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

On June 22, 2024, we posted an article, FTC Final Rule – Prohibiting Non-Compete Agreements – What Will Happen Next?, which provided an update on the legal challenges to the Federal Trade Commission’s (“FTC”) final rule prohibiting non-compete agreements (“Final Rule”).

By way of background, effective September 4, 2024 (the “Effective Date”), the Final Rule (also known as the Non-Compete Clause 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.

The third case filed against the FTC with respect to the Final Rule is ATS Tree Services, LLC v. Federal Trade Commission, which is currently pending in the Eastern District of Pennsylvania.[1] ATS filed its complaint on April 25^th, and filed a motion for preliminary injunction on May 14^th seeking a stay of the Effective Date. A response was filed on June 4^th. If a hearing is deemed necessary, it is expected to be held on July 10^th, with a decision expected on July 23^rd. The complaint filed by ATS carries with it the legal basis ATS uses to challenge the Final Rule, as summarized below.

In the complaint, ATS argues 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 alleges that the FTC overstepped its statutory authority under the FTC Act, which ATS argues only permits the agency to address unfair competition on a case-by-case basis, rather than broad rule-making.[2] ATS further pointed out that such a broad ban of all non-compete agreements as unfair methods of competition is belied by certain facts cited by the FTC in the Proposed Rule. Specifically, the FTC identified only 17 cases in which non-compete agreements were challenged as violations of Section 1 of the Sherman Act, which makes contracts in restraint of trade illegal. Of those 17 challenges, 15 failed. ATS asserted that in the Proposed Rule, the FTC only references three enforcement actions it brought against the use of non-compete agreements, despite its view that all non-compete agreements are unfair and unlawful.[3] ATS asserts 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 claims the FTC’s rule unlawfully overrides state laws that generally allow for reasonable non-competes, indicating that 46 states currently allow for non-compete agreements. ATS alleges the Final Rule undermines the legal frameworks established by most states to balance business interests and employee mobility. ATS further claims 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’s employees and obtain the benefit of the training and professional development investments by ATS. ATS claims these harms cannot be compensated monetarily.

The complaint has four counts, all citing to U.S.C. § 706(2).

1. 1. FTC does not have statutory authority to promulgate substantive rules to prevent purported unfair methods of competition.
   2. FTC’s ban on all non-compete agreements exceeds FTC’s statutory authority to prevent methods of competition that are unfair.
   3. Rendering existing non-compete agreements for non-senior executives unenforceable is arbitrary and capricious.
   4. The FTC Act unconstitutionally declares legislative power to the FTC.

ATS’s demand for relief includes preliminary injunction, declaratory judgment and permanent junction to hold unlawful and set aside the Final Rule, attorneys’ fees and costs, and other relief as the Court deems just.

A copy of the complaint filed by ATS can be found here.

With decisions expected to be made in July, employers and employees should pay close attention to assess how the outcome might impact them. 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] ATS Tree Services, LLC v. Federal Trade Commission, No. 2:24-cv-01743 (E.D. Pa.).

[2] See 15 U.S.C. § 45(b).

[3] Complaint, 47-50, ATS Tree Services, LLC v. Federal Trade Commission, No. 2:24-cv-01743 (E.D. Pa.).

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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.