The Federal Trade Commission's ban on noncompete agreements has been upheld after a second legal challenge, with a Philadelphia judge deciding that the FTC was well within its legal authority to prohibit such contract clauses.

The case between the FTC and ATS Tree Services, a small company located in a Philly suburb, is the second major challenge to the noncompete ban passed by the FTC in May. In this case, US District Judge Kelly Hodge denied ATS's attempt to stay the FTC's ban, which is scheduled to go into effect in early September.

Contrary to the plaintiff's argument, the FTC does have the authority to make such a rule, and ATS's arguments were largely "without merit," Hodge wrote in her decision [PDF]. 

"The Court finds it clear that the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition," Hodge wrote. "Had Congress intended to limit the FTC's substantive rulemaking authority … it would have done so at any time over the last century."

Beyond arguing that the ban was an overreach by the FTC, ATS also claimed that it would be irreparably harmed if its 12 employees, all bound by noncompetes, were suddenly without the restriction. Hodge didn't buy it, saying that an estimated $27.78 needed to notify each current and former employee was beneath the notice of the court, and that an estimate of $1,211.58 needed to revise employment contracts was simply the cost of doing business and an "insufficient [basis] for injunctive relief."

Further argument from ATS that employees would leave if the noncompete ban went into effect also didn't hold water with the judge, who said the company's specialized training "can be a competitive differentiator in a more competitive labor market where noncompetes do not restrict labor mobility."

"We are disappointed by the court's decision to deny our client … a preliminary injunction today," attorney Josh Robbins of libertarian law group Pacific Legal Foundation and representative for ATS told The Register.

"The FTC does not have the statutory authority to rewrite millions of employment contracts by banning noncompete agreements," Robbins added. "Despite today's ruling, we will continue to fight the FTC's power-grab."

Noncompete competition continues

The FTC estimates that around 30 million people, roughly one in five American workers, are bound by noncompete agreements that bar them from seeking work at a competitor, typically for a year after leaving their employer.

The Philadelphia decision stands in direct opposition to the other legal challenge raised against the FTC's noncompete ban in Texas, where a judge decided earlier this month to stay the rule, though only for the plaintiffs in that case.

Texas federal judge Ada Brown decided in that matter, which was brought by the US Chamber of Commerce, tax prep firm Ryan, LLC and several other Texas business associations, that the FTC had overstepped its authority. Brown called the noncompete ban "arbitrary and capricious," and said the plaintiffs were likely to succeed on the merits of their challenge, which rests largely on recent actions by the US Supreme Court that stripped federal agencies of their rulemaking authority.

While none of the recent applicable SCOTUS decisions were mentioned in ATS's suit, the contention that the FTC didn't have the authority to make such a rule generally falls in line with the arguments made in Texas.

It's not clear whether the outcome of the Philadelphia case will have any bearing on deliberations in Texas, which are ongoing. The stay in the matter isn't yet permanent, though Brown said it very well may become so when she issues a decision in August.

Brown was appointed to her seat in Texas by former President Donald Trump, while Hodge is a Biden appointee. With the matter twice decided on partisan lines, it's not clear how future litigation surrounding the noncompete ban will shake down.

Another case contesting the noncompete ban has been filed in Florida by retirement community The Villages, which also argues the ban is an overreach of the FTC's authority. The Villages have also asked for a preliminary injunction on the rule, but the matter has yet to be heard in court, nor has a date been set. Depending on the outcome of that injunction request, the FTC's noncompete ban could still end up stayed before September.

"The judge's decision [in the ATS case] 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 spokesperson Douglas Farrar told The Register.

The FTC claims that a ban on noncompetes would reduce healthcare costs by as much as $194 billion in the next decade, lead to 8,500 additional new businesses formed annually, and raise worker earnings by an estimated $524 per person per year.

We're told that the Philadelphia decision could have an impact on other court cases challenging the noncompete ban, and that the FTC is confident it would defeat ATS if the company chooses to go higher up the ladder to reach a different judicial branch. ®

https://www.theregister.com//2024/07/24/philadelphia_ftc_noncompete_ban_dispute/