Yesterday (July 23, 2024), the court (Judge Hodge) in the ATS Tree Service v FTC case issued its decision on ATS’s motion to stay and preliminary enjoin enforcement of the FTC’s rule banning noncompetes. Unfortunately, despite the court’s seeming receptiveness at the July 10 hearing to arguments in favor of issuing a preliminary injunction, the court denied the motion and opened the door to a world of confusion for companies and workers around the country.
Prior to the hearing, I (like many others) guessed that the decision was preordained. The judge was a Biden appointee and therefore likely shared many of his political views, including of the role of agencies. Further, the plaintiff was using noncompetes with tree maintenance workers. Accordingly, I could not understand why the Pacific Legal Foundation (the lawyers in the case) chose this plaintiff to be the poster child for the need for noncompetes or why they thought it would be a good idea to sue in this court.
Nevertheless, at the hearing, other than the impact of the painfully obvious lack of irreparable harm (despite the court giving ATS every opportunity to identify some), there was a hope that the court might have been sincerely questioning the FTC’s exercise of authority in issuing the rule. Indeed, I had come away wondering if the court might actually find that the FTC has rulemaking authority (which it did), but that perhaps the particular rule exceeded that authority. That was where I was apparently pollyannaish.
The court denied ATS’s motion on all grounds.
Though noting that the lack of irreparable harm was fatal to ATS’s motion, the court nevertheless went out of its way to uphold the FTC’s noncompete rule on the merits.
No irreparable harm
The court summarized ATS’s irreparable harm allegedly arising “in two ways: (1) by [ATS] incurring ‘nonrecoverable efforts to comply’ with the Rule; and (2) by [ATS] losing ‘the contractual benefits from its existing non-compete agreements.’”
As to the first alleged harm, ATS’s nonrecoverable costs fell into three categories: “(1) the costs associated with notifying its twelve employees of the change in accordance with the Rule’s notice provision; (2) the costs and efforts to ‘review and modify [its] business strategy’; and (3) the unquantifiable costs and efforts of altering its specialized training program.”
These were plainly deficient, even before the Third Circuit’s July 15 Delaware State Sportsmen’s Ass’n v. Delaware Department of Homeland Security decision chastising district courts for being too willing to grant preliminary injunctions without clear irreparable harm.
Judge Hodge agreed.
As a threshold matter, rejecting the Fifth Circuit caselaw cited by ATS, the court held that “[t]he Third Circuit . . . has not adopted this rule, and has held the opposite: that nonrecoverable compliance costs are not a valid basis for a finding of irreparable harm.” The court did not, however, foreclose such costs constituting irreparable harm if they are particularized to the plaintiff and not suffered generally by others affected by the rule. But ATS could not show particularized harm.
Worse, ATS acknowledged, as it had to, that the notice it would need to send to its 12 employees was de minimis ($27.78) and that the cost of revising its strategy would be only approximately $1,211.58.
The alleged harm resulting from scaling back its training program at least theoretically warranted and received a bit more analysis. The court identified the FTC’s not-based-in-reality, theoretical argument “that providing specialized training can be a competitive differentiator for an employer in a more competitive labor market where non-competes do not restrict labor mobility, and therefore not scaling back training may be a means for ATS to retain and attract employees.” Of course, the problem is not attracting talent – it’s losing trained talent to a competitor after making the investment in training them. It’s the free-rider problem. The new employer gets the benefit of training it did not have to pay for. That said, it’s unclear why a training repayment agreement (also under attack by the FTC, and some other states, such as Colorado) would not address this particular harm.
Nevertheless, the court seemed to neither accept nor reject the FTC’s argument, but instead accurately noted the lack of evidence supporting ATS’s “fear that its employees will immediately quit and defect to direct competitors” and held “that the possibility that ATS would need to scale back its training program to an unknown extent is too attenuated to constitute an immediate, irreparable harm.”
As to the ATS’s other alleged irreparable harm – the loss of its contractual rights – the court rejected ATS’s out-of-circuit black-letter caselaw that loss of contractual rights automatically constitutes irreparable harm, in favor of a case-specific analysis requiring particular and immediate harm. The court rejected the notion that ATS will suffer irreparable harm for several reasons, primarily relating to the lack of evidence or immanency: ATS offered no evidence of any employee leaving or threatening to leave if the noncompete is rendered unenforceable and offered no evidence of a threat to ATS’s trade secrets. As to that issue, the court bought the FTC’s argument that NDAs provide a viable option to a noncompete, and noted that ATS failed to show why that was not so in this case.
No likelihood of success
The handwriting was on the wall from the outset of the decision – and not just because the court right up front said it was denying ATS’s motion. Rather, the court went out of its way to reach the merits, acknowledging that it did not need to do so given the obvious lack of irreparable harm, and then heavily cited the FTC’s 2022 policy statement, which the democratic commissioners pushed through over the objection of the republican commissioners to set the stage for this very type of power grab.
In the end, the court rejected all of ATS’s arguments that the FTC lacked authority to issue the rule. It is, however, no surprise given that the court adopted the plainly fabricated idea that “the FTC’s Rule falls squarely within its core mandate . . . .” If the rule fell within the FTC’s core mandate, it would have been issued 110 years ago.
Oddly, in rejecting the notion that noncompete law cannot be regulated at the federal level because it is regulated by the states, the court randomly notes that “[m]any states have adopted or are considering adopting limitations to non-compete clauses, and California, North Dakota, Oklahoma, and Minnesota have banned them.” Yet the court draws no direct conclusion from this. It should have concluded that the FTC should not be interfering with widespread state legislative activity.
Now what?
The case puts us exactly where we expected to be when it started: Wrong plaintiff. Wrong court. Wrong result.
While superficially this decision may look good for workers and small businesses, it is not. First, it creates enormous uncertainty now. Second, would-be noncompete cases will instead be trade secret misappropriation cases, with their associated ambiguity and cost. It happens in California all the time. In fact, I have had to deal with many letters from California companies or letters that were sent to California employees threatening that the employee will inevitably use their former employer’s trade secrets.
Unfortunately, we now have conflicting decisions creating a world of confusion.
To address the confusion, I will be hosting a roundtable discussion (date TBD, likely during the week of August 5) about the rule and options for companies planning for the upcoming final decision in Ryan, LLC v. FTC and the anticipated preliminary injunction ruling in Properties of the Villages, Inc. v. FTC. The roundtable will be similar to the brainstorming session we did back in November when lawyers around the country wrestled with California’s new noncompete laws.
If you are interested in participating or observing, please contact me and my paralegal, Erika Hahn, to let us know.
Please note that attendance is limited. However, we plan to record the program and make it available afterward. The advantage to attending in-person is that you will be able to submit questions in the chat.
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*Thank you to Erika Hahn for checking the court’s docket throughout the day and getting me the decision so quickly.