On July 23, 2024, a federal district court judge in the Eastern District of Pennsylvania sided with the Federal Trade Commission (the “FTC”) in denying a request for a stay of the Rule’s effective date and a preliminary injunction on the enforcement of the final rule the FTC had issued that generally prohibits companies from utilizing non-compete clauses in the employment context (the “Non-Compete Rule” or the “Rule”).^[1] As explained in more detail below, the court’s conclusion differs strongly from the decision by a federal district court judge in the Northern District of Texas, on July 3, 2024, in which the court issued a preliminary injunction prohibiting the FTC from “implementing or enforcing” the Non-Compete Rule.^[2] 

Northern District of Texas – July 3, 2024

In granting the plaintiffs’ motion for a preliminary injunction, the court concluded that the FTC did not have the legal authority to issue the Non-Compete Rule and the plaintiffs had satisfied the requirements for the issuance of an injunction. In a partial win for the FTC, the court’s injunction was limited to the plaintiffs in that lawsuit.^[3] The court specifically declined to issue a nationwide injunction, instead the court issued a more narrow injunction prohibiting the FTC “from implementation of or enforcement of the Non-Compete Rule . . . against” the plaintiffs. The injunction will stay in place until the court issues a ruling on the merits. The court intends to issue its ruling on the merits on or before August 30, 2024, which is prior to the September 4, 2024 effective date identified by the FTC. As it stands, the court’s ruling does not delay the effective date of the Non-Compete Rule for everyone. 

As noted above, the court only issued a “preliminary” injunction and the court intends to issue a decision “on the merits” of the challenge to the Non-Compete Rule on or before August 30, 2024. It is possible that the court may expand the scope of the injunction at that point or vacate the Non-Compete Rule, which would effectively “erase the agency action from the books” and therefore provide “universal” relief,^[4] but we will have to wait until August 30th to see if that is the case.  

Eastern District of Pennsylvania – July 23, 2024

In rejecting a challenge to the validity of the Non-Compete Rule, the Eastern District of Pennsylvania disagreed with essentially the same arguments that had been successful in the Northern District of Texas. The Eastern District of Pennsylvania concluded that the plaintiff’s request for a preliminary injunction should be denied because the plaintiff had failed to establish the two elements necessary for the issuance of a preliminary injunction. 

First, the court explained that the plaintiff had failed to demonstrate that it would suffer irreparable harm if the Rule was not enjoined. Second, and more importantly, the court found that the plaintiff had failed to demonstrate a “likelihood of success on the merits.” On this second element, the court reasons that the FTC has the statutory authority to promulgate and issue the Non-Compete Rule. The court then rejected the other bases for the plaintiff’s challenge to the Rule, including a challenge to the constitutionality of the Rule and the statutory delegation of authority to the FTC.

It is likely that the plaintiff in this case will pursue an appeal to the United States Court of Appeals for the Third Circuit, but appeals take time and it is unlikely that the Third Circuit would take any action prior to the Rule’s scheduled effective date of September 4, 2024.  

What’s Next?

As noted above, the Northern District of Texas is expected to issue a decision on the merits by August 30, 2024. Depending on the form and scope of relief the court grants in that decision, it is possible that many short-term questions could be answered prior to the Rule going into effect. If, however, the court limits its relief to the named-plaintiffs, it is likely that the Non-Compete Rule will become effective on September 4, 2024.

If the Rule does go into effect, it is important to note that there is no private right of action under the Rule, meaning that employees cannot personally sue an employer for violating the Rule; rather, only the FTC can enforce the Rule. Likewise, the FTC does not have statutory authority to issue penalties for violating the Rule and the FTC can only sue for a court order instructing an employer to comply with the Rule. Ultimately, if the Rule does go into effect, its most significant impact will be as a defense that an employee can raise when an employer attempts to enforce a non-compete.^[5]      

Conclusion

Due to the uncertainty regarding the ultimate outcome of these legal challenges, we recommend that employers continue to consider what changes may need to be made if the Non-Compete Rule takes effect, but the dueling decisions indicate that we may be in for an extended period of uncertainty. 

Koley Jessen will continue to monitor the developments on the Non-Compete Rule and the legal challenges to the Non-Compete Rule and will provide additional guidance as needed. Employers with questions about the Non-Compete Rule or the court’s decision, should contact a member of our Employment, Labor, and Benefits Department.

^{[1] ATS Tree Services, LLC v. Federal Trade Commission, et al., No. 24-1743 (E.D. Pa. July 23, 2024).}  

^{[2] Ryan, LLC, et. al. v. Federal Trade Commission, No. 3:24-CV-00986-E (N.D. Tex. July 3, 2024).}

^{[3] The plaintiffs are Ryan, LLC, the U.S. Chamber of Commerce, the Longview, Texas Chamber of Commerce, the Business Roundtable, and the Texas Association of Business.}

^{[4] Texas v. United States Dep’t of Transportation, No. 5:23-CV-304-H, 2024 WL 1337375, at *20 (N.D. Tex. Mar. 27, 2024).}

^{[5] For a discussion of the Non-Compete Rule’s substantive provisions, here is a link to Koley Jessen’s previous article regarding the Rule: https://www.koleyjessen.com/newsroom-publications-ftc-issues-final-rule-to-ban-non-competes.}

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