Pennsylvania Judge Rejects Challenge to FTC’s Noncompete Ban

There are now two differing court decisions on the Federal Trade Commission’s ban on noncompete contracts for employees, currently scheduled to take effect on September 4.

A judge in the U.S. District Court for the Eastern District of Pennsylvania on Tuesday declined to halt the FTC’s ban, which many in the financial services sector are watching, as it may alter some employment contracts.

In ATS Tree Services LLC v. Federal Trade Commission, U.S. District Judge Kelley Brisbon Hodge upheld the ruling, saying the tree services provider had failed to establish that the FTC lacked the legal standing to issue “procedural and substantive rules as is necessary to prevent unfair methods of competition.”

Furthermore, the judge ruled that the company failed to show it would suffer harm if it had to rescind noncompete agreements for some of its roughly 12 employees.

The decision comes after the U.S. District Court for the Northern District of Texas earlier this month granted a preliminary injunction and postponed the effective date of the rule for the plaintiffs in Ryan LLC et al. v. Federal Trade Commission.

In that case, the judge ruled that the FTC did not have the authority to issue “substantive” rules regarding contracts, but should therefore  rule on “housekeeping” items or case-by-case rulings based on specific unfair practices. The court also ruled that employers may be harmed should the ban go into effect.

The Pennsylvania judge’s ruling “says exactly the opposite” of what the federal judge in Texas wrote, Jeremy Merkelson, a partner with David Write Tremaine, said via email.

 “Employers are left in legal limbo wondering whether millions of private agreements are going to be enforceable between now and September 4, when the FTC’s ban is set to go into effect,” Merkelson wrote. “As a consequence of this latest ruling, clients want to know: do I have to send notices by September 4 telling current and former employees that their restrictions are no longer enforceable? Do I have to modify existing restrictive covenants agreements?”

His advice to those employers is to “be ready, but don’t move too quickly just yet.”

Merkelson believes that the FTC’s ban will be halted nationally by at least one federal court before the deadline, and then “the process will take several months, probably until mid-2025, before we get a final resolution of this matter from the Supreme Court.”

Many advisers operate with non-solicitation agreements, rather than non-competes, which would circumvent the rules. But various trade organizations and companies, including the business-based U.S. Chamber of Commerce, have argued that the ban will hurt businesses and the economy.

The FTC has contended that roughly 30 million Americans, or one in five workers, are subject to such contracts, which limit their ability to change jobs, earn higher wages and add to a more dynamic labor market.