FTC Gets a “Dub” on Non-Compete Rule Compliments of Pennsylvania Federal Court

As previously covered here, on April 23, 2024, the Federal Trade Commission issued a final rule effectively concluding that it is an unfair method of competition, and therefore a violation of Section 5 of the FTC Act, for employers to enter into non-competes with workers and to enforce certain non-competes.

Following announcement of the final rule, a Dallas, Texas-based global tax consulting firm filed a lawsuit in a Texas federal court challenging the FTC’s authority to issue the final rule, including that the FTC has no authority to issue retroactive rules.  In doing so, the plaintiff sought a stay of the effective date and to preliminarily enjoin enforcement of the rule.  Subsequently, the U.S. Chamber of Commerce sought almost identical relief in the Eastern District of Texas on behalf of itself and other business associations, ultimately intervening in the former matter.

Specifically, the court found that: (i) the text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition; (ii) the FTC exceeded its statutory authority in promulgating the noncompete ban: (iii) the noncompete ban is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation; (iv) the noncompete ban imposes a one-size-fits-all approach with no end date, which fails to establish a rational connection between the facts found and the choice made; (v) the FTC’s reasoning for the rule is inconsistent and flawed empirical evidence that fails to consider the positive benefits of non-compete agreements, and disregards the substantial body of evidence supporting noncompete agreements; (vi) compliance with the noncompete rule, including required notice obligations, would result in financial injury to the plaintiffs; (vii) the requested injunctive relief is not granted, the injury to plaintiffs and the public interest would be great; and (viii) the noncompete rule makes unenforceable long-standing contractual agreements that have been judicially recognized as lawful and beneficial to the public interest.

The court declined to extend the injunctive relief to members of the U.S. Chamber of Commerce and other intervenors.  Notably, the court also refused to extend the rule nationwide.  A final decision by the Texas federal court is pending.  If the Texas court rules against the FTC, it can either vacate the rule in its entirety as unlawful and/or issue a permanent injunction.

Meanwhile, a decision issued on July 23, 2024 by the U.S. District Court for the Eastern District of Pennsylvania denied a different plaintiff’s motion for a stay of effective date and preliminary injunction against the Federal Trade Commission’s non-compete ban.  Here, the court held that plaintiff was unable to establish either irreparable harm or a likelihood of success on the merits.  With respect to the latter, the court held that the FTC has statutory authority to promulgate substantive rules as to unfair methods of competition.

The Pennsylvania court further held that the FTC has authority to designate non-compete clauses as unfair methods of competition because they are (i) exploitative and coercive; and (ii) unjustified by legitimate business purposes.  The court further found that regulation of non-competes is within the purview of both states and the federal government.

The Pennsylvania court decision is contrary to the ruling reached by the Northern District of Texas, where it was found that the plaintiffs there were likely to succeed on the merits.