive authority. (The relevant section of the FTC Act does not specifically state that the FTC has authority to issue rules that define unfair methods of competition, and a federal court in Texas found that the FTC lacks that authority.)[1]

The court found that the FTC’s non-compete rule was within the agency’s authority; it credited the FTC with “an extensive and thorough research and rule-making process.” And, the Court found that the FTC Act itself was constitutional and did not improperly delegate legislative authority to the FTC.

We previously discussed the contrary decision reached by the Northern District of Texas; to read about that decision, click here. To read our overview of the FTC rule itself, click here.

The lack of clear guidance in the face of a fast-approaching September 4, 2024 deadline puts employers and employees on the spot in determining next steps. Sullivan’s employment law team is diligently monitoring updates to the non-compete ban lawsuits filed nationwide and stands ready to advise on these issues.