Recent ruling by Pennsylvania court adds more confusion to the status of the FTC Non-Compete Rule

On July 23, 2024, in another lawsuit challenging the legality of the FTC’s Non-Compete Rule, the Eastern District of Pennsylvania denied a motion filed by ATS Tree Services, LLC (ATS) against the Federal Trade Commission and its Commissioners (collectively, the FTC) seeking to stay the effective date of the Federal Trade Commission’s broad Non-Compete Rule, and to preliminarily enjoin the enforcement of the Rule.

As explained in McDonald Hopkins’ previous alerts on the topic, the Rule is set to take effect on September 4, 2024, effectively banning most non-competition agreements with few exceptions. In early July 2024, in a separate consolidated case seeking injunctive relief from and stay of the Rule, a Texas court found that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition and granted preliminary injunctive relief as to the parties in that case, but chose not to enter a nationwide injunction.

Now, the Pennsylvania court reached a contrary decision and found that ATS failed to establish that it would be irreparably harmed if the Rule takes effect, and failed to show a likelihood of success on the merits of its preliminary injunction claims against the FTC. In doing so, the Pennsylvania court found that the FTC has the authority to make both procedural and substantive rules as is necessary to prevent unfair methods of competition.

The difference in the results reached by the Pennsylvania and Texas courts demonstrates a stark split in the courts regarding the enforceability of the Rule and the authority of the FTC.  Accordingly, the Rule is still set to go into effect on September 4. Because the Pennsylvania court denied ATS’s Motion, it is unlikely to address this topic further for the time being. However, the Texas court intends to rule on the ultimate merits of that action on or before August 30, 2024, and, therefore, there is still a possibility of a nationwide injunction being issued against the Rule.

Businesses and employers: Still plan for non-compete ban effective September 4

As a result of the Pennsylvania ruling and the limited scope of the injunction in the Texas case, for now, businesses and employers still need to plan for the Rule’s potential effective date on September 4, 2024. This means you should begin:

• Identifying the universe of employees and former employees who may need to be notified that their non-compete agreements are no longer enforceable;
• Identifying senior executives who are not subject to a non-compete, but who could be asked to sign one before September 4;
• Updating restrictive covenant agreements to ensure that non-solicitation and confidentiality language is appropriate and enforceable.

McDonald Hopkins has detailed information on these steps available here.

Moving forward, the courts may very well expand the scope of the injunction to further delay the implementation of the Rule for a broader number of businesses and employers. However, for now, most businesses still need to be preparing for the September 4, 2024 effective date. Given the continued uncertainty surrounding the FTC’s sweeping Non-Compete Rule, if you have questions regarding the Rule or your company’s current suite of restrictive covenants, contact your McDonald Hopkins attorney or any member of McDonald Hopkins' Trade Secret, Non-Compete, and Unfair Competition team.

We will continue to monitor developments and keep employers updated.