Federal Courts Issue Opposing Rulings on Noncompete Agreements

By Jeremy Grivensky, Esq. and Gordon Prince, Esq.

As discussed in our prior article titled “No More Noncompetes?” the U.S. Federal Trade Commission (FTC) issued a Final Rule, to become effective September 4, 2024, invalidating almost all noncompete agreements and prohibiting future ones with very limited exceptions. As anticipated, this Rule has faced legal challenges nationwide.

On July 3, 2024, federal District Judge Ada Brown of the U.S. District Court for the Northern District of Texas preliminarily enjoined the Rule for specific plaintiffs in that case, giving weight to the argument that the FTC exceeded its authority in implementing the Rule. Ryan LLC v. Federal Trade Commission, 3:24-cv-00986-E, 2024 WL 3297524 (N.D. Tex. July 3, 2024). However, Judge Brown did not extend the Court’s ruling to a nationwide injunction. In the Court’s ruling, Judge Brown stated that the Court will issue a decision on the merits of the case—which may still include a nationwide injunction—on or before August 30, 2024, just days before the Rule is to become effective on September 4, 2024.

On July 23, 2024, federal District Judge Kelley Brisbon Hodge of the U.S. District Court for the Eastern District of Pennsylvania took the opposite approach. ATS Tree Services, LLC v. Federal Trade Commission, 2:24-cv-01743-KBH (E.D. Pa. July 23, 2024). Judge Hodge upheld the Rule, denied a preliminary injunction, and issued an opinion in support of the FTC’s argument that its mission is to prevent unfair methods of competition. In the Court’s opinion, Judge Hodge held that the Rule prevents unfair competition, and thus falls squarely within the FTC’s rule-making authority.

These conflicting rulings create uncertainty for employers regarding compliance. The Eastern District of Pennsylvania plaintiffs are expected to appeal Judge Hodge’s ruling to the U.S. Court of Appeals for the Third Circuit. We await the pending Northern District of Texas decision on the merits, but that decision is also anticipated to be appealed to the U.S. Court of Appeals for the Fifth Circuit. Ultimately, it is likely one or both of the pending federal cases will be appealed to the Supreme Court of the United States for a final decision.

At this point, affected businesses, individuals and other organizations should seek experienced legal counsel and begin assessing the best course of action for their circumstances. For businesses, this assessment should involve preparing to comply with the Rule’s notice requirement, particularly if the situation remains unclear as the September 4, 2024 deadline approaches.

Attorney Gordon W. Prince is a member of the Business Law Department at Gawthrop Greenwood, PC, where he focuses his practice on business and corporate law, contracts, financing and secured transactions. He was named to Best Lawyers^®: Ones to Watch 2024, Super Lawyers Rising Star, as well as Top Lawyers in Main Line Today and the Daily Local News. For more information, contact Gordon at gprince@gawthrop.com or 610-696-8225.

Attorney Jeremy Grivensky is a litigator at Gawthrop Greenwood whose practice includes corporate law. He joined the firm in 2022 after graduating magna cum laude from Temple University Beasley School of Law, where he was a Beasley Scholar and an award-winning editor of the Temple Law Review. Jeremy was named to Best Lawyers^®: Ones to Watch in 2024 as well as Top Lawyers by Main Line Today and Daily Local News. For more information, contact Jeremy at jgrivensky@gawthrop.com or 610-696-8225.