FTC’s Upcoming Noncompete Ban Remains Intact (for Now)

Today, the Eastern District of Pennsylvania denied a request for a preliminary injunction to enjoin the FTC’s final nationwide noncompete ban rule (ATS Tree Services, LLC v. FTC). The Eastern District of Pennsylvania is now the second court to rule on the FTC’s noncompete rule. The first was the Northern District of Texas in Ryan LLC v. FTC, where the court issued only a limited injunction applicable to the named plaintiffs. Accordingly, no nationwide injunction against the FTC rule currently exists and the rule's September 4, 2024, effective date remains intact. Employers should nevertheless follow these cases for further developments, particularly the Texas case, as the district court has indicated it intends to make a final decision on the merits by August 30, 2024.

Background
The FTC’s final noncompete rule, issued April 23, 2024, applies to virtually all workers and employers in the U.S. other than to existing, but not future, noncompetes that apply to narrowly defined senior executives. Noncompetes entered as part of a bona fide sale of all or substantially all of a business are also exempted from the rule. Otherwise, the FTC’s rule effectively bans noncompetes nationwide for employers.

Two days after the FTC issued its final noncompete rule, ATS Tree Services, LLC (“ATS”) sued the FTC. ATS is a professional tree service company that serves residential, commercial, industrial, and municipal clients in Bucks County, Pennsylvania. ATS has only twelve employees, some of whom it describes as skilled tree climbers. ATS argued it would be harmed by the FTC’s rule by the potential loss of its investment in training and trained employees.

In denying ATS’s request for a preliminary injunction, the district court found that ATS failed to establish a reasonable likelihood that it would succeed on the merits of its claims that the FTC lacks substantive rulemaking authority under the FTC Act, that the FTC exceeded its authority by banning all noncompete clauses, and that Congress unconstitutionally delegated legislative power to the FTC. The district court’s analysis of the FTC Act relied in part on the Supreme Court’s decision last month in Loper Bright, noting that courts are required to exercise their independent judgment in deciding whether an agency has acted within its statutory authority.
 
What Next?
Because no court has issued a nationwide injunction against enforcement of the noncompete ban, the ban remains scheduled to go into effect on September 4, 2024, for everyone except a small handful of entities in Texas. The rule requires that employers provide, by the effective date, clear and conspicuous notice to workers covered by noncompetes that the noncompete will not be, and cannot legally be, enforced against the worker. Employers wanting to take steps for potential compliance might consider identifying current and former workers to whom notice must be given and preparing the form of notice. Employers should also closely follow developments in the ongoing challenges, however, especially in the Ryan case in Texas, given the possibility of a broader ruling that could delay the effective date of the noncompete rule.