ATS Tree Services, LLC and Ryan, LLC: A Detailed Review of Differing Analysis and Differing Conclusions

On July 23, 2024, U.S. District Court Judge Kelley Brisbon Hodge (E.D. Pa) denied the request of ATS Tree Services, LLC (ATS), a tree care company operating in Eastern Pennsylvania, for issuance of a stay of the Sept. 4, 2024 effective date of the FTC’s rule banning virtually all noncompete agreements (the Rule) along with a preliminary injunction.

Judge Hodge’s denial of the stay and injunction came a little more than two weeks after U.S. District Court Judge Ada Brown (N.D. TX) issued a preliminary injunction enjoining the FTC from enforcing the Rule against Ryan, LLC, a tax preparation company, and certain plaintiff-intervenors (collectively, the Ryan Plaintiffs).^[1]

As explained in detail below, the Courts’ analyses and reasoning and their ultimate conclusions are diametrically opposed, and they will continue to stand in sharp contrast to one another as the cases move through the appeals process.^[2]

Their fundamental disagreement centers around whether the authority granted the FTC is limited solely to procedural rules or extends to substantive rulemaking as well.

Moreover, given the likelihood that the legality of the Rule will shortly be before the circuit courts and ultimately resolved by the Supreme Court, the arguments made by the parties in these two cases and the analyses and reasoning of these two courts will likely frame the arguments that the circuit court judges and Supreme Court Justices will consider in ultimately deciding the fate of the Rule.

Some prefatory notes: The Rule is scheduled to take effect on Sept. 4, 2024. To date, no nationwide injunction has been issued.

In issuing the preliminary injunction in the Ryan case, Judge Hodge declined to apply it nationwide and it is presently in effect only as to the Ryan Plaintiffs. Cross motions for summary judgment are being filed by the Ryan Plaintiffs and the FTC, and the Court has stated that it will rule on the motions by Aug. 30, 2024.

It can be expected that ATS will appeal the denial of the preliminary injunction to the Third Circuit and it seems likely that Judge Brown will rule in favor of the Ryan Plaintiffs and an appeal to the Fifth Circuit will ensue.

What is not clear is whether before Sept. 4, 2024, there will be a nationwide injunction issued to stay the Rule from taking effect or a merits-based decision that would produce the same result. It seems inconceivable that as of Sept. 4, 2024, the Rule could be in effect for some employers but not others. What is quite conceivable is that the legality of the Rule will ultimately be discussed before the Supreme Court.

Approaching the effective date, employers will be facing some difficult operational decisions since, among other things, the Rule requires that on or before its effective date employers must give written notice to current and former employees covered by the Rule that their noncompetes will not and cannot be enforced.

The ATS Case

On April 25, 2024, just two days after the FTC voted to adopt the Rule, ATS filed a complaint challenging the Rule on various constitutional and statutory bases under 5 U.S.C. Section 706 of the Administrative Procedure Act (APA), namely that:

• The FTC lacks statutory authority to promulgate substantive rules to prevent unfair methods of competition

• Even if the FTC has substantive rulemaking power, the FTC’s ban on noncompete agreements exceeds its statutory authority to prevent methods of unfair competition

• Rendering existing noncompete agreements for non-senior executives unenforceable as provided under the Rule is arbitrary and capricious^[3]

• The Federal Trade Commission Act (FTC Act) unconstitutionally delegates legislative power to the FTC under Article 1 of the Constitution

Thereafter, ATS filed a motion seeking a stay and a preliminary injunction.

The Court’s analyses and reasoning in declining to issue the stay and injunction proceeded as follows:

• Pursuant to Section 5 of the FTC Act, unfair methods of competition and unfair or deceptive acts or practices (UDAPs) in or affecting commerce are declared unlawful and, subject to limited exceptions, the FTC is “empowered and directed” to prevent persons, partnerships or corporations from using them

• Section 5 includes a subsection which lays out the FTC’s adjudicatory procedures when it has reason to believe that any such person, partnership or corporation has been or is using any unfair method of competition or UDAP

• Section 6 of the FTC Act provides the FTC with additional mechanisms, including investigatory and regulatory powers. Among them is Section 6(g) which empowers the FTC to “[f]rom time to time classify corporations and (except as provided in Section 57a(a)(2) of this title) to make rules and regulations for the purpose of carrying out the provisions of this subchapter”

• In considering ATS’s request for the stay and the preliminary injunction, four factors inform the decision-making: (1) whether ATS will be irreparably injured by denial of the relief, (2) whether ATS has shown a reasonable probability of success on the merits, (3) whether granting preliminary relief will result in even greater harm to the FTC and (4) whether granting the preliminary relief will be in the public interest

• As a threshold matter, ATS must show that there will be irreparable harm if the relief is not granted, and even if it can do so it must show that there is a reasonable probability of its being successful on the merits before the Court reaches the last two factors — balance of the equities and public interest

• ATS has failed to show that there will be irreparable harm and failed to show that it has a reasonable probability of success

[For purposes of assessing how courts will respond to the ultimate question of the legality of the Rule, it is obviously the “reasonable probability of success” requirement that is the most important.]

• • With respect to the question of irreparable harm, ATS asserts that it would be so harmed on account of what it describes as “nonrecoverable costs of compliance” and “loss of contractual benefits” under its noncompetes because its employees could, upon the effective date of the Rule, leave and transfer the benefit of ATS’s training and investment, as well as ATS’s confidential information, immediately to a direct competitor
  • ATS relies on Fifth Circuit case law in support of its assertion that nonrecoverable costs, including purely economic costs, required to comply with government rules and regulations are a valid basis for a finding of irreparable harm.^[4] The Third Circuit, however, 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. Third Circuit precedent, which applies here, is that monetary loss and business expenses alone are insufficient bases for injunctive relief
  • With respect to the probability of success on the merits, and as a threshold matter for purposes of interpreting the relevant provisions of the FTC Act, the Court must look to the Supreme Court’s recent decision in Loper Bright Enters. v. Raimondo, 603 U.S. ___ (2024). Loper held that courts must independently interpret statutes and effectuate the will of Congress subject to constitutional limits and may not simply defer to an agency’s interpretation of the law
  • Interpreting the relevant provisions of the FTC Act consistent with Loper, the Court finds that the FTC has been granted substantive rulemaking authority for the following reasons:
    • Nothing in Section 5 or Section 6 expressly limits the FTC’s rulemaking power to exclusively issuing procedural rules
    • Nowhere in the text does Congress expressly limit the FTC’s enforcement mechanisms to adjudications; in fact, Congress does just the opposite by empowering the FTC to issue rules
    • When taken in the context of the goal of the FTC Act and the FTC’s purpose, it is clear that the FTC is empowered to make both procedural and substantive rules as is necessary to prevent unfair methods of competition
    • If the FTC’s power to write rules to combat unfair methods of competition “was limited solely to procedural rules for adjudications as [P]laintiff argues, the FTC would only be able to remediate harm once it occurred. This would result in a myopic and illogical interpretation of the ordinary meaning of the statutory text”
    • Section 5 of the FTC Act “empowered and directed” the FTC to “prevent persons, partnerships, or corporations, . . . from using unfair methods of competition in or affecting commerce …..”
    • The term “prevent” on its face means the FTC was intended to act prophylactically to stop “incipient” threats of unfair methods of competition, not solely responsively through adjudications, as courts interpreting the statute have confirmed
  • The FTC’s substantive rulemaking authority has been confirmed by circuit courts interpreting the FTC Act, as well as by Congress when it enacted its 1975 and 1980 amendments to the FTC Act
  • More specifically, the D.C. Circuit of Appeals’ decision in Nat’l Petroleum Refiners, Ass’n v. FTC, 482 F.2d 672 (D.C. Cir. 1973) held that Section 6(g) of the FTC Act grants the FTC authority “to promulgate rules defining the meaning of the statutory standards of the illegality the Commission is empowered to prevent,” including unfair methods of competition. Id. at 698
  • Subsequent amendments to the FTC Act in 1975 and 1980 did not limit the FTC’s rulemaking authority but instead confirmed its power to issue substantive rules. The 1975 amendments solely applied to UDAPs and made it clear that this was not intended to alter the FTC’s rulemaking authority as applied to unfair methods of competition
  • Importantly, prior to the 1975 amendment which left unchanged the FTC’s authority with respect to rulemaking insofar as unfair methods of competition are concerned, the FTC had used its Section 6(g) authority to promulgate 26 different rules to prevent both unfair methods of competition and UDAPs and Congress had done nothing to limit the FTC’s authority in that regard^[5]

• In considering whether the Rule goes beyond the FTC’s statutory authority because it bans all noncompetes with only limited exceptions and, as argued by ATS, could have instead adopted a case-by-case approach in determining the fairness of noncompete agreements, the FTC has been granted broad power to declare trade practices unfair. In this case, they have done so through an extensive and thorough research and rulemaking process and the Rule does not exceed the statutory authority granted

• Also, the fact that various states independently regulate noncompetes does not cause the Rule to violate principles of federalism because the Rule provides that “states may continue to enforce in parallel laws that restrict noncompetes and do not conflict with the final rule,” and state laws are therefore not entirely preempted

• With respect to ATS’s assertion that the Supreme Court’s “Major Questions Doctrine,” most recently applied by the Court in West Virginia v. EPA, 597 U.S. 697 (2022), applies here such that this court must “hesitate” before concluding that Congress meant to confer authority on the FTC to promulgate the Rule, that doctrine is reserved for “extraordinary cases” in which the history and breadth of the authority that an agency has asserted, and the economic and political significance of that assertion, provide a reason to hesitate. That is not the case here as the FTC has previously utilized its Section 6(g) rulemaking authority to promulgate substantive rules to prevent unfair methods of competition that had significant economic impact

• As to the question whether Congress’ delegation of rulemaking authority to the FTC violates Article I of the Constitution, only “twice in this country’s history has the [Supreme] Court found a delegation excessive, in each case because ‘Congress had failed to articulate any policy or standard’ to confine discretion.” Citing Gundy v. U.S., 588 U.S. 128, 130 (2019) (plurality op.)

• Pursuant to case law: (1) the nondelegation doctrine requires that Congress articulate an intelligible principle to guide the agency (see Whitman v. Am. Trucking Ass’ns, 531 U.S. 457, 472 (2001)), (2) the “intelligible principle” standard is not demanding (citing Gundy v. U.S., 588 U.S. 128, 130 (2019) (plurality op.) and (3) when the FTC is utilizing its Section 6(g) substantive rulemaking authority it is a constitutional delegation

• Because Section 6(g) of the FTC Act grants the FTC authority to make substantive rules related to unfair methods of competition and because the Rule does not exceed that authority, the FTC has a reasonable probability of success on the merits and ATS’s request for the stay and injunction are denied^[6] [7]

The Ryan Case: Different Analysis – Entirely Different Conclusions

In enjoining the FTC’s enforcement of the Rule in Ryan, the District Court considering the same issues as in the ATS case reaches entirely different conclusions.

In summary, it reasons as follows:

• Plaintiffs have a substantial likelihood of success on the merits because the FTC Act does not grant the FTC authority to promulgate the Rule, which is a substantive rule, and further the Rule is “arbitrary and capricious” and under the APA the Court must hold it unlawful and set it aside

• As to the question whether the FTC has statutory authority to promulgate the Rule, by a plain reading Section 6(g) of the FTC Act does not expressly grant the FTC authority to promulgate substantive rules regarding unfair methods of competition

• When authorizing legislative rulemaking, Congress historically prescribes sanctions for violations of the agency’s rules and there are none here

• Under Section 6(g), the FTC is empowered to “[f]rom time to time classify corporations and … to make rules and regulations for the purpose of carrying out the provisions of this subchapter.” The alleged substantive rulemaking power is in the latter portion of the statute. If the FTC is correct in its interpretation, then Congress did not choose to place such substantial power in a primary, independent place

• While in the National Petroleum case, the Court of Appeals held that Section 6(g) authorized the FTC to promulgate substantive rules; thereafter, from 1978 until the enactment of the Rule, the FTC did not promulgate a single substantive rule under Section 6(g)

• The later amendments to the FTC Act did not affirmatively grant the FTC substantive rule making authority

• Under the APA, courts must “hold unlawful and set aside agency action, findings and conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law”

• Because the FTC is an administrative agency, its actions are constrained by the APA’s arbitrary and capricious standard. There is a “substantial likelihood the [Noncompete] Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation. It imposes a one-size-fits-all approach with no end date, which fails to establish a rational connection between the facts found and the choice made.”^[8] The FTC also fails to consider other alternatives targeting specific harmful noncompetes

• Accordingly, the FTC lacks statutory authority to promulgate the Rule, the Rule is arbitrary and capricious and Ryan Plaintiffs are likely to succeed on the merits. Thus, the Court pretermits discussion of Ryan Plaintiffs’ remaining causes of action, as they have successfully proven their likelihood of success on the merits based on the reasoning enumerated above

• As for irreparable harm, there would be such harm (an injury that cannot be undone through monetary remedies) because Ryan’s noncompetes with present and former principals would be invalidated and it would be barred from entering into new noncompetes and would have to inform its workers that its noncompete agreements are now invalid. This would increase the risk that departing workers may take Ryan’s intellectual property and proprietary methods to its competitors — which cannot be effectively mitigated by trade secrets laws and non-disclosure agreements

• The Ryan Plaintiffs are likely to succeed on the merits that the FTC lacks statutory authority to promulgate the Rule and that the Rule is arbitrary and capricious. This pretermits discussion of Ryan Plaintiffs’ remaining causes of action, as they have successfully proven their likelihood of success on the merits based on the reasoning enumerated above

• The third and fourth requirements for issuance of a preliminary injunction — the balance of harms and whether the requested injunction will serve the public interest — merge when the government is the opposing party. Therefore, they should be considered together

• In assessing this, the competing claims of injury and the effect on each party of the granting or withholding of the requested relief and the public consequences of granting injunctive relief are considered together

• On this record, it is evident that if the requested injunctive relief is not granted, the injury to both Plaintiffs and the public interest would be great. Granting the preliminary injunction serves the public interest by maintaining the status quo and preventing the substantial economic impact of the Rule, while simultaneously inflicting no harm on the FTC

• Further, the Rule makes unenforceable long-standing contractual agreements that have been judicially recognized as lawful and beneficial to the public interest

• Granting injunctive relief both serves the public interest and tips the balance of harms in favor of Plaintiffs. Accordingly, Plaintiffs have satisfied all prerequisites for a preliminary injunction

As to the scope of the injunction, as explained in the prefatory notes above, the Court goes on to deny the Plaintiffs’ request for a nationwide injunction while stating that it intends to issue a merits disposition on the action on or before Aug. 30, 2024, which is five days ahead of the Rule’s effective date.

Final Note

As explained above, the Court in ATS rejects ATS’s argument that the Rule violates principles of federalism because it bans almost all noncompetes notwithstanding that various states have their own rules regarding them.

The parties agreed that the status quo for enforceability of noncompetes is varied as 46 states have varied case law and statutory schemes to address noncompetes.

Most recently, legislation was enacted in Pennsylvania that, effective Jan. 1, 2025, will make “void and unenforceable” certain noncompete agreements between employers and health care practitioners defined to include medical doctors, doctors of osteopathy, certified registered nurse anesthetists, certified registered nurse practitioners and physician assistants. The new law is described in greater detail in our previous Health Law Observer post.

^[1] The Chamber of Commerce of the United States of America, Business Roundtable, Texas Association of Business and Longview Chamber of Commerce joined Ryan as plaintiff-intervenors.

^[2] A third case is pending in U.S. District Court for the Middle District of Florida. In Properties of the Villages, Inc. v. Federal Trade Commission, a real estate company is similarly seeking a preliminary injunction to stop the FTC from enforcing the Rule as of its effective date.

^[3] The Court ultimately did not address the “arbitrary and capricious” claim because it was not included in ATC’s motion for the stay and the injunction.

^[4] The District Court for the Northern District of Texas is where the Ryan case is being litigated and in that case, as explained below, the Court holds that there will be irreparable harm.

^[5] The FTC gives as examples such rules as the 1964 rule requiring cigarette warnings, mandatory terms and conditions in consumer credit card contracts and octane ratings on gas pumps.

^[6] Having rejected ATS’s claim that it would suffer irreparable harm and having concluded that ATS did not have a reasonable probability of success on the merits, the Court did not go on to assess the remaining two factors, i.e., the harm to the nonmoving party and the public interest.

[7]Judge Hodge also discusses at some length the FTC’s 2022 Policy Statement in which the FTC describes the broad authority it asserts has been granted it under the FTC Act, including its power to make rules, and also states that, without reference to the Chevron doctrine, “Congress intended for the FTC to be entitled to deference from the courts as an independent, expert agency…”

^[8] As explained above, the Court in ATS did not consider the “arbitrary and capricious” issue as it was not put before the Court

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