Federal judge upholds FTC’s national ban on noncompete agreements

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The Federal Trade Commission (FTC) may enforce its national ban on noncompete clauses in worker contracts, according to a ruling by a federal court in Pennsylvania.

A judge ruled July 23 in the lawsuit filed by ATS Tree Services LLC against the FTC, which earlier this year proposed to ban noncompete agreements as an anticompetitive business practice. The ruling does not square with a Texas federal court ruling earlier this month that granted a preliminary injunction that essentially allows use of noncompetes to continue for plaintiffs in that case.

The FTC rule is scheduled to go into effect on Sept. 4. FTC estimates approximately 18% of the U.S. workforce – or 30 million people – are affected by noncompete agreements.

Pennsylvania case

The July 23 ruling involves the lawsuit filed by ATS Tree Services of Perkasie, Pennsylvania. The company has good reviews from customers, which ATS Tree Services attributed to its investment in training, skills growth and professional development, according to the Pacific Legal Foundation, which offered legal counsel in the case.

ATS Tree Services uses noncompetes with staff who agree they will not work for a direct competitor for a year after leaving the company, which provides specialized tree care training.

The FTC’s “ban permanently alters the successful model of mutual commitment between ATS and its employees that has led ATS to become a highly respected tree care service in its region. If ATS is not allowed to use its reasonable non-compete agreement, it faces the prospect of its employees leaving for direct competitors with the benefit of ATS’s investment,” said a summary by the Pacific Legal Foundation.

ATS Tree Services asked the court to block the FTC’s ban on noncompetes. “Congress never gave the FTC power to rewrite the employment contracts of millions of Americans,” Josh Robbins, an attorney at Pacific Legal Foundation said at the time the case was filed. “The FTC is attempting to invent new powers for itself that stray far from the agency’s original antitrust mission.”

U.S. District Judge Kelley Hodge in Philadelphia disagreed. Hodge ruled the FTC has the power to “to prevent unfair methods of competition in commerce” under the 1914 Federal Trade Commission Act, including agreements that prevent tens of millions of employees from leaving to work for a competitor or start a competing business, according to a report by political watcher The Hill.

“The Court finds Plaintiff has failed to establish a reasonable likelihood that it will succeed on the merits of its claims that the FTC lacks substantive rulemaking authority under its enabling statute, that the FTC exceeded its authority, and that Congress unconstitutionally delegated legislative power to the FTC,” Hodge wrote in her opinion, as reported by The Hill.

Pacific Legal Fund attorney Josh Robbins said the ruling was a disappointment and the fight will continue against the FTC’s power grab.

“The FTC does not have the statutory authority to rewrite millions of employment contracts by banning non-compete agreements,” Robbins said in a statement shared with Medical Economics. “ATS, a small tree care business, relies on its non-compete agreements to enable it to provide valuable training to its employees. Banning these agreements will significantly harm ATS’s business.

Additional action

There will be more legal action to come.

In Texas, Ryan LLC, a global tax service and software provider, sued the FTC to halt the ban on noncompetes. The judge there sided with the plaintiffs, but did not apply the ruling against the FTC for the entire country because Ryan, the U.S. Chamber of Commerce and other plaintiffs did not supply evidence supporting universal relief.

In that case, the judge has stated there will be a final ruling by Aug. 30. News reports also have stated in Texas, federal Judge Ada Brown was appointed by President Donald J. Trump, while in Pennsylvania, Hodge was appointed by President Joe Biden.

Affecting health care

In April, the FTC commissioners met publicly online and cited health care specifically among reasons to support a ban on noncompetes. At least one commissioner noted FTC jurisdiction includes for-profit businesses, but the new rule would not cover physicians, other clinicians and staff in nonprofit hospitals and health systems.

While some physicians noted benefits of noncompete clauses for their practices, doctors and hospital leaders generally split on the issue. Physicians have argued the noncompete clauses hurt their ability to make a living by limiting where and when they could practice. Hospital leadership countered that noncompetes help patient care while protecting investments that hospitals make to recruit physicians and executives, and to train staff.

The Commission has argued banning noncompetes will spur more innovation, more business start-ups and higher earnings for workers.