On July 23, 2024, the U.S. District Court for the Eastern District of Pennsylvania in ATS Tree Services, LLC v. Federal Trade Commission, declined to block the Federal Trade Commission’s (FTC) final rule that would cause most non-compete agreements, with few exceptions, to be unenforceable (referred to as the “Non-Compete Rule”). Denying the plaintiff’s motion for a preliminary injunction, the court concluded that ATS failed to demonstrate that the Non-Compete Rule would cause ATS irreparable harm (nonrecoverable compliance costs and loss of contractual rights were insufficient) or that ATS was likely to succeed on the merits (the FTC had constitutional and statutory authority to promulgate the Non-Compete Rule).

The court’s holding diverges from the recent holding in Ryan, LLC v. Federal Trade Commission, in which the U.S. District Court for the Northern District of Texas enjoined the Non-Compete Rule, finding the FTC lacked the statutory authority to issue the final rule, but limited the injunctive relief to the plaintiff and plaintiff-intervenors. The court in Ryan did not grant a nationwide injunction to the Non-Compete Rule, but will adjudicate the ultimate enforceability of the Non-Compete Rule on or before August 30, 2024.

The upshot from these cases is that, at present, the Non-Compete Rule remains set to take effect on September 4, 2024. Three remaining variables, however, could change this: a final adjudication on the merits in Ryan could expand the scope of relief; appeals in either the ATS or Ryan case could seek emergency relief from the circuit courts (though it is unlikely the circuit courts would rule before September 4); or a third challenge from the U.S. District Court for the Middle District of Florida in Properties of the Villages, Inc. v. Federal Trade Commission could halt the Non-Compete Rule.

The Court’s Ruling

ATS sought only to enjoin the Non-Compete Rule as to itself and did not ask the court for a nationwide injunction to the Non-Compete Rule either in its briefing or at oral argument. The court nonetheless denied the request. The court began by concluding that ATS failed to demonstrate that it would suffer irreparable harm in the absence of the enjoinment to the Non-Compete Rule, which alone warranted the denial for injunctive relief. The court concluded that purely economic compliance costs for the Non-Compete Rule (e.g., costs associated with employee notification, review and modifications to business strategy, changes to specialized training, and attorneys’ fees) were only monetary losses and business expenses, and were insufficient to cause irreparable harm. The court rejected ATS’s second basis for irreparable harm, loss of contractual rights, reasoning the irreparable harm analysis required a fact-based inquiry, and ATS failed to show the loss of contractual rights would cause the loss of employees or proprietary information.

Next, the court held that even if ATS could demonstrate irreparable harm, it could not demonstrate that it was likely to succeed on the merits. The court relied on two reasons:

First, the court found the FTC had procedural and substantive authority, which included the authority to promulgate the Non-Compete Rule. Nothing in the FTC Act, according to the court, limited the agency’s authority to procedural rules; the agency also had the authority to promulgate substantive rules to prevent unfair methods of competition. The court arrived at that conclusion by relying on the statutory and historical context, including amendments to the FTC Act over the last several decades.

Second, the court found the FTC did not exceed its authority to promulgate substantive rules by banning nearly all non-competes because (1) doing so was consistent with the FTC Act’s Policy Statement; (2) states remain able to regulate non-competes so long as there is no conflict with the Non-Compete Rule; (3) the major questions doctrine did not apply because the FTC had previously promulgated substantive rules to prevent unfair methods of competition; and (4) Congress’s delegation of authority to the FTC was constitutional because preventing unfair methods of competition was an intelligible principle.

What’s Next?

The court’s decision in ATS foreshadows the FTC’s gameplan for defending the Non-Compete Rule on potential appeals and in other cases, and the Ryan court could rely on some parts of the ATS opinion to limit injunctive relief to exclude a nationwide injunction.

The ATS opinion addressed most of the potential challenges to the FTC’s authority to promulgate the Non-Compete Rule and rejected them all. The FTC will likely rely on the ruling from ATS in defending against another challenge to the Non-Compete Rule in Properties of the Villages, Inc. v. Federal Trade Commission in Florida federal court, where the plaintiff is similarly seeking a preliminary injunction to the Non-Compete Rule as to itself without a request for a nationwide injunction.

For all employers other than the plaintiff and plaintiff-intervenors in Ryan, the Non-Compete Rule’s effective date remains September 4, 2024. As previously noted, there are three developments could change this. First, the court in Ryan could expand the scope of relief to include a nationwide injunction when it adjudicates the claim on the merits on or before August 30, 2024. Second, an appeal in the Ryan or ATS case could include a request to the circuit courts for emergency relief to halt the Non-Compete Rule. While ATS did not commit to appealing the district court’s ruling to the Third Circuit immediately following the court’s holding, an appeal in Ryan is likely. Assuming the court in Ryan adjudicates the claim on the merits on August 30, 2024, and does not invalidate the Non-Compete Rule, the plaintiff would have only five days (over a holiday weekend) to seek emergency relief from the Fifth Circuit before the Non-Compete Rule’s effective date. Third, the court in Properties of the Villages, Inc., could provide greater relief than the plaintiff requested and issue a nationwide injunction to the Non-Compete Rule, though courts rarely grant more expansive injunctive relief than requested.

As employers watch these developments shake out, they should consult legal counsel and evaluate strategies for their organization. This should include considering the risk factors associated with the Non-Compete Rule’s notice requirement as the September 4, 2024, notice deadline approaches.