In April, the Federal Trade Commission (FTC) promulgated a new rule banning non-competes (the Rule); the FTC adopted the Rule to prohibit employers from entering into or enforcing non-compete clauses with workers and senior executives. Several lawsuits were quickly filed challenging the rules. Separate parties filed in Texas (in which cases were consolidated), and ATS Tree Services, LLC, filed an action in Pennsylvania.

On July 23, 2024, the U.S. District Court for the Eastern District of Pennsylvania issued a ruling denying ATS Tree Services’ motion for a stay and a preliminary injunction against the Rule. ATS Tree Services, LLC v FTC, No: 2:24-cv-01743-KBH, at p.18 (E.D. Pa. July 23, 2024). The Court held that ATS had not demonstrated the irreparable harm necessary to justify the issuance of a preliminary injunction and also held that ATS failed to establish a reasonable likelihood of success on the merits of its action.

The ruling is diametrically opposed to the July 3, 2024, ruling from the U.S. District Court for the Northern District of Texas, which preliminarily enjoined the Rule and postponed its effective date in Ryan, LLC v. U.S., No. 3:24-CV-00986-E, 2024 (N.D. Tex. July 3, 2024). However, the district court declined to issue a universal injunction, making its ruling applicable only to the Ryan plaintiffs.

The Decisions

In ATS Tree Services, the court first held that nonrecoverable costs of compliance do not rise to the level of irreparable harm, in that “monetary loss and business expenses alone are insufficient bases for injunctive relief.” ATS Tree Services at p.18. Additionally, the court held that the claimed loss of contractual benefits was too speculative. Id. 20-21.

Even though the court found that ATS failed to establish irreparable harm, it added an analysis of ATS’s likelihood of success on the merits, spending the majority of its decision assessing (just as the Ryan Court had) whether “[s]ection 6(g) empowers the FTC with the authority to make substantive rules related to unfair methods of competition in or affecting commerce, or whether the rulemaking authority therein is limited to procedural rules relating to adjudications of unfair methods of competition in or affecting commerce.” ATS Tree Services, at p.8. Notably, the Court relied upon the Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, 2263 (2024) to “independently interpret the statute and effectuate the will of Congress subject to constitutional limits.” Id. at 25. In doing so, the Court harmonized sections 5 and 6 of the FTC Act, concluding:

When taken in the context of the goal of the Act and the FTC’s purpose, the Court finds it clear that the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition. Thus, the Court rejects ATS’s argument that it should read the word “procedural” but not the word “substantive” into the statutory text defining the FTC’s rulemaking authority. This argument is inherently inconsistent and therefore untenable. Id. at 26.

This was directly contrary to the Ryan decision where the court found under section 6(g) that the FTC lacks the authority to create substantive rules because the Act is only a “housekeeping statute” that allows the FTC to promulgate general “rules of agency organization procedure or practice,” not “substantive rules.” Ryan at *15 (citing Chrysler Corp. v. Brown, 441 U.S. 281, 310 (1979)).

The court in ATS Tree Services went on to address the FTC’s mandate to “prevent prohibited ‘unfair methods of competition’” under section 5, thereby acknowledging Congress’s terms were “intended to act prophylactically to stop ‘incipient’ threats of unfair methods of competition, not solely responsively through adjudications, as courts interpreting the statute have confirmed.” ATS Tree Services, at p. 28. In addition, the court found that the FTC’s rulemaking authority had been confirmed by other circuit courts. Finally, in the rest of the decision, the Court disposed of the other alternative challenges made by ATS. This was contrary to the Ryan decision, where the Texas court had held that the FTC acted arbitrarily and capriciously, because the Rule was “unreasonably broad without a reasonable explanation” and did not sufficiently address alternatives to issuing the Rule. 

 Key Takeaways

The two courts have issued opinions with conflicting analyses. While Texas has issued a preliminary injunction specific to the Ryan plaintiffs, the court did indicate it intends to make a final determination on the merits by August 30, 2024, prior to the Rule’s effective date. The Ryan Court will have the opportunity to vacate the Rule in its entirety as unlawful and issue a permanent injunction, with the scope of the relief ordered yet to be decided. This new ruling sets up the potential for an appeal to the U.S. Court of Appeals for the Fifth Circuit and possibly seek direct relief from the U.S. Supreme Court.

*This post was co-authored by Lily Denslow, legal intern at Robinson+Cole. Lily is not admitted to practice law.