ATS Tree Services noncompete case, snatching defeat from the jaws of victory

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Even though the federal court in Texas set aside (think vacated) the FTC’s noncompete rule in Ryan, LLC v. FTC, the continued pursuit of the ATS Tree Services case by the plaintiff in the federal court in Pennsylvania may needlessly revive the nationwide confusion that existed before the decision.

Thank you ATS Tree Services.

Executive summary:

Right now, the FTC’s noncompete rule is, for all intents and purposes, dead.

That means that companies – including ATS Tree Services – can once again use noncompetes without fear of violating the FTC’s ban. (That, of course, does not mean that every employee of every company should have a noncompete. Far from it. But more on that in a subsequent post.)

If ATS were to drop its case, companies and employees could reasonably assume that the rule is dead.

But ATS does not appear to be dropping its case. Instead, it has asked the court to temporarily stay the case.

That’s an odd choice, given that it necessarily requires the court to decide whether the Ryan court’s setting aside of the rule has preclusive effect. As Justice Gorsuch, in dicta in a concurring opinion in United States v. Texas joined by Justices Thomas and Barrett, cautioned, the Administrative Procedures Act does not necessarily authorize vacatur.

Accordingly, continuing to pursue the case will, at best, give ATS what the Ryan court gave us all – including ATS.

At worst – and more likely – continuing the case will result in an order that the rule is valid, providing clarity for ATS that it may not use noncompetes, and bringing back the tremendous uncertainty and confusion for most other companies around the country.

So why would ATS pursue no-win litigation?

Good question.

ATS appears to want to see whether the FTC will appeal the Ryan decision, and if so, whether the Fifth Circuit will affirm (as expected). While wanting to await those developments is understandable, staying the case is (in my opinion) the wrong approach. The better approach would be to voluntarily dismiss the case and, if necessary, refile it later (as I have recommended to ATS’s counsel, twice).

Let’s review the details…

FTC Noncompete Rule – Start to Finish

  • The FTC first began considering noncompetes in 2018 as part of broad-based hearings on “twenty-first century competition and consumer protection issues.” In connection with that process, then-FTC Commissioner Rohit Chopra issued a written comment on September 6, 2018 stating, “Given the paucity of private litigation challenging noncompete agreements as antitrust violations, the FTC might consider engaging in rulemaking on this issue. A rule could remove any ambiguity as to when noncompete agreements are permissible or not.” Instructively, just two months later, on November 6, 2018, in response to questions from the Senate Committee on the Judiciary, then-FTC Chair Joseph Simons stated:

In certain circumstances, narrowly tailored noncompete clauses can benefit competition. For example, noncompete clauses can protect against the disclosure or use of competitively sensitive information outside of an employer’s organization. Noncompete clauses also can encourage organizations to invest in employee training by reducing the risk that employees will take their new skills to a competitor. That said, several private suits have alleged that overly broad employee restrictions can violate the antitrust laws.

This official statement of the FTC seems to be forgotten in the FTC’s subsequent agenda-based “fact-finding.”

  • On January 9, 2020, the FTC held a full-day, in-person workshop, during which it explored the use and regulation of noncompetes. I attended the meeting. This was my summary from that time:

I am pleased to report that it was an outstanding program, with multiple speakers and panels of experts providing a broad spectrum of information, viewpoints, and thoughtful discussion. There was discussion about the history of noncompetes, the purposes they serve, the approach companies, courts, and legislatures have taken to using and enforcing them, issues of federalism, and possible approaches to regulating them.

As might be expected with any emotionally charged issue, there were definitely some strongly held opinions and advocacy, misinformation, and confusion of the legal theory and practical realities of noncompetes. But the firebrands were few and, by the end of the program, the sense of the room (in my opinion) was that the available research is nascent, inconclusive, and at times conflicting, and more research is needed before any significant controversial measures should be undertaken.

In addition, most everyone in the room also seemed to agree that a moderate approach, targeting abuses and fairness issues, would make sense – assuming, of course, that the FTC has the power to regulate noncompetes, which is far from a foregone conclusion.

For more details, read my full discussion of the workshop.

Following the workshop, there was a comment period that was ultimately extended to March 11, 2020. Before leaving that day, I was asked to submit comments. Of course, I had already planned to, and did, together with 21 other lawyers and my paralegal.

  • On July 22, 2020, Senators Elizabeth Warren and Chris Murphy, unable to push their agenda through Congress, turned to pushing the FTC to advance their agenda. Spewing misinformation, the letter used the Covid pandemic as a straw man to “urge the Federal Trade Commission (FTC) to take immediate action to protect workers from suffering undue harm from the imposition and enforcement of non-compete agreements during the coronavirus disease 2019 (COVID-19) pandemic.”
  • By December 2020, as part of his 2020 pre-inauguration agenda, President Biden included the following:

Eliminate non-compete clauses and no-poaching agreements that hinder the ability of employees to seek higher wages, better benefits, and working conditions by changing employers. In the American economy, companies compete. Workers should be able to compete, too. But at some point in their careers, 40% of American workers have been subject to non-compete clauses. If workers had the freedom to move to another job, they could expect to earn 5% to 10% more – that’s an additional $2,000 to $4,000 for a worker earning $40,000 each year. These employer-driven barriers to competition are even imposed within the same company’s franchisee networks. For example, large franchisors like Jiffy Lube have no-poaching policies preventing any of their franchisees from hiring workers from another franchisee. As president, Biden will work with Congress to eliminate all non-compete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets, and outright ban all no-poaching agreements.

So many of the assumptions in that statement are dubious, at best. Nevertheless, the takeaway was reasonable: He would work with Congress to eliminate some – but not all – noncompetes (and all no-poach agreements, though that really is a separate issue).

  • On July 9, 2021, President Biden changed course and issued an executive order in which he decided to forego the normal legislative process, and to instead try to accomplish his agenda through regulatory fiat. In that regard, he set out his agenda on noncompetes through two references in his executive order:
    • “Powerful companies require workers to sign non-compete agreements that restrict their ability to change jobs.”
    • “To address agreements that may unduly limit workers’ ability to change jobs, the Chair of the FTC is encouraged to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”

(Emphasis added.)

One might wonder what he thought about companies that were not “powerful.” And how “curtail” became a ban, but we’ll get there. Regardless, I – along with 57 other lawyers and two paralegals – wrote to the White House providing our recommendations.

  • On November 12, 2021, the FTC issued a draft Strategic Plan for Fiscal Years 2022-2026 in which it identified noncompetes “and other potentially unfair contractual terms resulting from power asymmetries between workers and employers” as an area of investigation, study, and (presumably) regulation.
  • On December 6 and 7, 2021, the FTC, in conjunction with the DOJ, held another workshop, this time online over two half-days. They invited comments, but set a deadline of December 20, 2021. Not surprisingly, I – along with 69 other lawyers and paralegals – submitted detailed comments. We were not alone, there were 26 other submissions as well.

Then we waited (during which Democratic Commissioner Alvaro Bedoya was sworn in on May 20, 2022, and Republican Commission Noah Phillips resigned on October 12, 2022).

Instructively, Commissioner Wilson (the sole republican voice on the FTC at the time) stated:

I wish it were accurate to say that this case (with apologies to Shakespeare) is a tale of sound and fury, signifying nothing. Unfortunately, it has great significance: it foreshadows how the Commission will apply the new Section 5 Policy Statement. Practices that three unelected bureaucrats find distasteful will be labeled with nefarious adjectives and summarily condemned, with little to no evidence of harm to competition. I fear the consequences for our economy, and for the FTC as an institution.

According to the FTC, most of those were from people who supported the rule. From my review, those who supported the rule were overwhelmingly individuals who did not think they should have a noncompete. (It is unclear how many of them were AI generated, written by labor unions, or otherwise spoon fed to the individuals.)

Regardless, the FTC’s role is to evaluate the evidence supporting a rule, not to yield to the subjective preferences of the majority of submissions.

And, as you might expect, I (along with over 100 other lawyers who practice in this field) submitted comments explaining lingering confusion about the use, enforcement, and impact of noncompete agreements; noting problems with the research extant at the time; providing information in response to the FTC’s specific questions; and identifying elements of possible guidance or a rule that would achieve most of the Commission’s objectives, while balancing the competing interests at play (i.e., those of companies, workers, states, and the United States economy) and avoiding both significant unintended consequences that are likely to flow from the currently proposed rule and an over-reliance on un-generalizable, conflicting, and limited academic literature. And, as you know, the FTC disregarded our concerns and recommendations.

  • On January 22, 2023, the U.S. Chamber of Commerce announced that it would challenge, if the FTC issued a final rule, it would challenge it.
  • On February 8, 2023, President Biden gave a State of the Union, during which, for the first time ever, noncompetes were discussed. Though referencing the alleged 30 million noncompetes, he focused on low-wage workers, with the example of “a cashier at a burger place.” I had the following to say at the time:

Let me interpret that for you: 30 million contracts will be abrogated by regulatory fiat, despite that we really have no idea what the unintended consequences of such a ban would be on the economy, on trade secret protection, or on companies and employees who will be enmeshed in far more more-costly, messy, and protracted trade secret litigation. That of course helps no one but the lawyers. I highlight this as a very bad outcome — despite knowing that I am one of the lawyers who will greatly benefit from a ban. And the truth is that, while I am no fan of noncompetes, they do serve some very important purposes when used appropriately.

Another important thing to know is that these 30 million (or whatever the number actually is) contracts can’t be abrogated that easily. There are several Constitutional hurdles that would need to be overcome. Indeed, the FTC almost certainly does not even get out of the gate, as it very likely does not have the authority to issue a rule like the one it is proposing.

In that regard, the U.S. Chamber of Commerce has already vowed to challenge the FTC’s rule, which the Chamber views as just one more part of the FTC’s (improper) “Rule-a-Palooza” (as they and FTC Commissioner Christine Wilson call it).

Although I was quite pleased to see that it was a balanced discussion, offering perspectives in favor and opposed to the proposed rule, it was surprising (and disappointing) how many of the comments in favor of the proposed rule were based on misinformation, anecdotes, and emotion. What also came through loud and clear is that the comments were primarily about policy issues and preferences that sound far more like the kind of testimony we heard in Massachusetts during the decade-long legislative process, that has been offered in other state legislatures as well, and that I am sure will continue to be submitted to Congress as it resumes consideration of the refiled federal noncompete bills.

* * *

In total, there were about 46 people who provided comments — too many to discuss in this post.

But, the spit, I believe, was 22 in favor of the ban and 24 against.

There were lots of anecdotes and emotion, and certainly plenty of rhetoric against noncompetes, but most of the discussion was tied to the abuses of noncompetes and sometimes untethered to real world uses of noncompetes.

In contrast, most of the analytical comments were provided against the proposed rule.

But the line of the day was about the FTC’s lack of authority to promulgate the proposed rule. Quoting the Supreme Court, the comment was, “Congress doesn’t hide elephants in tiny mouse holes,” but this is precisely what the FTC would be doing by seizing power in this way and acting as a “mini-legislature without anyone noticing.” (But people are noticing.)

More details are available here.

  • On March 2, 2023, Senators Elizabeth Warren and Sheldon Whitehouse sent a letter to the U.S. Chamber of Commerce demanding details about its plans to challenge the FTC’s noncompete rule. The letter was extraordinary in its thinly veiled effort to interfere with the Chamber’s First Amendment rights. It was truly disappointing – to me at least – to see an elected official demonstrate such an abuse of power and engage in such a blatant effort at intimidation. This is not a political statement – I disapprove such conduct from any party and any person. The First Amendment is meant to safeguard against this type of conduct, and our elected officials should protect, not violate, those rights.
  • On November 28, 2023, the FTC sent a letter to New York Governor Kathy Hochul urging her to sign a bill banning all noncompetes in New York. As I noted at the time, based on the points in the letter, the FTC appeared to continue to believe that a full ban on employee noncompetes is the right approach. Further, as several commentators observed, the fact that the FTC sent that letter suggested that the FTC may doubt its ability to issue a rule at all. Obviously, if the FTC could itself ban noncompetes, there would be no need for the states to pass legislation that would soon be rendered nugatory.
  • On February 26, 2024, the FTC sent another letter attempting to influence state legislation, this time to Oregon state senator Deb Patterson relating to a bill to ban physician noncompetes. The FTC states in that letter, “The FTC proposed a rule in January of 2023 banning non-compete clauses across sectors in its jurisdiction. In doing so, the FTC made several preliminary findings and received numerous comments that you may find informative as you consider this bill.” Like the letter to Governor Hochul, this letter seems to suggest that the FTC was dubious of its authority to issue the then-forthcoming rule.

With limited exceptions, the FTC’s noncompete rule would have prospectively banned all employee noncompetes and rendered unenforceable nearly all existing noncompetes. Specifically, the rule declared it an unfair method of competition (a “UMC”) to “enter into or attempt to enter into,” “enforce or attempt to enforce,” or “represent” that a worker is subject to a noncompete.

The only exceptions were for (1) existing (not new) noncompetes with so-called senior executives (workers who have final policy making authority and earn total compensation of at least $151,164); (2) noncompetes arising from “a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets”; and (3) enforcing or attempting to enforce a noncompete or making “representations about a non-compete clause where a person has a good-faith basis to believe that” the rule is inapplicable.

The rule would have also required companies to send a notice by the rule’s effective date to any worker subject to a noncompete that their noncompete was no longer enforceable and would not be enforced. The rule provided a sample notice, though most commentators (me included) agreed that the notice needed to be modified significantly (if it would be sent at all).

During that hearing, referring to that preliminary injunction, Chair Khan stated, “So as you know this was a preliminary injunction hearing and the judge has said that she will issue a full opinion by the end of August. So we will wait to see what happens there. And of course we would proceed with — in accordance with, you know, court decisions that that come down.” (Emphasis added.)

Spoiler alert: Chair Khan is not proceeding in accordance with the Ryan decision.

Ryan, LLC v. FTC – Preliminary Injunction

  • On April 23, 2024, the same day that the FTC issued the noncompete rule, Ryan, LLC filed a lawsuit challenging it in the Northern District of Texas, beating the U.S. Chamber of Commerce to the punch.
  • On May 10, 2024, the intervenors filed their own motion for a stay of the rule and preliminary injunction enjoining the FTC from enforcing the rule.

U.S. Chamber of Commerce v. FTC – Filed and Dismissed

  • On April 24, 2024, true to its word, the U.S. Chamber of Commerce, along with the Business Roundtable, the Texas Association of Business, and the Longview Chamber of Commerce, filed a lawsuit challenging the FTC’s noncompete rule in the Eastern District of Texas.
  • On May 30, 2024, the court dismissed the case without prejudice, noting that it had “previously disclosed its receipt of an ex parte communication questioning the need for recusal and invited the parties to file briefing explaining their views,” that no party requested recusal, and that, based on a lengthy analysis, it did not believe recusal was warranted or appropriate.

ATS Tree Service, LLC v. FTC – Preliminary Injunction Denied

  • On July 10, 2024, the court held a hearing on ATS’s motion. During the hearing, the judge seemed inclined toward interpreting the FTC Act as permitting the FTC to make substantive rules regarding unfair methods of competition, but also seemed receptive to arguments that the rule itself was outside the scope of the FTC’s authority. Nevertheless, it was painfully clear that ATS had a difficult time articulating imminent irreparable harm to justify the requested relief.

Although 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, including holding that “the FTC’s Rule falls squarely within its core mandate . . . .” (Of course, we haven’t seen a single noncompete rule or enforcement action in the 110 years preceding the 2023 activity undertaken to justify the rule.)

Properties of the Villages, Inc. v. FTC – Preliminary Injunction

  • On June 21, 2024, Properties of the Villages, Inc. filed litigation challenging the FTC’s noncompete rule in the Middle District of Florida.
  • On August 23, 2024, the court granted an unopposed motion of the Properties of the Villages to suspend the FTC’s responsive pleading deadline, relieved the FTC of its obligation to respond to the complaint until further order, and required the parties to file a joint status report by September 25, 2024.

Ryan, LLC v. FTC – Redux – Final Decision

The court found that the FTC had no authority to issue the rule, that (even if it had authority) the one-size-fits-all approach was arbitrary and capricious. Accordingly, the court found the rule to be unlawful and set aside it, ordering that it “shall not be enforced or otherwise take effect on September 4, 2024, or thereafter.” As the court explained, its decision has nationwide effect and is not limited to the parties.

Interestingly, a case decided before the court’s summary judgment decision found no likelihood of success on the merits of a noncompete claim in light of the FTC’s rule. Presumably, that will not happen again.

  • The FTC has until October 19, 2024 to appeal this decision to the Fifth Circuit. But the Fifth Circuit is likely to affirm the district court, especially given its August 23, 2024 decision in Restaurant Law Center v Department of Labor, vacating the DOL’s tip rule. Accordingly, the FTC would be crazy to appeal, especially as it may get lucky and the ATS case may wind up going to the Third Circuit. Of course, that could be avoided if ATS would voluntarily dismiss its case (as I have urged it to do, now twice).

ATS Tree Service, LLC v. FTC – Redux – Continued Pursuit

  • On August 22, 2024, the court issued an order setting deadlines for anticipated summary judgment motions, with ATS’s brief due on September 20, 2024.
  • On September 6, 2024, continuing to make questionable choices, rather than dismiss the case, ATS filed a motion to stay the case “because there is nothing to litigate at this time . . . .”

Specifically, “ATS requests that the Court stay all proceedings in this case pending the earliest of the following events: (1) the expiration of time for the Commission to file a notice of appeal of the final judgment in Ryan; (2) if the Commission appeals the Ryan Judgment, a decision on the merits from the U.S. Court of Appeals for the Fifth Circuit; or (3) any other event that changes the effectiveness of the Ryan Judgment as to ATS.”

It’s unclear what the purpose of this is. Under Rule 41(a) of the Federal Rules of Civil Procedure, ATS could have – and should have – dismissed the action. That process would (and still could) have allowed ATS to file a new action, if the circumstances warranted later.

Seeking a stay, in contrast, eliminates ATS’s control and opens the door for the court to disagree with the decision in Ryan, putting the country right back in midst of the uncertainty it faced before. In fact, in contrast to its willingness to stay the Properties of the Village case (where it is likely to get an adverse final decision), the FTC opposed ATS’s motion to stay.

As noted above, upon seeing that motion, I again contacted ATS’s counsel and urged them to dismiss the case while they still can.

We’ll see if they take up that suggestion.

Stay tuned.

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