Two District Courts Weight in on the FTC's Ban on Non-Competes

Back in April, we posted about the new Federal Trade Commission (FTC) rule that bans most non-competes and may also ban some other restraints on the ability of employees to leave their jobs.  The response was quick and predictable.  Ryan, LLC v. Federal Trade Commission was filed pretty much immediately in the Northern District of Texas.  ATS Tree Services, LLC (ATS) filed its claim in the Eastern District of Pennsylvania two days after the new rule was promulgated.

The Ryan court struck first, issuing a preliminary injunction in early July.  The Eastern District denied ATS's motion for a preliminary injunction in ATS Tree Services, LLC  v. Federal Trade Commission in late July.  Then, on August 20th, the District Court in the Ryan case granted Ryan's motion to set aside the non-compete rule and enjoined it from going into effect on its effective date of September 4th or thereafter.

In the Pennsylvania case, ATS claimed that it would be irreparably harmed if it could not require that its employees sign non-compete clauses prohibiting them from working for rival tree-trimming services for one year after leaving ATS.  ATS claimed that is non-compete clause is necessary to enable ATS to recoup its investment on the specialized training that its employees receive.  ATS argued that the FTC either lacked regulatory power to ban non-competes or exceeded that power.  In the alternative, ATS argued that the ban was arbitrary and capricious.  If none of those things are true, ATS maintained that the FTC Act is an unconstitutional delegation of legislative power to the agency under the major questions doctrine.

In denying ATS's motion for a preliminary injunction Judge Hodge (left) first found that ATS would suffer no irreparable harm from the non-compete ban.  Moreover, she concluded that ATS had not established that it would likely win on the merits.  ATS could not establish irreparable harm because its alleged losses were either de minimis or in any case insufficient to amount to irreparable harm.  Moreover, ATS  failed to make a credible factual  allegation that there was any danger that it would lose employees once the ban goes into effect. 

Judge Hodge was no more impressed with the somewhat exotic argument that the rule would strip ATS of its contractual rights.  She did not find any binding caselaw endorsing the argument that loss of contractual rights amounts to irreparable harm. To the extent that the harm related to employees using their ATS training to benefit rival businesses, she did she not see why ATS could not protect its contractual rights through the less onerous mechanism of non-disclosure agreements.

On the merits, Judge Hodge was satisfied that the FTC had power to enact the law and that doing was was not arbitrary and capricious.  She also found that the FTC had previously issued equally sweeping rules without implicating the major questions doctrine and that this situation was thus distinguishable from recent cases in which SCOTUS invoked that doctrine.  Finally, Judge Hodge rejected ATS's argument based on Schechter Poultry  because it's not 1935, or at least not yet.

Things went differently before Judge Brown (right) in the Northern District of Texas.  Having already granted the motion for a preliminary injunction, it is hardly surprising that Judge Brown went ahead and granted the full injunction.  Unlike her preliminary injunction, however, which applied only to the named plaintiffs and intervenors, this injunction is nationwide.

She granted the motion for an injunction on multiple grounds.  First, she concluded that the FTC  lacked substantive rule-making authority with respect to unfair methods of competition and thus lacked authority to create the non-compete ban. In addition, Judge Brown found that the FTC acted arbitrarily and capriciously in creating the ban.  She found that the ban was "based on inconsistent and flawed empirical evidence," and that the FTC failed to consider the upside of non-compete agreements, disregarding substantial evidence supporting such agreements.  Just as Judge Hodge chided ATS for failing to consider how it might use devices other than its sweeping non-compete to protect its investment in its employees, Judge Brown faults the FTC for failing to consider less sweeping alternatives to the ban it imposed.  Having ruled on statutory grounds, Judge Brown did not address Ryan's constitutional claims.

Both opinions are persuasive in their own terms and they reach their conclusions categorically and without acknowledgment that the case is a close one.  It is challenging for a non-expert in administrative law to know which judge got it right.  My hunch is that this challenge would have been dismissed without much fanfare in the period between Schechter Poultry and the Roberts Court, and I suspect that an opinion like Judge Brown's would have been hard to imagine before Gundy. It may also be that executive agencies have gotten much more ambitious in this era of Congressional gridlock.  And so perhaps rules like this one were relatively rare before, say 2009.