On July 23, a judge in the Eastern District of Pennsylvania denied a company’s motion to stay the September 4 effective date of and preliminarily enjoin the Federal Trade Commission’s (FTC) rule banning non-competes for almost all employees and independent contractors (the Rule).
This decision comes on the heels of a July 3 decision out of the Northern District of Texas that enjoined the FTC from enforcing and implementing the Rule and stayed the Rule’s effective date against the plaintiff and other plaintiffs that intervened in the case, but not against anyone else.
The main issue in these cases is whether Section 6(g) of the FTC Act grants the FTC the authority to issue substantive rules to prevent unfair methods of competition, such as the Rule. The Texas court held that the FTC Act does not grant the FTC such authority, calling Section 6(g) a “housekeeping statute” that authorizes the FTC to issue procedural, but not substantive, rules, while the Pennsylvania court held that through Section 6(g), “the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition.” The Texas court held that compliance with the Rule would result in financial injury and irreparable harm necessary to obtain injunctive relief and recognized that “[s]tates have historically regulated non-competes through caselaw and statute.” The Pennsylvania court held that the Rule would not result in irreparable harm because monetary loss and business expenses spent to comply with the Rule alone were not sufficient bases for injunctive relief and the plaintiff could not show that any of its employees would leave the plaintiff’s employ due to the Rule. The Pennsylvania court also held that “the existence of state regulations of non-competes does not preclude the FTC from issuing [the Rule].”
Despite the Pennsylvania court’s ruling, our recommendation is still for companies to hold off on making changes to their employment agreements, non-compete provisions or other restrictive covenants. The judge in the Northern District of Texas case plans to issue a final decision by August 30, which could still stop the Rule from going into effect. Further, there is another pending challenge to the Rule in the Middle District of Florida. We will continue to watch these cases closely.
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