Health / Employment Law Alert by Lamb McErlane attorneys Vasilios J. Kalogredis, Esq. and Sonal Parekh, Esq.

This week, on July 23, 2024, Judge Hodge in the U.S. District Court for the Eastern District of Pennsylvania denied a tree care company’s motion to stay the effective date and preliminary enjoin the Federal Trade Commission’s (“FTC”) proposed final rule banning non-competes, marking a major win for the FTC.

We have previously posted articles relating to the ATS Tree Services, LLC v. FTC and the FTC’s Non-Compete Clause Rule (the “Final Rule”), which goes into effect on September 4, 2024 (the “Effective Date”).

By way of background, as of the Effective Date, the Final Rule makes it unlawful for a person covered thereunder (i) to enter into or attempt to enter into a non-compete clause, (ii) to enforce or attempt to enforce a non-compete, and (iii) to represent that the worker is subject to a non-compete clause (provided that the worker is not a senior executive, as defined by the Final Rule, that entered into the non-compete clause prior to the Effective Date). While the Final Rule is subject to some exceptions, it is anticipated to impact approximately 30 million employees across the nation, unless expressly overturned.

Almost immediately after the Final Rule was issued (but before it was published in the Federal Register), three cases were filed to challenge the Final Rule and seek a stay of the Effective Date (i.e., temporarily block the Final Rule and delay the Effective Date). Two cases (one of which was dismissed) were filed in Texas. See Ryan LLC v. FTC, USDC ND Tex. No. 3:24-cv-00986. On July 3, 2024, the U.S. District Court for the Northern District of Texas – Dallas Division granted the U.S. Chamber of Commerce’s motion for preliminary injunction. In other words, the Court has agreed to temporarily block the Final Rule but only as it applies to the plaintiff parties, as opposed to a nationwide effect. The U.S. Chamber filed a motion for summary judgment in challenge to the Final Rule on July 19, 2024. The case remains pending, with a final judgment expected by August 30, 2024.

In the third case, ATS Tree Services, LLC v. FTC, ATS argued that the FTC lacks the authority to impose such a broad ban, claiming it violates the Administrative Procedure Act and the U.S. Constitution. ATS alleged that the FTC overstepped its statutory authority under the FTC Act, which ATS argued only permits the agency to address unfair competition on a case-by-case basis, rather than broad rule-making.[1] ATS asserted their non-compete agreements (for a duration of 1 year) are fair and beneficial, and protect the company’s investment in specialized employee training, which enhances the employees’ skill and career opportunities while safeguarding the business from immediate competition. ATS claimed that the inability to enforce non-compete agreements will irreparably harm ATS because it will lose significant benefit of its agreed employment arrangement with its employees. In other words, if the Final Rule is implemented, employers will be able to hire away ATS’ employees and obtain the benefit of the training and professional development investments by ATS. Because these harms cannot be compensated monetarily, according to ATS, ATS’ demand for relief includes preliminary injunction, declaratory judgment and permanent injunction to hold unlawful and set it aside.

However, the Pennsylvania court denied ATS’ request for a preliminary injunction based on its conclusion that the company failed to establish that it (i) would suffer irreparable harm if injunctive relief was not issued, and (ii) had a reasonable likelihood of succeeding on the merits of its claim. While ATS argued that it would be harmed by incurring nonrecoverable efforts to comply with the Final Rule and by losing contractual benefits from its existing non-compete agreements, the court found these arguments insufficient and/or too speculative to warrant injunctive relief. The court also rejected ATS’ arguments that (i) FTC lacked substantive rulemaking authority; (ii) FTC exceeded its authority; and (iii) Congress unconstitutionally delegated legislative power to the FTC. The court found that the FTC is likely within the bounds of its authority under Section 5 of the FTC Act, which allows it to police unfair methods of competition, combined with its power under Section 6. Specifically, the judge stated “Nothing in Section 5 or Section 6 expressly limits the FTC’s rulemaking power to issuing exclusively procedural rules. Further, nowhere in the text does Congress expressly limit the FTC’s enforcement mechanisms to adjudications; in fact, Congress does just the opposite by empowering the FTC to issue rules.” Judge Hodge further highlighted the statute’s use of the word “prevent” to underscore his view of the Final Rule Congressional intent in allowing the FTC to bring such enforcement actions and issue rules.

Importantly, the court found that the “major questions doctrine” did not apply because the Final Rule falls within the FTC’s core mandate, and “the FTC has previously utilized its Section 6(g) rulemaking authority to promulgate substantive rules to prevent unfair methods of competition that had significant economic impact,” which makes this case distinguishable from other major questions cases.

This ATS decision is interesting in comparison to the Ryan decision, which was not cited or relied upon. Appeals are likely to be filed in both cases with the Third Circuit reviewing any decisions in Pennsylvania and the Fifth Circuit responsible for Texas. A split between the appellate courts could prompt U.S. Supreme Court interest and potential involvement, especially in light of other recent major Supreme Court rulings.

Despite the decisions of the Pennsylvania and Texas courts as we sit here today, the Final Rule is still set to take effect on the Effective Date (for essentially all covered parties with exception to the plaintiff parties in Ryan). Accordingly, employers and employees should pay close attention to updates to assess how they might be impacted. As always, we will continue to post updates, so stay tuned for more!

If you have any questions or if we may be of further assistance regarding compliance with the Final Rule, or other health law matters, please feel free to contact Bill Kalogredis, Esq. or Sonal Parekh, Esq.

[1] See 15 U.S.C. § 45(b).

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Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other healthcare professionals and their businesses as to contractual, regulatory and transactional matters for 50 years. He is Chairman of Lamb McErlane PC’s Health Law Department. Bill can be reached by email at bkalogredis@lambmcerlane.com or by phone at 610-701-4402.

Sonal Parekh, Esq., is an associate at Lamb McErlane PC who focuses on healthcare transactional matters and a broad range of healthcare regulatory-related issues on behalf of healthcare systems, physicians, dentists, and other healthcare providers, and is a pharmacist by education and training. Sonal can be reached by email at sparekh@lambmcerlane.com or by phone at 610-701-4416.

*This alert is for educational purposes only and is not intended to be legal advice. Should you require legal advice on this topic, any health care matter, or have any questions or concerns, please contact Vasilios J. (Bill) Kalogredis, Esq. or Sonal Parekh, Esq.