On April 24, 2024, Senior Associate Alexis Wheeler posted an article on the New FTC Rule Banning Non-compete Clauses (the “New Rule”). Since that time, several lawsuits have been filed alleging that the FTC has overreached in hopes of striking down this new law. At present one such case is being litigated in the Northern District of Texas, and another was recently decided in the Eastern District of Pennsylvania. Below is a brief update on those cases and how they affect the upcoming implementation of the New Rule on September 4, 2024.

Ryan LLC v. Federal Trade Commission, No. 3:2024cv00986

The judge presiding over the Texas litigation granted a preliminary injunction against the FTC on July 3. The case, Ryan LLC v. FTC, asserts the FTC lacks the substantive rulemaking authority necessary to implement a comprehensive ban on non-competes. The Plaintiffs allege that their business’s economic viability would be damaged by the FTC and that the FTC is overreaching their authority by promulgating this rule. The preliminary injunction barred the enforcement of the FTC rule exclusively on the named parties of this case – limiting the new guidelines as they relate to Ryan LLC and a handful of other entities who moved to intervene in this suit, but not impacting other companies or the economy at large.

The Court declined to issue a nationwide injunction, but a decision is slated for August 30 and may limit enforcement prior to the rule taking effect on September 4. However, in issuing this injunction, the Court indicated that the Plaintiffs are likely to prevail on the merits of their case. Should the Court rule against them, the FTC will likely appeal. However, this would be a lengthy process and would result in a significant delay in the enforcement of the final rule.

ATS Tree Services, LLC v. Federal Trade Commission, No. 2:2024cv01743

The other pending litigation comes from the Eastern District of Pennsylvania. This case, entitled ATS Tree Services v. FTC, asserted many of the same claims as Ryan LLC. ATS’ complaint cites four counts, stating: (1) The FTC does not have statutory authority to promulgate substantive rules to prevent unfair methods of competition, (2) the FTC’s ban exceeds the FTC’s authority for preventing unfair methods of competition, (3) Rendering existing non-compete agreements unenforceable is arbitrary/capricious, and (4) the FTC Act unconstitutionally grants legislative power to the FTC.

While ATS’ claim was brought and scheduled to be decided after Ryan, LLC, the District Court for the Eastern District of Pennsylvania rendered a decision on July 23, 2024. Judge Kelley Brisben stated that the FTC possesses the clear legal authority to issue “procedural and substantive rules as is necessary to prevent unfair methods of competition.” The judge signaled that ATS provided no evidence to meaningfully substantiate that any of its twelve employees would leave if not for their non-compete contracts. Judge Brisben flatly rejected ATS’ challenge, which serves as a stark contrast to the recent preliminary injunction in Texas where that court signaled that the plaintiffs were likely to succeed on the merits of their claim, though the preliminary injunction only granted immediate protection to the named parties. The decision in ATS Tree Services serves as a victory for the FTC, as the new rule against non-competes is one step closer to being successfully implemented on September 4, 2024.

As you can see, there are very different opinions among federal court jurisdictions. As such, it is extremely important to monitor this law and consult an attorney on what actions, if any, that your business should take.