A recent ruling by a federal judge in Philadelphia rejecting a company’s bid to temporarily block the Federal Trade Commission’s proposed ban on noncompetes in employment contracts could set the stage for a hearing before the U.S. Supreme Court, experts say.
The judge in ATS Tree Services LLC v. Federal Trade Commission said in the July 23 ruling that the 12-employee Perkasie, Pennsylvania-based company did not show irreparable harm or a likelihood of success on its claims that the FTC overstepped its authority when adopting the rule set to go into effect Sept. 4. As a result, the judge denied ATS Tree Services’ motion for a temporary restraining order.
Noncompetes, which are used by a wide range of companies, often ban employees from starting a competing business or joining a rival within a certain time frame or geographical area. Advocates of the agreements say they help guard trade secrets and proprietary information; opponents say they unreasonably restrict the movement of workers and are often imposed too broadly.
Albany, New York-based Kadeem Wolliaston, a commercial litigation and insurance attorney at Wilson Elser Moskowitz Edelman & Dicker LLP, said a key aspect of the Philadelphia ruling is that the judge ruled the costs of complying with a government rule was not enough to result in irreparable harm.
Conversely, a July 3 decision by a federal judge in Dallas in Ryan LLC v. Federal Trade Commission granted the tax services company’s motion for a temporary restraining order barring enforcement of the rule. The judge said Dallas-based Ryan demonstrated a likelihood of success on its claims and irreparable harm if forced to comply with the rule.
“I’m not surprised by the judge’s ruling (in the Ryan case). She really broke it down to whether the FTC actually had the statutory authority to do what it did and ultimately determined it didn’t,” said New York-based Allison Gotfried, a labor and employment attorney at Venable LLP.
Ms. Gotfried also said that while one district court’s ruling is not binding on another, they typically look to one another when deciding novel issues such as those arising from the FTC’s rule, which bars companies from requiring noncompete agreements for employees unless they are “senior executives,” or employees making more than $151,164 and who are in a “policy-making position.”
Mr. Wolliaston said the contrasting rulings likely resulted from differences in existing case law between the 3rd and 5th U.S. Circuit Courts of Appeals, an issue that could necessitate a decision from the U.S. Supreme Court.
Peter Lauricella, a partner and co-chair of the commercial litigation practice at Wilson Elser, said a key aspect of the cases moving forward is how courts apply the U.S. Supreme Court’s June 28 ruling in Loper Bright Enterprises v. Raimondo, which overturned the so-called Chevron deference doctrine. The long-standing doctrine required courts to defer to federal agencies in interpreting ambiguous statutes.
“The Supreme Court didn’t say all cases previously decided with the Chevron framework are no longer viable, but that it can’t be used moving forward,” he said.
Kimberly Carson, an employment litigation partner at Quinn Emanuel Urquhart & Sullivan LLP, said parties in every restrictive covenant case are watching the Texas case because the July 3 ruling only applies to the parties in the case.
The judge said she would decide on the case’s merits by Aug. 30, days before the rule’s effective date.
On July 19, the U.S. Chamber of Commerce and three other business groups filed a motion for summary judgment in a lawsuit consolidated with Ryan’s suit that could have a broader impact.
While the judge appears poised to at least grant the groups’ motion before Sept. 4, it is unclear if her ruling will influence other courts and result in a nationwide halt on the FTC rule, Ms. Gotfried said.
Ms. Carson said that if the judge does not expand the ruling to include outside parties and the rule goes into effect outside of Texas, “a lot of litigants will seek some type of relief related to the rule.”
As the uncertainty about the rule’s future continues, Ms. Gotfried said she is advising her clients to review their other restrictive covenant and confidentiality provisions to ensure that they are robust enough to protect what they intend to protect.
