Client Alert: New Decision in Pennsylvania Federal Court Stirs Turmoil Around the FTC Non-Compete Ban
July, 2024 - United States of America
Following the July 3, 2024, Order by the Hon. Ada Brown, U.S.D.J. in the Northern District of Texas staying the effectiveness of the Federal Trade Commission’s (“FTC”) Non-Compete Rule (“Rule”) (see link to last blog), the Hon. Kelley B. Hodge, U.S.D.J. of the Eastern District of Pennsylvania took the exact opposite position. In ATS Tree Service, LLC v. The Federal Trade Commission, et al., Case No. 2:24-cv-01743, Judge Hodge declined Plaintiff ATS Tree Service, LLC’s (“ATS”) request for a preliminary injunction and stay of the Rule, finding that ATS had failed to show irreparable harm or a likelihood of success on the merits. A potential circuit split is now looming, putting thousands of companies and their employees in limbo regarding the viability of their existing and future non-compete agreements.
With respect to irreparable harm, Judge Hodge found that ATS’s (minimal) interim costs of compliance – which are not recoverable against the FTC if the Rule is invalidated – are not a valid basis for a finding of irreparable harm under the Third Circuit. ATS articulated other harms, such as the need to scale back training to guard against attrition of employees to competitors with ATS’s specialized training, loss of contract, and loss of employees. The Court found that all of these potential harms were too speculative in nature, especially as no employee of ATS has quit or even indicated an intention to resign as a result of the Rule. Judge Hodge’s decision is in stark contrast to Judge Brown’s decision in this regard. This wide variation can be attributed, at least in part, to the vast difference between the two plaintiffs. The plaintiff in the Texas case, Ryan LLC, is a global tax services firm with over 4,000 employees worldwide, whereas ATS is a 12-person operation in a single county in Pennsylvania. As such, ATS’s compliance costs were estimated to only be about $1,500 and the impact across its employees would likely be relatively minimal in comparison.
As to the likelihood of success, Judge Hodge determined that “the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition.” Moreover, Judge Hodge opined that Congress’s use of the term “prevent,” “means the FTC was intended to act prophylactically to stop ‘incipient’ threats of unfair methods of competition, not solely responsively through adjudications[.]” The Court further found that the blanket ban was within the FTC’s authority based on the FTC’s research indicating that non-compete clauses are not justified by legitimate business purposes and are, instead, exploitative and coercive. With respect to states’ rights in regulating the non-compete arena, Judge Hodge believes that the state and federal governments have shared jurisdiction in this arena.
Notably, the Court did not analyze, because it was not presented as part of this application, the arbitrary and capricious nature of the Rule. Judge Brown in the Texas case held that the Rule is arbitrary and capricious because it is “unreasonably overbroad without a reasonable explanation.” It also appears ATS did not advance a claim that the FTC insufficiently addressed alternatives to issuing the Rule, which was raised by Ryan and endorsed by Judge Brown in Texas.
Judge Hodge’s decision and Judge Brown’s decision regarding the likelihood of success are polar opposites. While Judge Hodge is clearly leaning toward confirming the viability of the Rule, Judge Brown seems poised to throw it out. The question now becomes: will a circuit split arise and how will that affect the thousands of companies who need to know if compliance on the rapidly approaching September 4 deadline will come to fruition? It may be in ATS’s best interests to dismiss its case pending Judge Brown’s final decision, which is anticipated by August 30, 2024.
If you have questions about how a circuit split, pendency of the Rule, or its effectiveness may affect your non-compete agreement(s), or what options you may have moving forward, please contact Kory Ann Ferro or Kelly Purcaro at Greenspoon Marder.
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