Courts split on FTC’s noncompete ban after Pennsylvania judge’s decision

The ruling comes exactly 20 days after a Texas federal judge placed a partial injunction on the noncompete ban.

July 23, 2024 - HR Dive
Ryan Golden, Senior Reporter

Dive Brief:

• A federal judge on Tuesday denied a Pennsylvania tree care company’s bid to stay and preliminarily enjoin the Federal Trade Commission’s ban on noncompete agreements in employment contracts because the plaintiffs failed to show that the ban would cause irreparable harm.
• Judge Kelley Hodge of the U.S. District Court for the Eastern District of Pennsylvania held ATS Tree Services’ claim that it would face nonrecoverable compliance costs is not a valid basis for finding irreparable harm in the 3rd U.S. Circuit Court of Appeals. Hodge also found that the possible risk of losing employees due to the ban could not substantiate a finding of immediate and irreparable harm.
• Hodge said that even if ATS Tree Services could establish irreparable harm, its motion would still fail because it is unable to show that the ban exceeds FTC’s statutory authority. Hodge’s decision comes exactly 20 days after a Texas federal judge partially enjoined》he noncompete ban, finding that the agency did exceed its statutory authority and that the ban has a “substantial likelihood” of being found arbitrary and capricious.

Dive Insight:

Hodge’s decision creates a split among the district courts on the ban, amounting to “complete uncertainty” for employers, John Siegal, partner at BakerHostetler, said in an email to HR Dive.

In the Texas case decided July 3, Judge Ada Brown said her preliminary injunction of FTC’s ban applied only to the plaintiffs and plaintiff-intervenors in the case before that court. Brown denied the plaintiffs’ request for a nationwide injunction, stating that the court did not view the preceding as an “‘appropriate circumstance’” meriting nationwide relief.

However, Brown said she also would rule on the merits of the noncompete ban on or before Aug. 30, 2024, just days prior to its effective date on Sept. 4.

Employers may not see a nationwide preliminary injunction of the rule before its effective date, according to Siegal. “While expedited appellate review is possible, it seems unlikely that two circuit courts of appeals will hear and determine appeals in August or that they would necessarily come out the same way,” he said. “There are also other district court cases in which the issue may be litigated. So unclarity is most likely.”

Hodge, who invoked the U.S. Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo ・which struck down the court’s Chevron doctrine of deference to agency interpretations of federal statutes ・held that the text of the Federal Trade Commission Act did not prohibit the agency from issuing substantive rules like the one implementing the noncompete agreement.

“The plain text of the statute provides no express limitations on the FTC’s rulemaking authority and the Court will not read in such limitations,” Hodge said.

Hodge also rejected ATS Tree Services’ claim that the ban violated the Supreme Court’s major questions doctrine, under which agency actions that decide an issue of national significance must be supported by clear congressional authorization. She held that the FTC’s action “falls squarely within its mandate to ‘prevent’ ‘unfair methods of competition’” and that Congress properly delegated authority to the commission.

“Today’s decision shows that the so-called major questions doctrine and the Loper Bright decision are not the magic formulas to [overturning] agency actions that some believe they are, and that congressional intent and the track record of agency regulatory efforts remain critical issues in any challenge to an agency rulemaking,” Siegal said. “Like seemingly everything else in America these days, these issues are going to be disputed, debated and are not going to be conclusively resolved in the near-term.”