Courts Are Now Split on Legality of FTC’s Non-Compete Ban – Pennsylvania District Court Determines that FTC Ban is Legal

Two district courts have now ruled on the legality of the FTC’s general ban on non-compete agreements.¹ Our July 5 blog described the Ryan LLC v. FTC case, a decision by a federal district court in Texas that issued a preliminary injunction barring the FTC from enforcing the rule. A federal district court in Pennsylvania has just reached the opposite conclusion in ATS Tree Services, LLC v. FTC.

The plaintiff in ATS Tree Services sought a preliminary injunction barring FTC enforcement of the rule.  In denying the preliminary injunction, the court held that a preliminary injunction should be denied for two reasons: (1) plaintiff could not meet the requirement for a preliminary injunction that a plaintiff would suffer irreparable injury if the rule were allowed to go into effect; and (2), more importantly, plaintiff had not shown a reasonable likelihood of success on the merits of its challenge.

It is expected that the next important development in this confusing situation may occur in the Texas case. The judge in the Ryan case indicated that she would issue a final decision before August 31. An important issue in that case remains the scope of any final injunction that may be issued. While the parties sought a nationwide injunction, the initial ruling limited the relief to only the parties in the case, so, unless the scope of relief is broadened in the final order, only the plaintiffs in Ryan will directly benefit from the case.

The obvious question is what employers should be doing now if they have employment arrangements with non-compete provisions. Since any ruling in the Ryan case might come so late that there would be almost no time to act before the September 4 effective date, depending on the employer’s situation, there are some steps that should be taken now. This issue is discussed in more detail in our April 24 blog, but here is a summary of our thinking:

• The most obvious first step is to determine what agreements might be illegal under the FTC’s rule and see whether there are any changes that might salvage them.
• There is an exception for agreements with “senior executives” entered into before the effective date. Determining the scope of this exception (and maybe entering into new or revised agreements with some executives) will be important for some employers.
• The rule requires that the employer issue a notice by the effective date to all employees with non-compete clauses, telling them that the clauses will not and cannot be enforced against them. Employers need to determine what stance they intend to take with respect to this aspect of the rule, including how to draft the notice in a way that does not prejudice the employer’s rights in the event the FTC rule is ultimately found illegal.

¹ See our blog of April 24 for a general description of the new FTC rule and some of the issues companies should be thinking about prior to its September 4, 2024, effective date.