Within the last five months, the two executive arms responsible for enforcing antitrust laws—the US Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”)—held public workshops to examine the effect of non-compete clauses in employment contracts on the labor market. The DOJ held its workshop on September 23, 2019, while the FTC recently held its own at the top of the year, on January 9, 2020. The purpose of the FTC workshop was “to examine whether there is a sufficient legal basis and empirical economic support to promulgate a Commission Rule that would restrict the use of non-compete clauses in employer-employee employment contracts.”
Why the FTC now wants to regulate in the employment space is not readily apparent apart from attempting to capitalize on a low-hanging fruit populist issue concerning the overreporting of some companies allegedly using non-competes with low-wage workers.
In advance of the workshop, comments in support of prohibiting non-competes came from, among others, 18 Democratic state attorneys general; academics, labor unions, and other advocates; and surprisingly Senators from both sides of the aisles. In a separate letter to the FTC, Senator Rubio—who introduced federal legislation to ban noncompetes for low-wage workers in early 2019—cited the presentations during a November 14, 2019, Senate Committee on Small Business and Entrepreneurship hearing that discussed the deleterious consequences of non-competes. Needless to say, scrutiny of non-compete provisions will remain an FTC priority this year, especially in the wake of changes to state labor laws to protect low-wage workers. It is not clear why the business community would support any blanket ban on non-competes.
Unsurprisingly, then, after a general and historical presentation on these clauses and the regulatory landscape, the workshop opened up with economic scholarship reflecting how non-competes chilled labor mobility, stifled wage growth, worsened income parity and business dynamism, caused anticompetitive harm, and increased the chances of a monopsony.
While there was broad consensus that the FTC has statutory authority under the Sherman and FTC Acts to regulate non-competes, questions still remained: are there enough empirical data and legal precedents to justify FTC rulemaking; and if so, what should be done? The answers ran the gamut. While recent scholarship offers opposition to noncompetes, comprehensive reviews are novel and appear too limited to justify action. One scholar, in fact, argued that this is still far from reaching a scientific standard to conclude that such covenants are bad for overall welfare. Indeed, the benefits of noncompetes include ensuring accountability among executives, protecting trade secrets, and incentivizing the training of employees, to name a few.
Assuming there is evidence to convince the FTC to act, the ideas offered included (a) banning non-competes altogether for low-wage workers, (b) creating a rebuttable presumption in court that non-competes are illegal, (c) limiting non-competes to those with access to a company’s trade secrets, (d) minimizing the duration and geographical scope of such provisions, (e) requiring garden leave as consideration for the enforcement of these agreements, (f) voiding non-competes unless the employer has disseminated notice of the covenants at appropriate times, and (g) banning intra-franchise non-poach agreements.
Even still, one still wonders about the practical effects of any regulation. In California, which generally prohibits non-competes, the rate of the workforce subject to these provisions is allegedly similar to the rates in states that permit non-competes. Confounded by this, one scholar suggested that (1) while statutory penalties are a novel idea, these may be the necessary teeth to ensure compliance or (2) at a minimum, regulators should provide carrots to companies to nudge appropriate behavior.
Turning to litigation, one presenter questioned the ability to overcome the evidentiary hurdle of antitrust lawsuits on behalf of low-wage workers: in isolation, the anticompetitive injury (an element to prove in such cases) caused by one covenant is absent. As a result, this has led to victories for the government with the least significant impact; that is, the government tallies more wins in the case of high-level executives, whose numbers pale in comparison to the general workforce population. The solution, this commenter proposed, is to collectivize the low-wage workers and study the effects of the covenants in the aggregate, thereby arming the governmental litigant with the necessary proof to prosecute antitrust claims. The problem, at least for class actions, is that little is known about which companies require their employees to sign non-compete restrictions. To address this, one idea offered was to require employers to disclose their restrictive covenants. Suffice to say, it appears this effort is an academic solution in search of a problem.
To get a sense of what the FTC may do in response to the workshop, the dichotomy of the remarks from FTC Commissioners Noah Joshua Phillips and Rebecca Kelly Slaughter offers insights. On the one hand, Republican Phillips expressed incredulity at the notion that there was both the evidentiary support and legislative authority for the FTC to act. With hardly any precedent (aside from one competition rule issued in the 1960s but never enforced and later withdrawn) and the implication of the non-delegation doctrine, Commissioner Phillips cautioned against moving swiftly. On the other hand, Democrat Slaughter disagreed, recognized the FTC’s authority to act now, and, while commending the bipartisan bill introduced recently by Senators Murphy and Young, informed the audience that the FTC “need not wait for legislation to tackle this issue head-on.”
With Republicans leading the FTC, rulemaking is less likely to occur except perhaps a mandate to carve out low-wage workers from non-compete applications. Such a carve out, however, may be a dangerous precedent and lead to a whittling away of legitimate non-compete agreements designed to protect trade secrets. At any rate, the FTC continues to invite comments up until February 10, 2020, to address the following:
- What impact do non-compete clauses have on labor market participants?
- What are the business justifications for non-compete clauses?
- Is state law insufficient for addressing harms associated with non-compete clauses?
- Do employers enforce non-compete agreements contained in standard employment contracts? How routine is such enforcement?
- Are there situations in which non-compete clauses constitute an unfair method of competition (UMC) or an unfair or deceptive act or practice (UDAP)? How prevalent are these situations?
- Should the FTC consider using its rulemaking authority to address the potential harms of non-compete clauses, applying either UMC or UDAP principles? What “gap” in existing state or federal law or regulation might such a rule fill? What should be the scope and terms of such a rule? What is the statutory authority for the Commission to promulgate such a rule?
- Should the FTC consider using other tools besides rulemaking to address the potential harms of non-compete clauses, such as law enforcement, advocacy, or consumer/industry guidance?
- What additional economic research should be undertaken to evaluate the net effect of non-compete agreements? Should additional economic research on the empirical effects of non-compete agreements focus on a subset of the employee population? If so, which subset?
For more information and a for a review of the latest changes to state laws, please attend our upcoming Year in Review webinar and request Seyfarth Shaw’s 2019-2020 edition of its 50 State Desktop Reference. In addition, below are links to the videos of the morning and afternoon sessions of the FTC workshop: