FTC’s Sweeping Non-Compete Ban: Summary, States’ Views, and Litigation Challenges

[Music] hello everyone and welcome to this Federal Society virtual event my name is Emily Manning and I'm deputy director of strategic Partnerships with the federal society today we're excited to host a discussion on the ftc's sweeping non-compete ban including a summary States views and litigation challenges we have an excellent panel today moderated by Alexander P aouar who I will introduce briefly Alex is co-chair of the global antitrust Law Practice Group at Morrison Forester he is the former deputy Assistant Attorney General for civil antitrust enforcement at the US Department of Justice and a former former adviser at the Federal Trade Commission after our speakers give their opening remarks we will turn to you the audience for questions if you have a question please enter into the Q&A function at the bottom of your Zoom window and we will do our best to answer as many as we can finally I'll note as always all expressions of opinion today are those of our guest speakers not the federal system with that thank you for joining us today and Alex the floor is yours well thanks so much Emily and and welcome again everyone to today's webinar uh which is sponsored by the Federalist society's corporations Securities and NH Practice Group uh we have an excellent panel for you today um I'm going to give some introductions now uh the panel includes Chris muar uh Chris's chief of staff and attorney adviser to FTC commissioner Melissa Holio Chris council is the commissioner across both consumer protection and competition m matters uh he joined the FTC from Marquetta where he was an assistant general counsel focusing on product and Regulatory matters related to bank Partnerships and digital wallets Chris was previously an associate with Wilson sansini and earlier in his career he was a senior advisor in the director's office at the cfpb and also spent time in oira the office of information and Regulatory Affairs we're also joined by Tyler Badgley Tyler is a senior counsel at the US Chambers litigation Center where he focuses on Capital markets competition and consumer protection among other issues before joining the litigation Center Tyler clerked for judge Edith Jones He also worked as a special counsel at the Senate Judiciary Committee and as an associate at suan in Cromwell before his legal career Tyler worked as a policy aid for senator Pat Tumi we're also joined by gwendelyn kolie gwendolin is Wisconsin's Assistant Attorney General for antitrust and needs the State Attorneys General as chair of the Multistate antitrust task force and finally we have Julian Klein BR Julian is an antitrust and labor and employment partner in Gibson dun's San Francisco office so welcome to all of you thanks for being here today as the name of today's program suggests you know we plan to discuss the ftc's recently issued final rule prohibiting most employee non-compete agreements we'll be discussing the rule from a number of different perspec perspectives uh and I'll actually start with a brief background on how we got here so after decades with little enforcement uh activity in the labor space the federal antitrust agencies actually began seriously thinking about how to apply antitrust and unfair competition laws to labor issues into worker Mobility almost 15 years ago um in 2009 the doj began investigating series of bilateral agreements among tech companies not to coold call another's workers that investigation ultimately resulted in a settlement US versus Adobe at all the agency claimed at the time that those agreements were facially anti-competitive and harmed workers and there was mostly software Engineers um because they were deprived of competitively important information about their job prospects um their value in the market they also lost access to potentially better job opportunities the resulting case against adobi Adobe and the other Tech companies you know ultimately was settled but was followed by class action activity as well as several speeches uh that began to warn that the doj saw worker Mobility as an enforcement priority so I was on the defense side of that case before I served at doj um I recall at the time the defense bar actually viewed it as controversial move because doj was waiting into labor issues with the antitrust laws but some of those legal theories began to take hold and build momentum both among private plists as well as Government enforcers indeed in 2016 the two agencies took things a step further they issued a new policy that the doj would now criminally prosecute certain Standalone agreements between employers not to solicit employees or to fix wages or really fix any elements of employee benefits or ter terms of employment so following this announcement the doj began to investigate and criminally process prosecute these agreements among employers not to steal one another's employees now those cases by and large fell flat I think one resulted in a plea deal the others in acquittals or dismissals the doj dismissed the last of these cases late last year now the Biden Administration is really taking another approach to worker mobility and rather than pleading under the antitrust laws to the courts the juries President Biden issued an executive order on competition it's about three years ago July of 21 that invited the FTC to consider Ru making which is a mandate that led the agency to notice the proposed rule making in January of 23 uh receive more than 26,000 comments and then vote on an issue the final rule on a Partyline vote just a couple of weeks ago on April 23rd the final rule as I'm sure most people are familiar is quite Sweeping in its breadth uh it essentially voids um 30 million or more non-compete agreements uh it implicates conduct and agreements that have been really negotiated across the economy for hundreds of years so that's a short version of how we got to where we are with this rule um let me turn over to Julian Julian can you walk us through the the key features of the rule you know what it covers any exceptions other key points that we should be thinking about thanks Alex happy to set the table uh for us today um as as you noted um you know this is this is the first unfair competition rule in in decades but the FTC uh is back in a big way here because this is a sweeping rule that it estimates will affect 30 million Americans and the headline as you noted is that it is a ban it will be a violation to enter into a new non-compete Clause it will be a violation to enforce or attempt to enforce a non-compete clause and it will be a violation to represent that a worker is subject to a non-compete clause in the scope of the rule is quite broad the definition of non-competes it's a functional definition so it doesn't have to be what we all think of when we think about a traditional non-compete clause in an employment agreement or you know a severance provision it is any term or condition of employment that prohibits penalizes or functions to prevent a worker from seeking or accepting work with another uh person for work that would begin after after their current uh employment and you may have picked up there on the phrase term and condition of employment and those in the employment space know that but it's important to call out that you know that means it doesn't have to be in the official agreement or contract itself it is a term of employment if it's in the handbook um and that can come within the rules Ambit and the definition of worker is also very broad it is not just employees it is independent contractors interns volunteers apprentices they all potentially fall within the rule so on all kind of the key definitional Provisions the FTC has gone broad here um and that is you know in part how it is sweeping so so much potentially within its Ambit in addition to the kind of restrictions that I just mentioned there's also a notice requirement so employers uh must notify workers that existing non-competes are void the FTC has published a template notice and this can be done by mass blast which may be welcome news for those working at or advising uh large companies you you don't have to necessarily individual uh email everyone individually but um you know that is a significant um requirement to figure out who is subject to a non-compete or blast it out uh at least over inclusively and I will flag that this is a change though from the proposed rule the proposed rule would have required actual recision of existing non-compete clauses the FTC in its uh published final rule decided recision was more trouble than it's worth and has instead required this notice all of this is set to go into effect on September 4th of 2024 there is some legal challenges that could potentially disrupt that that we'll we'll get to but um right now September 4th is day uh there are a couple exceptions as as Alex alluded to and so the two primary ones I think I'll I'll just briefly touch on the first one is for non-competes with senior Executives those are individuals who meet an annual compensation threshold and have significant public uh policymaking Authority within an organization but that is really a grandfathering provision even for senior Executives New non-competes won't be allowed after September 4th the second exception is the scale of business exception without going through all the the technical aspects of that one essentially the rule won't apply to non-competes entered into as part of a Bonafide sale of a business entity um and this again these two exceptions are both areas that are that have been changed since the proposed rule the exceptions are are either you know new or slightly large uh more expansive than they were uh in the proposed rule the last thing I I just want to flag to is the inter Play Between the rule and state law you know state law has historically governed and regulated non-competes the ftc's rule creates a regulatory floor so it preempts state laws that take a more relaxed approach but it does not uh preempt stricter state laws so for example we've already seen some saber rattling in my home state of California about how our state law is is broader and stronger than the ftc's rule um but you know so state law remains uh something that folks need to keep in mind but you can't rely on it if it is more permissive uh than the ftc's rule so that I think in broadstones is is the plague field you know the final rule is over 500 pages every pre commissioner issued a statement there's lots more that we could say but um let me stop there so that we can get everybody's uh insight and takes on this well thanks Julian and let me ask you just a followup question I mean you said that the the definition of worker is incredibly broad um and from what I can see and having looked at the rule it certainly is but so it'll cover obviously employees independent contractors interns unpaid right interns volunteers potentially right um so Proprietors is that is that correct yeah that I mean they're all of the kind of distinctions that we often see in employment law you know are are not distinctions that matter here it's paid or unpaid it's you know employee independent contractor volunteer intern uh even you know someone doing work for a sole proprietor as you said um they do need to be working in the United States it does have a limit to the the geography um in that way but it is you know I think intentionally cast to be very expansive in the way it describes worker thanks and so it looks like the exceptions you know some of them I remember the the Bonafide sale of a business I think a lot of people are thankful that it didn't get in cul in the final rule the way it was in in the draft rule um which would have allowed for that um now what about sort of non competes between like franchisors franchises assume those are those accepted or is that part of the is that covered by the rule so the the rule does you know clarify that it's not applying to non-competes between the franchisors and franchisees specifically um you know some of the statements you you read say those are going to be subject still of course to case-by casee scrutiny uh but to be clear you know any non-competes imposed by a franchisee on one of their employees that would be encapsulated by the rule okay okay and then um what about other typical agreements that we see you know non-solicit agreements with employees non-disparagement things like that and you you discussed a little bit of about that how how broad are those exceptions and how are people supposed to be thinking about those exceptions yeah so this goes back to the you know the the broad functional definition of what a non-compete is it is intentionally you know cast not to just Target what we traditionally call a non-compete but anything that functions like one and the rule you know mentions that everything from a non-solicit to a uh even you know potentially Garden leave or um a a no hire restriction or um a liquidated damages clause or some kind of clawback clause I mean all of these if they would prevent someone from you know practically starting their own competing business or going to work for a competitor would be defined as a non-compete and I'm sure we'll talk about this more but you know that ambiguity of well what would we not call a non-compete generally but you know might be a non-compete under this rule that's something that everybody is you know figuring out and certainly you know is is kind of working uh under the the gun uh for given that we' got to figure that out by September 4th okay okay seems like it's um an opportunity for a lot of litigation uh with respect to scope of what constitutes a non-compete or not so well let me ask Chris let me turn it to you for for a minute here Commissioners um Holio and and Ferguson actually both dissented on the rule why why was that thank you Alex and uh thank you to the Federalist Society for inviting me today to join this great panel I'll start with a bit of housekeeping uh the views I expressed today are my own and they do not necessarily represent those of the Federal Trade Commission uh I'm sure many of you have read commiss hoo's uh remarks on the non-compete rule making uh my remarks today are going to focus at a high level the key issues that animated uh her concerns with the rul making her descent is principally animated by four key issues the importance of separation of powers the plain text of section six and section five congress's and the commission's his hisorical interpretation of the ftc's competition rulemaking Authority and how traditional antitrust tools are a better vehicle by which to prosecute anti-competitive non-competes beginning with separation of powers uh her remarks begin with article one of the Constitution vests all legislative powers in Congress respecting congress's exclusive authority to legislate has both separation of powers and Democratic implications executive branch agencies must be able to clearly identify delegated authority before proceeding with legislative rulle making this ensures that the executive branch does not infringe on congress's authority to legislate and it also ensures that the people's Representatives not executive agency Personnel make new law because commissioner Holio does not read section five and section 6G of the FTC act to provide authority to the commission to issue competition rulemaking the non-compete rule making exceeds the commission's authority and infringes on congress's authority to legislate turn rning to the text of section six and section five commissioner Holio is a textualist and begins and ends her analysis with the plain text of the statute she's reviewing and a review of both section five and section 6G suggests the commission has no Authority here to issue competition rulemakings beginning with Section Five it provides the commission with the authority to do many many things including issuing cease and desist orders it does not however mention rul making the commission therefore looks to section 6G in the critical language there that relies on suggests that the commission may from time to time classify corporations and make rules and regulations for the purpose of carrying out the provisions of the ACT critically this language does not express a clear expression of congressional intent to confer the power to issue uh legislative rulemakings that carry the force of law here in her remarks if you look at them um she cites to uh literature within the administrative procedure uh world where there's been critical analysis of where and when agencies have been provided or conferred the authority to issue legislative rulemakings here 6G just simply doesn't have it the rule also turns to section section five and argues that it provides the commission with the authority to enforce section six rules but this also has significant problems the final rule maintains that congress's section five delegation of adjudicative authority implies that congress's delegate Congress has delegated authority to enforce legis legislative rule making but that inference is mistaken legislative ruem is by definition creating law and adjudication by contrast enforces pre-existing law in other words competition rulemaking would fundamentally expand the relative relative to the case by case adjudication that the section five um implies the commission's delegated authority to prevent unfair methods of competition turning to the historical interpretation of the FTC act here the the commission's own interpretation of the FTC act as well as congress's interpretation suggests that the commission doesn't have the authority to issue legislative Ru makings in the competition space be for many for many decades after 1914 Co the commission itself never suggested that it had Authority is to issue rulemakings generally much less for competition rulemakings beginning in 1940 the Cong congressional action also suggests that Congress itself did not believe the agency has Authority here they provided the authority to pass the wool products labeling Act and the fur products labeling act in addition to several other other legislative rulemakings the commissioner's remarks also touch on the non-compete rules Reliance on National Petroleum refiners Association while her descent goes into great detail on this issue commission commissioner Holio does not believe that the statutory interpretation used to advance the holding in National Petroleum is likely to be used by a reviewing court today finally turning to the focus on traditional antitrust rules over competition rulemaking the non-compete non-compete agreements do present complex policy questions and commissioner Holio is sympathetic to many of the comments that she read including those that suggest that some employees feel like they are stuck in a job and they unable to go and seek other opportunities but she's equally sympathetic to the small business owner who invests in her new employees just to watch them potentially walk away to their biggest competitor with valuable training and Trade Secrets relatedly Commission Holio fears that banning non-competes May potentially deprive employees of important training and other tangible benefits which itself could potentially impede career progression non-competes non-competes involve a case-by case weighing of the cost and benefits to not and that case-by casee analysis is critical here the reciprocal nature of agreeing to stay with an employer for a period of time in exchange for the employers investment in training and related Services only underscores the inherent difficulty of condemning non-competes generally that is why commissioner Holio supports using the ftc's antitrust tools to examine non-competes on a case-by casee basis and would be in favor of the FTC dedicating resources to investigating potentially anti-competitive non-competes thank you for my time and I look forward to your questions thanks Chris and look I mean I think that a lot of people I I agree with a lot of the views that um you know it's it's sort of like hiding an elephant in a mous holes they always say right that that there that it's difficult to kind of interpret the agency's rules as supporting and the statute is supporting this kind of a broad action but there is the precedent that you refer to the National Petroleum refiners Association case I mean how do you contend with that I know you said that you know commissioner Holio thinks that that type of a decision would be made differently be analyzed differently by court today but can you expound on that a little bit sure sure and um I think commissioner hok's remarks that they touch on this particular issue I think first of all uh an important Point here is that uh the manner in which uh courts uh employed statutory interpretation tools is very different back then than it is today I think that's just that's a general consensus among administrative uh procedure act Scholars uh I think also there's been recent scholarship by Professor Merill uh and Professor Pierce on this particular issue U that being when and where agencies have been conferred the authority to issue rul makings and I think uh turning in particularly to Professor Merl's arguments and scholarship I think actually this was with Merill and watts in particular um you know their their discussion of these issues I think is critical in terms of understanding when and where agencies were conferred the authority issue rulemakings and this language of you know rules and regulations in terms of you know internal housekeeping you know this is found in other um you know grants of authority to agencies and uh I think Professor Merl's scholarship suggests you know you know there has to be a sanction and a clear conferral of authority to legislate uh on rulemakings and that just doesn't exist here thanks Chris so the chamber you know challenged the rule shortly after adoption um Tyler you know what were the main concerns that the chamber raised there um and are those concerns you know limited to this particular rule are they broader you know Chris was alluding to some broader concerns here talk to us a little bit about what's going on with respect to the chambers's case and what its concerns are here yeah thank you Alex um for your introduction and for moderating this panel um thank you to the Federalist Society for hosting this conversation and thank you of course to my fellow panelists I really appreciate the opportunity to get to be a part of this important conversation with each of you um I also need to say at the outset that my remarks are purely in my personal capacity and do not necessarily reflect the views of the US Chamber of Commerce or its members so with that disclaimer out of the way happy to discuss the chambers challenge to the ftc's final rule you know as has already been mentioned the FTC finalized the sweeping ban uh of non-competes on April 23rd the chamber and our Coalition filed a complaint in the eastern district of Texas the next morning and our motion first day in preliminary injunction that evening um as an aside and what we understand to be a novel application of the first defile Doctrine our judge actually stay our case and directed us to intervene in a case filed the night before ours in the Northern District of Texas we're now consolidated there working to get Consolidated there um our challenge really focuses on four core concerns and I don't think anyone will be terribly surprised to hear me pull on some of the same threads Chris just did when discussing commissioner hok's descent um the first is that the FTC lacks the statutory authority to Define and prohibit unfair methods of competition by rulemaking second the FTC fails to establish the non-compete Agreements are per se antitrust violations such that they can be deemed categorically unfair um third if a court were to find such a broad grant of authority sufficient to justify the rule that grant of authority would itself violate the non-delegation doctrine and finally that the rule violates the administrative procedure act in a variety of other ways um so as I mentioned whereare of at least two other challenges to the ftc's rule including the one we saw to intervene in um and the one we intervened in that case adds the argument that the FTC is unconstitutionally structured I'm not going to touch on that but the federal Society did recently host a conversation about the ongoing viability of humph execu at its recent executive branch review conference so if you are interested in digging into that issue more I'd encourage you to watch that program so uh first can the FTC even do this does section 6G of the FTC act which the FTC sites in the rule actually profi provide the FDC the authority to issue competition rules we think the answer is clearly no and that if it's even a close question then the major questions Doctrine operates to reject attempts like this by administrative agencies to take unprecedented actions with vast economic and political significance based on nothing more than ambiguous and ancillary statutory text just to get into a little bit of the history of the FTC act U the House of Representatives originally envisioned the commission as a purely investigative body which would gather information produce reports and make recommendations to the attorney general regarding suspected violations the house then drafted the statutory text that became six section six including its reference in 6G to rules and regulations necessary to carry out its investigative functions with that specific Envision in Mind by contrast the Senate envisioned the commission as an enforcement agency and wrote what became section five to empower the commission to enforce the law through Case by case adjudication uh following negotiations between the two Chambers the FDC act ultimately included both Provisions um but at no point during congress's deliberations did the house or Senate ever suggest that the newly formed commission would have substantive rulemaking authority over the entire economy a proposition that would have been unheard of in 1914 decades before the creation of the modern administrative State now Congress has repeatedly amended the ACT to Grant Ru making Authority in certain limited circumstances but these grants of specific rulemaking authority to the commission only further underscore that it lacks General rulemaking Authority these amendments clearly run counter attending suggestion by the commission that the broader Authority has just been there all along and the commission has long understood the limits on its Authority which is why for 50 years after the FTC X passage it never attempted a rule making under Section 6G now the commission now cites an experimental and short-lived effort to issue joint deceptive practices and unfair competition rules in the 1960s and 1970s those actually prompted Congress to specifically cabin The commission's rulemaking Authority through Magnus and Moss to rule makings for unfair or deceptive Acts or practices and the commission seemingly understood those limits for another 50 years and what appears to now have become a bit of a cycle for the FTC uh the commission cites National Petroleum refiners which I know Chris touched on and you guys have discussed already but it's a single decision out of the 1970s DC circuit that decision rested on the fact that Congress had not expressly excluded The Authority but agencies do not have unlimited power to accomplish their policy preferences up to the point that Congress stops them they have only the powers that Congress grants through a textual commitment of authority that decision flipped the proper analysis on its head it was wrong at the time and is obviously wrong now to the extent there is any confusion under the major question Doctrine the more expansive the agency's claim of authority and here the new found claim of long dormant Authority is quite sweeping the clearer the textual commitment must be so in short you know whatever persuasive Authority National Petroleum refiners might have had in 1973 has long since evaporated but what if the court disagrees with that Frontline position well it's long been settled that to bring an enforcement action against conduct under Section 5's unfair methods of competition Authority the FTC must show that conducted issue harms competition more than helps it I don't want to speak for the other panelists but I I doubt anyone disagrees that some individual non-compete agreements impose harms that are not outweighed by Pro competitive benefits but plainly not all of them do and it's important to note here that it's the FTC not its Challengers who are taking an absolute approach to this issue and have the obligation to justify it under Section Five in order to show that non-compete agreements constitute per se unfair methods of competition the commission must show that every non-compete agement causes competitive harm that is not outweighed by Pro competitive benefits and the commission did not even attempt to do so it does attempt to make an argument based on aggregated harms which is an approach courts have routinely rejected it then acknowledges that non-competes serve many legitimate business interests but it never actually attempts to show that those benefits are outed by the anti-competitive harms for every non-compete agreement prohibited by its rule section five does not allow the commission to designate a common business practice as unfair if only some instances of that practice unjustifiably harm competition all of which is unsurprising as at least 46 states have for hundreds of years relied on case- specific or context dependent determinations that have upheld non-competes in certain circumstances and found others unenforceable so those all lead directly into the non-delegation doctrine argument if if the commission's interpretation of unfair methods of competition is correct section five would amount to an unconstitutional delegation of leg legislative power breaking with Decades of case law interpreting Section 5 the commission's 2022 policy statement says that the commission may determine the conduct is unfair if it is restrictive or exclusionary and it tends to negatively affect comp competitive conditions if those you know vague requirements are all that is necessary to declare a long-standing business practice unlawful then there are no meaningful guard rails on the commission's power it has a roving mandate to condemn any commercial conduct that it dislikes and that t to negatively affect competitive conditions it does not need to show any evidence of actual harm Define a relevant Market prove Market power or consider Pro competitive justifications understood that way section five lacks any intelligible principle to guide the commission's discretion and I think this is a good place to answer your question about why the chamber sued and whether the con concerns are broader than just this rule in that 2022 policy statement the FTC laid out its intention to Outlaw a Litany of other actions that businesses take to remain competitive from loyalty rebates to entire classes of murgers and Acquisitions all those aspirational bans turn on whether the FTC has the power to undertake these rulemakings and what they would be required to do if they do have that power the FTC has been very upfront that this is just the appetizer and their focuses on concerns far broader than this Rule and on at least that we agree so the unifying theme behind each of these arguments is quite simple over a 100 years ago Congress did not silently give the FTC the authority to unilaterally rewrite tens of millions of contracts to eliminate a practice that preceded the FTC in this country by more than 100 years and just to really briefly touch on the APA and you know in the interest of time I won't dig too deeply into these but first the rule is impermissibly retroactive the Supreme Court has held that a statutory Grant of legislative rulemaking Authority will not as a general matter be understood to Encompass the power to promulgate retroactive rules second the commission relies on inadequate evidence to support the broad sweep of its category ban know Julian mentioned that California thinks their their ban is actually broader but I would argue that even California's ban defines non-competes more narrowly than the commission's functional test you know the commission needs to show a reasoned basis for painting with such a broad brush rather than targeting those non-compete agreements that are actually harmful third the commission failed to meaningfully engage with more tailored Alternatives raised by commenters instead flippantly relying on single sentence unexplained assertions that employers had other means for protecting their interest or that business justifications were not sufficient and finally commission relied on flawed cost benefit analysis ignoring certain costs such as the litigation cost to protect or the cost of business's inability to actually protect their confidential information altogether in many instances and it relayed on relied on outdated data sets that examine narrower bands to justify the rules benefits um so you know I would commend to everyone the reading Commissioners Holio and Ferguson statements on the rule um they're incredibly well thought out and well footnoted and um with that I think turn it back to you Alex thanks Tyler for all those insights very very helpful I wanted to ask you just very quickly kind of bottom line this for us when are we gonna get an answer like when do you think we'll actually get a decision from a court that will instruct us as all as to either the scope of the rule the viability of the rule um really any kind of guidance on this yeah so the case that we were directed to intervene in the Northern District of Texas um just last week I believe Judge Brown entered an order that committed to resolving the preliminary injunction by July 3rd um so I think that would probably be the first time we would see a definitive ruling um at least on the pi posture and then I assume the fist circuit will will be asked to take it up kind of regardless of of how that turns out thanks again so gwendelyn you've been waiting patiently thank you so much so I wanted to ask you um given you know your work and your position the the states had competing views on the original FTC proposal what were what were some of those views that the states had put forward sure so like you said I'm the chair of the antitrust task force which means that I represent all the Attorneys General and all of their various views and so I'm just going to give you a little bit of an idea about what both sides had to say about this but first I need to make somewhat of a gentle correction to my co-panelists state antitrust laws are not preempted and let me tell you what um the statute when you actually look at it expressly recognizes State Authority and the existence of private rights of action unless a state law conflicts with the final rule so what does this mean that in contrast with the FTC act which can't be enforced by private persons or by state authorities non-compete laws of the very states provide for that enforcement so there are State penalties there are penalties in the state statutes those are still in place and really I think the way to really look at it is it's really the Nuance of preemption right frankly we're going to talk about disperate views the Democratic State Attorneys General who commented on this and not all Democratic AGS did comment on this um but they were arguing for essentially what you guys are talking about right they're talk they were arguing for a more than standard and then if if FTC had said this is going to be a more than standard I think that the arguments about whether California would be more than those are legit arguments but when you actually look at the language the preemption language in the statute is impossibility preemption in other words if any state did and no state does had a statute that said uh non-competes are pro competitive and I don't think anyone's going to do that because of the reasons you mentioned right like some of them I think we can all probably agree that like if you work at Subway you probably don't need a non-compete right it's it's not really that specialized Etc right so it unless it is impossible to comply those state laws are still in place so so that's my slight disagreement with you but I will say that there are lots of places where we agree I think that this group in particular will love all the states love federalism obviously right like that's what we're all about um so even the Democratic State Attorney General comments talked about this preemption issue um I think if you look at those existing state non-compete statutes you're going to still see and I would certainly advise your clients if you're figuring out what you're going to do about this Federal overlay regardless of what happens with the challenges to the statute you're still going to want to make sure that you're complying with those State statutes because of this impossibility preemption you're going to still see enforcement by some states for um time space and scope type non-compete rules Wisconsin has a not time voice and scope statute uh low income like the 400% of the poverty line in Maine $75,000 threshold in Illinois 113,000 nice round number in Oregon you're GNA want to look at specialist exemptions in the various States right you're still going to be wanting to make sure you're complying with those as well so I wouldn't say they going to challenge this this is going to go away we don't have to worry about it so I would still continue to advise you toly um and the reason why in particular Alex talked a little bit about some of the successes and challenges that the feds have had with these cases well the states have been a lot more successful uh you think about Washington state had a number of challenges to non-competes uh New York has had some challenges right so Washington was focusing a lot more on those sandwich shop type folks but you see that also more at the highend in New York they were challenging a lot of non-competes um in in banking um and in higher-end businesses like we work and Reliance payment and folks like that okay so that's kind of the lay of the land let's talk about the comments this is your original question and being a typical lawyer I have given my own Preamble first but here's your your back to your question the Dems there were 18 states all Democratic who really got into the Weeds on on the comments right I talked to you about the preemption issue they were like please don't preempt us it should be more than fortunately the FTC came to its senses and said impossibility preemption that's going to be much more straightforward so then you're not going to be litigating what's more than the Dems were worried about choice of law to evade enforcement of specific State statutes because obviously right like California let's assume that you agree that California's non-compete law exists and is enforcable right so obviously if you've got California and Wisconsin employees and you have a choice of law for Wisconsin with our extremely lowercase a liberal policy on what businesses can do in terms of non competes that's obviously a problem if you're California Californian rather um Dems pointed out that some non-competes can benefit businesses by increasing entrepreneurship right the idea that if I'm a physician and I can go decide to take my business elsewhere and then like go open my own shop it's going to increase entrepreneurship and they also really got into the Weeds on the actual rule itself about de facto non-competes versus Express non-competes and Julian talked about this a little bit about non-solicitation clauses is about the definition of worker and I won't repeat what Julian said because I think he articulated that whole discussion very well um Republicans they it's great because that everybody else has already gone since you kind of laid out the land right so the Democrats really had those in the weeds comments and the and concerns about preemption and the Republicans um including commissioner oh Holly Oaks former state of Utah um they were really concerned about the inability to promate rules under the FTC act right and so raised a lot of the same kind concerns that you've heard today about whether the FTC really does have that Authority um and so I suspect although I don't know you'll note I didn't give a disclaimer at the beginning but I suspect that you will likely see folks weighing in on the situation in terms of the challenges to the ftc's authority because there were those those serious concerns about whether the FTC really had the authority to do this in the first place so next steps right there's no concurrent enforcement um in other words the states can't enforce the FTC Act statute I would expect you'll see more of the same and I'm going to an anticipate a nuanced question about this that I actually got from a citizen and I'll share it with you guys what about states that don't have a really strong non-compete statute dud are they going to interpret their many FTC acts um consistent with the federal FTC act if this non-compete rule continues my answer to that is actually twofold I would expect that you will see first of all it's more likely that states are just going to pass the statute because typically in order to get a room done those still need to go through a process right like you do still need to have a Ru making particularly for those states that have enumerated FTC act statutes like this particular thing is illegal this particular thing is illegal those are going to probably need a rule those states that have kind of grab bag FTC act statutes those you may see some Court challenges but the number of states that have those I would say still unlikely to see that adoption of the mini FTC act as the the pathway because a lot of those States already have non-competes right if you think about the states that have brought challenges on non-competes it's not all AGS so that's kind of an overview of where they're at but that that misreported um setting a floor idea it it I don't think it understands the Nuance of right like there's no private right of action so that would be the thing I really want to just emphasize for all of you okay and thanks wendeln and um I don't know if anyone wants to react to that last point Tyler or Chris or Julian um about the misconception that gwindel Lin's pointing out um that she perceives with respect to setting a floor but um if not I have a follow-up question for you gwendaline so you talked a little B about sort of the the future possible legislation in some states uh what do you envision and really I'm I'm thinking about state federal enforcement but what do you envision sort of state enforcement to look like on a go forward basis just speaking at a high level um you know are you envisioning a lot of State FTC interaction with respect to investigations and enforcement um and this assumes that the rule is you know validated right by a court um and are there particular areas uh you know as we've talked about I think everyone would agree the rule is really broad it covers you know potentially lots and lots and lots of workers essentially everyone where might the states um look to enforce first or most frequently you mentioned sandwich shop employees multiple times um any thoughts on that yeah I think that's a fantastic uh question I would say the states are going to continue to look at the folks that are in their borders would be the place that I would look at first right how I expect it will go forward assuming that you the chamber loses sorry um assuming that the rule continues to exist I would expect that you're going to see maybe some cooperation amongst those States that have um if let's say we're taking a giant big tech company right talking about some of these earlier ones you're taking a giant big tech company that's got non-competes and it's got workers all over the country okay I expect you're going to see that FTC would take a lead in that case and then maybe some of those states that have non competes would would join I think you will see a framework that's very similar to the if you think about existing multi-state cases and existing federal state partnership cases right if the case is a giant case case then it's possible you would see some kind of cooperation but I would expect that for example if there's bid rigging in Wisconsin that's likely going to be a gwendaline case whereas if there's bid riging in Wisconsin and Illinois it's Poss we might get the feds involved because you've got that Interstate angle so that would be what I would expect of kind of the division of labor um I would be but I would again continue to be very careful if you're advising your clients on how do you guys deal with non-compete statutes because I think there is definitely much more likelihood of having Federal interaction right if you are saying oh we're going to put in a Wisconsin a choice of law for Wisconsin because Illinois non-compete is at 75,000 I I would just be very careful about that well again thanks gndn um really helpful insights we do have several questions that that have rolled in um I'm going to get to those in just a minute but Julian I wanted to give you an opportunity to talk a little bit about um you know gwendaline was giving some some helpful advice um you know potentially to to to clients out there um what are you telling clients these days in terms of you know what should they be doing now how should they be approaching this this rule as we move towards it potentially becoming effective this fall thanks Alex I I'll be brief uh so we can get to those questions um certainly after what I hear from gwand I'm going to tell him to watch out for the states no I'm kidding I I think gwand and I actually probably agree on on a lot of what we're talking about here um but you know I I think first and foremost um you know clients are watching the lawsuits very closely right now you know we have this period until September 4th to get ready to do all of these things um and so you know as Tyler mentioned we're kind of expecting a ru at least in preliminary posture by July 3 so you know lots of clients are kind of moving forward with Preparatory work but maybe you know waiting to hold the trigger on things until we see is that September 4th date going to hold or not you know in terms of of what clients are doing right now what they're asking about I think you know there are big workflows to get ready to do this notice requirement especially for large organizations it's just a big administrative you know thing thing to do figure out who has non-competes in your organization and you know get ready to send a notice um lots of folks know that's not something that happens overnight you know I think the other uh couple things that I'm seeing a lot uh about are between now and September 4th is the opportunity to get non-competes in place with senior Executives that could be grandfathered in under the rule and so to the extent uh you know people want to put a new non-compete in or even amend one this is kind of a safe harbor window to do that uh you know notwithstanding state law keep it in mind folks um but uh you know the it's not even clear I think under the ftc's rule whether an amendment of an existing non-compete after September 4th would be deemed a new one um or not so people are using this window to to think about that and then I think you know hitting on another thing we've touched on a couple times is it's one thing to review your employment agre ments in your handbooks and say okay here are my non-compete Provisions I got to email you know all of these employees or even former employees if they're still subject to them um but what about my non-solicitation Provisions what about my non-disclosure Provisions what about training repayment forfeiture clawback liquidated damages I mean all of these things could conceivably be subject to the rule depending on it and so I think that is an area with a lot of ambiguity and that we are getting a lot of um you know questions from clients about and and you know sometimes the question is I have this is this a problem or is this going to be a problem under the rule and sometimes the question is okay I can't do a non-compete um but I still have these legitimate business interests that you know Tyler was talking about what else can I do to best protect that and I don't want to suggest that any of these things are necessarily as effective or or close to as effective um as the non-competes that many businesses have used historically but you know trying to figure out other ways to as best as we can prot protect Trade Secrets protect legitimate you know free writing concerns or the S or similar um you know compliant with the ftc's rule and state law that's another area of a lot of activity thanks Julian and let me follow it up with with some of the questions that we've been getting um which really are directed to some of what you were just discussing and one of them we've actually got two questions related to uh the essentially definition of senior executive under the rule um you know one asks in terms of what constitutes or who who can be a senior executive has policymaking Authority ever been defined is that sort of a defined term that we should be looking to um and if not Is there further guidance anticipated on that aspect of the rule yeah I think that is actually one of the more you know uh one of the more ambiguous terms terms in the rule that is giving you know clients a lot of uh uncertainty to deal with right now it it is not you know defined in any way that um that I think creates Crystal Clear boundaries there is some discussion of you know what are officers under other laws and and analogizing to the way that we Define Executives or officers um in other acts but th those are not dispositive designations necessarily I think I would just generally say that the way um I think most are reading the rule right now is that the definition of senior executive is pretty narrow so you know policymaking it's not you know it's not every middle manager that may be making policies for a team or a small group you know we are looking really at I think closer to the top of organizations probably mostly in the SE Suite um as people who are going to be likely to to be deemed senior Executives under the rule and and this goes to a second question um that we received is it both policymaking Authority and a certain level of compensation that would qualify someone as a senior executive under the role that's right it's an and not an or um you know and the there's a very specific number I think it's around $150,000 is the is the threshold but um it's it's not a round number so I don't have it off the top of my head fair enough um so another question that we received that I think that the the group really could speak to but Chris I'm going to maybe ask that you start um is you know how would enforcement of the rule as a practical matter work well uh thanks I I'm not sure I want to speculate about what the next steps would be but um I would think it would you know would I would imagine that it would be a priority moving forward in terms of making sure that uh um making sure that businesses are complying with the rule assuming it uh it's it remains valid um yeah I expect some resources to be dedicated to that certainly sure and I think I think the question also goes to really um you know how will the FTC approach enforcing this rule I mean we have some analogous experience with the agency enforcing in the consumer protection space right with rules that it promulgates there um and the means of investigation and enforcing typically involve you know a complaint to the agency it gets you know routed to the the correct shop within the agency then there is a subsequent investigation that involves subpoenas civil investigative demands uh investigational hearings or depositions uh so on and so forth up to the point where there's either a settlement that's filed in in court or that ultimately is agreed to between the parties um in the agency how do we envision I mean is is that going to be the model for enforcing this rule in other words are people going to be getting calls from what the an competitive practices division over at the FTC is that kind of how this is going to go or do you not have those details yet yeah now I don't think I have those details but I think the question highlights in an important way the novelty of the competition Ru making itself right it's um enforcing Ru makings is not a muscle that the Bureau of competition currently has but of course they could they could quickly de that muscle and get in the weight room uh I'd expect and I mean obviously sister agencies have rle making authorities and BCP has rule making Authority and they'll I'm sure they'll quickly be able to um you know get up to speed and develop that and and push out resources to to prosecute uh violators of the rule assuming it remains valid okay yeah it doesn't seem that there is very clear Authority um for how to enforce you know this this type of a you unfair method of competition rule um but let me ask a question that I think is nested within this question would how would the rule enforcement take place would they go and maybe Tyler or others know this would the agency have to go to Federal Court to get this enforced uh would there be civil penalties involved you know can people speak to that or again is that still a bit of an unknown well I think I think that I'll speak to commissioner hok's uh dissent in this regard uh I think that one of the outstanding questions is the plain language of section five envisions you know cease and desist orders but even those cease and desist orders that their challenge need to go to court in order to be enforced it doesn't speak to you know what would happen in a rul making setting and I think that's part of the nebulous you know issue here about what would happen and um you know I think commissioner hoio from Mark suggests that because that enforcement mechanism isn't there it's not a valid valid use of rulemaking authorities and I'm not sure what would happen frankly if uh you know if it remains Val and what would how enforcement would proceed then uh Curious Tyler if you have any thoughts no I mean I really think this is an area of tremendous uncertainty both what will be the enforcement priorities under this Rule and and how it will actually happen I mean you talked Chris about the uh the FTC not having the the muscle here I mean I've also Su the SEC a number of times which does have Ru making Authority um and the SEC defends its own suits um the FTC however kicked this one over to the doj federal programs branch which I think just continues to go to like they just don't have the the uh uh experience in this in this area and there's just a lot that needs to be figured out and thank you Tyler and thank you Chris another question that's come in is maybe gwendelyn more directed to you which is that a question as to whether the rule would preclude state courts from enforcing non-competes uh so if if a state statute says you go to State Court to uh invalidate a specific non-ed let's take Wisconsin for example let's say it's unreasonable in time scope yeah that state court is going to be the one that's got jurisdiction over that we're not going to be let me rephrase that the worker would not be doing that in federal court under the FTC statute because right there's no private right of action there so we we don't have the full lay of the land on how this is implemented but right it would be in Wisconsin only right it would just be the worker who'd have that ability to go into State Court Wisconsin the AG's office doesn't have that but if you're in California right that would be in California state court and that could be the AG it could be the worker or whatever thank you WN um so let me we are almost out of time but let me see if I can get through a couple more questions just very quickly um one one actually more than one question focuses on the fact that non-compete agreements often are used to protect Trade Secrets for companies um maybe Chris this is best directed to you because you were right in the think of things did the FTC think about the potentially adverse impact on companies relying on non-competes for purposes of trade secet protection sure yeah know the staff did a great job in terms of working through the the relevant materials in the economic literature um you know I think it just comes down to a weighing you know the cost and benefits and I think in commercial commissioner Holio remarks you know she you know she suggests that um you know the the the manner in which we prescribe non-competes in the rul making doesn't necessarily provide enough incentive you know on those issues of how do you invest in employees Trade Secrets uh trainings for employees you know sometimes employers provide um you know trainings and and educational subsidies Etc so yes I think the staff did a great job in terms of the analysis here but um I think commissioner hok is concerned that you know just simply creating a per se rule here in validating all non-competes uh can introduce some problems in terms of the incentives employers will have the future employees yeah and just a flag I mean we are certainly making the argument in our in our litigation that you know violate the APA by not adequately you know considering the Alternatives that would have resulted in more tailored solutions that would have um been better able to preserve trade secret protection um you know failed to to do an adequate cost benefit analysis because of this very issue among others um so it's certainly an active part of litigation as well well thank you Tyler um well thanks everyone we're now at one o'clock um I'm for the audience sorry if we couldn't get through all the questions I know we will provide some answers there's still a lot of unanswered questions generally speaking but um hopefully over the next year we'll we'll we'll get some answers hopefully before September fourth um ideally but anyway thanks again to everyone uh Emily back to you on behalf of the federal Society thank you all for joining us for this great discussion today thank you also to our audience for joining us we greatly appreciate your participation check out our website fed.org or follow us on all major social media platforms at fedock to stay up to date with announcements and upcoming webinars thank you once more for tuning in and we are adjourned [Music]

Channel: The Federalist Society

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Length: 60min 26sec (3626 seconds)

Published: Fri May 10 2024