A federal judge in Pennsylvania on Tuesday declined to block the Federal Trade Commission’s ban on noncompete agreements, diverging from another judge’s recent finding that the agency’s move was on shaky legal ground.
The decision clears one obstacle to the F.T.C.’s move to prohibit virtually all noncompete agreements, which prohibit employees from switching jobs within an industry and affect roughly one in five American workers. The rule is set to take effect on Sept. 4.
Several business groups sued to block the ban as soon as the F.T.C. voted to adopt it in April, saying it would limit their ability to protect trade secrets and confidential information. ATS Tree Services, a tree-removal company, filed a lawsuit in U.S. District Court for the Eastern District of Pennsylvania, arguing that it used noncompetes to “provide its employees with necessary and valuable specialized training while minimizing the risk that employees will leave and immediately use that specialized training and ATS’s confidential information to benefit a competitor.”
But on Tuesday, Judge Kelley Brisbon Hodge ruled that ATS had not proved that it would suffer irreparable harm from the rule. Denying the company’s motion for a preliminary injunction, she said the lawsuit was unlikely to ultimately prevail on the merits.
Judge Hodge’s decision “fully vindicates” the F.T.C.’s authority to ban noncompete clauses, “which harm competition by inhibiting workers’ freedom and mobility while stunting economic growth,” Douglas Farrar, a commission spokesman, said in a statement.
A lawyer representing ATS, Josh Robbins of the Pacific Legal Foundation, a libertarian law group, said the firm was disappointed by the court’s decision and would “continue to fight the F.T.C.’s power grab.” Mr. Robbins declined to say whether the firm intended to appeal.
In any case, employers remain in limbo as they await a decision from Judge Ada Brown of U.S. District Court for the Northern District of Texas, who this month granted a preliminary injunction requested by several plaintiffs, including the U.S. Chamber of Commerce.
While that ruling was limited to the plaintiffs in the Texas case, Judge Brown said the F.T.C. lacked “substantive rule-making authority” with respect to unfair methods of competition and that the plaintiffs were “likely to succeed on the merits” of their challenge.
Judge Brown said she expected to issue a final decision by the end of August.
The lawsuits to block the F.T.C. rule asserted that it was issued without constitutional and statutory authority. The three Democrats on the five-member commission who voted to approve the rule maintain that it is consistent with authority granted under the F.T.C. Act of 1914, which created the agency.
Employers could face a prolonged period of legal limbo even beyond the rule’s effective date as lawsuits weave their way through the courts, said Jeremy Merkelson, a partner at the law firm Davis Wright Tremaine.
“There is definitely tension between what the two districts have done, and I expect both will be appealed up to the appellate courts,” Mr. Merkelson said. “The Supreme Court will likely have to weigh in on this issue because of its importance.”