Once again, Senators Elizabeth Warren and Chris Murphy are pushing for federal regulation of noncompetes.
By way of background, starting in 2015, a few U.S. Senators (Senators Warren and Murphy included) began trying to convince the federal government to wrest power over the appropriate regulation of noncompetes from the states. Having been unable to convince Congress of the propriety of legislating in that area (much less what the appropriate legislation would be), they turned to pushing the Federal Trade Commission to do what Congress won’t. (For background, see “Federal Noncompete Initiatives: When you can’t convince the states, ask the feds.”)
As requested, the FTC began looking into the propriety of regulating in that space. Accordingly, on January 9, 2020, the FTC conducted a Workshop, “Non-Compete Clauses in the Workplace: Examining Antitrust and Consumer Protection Issues.” Following that workshop, the FTC received 328 submissions answering several questions that the FTC had posed. Those submissions provided myriad varied perspectives, ranging from strong support for the FTC to claim authority and ban noncompetes to strong support to leave the regulation to the states.
Among those submissions was a letter that I and 21 other 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 my paralegal Erika Hahn collectively submitted to the FTC in response to the questions at the workshop.
As explained in our submission, even assuming that the FTC has authority to regulate in this area – authority that is far from certain – proper regulation of noncompetes is a very nuanced issue with which states have wrestled for over 200 years. Indeed, in the past decade, most of the states around the country have reassessed, or are in the process of reassessing, their laws to find the balance of interests that is appropriate for their particular citizens, industries, and economies. And, the appropriate balance has become even more elusive now, as trade secrets have become increasingly easy to misappropriate and employees routinely take confidential company information with them when they change jobs. Accordingly, as noted in our letter, “with so much focus on the risks posed to companies’ trade secrets by the movement of employees, there is a bit of cognitive dissonance in the rush to ban noncompetes, which are oftentimes the most effective tool at preventing that very risk.”
Nevertheless, a recent press release from Senator Elizabeth Warren’s office reported by Framingham Source indicates that the issue has taken on a renewed urgency for Senators Warren and Murphy. According to the press release, Senators Warren and Murphy state, “The threat of non-compete agreements both during and after the economic crisis precipitated by the COVID-19 pandemic has put millions of workers in an untenable position. We urge the FTC to immediately move forward with its Commission Rule to restrict non-compete agreements, and we ask that the agency pursue emergency action to limit the enforcement of non-compete agreements during and after the COVID-19 public health emergency . . . .”
According to the press release, Senators Warren and Murphy premise their request on the assertion that “[n]on-compete agreements give employers undue power in the employer-employee relationship, allowing them to cut wages, decrease benefits, or subject workers to inhospitable environments without fear of their employees leaving for a competitor.” Unfortunately, assertions like these have been repeated to the point that they are now simply accepted as true. But, they are not. They are highly oversimplified, very one-sided, and ignore conflicting research. By way of example, three of the leading researchers in the area, Evan Starr, J.J. Prescott, and Norm Bishara, explained in a report that – when employees are given advance notice that a noncompete will be required – noncompetes actually have significant positive effects:
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.
While there is no question that COVID-19 raises significant potential issues (see, for example, “Preliminary Injunctions, Rainbows, and Unicorns During a National Emergency” and “A primer and checklist for protecting trade secrets and other legitimate business interests before, during, and after lockdown and stay-at-home orders”), any changes to the law should be grounded in fact, not rhetoric. Based on the FTC’s thoughtful process to date, I remain optimistic that the FTC will make an informed decision about the scope of its power and, assuming it determines that it has authority to regulate, will evaluate the appropriate scope of regulation in light of the information it has received through its workshop and the resulting submissions, rather than on a broad animus toward noncompetes.
According to the press release, “Senators Warren and Murphy have requested a response no later than August 4, 2020.” (A copy of their letter to the FTC is available here.)
*Photo credit: Martin Falbisoner https://commons.wikimedia.org/wiki/File:Capitol_at_Dusk_2.jpg