*This post was originally published by Erika Hahn and me on Law360 under the title, “Noncompete Misconceptions May Be Inhibiting Reform.”
Federalism is alive and well.
For about 200 years, employee noncompetes have been governed by state law. While the first noncompete case in the United States was in Massachusetts, all but three states allow the use of noncompetes. The three that ban them are California (since 1872); North Dakota (since 1865 – before it was even a state); and Oklahoma (since 1890 – before it was a state). (Those bans are all based on the Field Code.)
Over just the past several years, bills to modify noncompete laws have been introduced in no fewer than 29 states. Nineteen of those states have enacted legislation modifying their laws – seven this year alone. Those 19 states are Alabama, Arkansas, Colorado, Connecticut, Florida, Hawaii, Idaho, Illinois, Maine, Maryland, Massachusetts, Nevada, New Hampshire, New Mexico, Oregon, Rhode Island, Utah, Washington, and West Virginia. Some have strengthened noncompetes, while others have made it harder to enforce them.
Among the states making changes in the past few years, seven have banned noncompetes for low-wage workers (with varying methods of determining who qualifies for the exemption). Those states are Illinois, Maine, Maryland, Massachusetts, New Hampshire, Rhode Island, and Washington. (Oregon had such a ban since 2008.)
Instructively, while many of the states have recently considered banning noncompete, not a single state has done so. Rather, each state has evaluated the diverse needs of its workforce and industries, and reached a balance of interests that it determined appropriate for its population. For example, in 2015, Hawaii banned the use of noncompetes for workers in the technology field. No other state has followed its lead.
Nevertheless, the debate over this traditional state-law issue has spilled over to the federal level – in Congress (at both the House and the Senate) and at the Federal Trade Commission. Much of the push for restrictions or a ban is premised on (1) the mistaken belief that Silicon Valley is the epicenter of tech because California bans noncompetes; (2) recent preliminary, inconclusive, and somewhat inconsistent studies, the nuances of which are ignored; (3) the mistaken belief that trade secrets laws and nondisclosure agreements provide adequate protections for trade secrets; (4) the mistaken belief that noncompetes prevent employees from using their general skill and knowledge; and (5) the prevalence of abuses in the use and drafting of noncompetes. When the mistakes are corrected and the issues put in context, a reasonable balance is one that (similar the Obama Administration’s Call to Action) bans noncompetes for low-wage workers and medical professionals, requires advance notice if a noncompete will be required, limits the ability to rectify overly broad noncompetes after the fact, and provides a meaningful remedy for companies that attempt to rely on less restrictive alternatives.
Federal Noncompete Regulatory Efforts
The recent federal noncompete reform efforts can be traced back to three bills filed in 2015. The first (the “Mobility and Opportunity for Vulnerable Employees Act” or “MOVE Act“), filed by Senator Chris Murphy (D-CT) and co-sponsored by then-Senator Franken and Senators Elizabeth Warren (D-MA), Richard Blumenthal (D-CT), and Sheldon Whitehouse (D-RI), sought to prohibit the use of noncompetes for “low-wage employees.” The other two were the “Limiting the Ability to Demand Detrimental Employment Restrictions Act,” which was very similar to the MOVE Act, and the “Freedom for Workers to Seek Opportunity Act,” which sought to ban the use of noncompetes for grocery store workers (only). None of these bills passed.
A few years later, in April 2018, Senators Elizabeth Warren (D-MA), Chris Murphy (D-CT), and Ron Wyden (D-OR) introduced the Workforce Mobility Act of 2018 (S. 2782) to impose a federal ban on the use of employee noncompetes. A companion bill was introduced in the House by Representatives Joseph Crowley (D-NY), Linda Sanchez (D-CA), Mark Pocan (D-WI), Keith Ellison (D-MN), Jerrold Nadler (D-NY), and David Cicilline (D-RI), who were later joined by Janice Schakowsky (D-IL), and Alan Lowenthal (D-CA). That legislative session ended without action on either bill.
More recently, in January 2019 (the current legislative session), Florida Senator Marco Rubio introduced the “Freedom to Compete Act” to amend the Fair Labor Standards Act of 1938 (29 U.S.C. 201, et seq.) to ban noncompetes for most nonexempt workers. And, on October 17, 2019, Senator Chris Murphy (D-CT) and Senator Todd Young (R-IN) filed the Workforce Mobility Act to ban the use of virtually all employee noncompete agreements.
Congress: the House
Although no bill is presenting pending before the House, on October 29, 2019, the United States House Committee on the Judiciary Subcommittee on Antitrust, Commercial, and Administrative Law held a hearing on “Antitrust and Economic Opportunity: Competition in Labor Markets.”
Congressman David N. Cicilline (D-RI) – who is a cosponsor on the 2018 Workforce Mobility Act – is the Chair of the Subcommittee and Congressman Frank James Sensenbrenner, Jr. (R-WI) is the Ranking Member.
The hearing started off with the Chairman Cicilline’s opening remarks concerning the plan to “[e]xamine anticompetitive conduct in the labor markets, such as the widespread and growing use of noncompetes and no-poach agreements,” stating that “illegal no-poach agreements are being used in employment contracts.” The remaining testimony was wide-ranging, and focused more on no-poach agreements, mergers, licensing, and other topics, than on noncompetes. As to noncompetes, some people came with a clear agenda, while others seemed more interested in learning and having a true dialogue.
The witnesses and testimony were largely as follows:
- The Honorable Noah Phillips, Commissioner, Federal Trade Commission, provided thoughtful and balanced testimony, stating that, “[n]on-competes can serve good purposes, incentivizing investment in workers and protecting trade secrets – worthy goals in our increasingly knowledge-driven economy,” while observing that noncompetes are also used in contexts where such justifications “are not obvious,” such as with low-wage and seasonal workers. He also cautioned that “[l]abor mobility is a complex issue, and examining the inputs to it from both sides has a better chance of contributing to a thoughtful response that will improve the lot of American workers and the nation as a whole.”
Even in response to repeated, pointed questions, Commissioner Phillips remained steadfast in his thoughtfulness. For example, when asked by Congressman Johnson (D-GA), “How have anticompetitive contracting practices such as no-poach and noncompete agreements affected labor mobility,” Commissioner Phillips began his response by noting, “Just a caveat . . . , it’s not clear that in every situation, a noncompete is anticompetitive.” Similarly, when Congressman Johnson followed up, “So you’re concerned that the prevalence of noncompete agreements has harmed economic opportunity for working Americans,” Commissioner Phillips responded, “Yes. Not in every case. But I think we’re seeing them as more prevalent than we thought they were.” He was then asked about a later witness’s (Dr. Topel) testimony concerning the potential harmful effects of banning noncompetes and responded, “I think there’s some truth to that.” He went on to explain that studies show that “where a noncompete is made apparent to [workers], where it’s negotiated, where there’s consideration for it, the effects [for workers] are better. . . . We also see that there may be different justifications depending on whether someone is high wage or low wage. Those are all kinds of nuances that federal policy ought to have in mind.” Looking past those, Mr. Johnson continued his examination, “So you do see a . . . need for federal legislation to address some of the ills of noncompete agreements and the impact on workers?” Mr. Phillips explained, “What I said in my testimony is that we’re convening a workshop to look at this question, and I think it’s a little too early to answer that particular question on the need for federal legislation. One of the things we’ve seen in the last few years in states is a tremendous flowering of different kinds of legislation. As I said before, Hawaii is looking at tech workers. Oregon is working at low-wage workers. That’s federalism at work. And I think we want to understand the effects of what the states are doing, before we arrive at a federal solution.”
In response to additional questioning, Commissioner Phillips reiterated that “[n]oncompetes can function to help support worker training, and worker training is an import thing, and that’s part of the nuance that I think we all need to take into account.” When asked about whether there are less-restrictive ways to address investment in worker training, Commissioner Phillips again provided a thoughtful response: “There may be depending on the context. Noncompetes are ubiquitous in the economy and they are not always bad.”
- Doha Mekki, Esq., Counsel to the Assistant Attorney General, United States Department of Justice, noted in her testimony that the DOJ is working with the FTC to research (among other things) the impacts of noncompetes.
- Rahul Rao, Assistant Attorney General, Washington State Office of the Attorney General, testified that the use of noncompetes with low-wage workers is “an unfair method of competition in violation of antitrust laws.”
- Professor Sanjukta Paul, Assistant Professor of Law, Wayne State University, testified that noncompetes between large corporations and low-wage workers were “precisely the sort of unfair bargain that [Senators] had in mind when they crafted the first antitrust law” (though she did not assert that the Senators ever actually mentioned this issue).
- Dr. Ioana Marinescu, Assistant Professor, University of Pennsylvania School of Social Policy and Practice, testified largely about mergers and monopsonies, with only a passing reference to the use of noncompetes as an example of potentially anticompetitive behavior when engaged in by “employers with market power.”
- Dr. Evan Starr, Assistant Professor of Management and Organizations, University of Maryland Robert H. Smith School of Business, who is one of the leading researchers trying to understand the economic impacts of noncompetes, provided thoughtful and balanced testimony about the use and effects of noncompetes, and “urge[d] Congress to consider commissioning the FTC to engage in a . . . study to help expand our understanding of potentially anticompetitive employment contracting practices and the ways they affect economic activity.” Like Commissioner Phillips, Dr. Starr explained that the issues are nuanced and a blanket ban could have unintended harmful consequences. He also explained that holding Silicon Valley out as the example of what happens when noncompetes are banned is debatable, and “that we do see a little bit higher trade secret litigation in California. . . . In the academic literature there is a little bit of mixed evidence on the effect of noncompete laws on innovation; there is some evidence that investment is lower in states that more vigorously enforce noncompetes, and some studies find that when states . . . increase their enforceability, that firms do invest in a little bit riskier innovation. So there is some evidence cutting both ways there.”
- Richard Masters, Esq., Special Counsel, National Center for Interstate Compacts, testified about certification and licensure issues (not noncompetes).
- Dr. Kate Bahn, Director of Labor and Market Policy and Economist, Washington Center for Equitable Growth, testified predominately about the impact of monopsonies, sexual harassment, and gender-based discrimination and expectations on wages (particularly those of women). Most significantly, she pointed out that the impacts of monopsonies vary by industry – an important point as the federal government considers its place in regulating an area with broad, diverse impacts.
- Dr. Robert Topel, Isidore & Gladys Brown Distinguished Service Professor of Economics, The University of Chicago Booth School of Business, testified that a ban “would be unwise,” and unlike most other witnesses, talked about unintended consequences, specifically that a ban “would harm labor market performance.” Pointing out that companies without market power use noncompetes just like companies with market power, Dr. Topel opined that “[i]t is a dangerous law that would prohibit” noncompetes, and observed that, if banned, employers and employees will both lose the positive impacts of noncompetes, including associated investments in productivity and employees’ careers. Dr. Topel warned that “the only guaranteed beneficiaries of [a ban] are employees who have already realized the productivity gains of employer investments, who can capture the returns of leaving. That is a one-time transfer of wealth from employers to a cohort of existing workers, not a long-term productivity gain.” Dr. Topel ended with the conclusion that noncompete agreements “have clear pro competitive justifications” and that “a law making them presumptively illegal would [have] potentially large and damaging costs.”
As detailed above, although a total of nine witnesses testified, the three who addressed noncompetes most directly and substantively were FTC Commissioner Noah Phillips, Dr. Evan Starr, and Dr. Robert Topel. Their testimony collectively and consistently established that, although sometimes abused, noncompetes when used properly serve legitimate purposes, including, “incentivizing investment in workers and protecting trade secrets – worthy goals in our increasingly knowledge-driven economy.” In sum, the testimony made clear that a blanket ban can have serious unintended repercussions, and if any regulation is to be considered at the federal level, it needs to be a nuanced approach. As Commissioner Phillips explained, “[l]abor mobility [which might be affected to some extent by noncompetes] is a complex issue, and examining the inputs to it from both sides has a better chance of contributing to a thoughtful response that will improve the lot of American workers and the nation as a whole.” This concern is consistent with answers previously provided by FTC Chairman Simons to written questions from the Senate Committee on the Judiciary, in which Chairman Simons stated, “In certain circumstances, narrowly tailored noncompete clauses can benefit competition. . . . Noncompete clauses also can encourage organizations to invest in employee training by reducing the risk that employees will take their new skills to a competitor.”
No additional hearings have been announced. However, after finding consensus among the experts that noncompetes can be appropriate in some circumstances, Vice Chair Neguse suggested that the consensus path forward would be (as Dr. Starr suggested) to have the FTC commission a study to understand the full implications of noncompetes and craft a “surgical” solution, rather than a total ban.
Congress: the Senate
On November 14, 2019, the United States Senate Committee on Small Business and Entrepreneurship held a hearing on “Noncompete Agreements and American Workers.” Senator Marco Rubio (R-FL) is the Chair of the Committee and Ben Cardin (D-MD) (who joined the petition to the FTC (see below)) is the Ranking Member.
During the hearing, the Committee took testimony from three witnesses:
- Keith Bollinger, an individual whose testimony highlights a serious example of how noncompete agreements are sometimes abused;
- Mr. John Lettieri, President and CEO, Economic Innovation Group, a lobbying organization opposed to noncompetes, whose testimony was unwaveringly against noncompetes; and
- Professor Evan Starr, Ph.D., whose testimony (like his testimony before the House Subcommittee) was moderate and based on his and others’ burgeoning research in the field.
The hearing started off and initially remained fairly moderate (including with Senator Rubio’s framing of the issue and Senator Romney’s questioning whether the issue even belongs at the federal level). By the end, the focus of the hearing shifted toward a ban of all employee noncompetes. This is, of course, no surprise given the truly sad story reported by Mr. Bollinger (who never should have been treated the way he was), the opinion-based advocacy of Mr. Lettieri, and the general hostility toward noncompetes of some of the Senators. (See below for their advocacy at the FTC.)
The push to ban noncompetes was (as it often is) primarily focused on five things:
1. The mistaken assumption that Silicon Valley is the epicenter of tech because California bans noncompetes. Consistent with that fallacy, Mr. Lettieri commented, “We have not seen intellectual property intensive companies flee [California, North Dakota, or Oklahoma] after the [noncompete] bans.” (This is, of course, no surprise given that the last ban was put in place in 1890 – before IP-intensive companies even existed.) The reflexive assumption that Silicon Valley is the product of California’s ban on noncompetes, while fine for casual conversation, is dangerous to rely on for public policy; it is unproven, contrary to some of the research, and ignores that neither North Dakota nor Oklahoma has developed a tech center rivaling Silicon Valley, whereas Austin, Boston, Denver, New York, Raleigh, Seattle, and others (all in states that enforce noncompetes) have all developed major tech hubs (several with a higher “percentage of job openings in the technology category” than San Jose or San Francisco). Indeed, Florida – which has the strongest noncompete laws in the country – recently “ranked just behind California for net tech employment jobs added and came in fourth for net tech employment rank and innovation.” And, Colorado – a state that enforces noncompetes – is home to two of the top 12 tech hubs in the country, including the number 1 tech hub, Boulder, which surpasses San Jose (number 2) and San Francisco (number 5). Of course, this entire discussion presumes that all states should be like California so they too can have a Silicon Valley, ignoring the policy considerations around the resulting high cost of living and associated displacement of the lower-wage earners who can no longer afford to stay in their homes in large tech hubs, and the legal machinations undertaken by businesses to substitute for the absence of noncompetes. (For more information about the Silicon Valley vs. Massachusetts Route 128 false comparison, see Misconceptions In The Debate About Noncompetes (available without a subscription here).
2. The various studies that suggest that noncompetes may have certain adverse impacts on wages, in particular for low income workers. Not meaningfully discussed, however, is that the research is preliminary and inconclusive and other studies suggest that noncompetes may confer significant benefits. For example, one study by Professor Starr and others suggests that states that permit stronger enforcement of noncompete agreements tend to have fewer – but better (higher-quality ideas and more likely to survive) – startups. Another study suggests that companies in states that permit stronger enforcement of noncompete agreements tend to provide more training to their employees. And, according to Professor Matt Marx (one of the leading researchers in this field), “If it were the case that workers made fully informed decisions about signing a non-compete and could negotiate higher compensation in exchange for doing so, these agreements could be valuable for both workers and firms.”
3. The mistaken belief that trade secrets laws and nondisclosure agreements are sufficient tools to fully protect companies’ trade secrets. They are not. And, they do not adequately protect companies when 72 percent of employees changing jobs reportedly take – and are willing to use – their employer’s trade secrets. Indeed, “[t]he U.S. Chamber of Commerce estimates that 75% of employees steal from the workplace and that most do so repeatedly.”
4. The mistaken belief that noncompetes prevent employees from using their general skill and knowledge. They do not. When used properly, noncompetes protect only “legitimate business interests,” i.e., the protection of companies from unfair competition. Employee can continue in their field, so long as they don’t interfere with their former employer’s right to protect its trade secrets and other legitimate business interests.
5. The abuses in the use and drafting of noncompetes, including using them for people who should not be bound by them; drafting overly broad agreements; and springing them on employees on their first day of work. There indeed abuses. And, they should be curbed. But the way to curb the abuses is to prohibit the abuses (see below), not to wholesale ban noncompetes.
While there was no real discussion of the benefits that result from noncompetes or the possible solutions (other than a ban), the hearing record remained open until Thursday, November 28 (yes, Thanksgiving day), to submit testimony. I submitted testimony.
Additional hearings will likely follow, as this was designated “Panel 1.”
- My background (so the Committee could evaluate my testimony).
- The purpose and practicalities of noncompetition agreements (explaining, among other things, why trade secrets law and nondisclosure agreements are often insufficient to protect an employer’s legitimate business interests).
- Common misconceptions about the use, enforcement, and impact of noncompetes.
- Recommendations for an approach that addresses most of the abuses without throwing the baby out with the bathwater.
As to the final topic, I made five recommendations.
First, ban noncompetes for low-wage workers. As a group, low-wage workers rarely have the level of exposure to trade secrets or depth and breadth of customer relationships that might warrant the enforcement of a noncompete, given the countervailing issues. Putting aside how you define “low-wage” (in Massachusetts, we used nonexempt employees under the Fair Labor Standards Act as the standard), a ban like this is an easy fix for the majority of the abuses. In that regard, the same study that suggests that noncompetes are particularly harmful to low-wage workers also says that, because of the magnitude of the pool of low-wage workers in the workforce, the majority of noncompetes (53 percent) apply to low-wage workers.
Second, ban noncompetes for medical professionals. The use of noncompetes for doctors, nurses, and other healthcare providers has received substantial scrutiny in the past few years, and has resulted in many states changing their noncompete laws to ban such agreements. Given the overwhelming public interest in patients having the ability to select who provides their medical care, exempting medical professionals is certainly a rational approach. That said, this public policy rationale doesn’t really apply to practices where the patient does not in fact choose the provider (for example, a hospitalist), as opposed to where they do choose (for example, a primary care physician). Of course, the question then becomes, what is the legitimate interest in enforcing the noncompete? (Note that the AMA’s Code of Medical Ethics Opinion 22.214.171.124 urges the limited use of noncompetes.)
Third, require employers to provide advance notice if they wish employees to sign a noncompete. One of the other major criticisms of noncompetes is that they are often sprung on employees the day they show up work. A simple way to eliminate that criticism and get the potential benefits of negotiated noncompetes observed by Professor Marx (see above) is to require advance notice.
Fourth, adopt the so-called “purple pencil” approach for overly broad noncompetes. (The term “purple pencil” was created by a Massachusetts senator during the waning years of the decade-long journey to reform Massachusetts noncompete law.) That approach is a hybrid of the reformation approach (where courts rewrite overly broad agreements) and red pencil approach (where courts void an overly broad noncompete in its entirety), and requires courts to void an overly broad noncompete unless the language reflects a good faith intent to draft a narrow restriction, in which case the court may reform it.
Fifth, explicitly authorize “springing noncompetes” (or, as John Marsh has termed them, “time out” noncompetes). To the extent that one of the goals is also to encourage companies to limit their use of noncompetes generally, employers must have a clear and viable remedy for when employees violate other, less-restrictive, obligations such as nondisclosure agreements and nonsolicitation agreements, misappropriate trade secrets, or breach their fiduciary duties to the company. In Massachusetts, the new noncompete law expressly authorizes a court to, in effect, create a noncompete for someone engaged in this unlawful conduct. We colloquially refer to these as “springing noncompetes” because they are not required of the employee in the first instance, but are only activated if the employee engages in otherwise unlawful behavior. This expressly authorized remedy would be particularly useful for the all-too-common occurrence of an employer waiving its noncompete (based on assurances from the employee that he or she will comply with the nondisclosure and nonsolicitation agreements) only to later discover that the employee misappropriated trade secrets or is secretly using them or violating a nonsolicitation agreement (or both).
Not surprisingly, these recommendations are the types of changes recommended by the Obama Administration in its Call to Action on noncompetes and by many of the states making changes to their laws in the past few years (see, e.g., Florida, Maine, Massachusetts, New Hampshire, Rhode Island, Maryland, and Washington).
The Federal Trade Commission
In the meantime, there have been multiple recent efforts to push the FTC head off not just the states’ evaluation of the propriety and potential form of noncompete reform, but Congress’s consideration as well. (One might question whether the FTC has the statutory power to address this issue anymore than it has the ability to regulate other aspects of an employment relationship, but we’ll leave that for another day.)
These efforts appear to have arisen in response to a June 2018 FTC announcement that it planned to “hold a series of public hearings on whether broad-based changes in the economy, evolving business practices, new technologies, or international developments might require adjustments to competition and consumer protection enforcement law, enforcement priorities, and policy.” Although the FTC did not at that time mention noncompetes, it did state that it was taking public comments through August 20, 2018.
Not surprisingly, the Open Markets Institute (“one of the most influential drivers of Democratic politics,” according to Politico) seized the opportunity to submit a statement urging the FTC to (among other things) “restrict or prohibit non-compete agreements that impair worker mobility and depress wages.”
A few weeks later (September 5, 2018), Congressmen Mark DeSaulnier (D-CA), Mark Pocan (D-WI), and Donald Norcross (D-NJ), and Congresswoman Debbie Dingell (D-MI) issued so-called “findings and policy recommendations” entitled, “The Future of Work, Wages, and Labor.” The recommendations covered many topics, including, labor unions, minimum wage, universal basic income, the government as an employer of last resort, wealth taxes, etc., and calls for (among other things) a ban of all noncompetes “in employment contracts, with exceptions for senior executives who possess trade secrets.”
The next day (September 6, 2018), FTC Commissioner Rohit Chopra issued a written comment stating, “Given the paucity of private litigation challenging noncompete agreements as antitrust violations, the FTC might consider engaging in rulemaking on this issue. A rule could remove any ambiguity as to when noncompete agreements are permissible or not.”
On October 3, 2018, the Senate Committee on the Judiciary, submitted questions to Federal Trade Commission Chairman Joseph Simons. Chairman Simons responded on November 6, 2018. In one of his responses, Chairman Simons stated:
In certain circumstances, narrowly tailored noncompete clauses can benefit competition. For example, noncompete clauses can protect against the disclosure or use of competitively sensitive information outside of an employer’s organization. Noncompete clauses also can encourage organizations to invest in employee training by reducing the risk that employees will take their new skills to a competitor. That said, several private suits have alleged that overly broad employee restrictions can violate the antitrust laws.
More recently, in March 2019, seven Senators (Richard Blumenthal (D-CT), Ben Cardin (D-MD), Sherrod Brown (D-OH), Elizabeth Warren (D-MA), Edward Markey (D-MA), Chris Van Hollen (D-MD), and Amy Klobuchar (D-MN)) petitioned the FTC to ban noncompetes, calling them “these insidious little clauses” and a “scourge . . . rigging our economy against workers.” At about the same time, OMI once again – this time enlisting other advocacy organizations, labor unions, individuals, and academics – petitioned the FTC (in apparent coordination with the Senators), demanding the complete ban noncompetes. (The participation of labor unions in this group is surprising given that union workers are rarely, if ever, affected by noncompetes (as opposed to nondisclosure agreements and no-moonlighting restrictions, which some people mistakenly think are noncompetes).)
The Senators’ letter and OMI’s petition are both premised on the same mistaken assumptions permeating the noncompete debate overall (for example, the mistaken assumption that Silicon Valley resulted simply because noncompetes are banned), ignoring conflicting research and the significant potentially harmful unintended consequences. Perhaps most telling, however, the OMI petition goes so far as to seek to ban all noncompetes premised in part on the radical view that sharing other people’s trade secrets may be justifiable. Specifically, the petition states, “Even accepting that firms principally use non-competes to protect their intangibles, information sharing is not a categorical ‘evil’ that state action should police at any cost. What is disparaged as free riding often is the broad dissemination of knowledge that contributes to economic growth and innovation.” Such a position is directly at odds with the reasons Congress passed the Defend Trade Secrets Act of 2016.
On June 12, 2019, the FTC held “Hearing #14: Roundtable with State Attorneys General,” during which, in response to a question about whether the FTC should look at noncompetes, Eric Newman (Chief Litigation Counsel for the Antitrust Division of the Washington State Attorney General’s Office) responded, “Sure.” He then elaborated on what Washington state had done, noting that Washington “just had a statute passed that made them illegal for low-wage workers and really up to $100,000 a year. So I think that is a really effective way of getting in front of it obviously, is just outlawing it completely.”
Joining the bandwagon on July 15, 2019, 18 state attorneys general – most of them from states that have made or considered moderate changes to their noncompete laws – also petitioned the FTC to investigate noncompetes.
By September 18, 2019, “[t]he Federal Trade Commission deemed evidence on worker non-competes insufficient to justify a rulemaking, chairman Joseph Simons has said, but the agency will continue to pursue action against such clauses.” Thereafter, Chairman Simons was pushed by Senator Blumenthal to move forward on rulemaking. Specifically, in a series of written questions to and answers by Chairman Simons, Senator Blumenthal stated, “While non-compete agreements can help protect employers and incentivize investments in workers, too often they are used to stifle competition. I was disappointed to hear that the Commission found insufficient evidence in its literature review to justify a rulemaking. Nevertheless, I am glad that the FTC is hosting a workshop on this issue . . . and is seeking additional evidence to support a rulemaking.”
On November 15, 2019, some of the same state attorneys general who submitted the July 15, 2019 public comments, wrote a new, sterner letter. Four attorneys general (from Hawaii, Nevada, New Jersey, and New York) who signed the July 15 comments did not join in the new letter, though attorneys general from New Mexico, North Carolina, Oregon, Vermont, and Wisconsin (who had not been on the July letter) signed onto this new one. This newly constituted group summarily rejected (despite the studies to the contrary) the notion that noncompetes serve legitimate purposes and contended that nondisclosure agreements and trade secrets laws are sufficient to protect trade secrets – a position that most trade secrets lawyers (who would be a beneficiary of the increased, costly litigation that would result) would dispute. For more reading, see California Trade Secrets Litigation Supplants Noncompete Litigation. In the end, these attorneys general called for the FTC to ban noncompetes – and to give them a timeline to complete the work.
On December 5, 2019, the FTC announced that it would be conducting a “Workshop on Non-Compete Clauses Used in Employment Contracts” on January 9, 2020. Given the push by the Senate, the advocacy groups, and the state attorneys general, it will be hard for the FTC to stand its (principled) ground.
Time will tell if the states will be permitted to continue adopting laws that work for their citizens, or if the federal government will force a one-size-fits-all approach.