FTC Noncompete Workshop – Update on Our Submission

Ask two lawyers for their opinion, and you’ll get three opinions.

But I asked 21 lawyers and a paralegal and got only one opinion.

That opinion that is set out in a letter we collectively submitted to the FTC in response to questions posed by the FTC in connection with its Workshop, “Non-Compete Clauses in the Workplace: Examining Antitrust and Consumer Protection Issues.”

Our submission is based on the collective experience of 22 lawyers from around the country, from California to Massachusetts to Florida, including Georgia, Illinois, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Texas, and Washington D.C., and one paralegal (Erika Hahn), based in Boston (with me). We (the signatories) each practice extensively in the area of restrictive covenants and trade secrets.

Given the broad range of clients we help, where we are based, and the local, regional, or national scope of our respective practices, we see the issues from all three perspectives: that of the former employer, the employee, and the new employer. And, we see the issues from diverse geographic perspectives and legal frameworks. Yet, we were all in agreement about what to say in a 20-page letter/259-page submission to the FTC. 

In our submission, we provided answers to six of the FTC’s questions about the use of noncompetes. (We did not offer an opinion on the threshold question of the FTC’s power to regulate noncompetes.) 

The thrust of our position was three-fold.

First, we explained that the issues surrounding the use of noncompetes are complicated, and the research upon which any decision might be based at this point is nascent, inconclusive, and inconsistent. Indeed, as we pointed out, three of the leading researchers in the area, Evan Starr, J.J. Prescott, and Norm Bishara, issued a report demonstrating that – when employees are given advance notice that a noncompete will be required – noncompetes actually have significant positive effects, directly contrary to the results of some other research about the purported effects of noncompetes: 

Differences in the timing of the noncompete are associated with different outcomes: those presented with a noncompete before accepting the associated job offer earn 9.7% higher wages, receive 11% more training, and are 6.6% more satisfied with their position than those who are not bound by noncompetes. In contrast, those asked to sign after accepting their job offer are 12.5% less satisfied in their job and experience no wage and training benefits. 

Second, separate from the problems with the state of the research, we recommended that the FTC leave these matters to the states — which, as laboratories of democracy, have been regulating noncompetes for over 200 years and have recently been reevaluating their regulations.

Third, we also recommended that — if the FTC were to promulgate a rule or issue a policy statement or guidance — it should be judicious and focus just on the abuses. Accordingly, any action should be limited to (at most) the following: 

A.  Fairness and Transparency
There are several changes that would balance the playing field and ensure fairness. They are as follows:  
      • A ban on noncompetes for low-wage workers (defined as employees who are not exempt under the Fair Labor Standards Act). There is rarely a need for such workers to be bound by noncompetes, and even when the need exists, the potential detriment to such workers will typically outweigh that risk (unless they have stolen trade secrets).
      • A requirement that employers provide advance notice that a noncompete will be required. As Professor Marx has observed, “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.”[1]   
      • A ban on noncompetes where the overriding interests of third parties should be given priority.
B.  Limitation of Use to Only What Is Necessary
Recognizing that noncompetes are an important tool in the protection of trade secrets (and other business interests recognized by many states), the following changes would allow the agreements to be used only where needed and only in a non-overreaching way. 
      • Mandate the so-called “purple pencil” rule to address overly broad noncompetes. States take one of three general approaches to overly broad noncompetes:  reformation (sometimes called “judicial modification,” in which the court essentially rewrites the language to conform the agreement to a permissible scope); blue pencil (in which the court simply crosses out the offending language, leaving the remaining language enforceable or not); and red pencil (also referred to as the “all or nothing” approach, which, as its name implies, requires a court to void any restriction that is overly broad, leaving nothing to enforce).  Although in its new law, Massachusetts retained the reformation approach (which the majority of states have historically used), an equitable, middle-ground approach (which one Massachusetts state senator named the “purple pencil”) is a hybrid of the reformation and red pencil approach, requiring courts to strike the noncompete in its entirety unless the language reflects a clear (good faith) intent to draft a narrow restriction, in which case the court may reform it. 
      • Provide for “springing” (or “time-out”) noncompetes. To encourage employers to limit their use of noncompetes, they must have a clear and viable remedy 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 allows a court to, in effect, create a noncompete for someone who has engaged in this unlawful conduct.  We colloquially refer to these as “springing noncompetes” (or sometimes “time out” 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.
[1]    The Chilling Effect of Non-Compete Agreements, by Matt Marx and Ryan Nunn (May 20, 2018), available at https://econofact.org/the-chilling-effect-of-non-compete-agreements (emphasis added).

Our letter was one of a total of 333 submissions (available on the FTC’s website here). 

As might be expected, many of the submissions come from individuals who have been bound by a noncompete. The people offering those opinions do so based (rightly so) on their first-hand (albeit limited) experience. And, in fairness to those views, it is important to remember that noncompetes impose limitations on certain post-employment conduct and, whether the restrictions are justified or not, they can feel quite unfair to the person who is bound by them. I note only that given such an understandable response, particularly when coupled with the research suggesting that an estimated 28 million people are currently bound by a noncompete, it is surprising that there were so few submissions from individuals subject to noncompetes.

The remaining submissions run the gamut of opinions. (More on that in an up-coming blog post.)

In the meantime, we’ll be staying tuned to see what happens next at the FTC and elsewhere.