A federal judge rejected a small Pennsylvania company’s challenge of the Federal Trade Commission’s ban on noncompete contracts, creating a divide in the judiciary over the regulator’s powers.
The FTC has clear legal authority to issue “procedural and substantive rules as is necessary to prevent unfair methods of competition,” said Judge Kelley Brisbon Hodge of the US District Court for the Eastern District of Pennsylvania. ATS Tree Services has failed to establish it would eventually succeed on the merits of its argument that the agency lacks such power, she said.
Beyond that, the tree-trimming company, which employs about 12 people, most of whom are subject to noncompete agreements, failed to show it would suffer irreparable harm if the rule were to go into effect. “On that finding alone, the court must deny plaintiff’s motion,” she said, rejecting the company’s push for a preliminary injunction.
Hodge, an appointee of President Joe Biden, is the second federal judge to preliminarily rule on a challenge to the FTC rule barring noncompete provisions in employment agreements. Such contracts generally restrict workers from switching jobs in a particular industry for a set period of time.
A judge appointed by Donald Trump in Texas on July 3 sided with a Texas tax firm and the US Chamber of Commerce in blocking the rule. Judge Ada Brown said the “FTC lacks substantive rulemaking authority with respect to unfair methods of competition” under the FTC Act, the opposite conclusion that Hodge reached.
Hodge’s decision “fully vindicates that precedent and the plain text of FTC Act clearly provide us rulemaking authority to ban noncompete clauses, which harm competition by inhibiting workers’ freedom and mobility while stunting economic growth,” FTC spokesman Douglas Farrar said.
The White House also celebrated the ruling as a “victory for American workers and small businesses—delivered by the Biden-Harris Administration.”
“While Republicans sided with special interests to try to undermine working Americans, the Biden-Harris Administration is empowering workers to switch jobs, get raises they deserve, and open businesses,” said Jonathan Donenberg, deputy director of the National Economic Council.
Brown, of the Northern District of Texas,said in her July ruling that plaintiffs were likely to succeed on the merits. She will make a final ruling on the challenge by Aug. 30.
Challengers in that case are also seeking a nationwide injunction blocking the FTC from enforcing the rule, set to go into effect Sept. 4. Brown initially denied the challengers’ motion for a nationwide freeze.
ATS Tree Services, represented by the Pacific Legal Foundation, a libertarian public interest law firm, didn’t seek a nationwide injunction.
Josh Robbins, an attorney for the legal group, said in a statement that “despite today’s ruling, we will continue to fight the FTC’s power-grab.”
“ATS, a small tree care business, relies on its non-compete agreements to enable it to provide valuable training to its employees,” he said. “Banning these agreements will significantly harm ATS’s business.”
The FTC contends that its rule targeting noncompetes falls squarely within its authority to enforce unfair methods of competition. The agency estimates roughly 30 million Americans—or one in five workers—are subject to such employment contracts and that eliminating them would bolster opportunities and increase wages.
ATS Tree Services was among a tranche of businesses and trade associations that sued the agency soon after the commission issued the rule in April via a 3-2 party-line vote. A real estate firm in The Villages, Fla., is also pursuing a lawsuit over the rule in the Middle District of Florida.
Hodge said that the FTC Act includes no language that limits the agency’s rulemaking authority on competition to “procedural” issues.
Lawyers for ATS Tree Services argued that through the noncompete rule, the FTC converted itself from an “adjudicator to legislator.” However, Hodge said, “nowhere in the text does Congress expressly limit the FTC’s enforcement mechanisms to adjudications.”
She also rejected the ATS Tree Services arguments that the noncompete rule would create several problems for its business, which makes significant investments in training employees.
“ATS has provided no evidence to meaningfully substantiate” that any of its employees would leave were it not for their noncompete contracts, she said.
The case is ATS Tree Servs. LLC v. FTC, E.D. Pa., 2:24-cv-01743-KBH, 7/23/24.
Continue ReadingTo contact the reporter on this story: Justin Wise at jwise@bloombergindustry.com
To contact the editor responsible for this story: Rob Tricchinelli at rtricchinelli@bloombergindustry.com
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