Non-compete agreements are here to stay, at least for now.
On August 20, 2024, Judge Ada E. Brown of the United States District Court for the Northern District of Texas ruled that the Federal Trade Commission’s (“FTC”) final rule banning the majority of non-competition agreements nationwide is unlawful and unenforceable. Judge Brown’s ruling in Ryan LLC v. Federal Trade Commission, C.A. No. 3:24-CV-00986-E (N.D. Tex.) is at odds with an earlier decision from the United States District Court for the Eastern District of Pennsylvania.
The Texas federal court ruling means that the FTC’s Non-Compete Rule, adopted on April 23, 2024, is set aside and will not take effect on September 4, 2024. The FTC’s non-compete ban would have applied to most post-employment non-compete agreements in the workplace – including non-compete provisions found in employment contracts – that prevent employees, independent contractors and others from working for direct competitors.
The decision does not prevent the FTC from addressing non-compete agreements through “case-by-case” enforcement actions, an agency spokeswoman told the Associated Press. The FTC may appeal the judge’s decision, the AP reported.
In the Texas case, Ryan LLC, backed by the U.S. Chamber of Commerce and other intervening plaintiffs, originally brought suit seeking a stay and preliminary injunction to prevent the FTC’s final rule from going into effect. On July 3, 2024, Judge Brown determined that there was a substantial likelihood that the plaintiffs would succeed on the merits of their claim. The court preliminarily enjoined implementation and enforcement of the rule as to the plaintiffs.
Shortly thereafter, the parties sought summary judgment. Judge Brown, as she had when ruling on the preliminary injunction, ruled in favor of the plaintiffs in finding that the FTC had overstepped its authority. Specifically, the court stated that while the “FTC has some authority to promulgate rules to preclude unfair methods of competition[,]” the agency “lacks the authority to create substantive rules through this method.”
“In sum, the Court concludes that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious,” the judge ruled. “Thus, the FTC’s promulgation of the Rule is an unlawful agency action.”
After finding the non-compete ban invalid as to the parties, Judge Brown held that the proper remedy under the Administrative Procedure Act (a federal statute governing the authority and scope of federal agencies) was to invalidate the rule in its totality. The court ruled that the relief that it granted in setting aside the FTC’s non-compete rule has “nationwide effect” and is not limited to only the named plaintiffs in the case.
The 27-page Memorandum Opinion and Order issued by Judge Brown of the Northern District of Texas is contrary to a ruling made last month by Judge Kelly B. Hodge in the Eastern District of Pennsylvania, ATS Tree Services, LLC v. Federal Trade Commission, C.A. No. 24-1743, 2024 WL 3511630 (E.D. Pa. July 23, 2024).
In the Pennsylvania decision, the judge denied a plaintiff tree company’s request for a stay and preliminary injunction seeking to block the FTC’s non-compete ban. The court found that it was unlikely that the plaintiff would ultimately prevail on the merits of its claim, and that the plaintiff had failed to show that it would be irreparably harmed by the rule.
In a separate Florida lawsuit, which was brought by a retirement community, a federal judge in the U.S. District Court for the Middle District of Florida granted a preliminary injunction, prohibiting enforcement of the rule just for the plaintiff, but not any other company, the AP reported.
In light of these conflicting lower-court rulings, the enforceability of the FTC’s non-compete ban likely will be appealed to federal appellate courts and ultimately may be decided by the U.S. Supreme Court due to the far-reaching consequences of the rule.
Until such time as the higher courts weigh in, non-compete clauses for employers and employees here will continue to be governed by existing Pennsylvania law. In Pennsylvania, while some court decisions comment on non-competition clauses being disfavored, the Pennsylvania Supreme Court has held that non-competes and other restrictive covenants “are enforceable if they are incident to an employment relationship between the parties; the restrictions imposed by the covenant are reasonably necessary for the protection of the employer; and the restrictions imposed are reasonably limited in duration and geographic extent.” Hess v. Gebhard & Co. Inc., 570 Pa. 148, 157, 808 A.2d 912, 917 (2002).
For more information about how these developments may impact your employment contracts, or if you need guidance on how to proceed in this shifting legal landscape, call us at 412-209-3200 or email us at wlabovitz@PaLawFirm.com to schedule a free, no-obligation consultation.