The Federal Trade Commission (FTC) got a boost in its efforts to implement a nationwide ban on noncompete contract clauses courtesy of a Pennsylvania-based federal judge’s July 23 ruling, but whether the prohibition will take effect as planned on Sept. 4 remains an open question due to a separate case in Texas.
In the Pennsylvania case, U.S. District Judge Kelley Brisbon Hodge denied a request from plaintiff ATS Tree Services to issue a stay and preliminary injunction that would have prevented the FTC from enforcing its ban on noncompete agreements at least temporarily.
Contrary to ATS’s assertions, Hodge ruled that the FTC has the legal authority to promulgate the noncompete ban. The judge also said that ATS had failed to establish that it would suffer irreparable harm if an injunction wasn’t issued while asserting that the business further came up short in making a case that its suit would ultimately prevail.
“Plaintiff has failed to establish a reasonable likelihood that it will succeed on the merits of its claims that the FTC lacks substantive rulemaking authority under its enabling statute, that the FTC exceeded its authority and that Congress unconstitutionally delegated legislative power to the FTC,” Hodge wrote in a memorandum.
FTC Spokesperson Douglas Farrar said Hodge’s ruling “vindicates” the FTC and shows the organization is on firm legal ground in pressing forward with the noncompete ban. Noncompetes “harm competition by inhibiting workers’ freedom and mobility while stunting economic growth,” Farrar said.
A lawyer for ATS, Josh Robbins of the libertarian Pacific Legal Foundation, indicated that Hodge’s ruling was incorrect. “The FTC does not have the statutory authority to rewrite millions of employment contracts by banning noncompete agreements,” Robbins said in a statement.
The Texas Case & Legal Outlook
Texas-based U.S. District Judge Ada Brown appears to agree with Robbins.
Earlier this month, Brown issued a preliminary injunction that prevents the FTC from enforcing the ban against plaintiffs that are suing the agency to have the noncompete rule struck down. Those plaintiffs include business groups, such as the U.S. Chamber of Commerce, and Ryan, a global tax services firm and software provider.
Brown stopped short of immediately enjoining the FTC from enforcing the noncompete ban against all employers nationally but granted the injunction after preliminarily concluding that the commission lacks the authority to promulgate the rule, making it likely that Ryan and the business groups will prevail in their lawsuit. A final ruling in the case is expected Aug. 30, just days before the planned Sept. 4 enforcement date.
Regardless of the final adjudications in the Pennsylvania and Texas cases, appeals that lead to potentially lengthy litigation battles are probable, according to legal experts. “It is likely that the dispute will ascend to the Third and Fifth Circuits, respectively,” wrote attorneys for the labor law firm Proskauer. The Third Circuit Court of Appeals’ jurisdiction includes Pennsylvania, while the Fifth Circuit includes federal cases being appealed from Texas.
Also clouding the future of the noncompete ban is a late June ruling from the U.S. Supreme Court that weakened federal agencies’ regulatory authority – a decision some legal experts say will make it even more difficult for the FTC to keep its noncompete ban on the books.
“The power has shifted to people challenging the FTC,” Chuck Machion, senior vice president and senior counsel at ASI, has said.
The FTC approved banning noncompete agreements this spring, voiding existing clauses for all workers besides senior-level executives and preventing new noncompetes. A noncompete agreement prohibits workers from taking another job or starting a business in a profession that competes with their previous employer.
The FTC says about 30 million workers in America are subject to noncompete agreements. Banning them will generate more start-up businesses, lead to more patents and generally increase wages for workers, according to the FTC.
Noncompetes have proven a controversial topic in the promotional products industry. Some industry pros say they’re necessary to protect businesses, while others argue they unfairly limit worker mobility and prevent professionals from making a living
