New Vigor at the FTC and DOJ to Ban Noncompetes

*This article was originally published in Law360.

The Federal Trade Commission (FTC) and Department of Justice (DOJ) just completed their second workshop on competition.1 Noncompetes are again squarely in the crosshairs.

Here is what you need to know and what you need to do.

What you need to know

Noncompetes have been the subject of state regulation for over 200 years, and starting in 2015, have been the subject of proposed federal regulation.2 The FTC’s workshop is just the latest salvo.

Although the scope of the workshop was wide-ranging, there was a clear focus on noncompete agreements. Indeed, the topic of noncompetes came up repeatedly throughout the course of the full, two-day workshop, literally from the opening, in which FTC Chair Lena Khan referenced noncompetes as “take-it-or-leave-it agreements,” to the closing remarks, in which DOJ Assistant Chief Karina Lubell3  noted that, like “other vertical restrictions,” noncompetes are harmful, “especially for low income and other workers ill positioned to negotiate” the restrictions “or later challenge them in court.”

This should come as no surprise. President Biden’s July 9, 2021 Executive Order on Promoting Competition in the American Economy4 expressly “encouraged” “the Chair of the FTC . . . to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority . . . to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” For the same reason, it should also come as no surprise that the workshop, at times, also discussed no-poach agreements,5 nondisclosure agreements,6 and training repayment agreements,7 among others.

Nevertheless, despite the focus on restrictive covenants (noncompetes in particular), they were the main topic of only one of the four one-minute videos8 played during the workshop and only one of the seven panels.9 While the members of the panel held divergent perspectives, the discussion was thoughtful, respectful, and balanced, touching on the theory, practice,10 economics, and pros11 and cons of noncompetes.

Ultimately, however, the point of the workshop insofar as it concerned restrictive covenants was to evaluate possible regulation. Accordingly, throughout the workshop (and during the video and this panel in particular), questions centered on what additional regulation is appropriate and what entity can and should impose any such regulations.

As to the former, given that any regulation should be grounded in more than anecdotes and uninformed assumptions, the starting point for many is the existing research and what additional research is needed. While there is a growing body of research, the more it develops, the more clear it becomes that additional research is needed.

For example, the discussion throughout the workshop echoed a frequent theme in the noncompete debate that some studies show that noncompetes inhibit startups (which is in turn assumed to result in less competition, higher prices, and lower wages). However, a new study issued by the Federal Reserve Bank of Philadelphia12 that was not discussed during the workshop, challenges those studies.

Specifically, the Federal Reserve’s study found “little support for the widely held view that enforcement of non-compete agreements negatively affects the entry rate of new firms or the rate of jobs created by new firms.” To the contrary, the study (which focused on Michigan’s 1985 elimination of a ban on noncompetes) found:

that increased enforcement [of noncompetes] had no effect on the entry rate of startups, but a positive effect on jobs created by these startups in Michigan relative to a counterfactual of states that did not enforce such covenants pre- and post-treatment. Specifically, we find that a doubling of enforcement led to an increase of about 8 percent in the startup job creation rate in Michigan. We also find evidence that enforcing non-competes positively affected the number of high-tech establishments and the level of high-tech employment in Michigan.

This study thus raises the serious prospect that bans on noncompetes intended to help startups, will do precisely the opposite.

Similarly, when it came to no-poach agreements, Doha Mekki, Assistant Chief & Special Counsel for Labor at the DOJ,discussed an academic article claiming that no-poach agreements have anticompetitive effects that harm employees, presumably in part by suppressing worker wages. However, Rachel S. Brass, a partner at Gibson, Dunn & Crutcher, noted that the evidence in two cases (one in Florida involving McDonalds’s use of no-poach agreements, and another in Washington against Jimmy Johns for the same) revealed that precisely the opposite happened: wages were higher before the elimination of no-poach agreements, and lower after. This difference in theory and practice is a real-life example of the aphorism that in theory, theory and practice are the same; in practice, they are not.13

With so much conflicting information (studies contradicting other studies, evidence disproving studies, misplaced assumptions about the rise in use of noncompetes, etc.14) and such high stakes (nothing short of the impact on the U.S. economy), regulators need to be extremely careful how they proceed. These issues are plainly more complicated than they appear, and there seemed to be a general understanding that additional research is required.15

Perhaps in part because of this, in the end, the focus seemed to be primarily on low-wage, unskilled/low-skilled workers, for whom the justifications for noncompetes rarely apply or are generally outweighed by countervailing considerations.16

As to what entity should regulate, the discussion acknowledged that the states have been the sole source of regulation and are currently reevaluating their laws,17 and that there would be some concern that any action by the federal government would be with too heavy a hand and not allow for flexibility to accommodate state-by-state variations.18 As to this issue, Chair Khan expressed her view that the antitrust laws can protect workers, and therefore the FTC is examining whether it has the power to regulate noncompetes19 and other “take it or leave it agreements.”

What you need to do

Increasing hostility to noncompetes and other restrictive covenants is building on itself. Indeed, as nondisclosure agreements used to protect trade secrets and other confidential information are conflated with nondisclosure agreements used as part of a settlement of an employment dispute, the prospect of further misplaced regulation looms large.

So, what should you do?

First, become part of the discussion. Whether you use noncompetes or oppose their use, if you have something useful to add to the discussion, add it. This is the time to voice your opinion before it’s too late.

In that vein, on July 14 (in response to the President’s July 9 Executive Order), I along with nearly 60 other practitioners submitted a letter to the White House and the FTC providing background to the issues and identifying areas for reasonable regulation, should the federal government step into the historically state-law issue.20 We are in the process of updating that letter, and will be submitting it to the FTC and DOJ by their December 20, 2021 deadline.21

Second, recognize that some additional regulation is coming and take steps now to be prepared. States are broadly banning noncompetes for low-wage, low-skilled workers22 and requiring varying types of notice of the use and laws concerning noncompetes.23 If your company or your clients’ companies use restrictive covenants, they need to keep up with the changing laws, and make sure the agreements are compliant. For example, Illinois law will change on January 1, 2022, and will prohibit the use of noncompetes, nonsolicitation, and no-recruit agreements for certain employees. Are you ready?

Third, if a company does not need a noncompete, it would wise to consider alternatives. The key agreements and their relative enforceability (i.e., how likely a court is to enforce the particular agreement) and level of protection they afford are plotted (roughly) on the graph below, with greater relative protections higher and greater relative enforceability farther to the right.

To the extent the company uses agreements other than a noncompete (or the similar agreements, like garden leave), it may wish to include “springing noncompete” language, i.e., a provision that provides a noncompete as a remedy for a breach of one of the less-restrictive restrictive covenants.

Fourth, companies should supplement their agreements with appropriate policies and procedures, including in particular, policies governing the proper use of company owned equipment and technology and personal devices (BYOD policies), trade secrets and confidential business information policies, and codes of conduct, as well as appropriate trade-secret/nonsolicit-focused onboarding and off-boarding practices.

Fifth, with all of the agreements, policies, and procedures in place, nothing substitutes for proper training – starting before a new employee walks in the door, continuing during the employment cycle, and repeating at the end (where it starts for the new employer). Training is critical to preventing information from entering the company and contaminating the company’s existing information and research, as well as to making sure the company’s information isn’t taken from the company.

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[1]     Making Competition Work: Promoting Competition in Labor Markets. The first workshop, “Non-Competes in the Workplace: Examining Antitrust and Consumer Protection Issues,” was held in-person on January 9, 2021.

[2]     See A Brief History of Noncompete Regulation.

[3]     Ms. Lobell is the Assistant Chief of the Competition Policy & Advocacy Section, Antitrust Division at U.S. Department of Justice.

[4]     Available at https://www.federalregister.gov/documents/2021/07/14/2021-15069/promoting-competition-in-the-american-economy.

[5]     Assistant Attorney General for the Antitrust Division Jonathan Kanter commented that no-poach agreements, which are agreements between companies to not solicit (and sometimes not to hire) each other’s employees, “steal from workers.” In contrast, as noted below, evidence from two cases suggests (though it may reflect more correlation than causation) that no-poach agreements actually increase worker wages.

[6]     The discussion about nondisclosure agreements was not truly applicable to the types of nondisclosure agreements that are used to protect trade secrets and other confidential information. Rather, the discussion focused on nondisclosure agreements (and nondisparagement clauses) used as part of a resolution of disputes alleging labor law violations.

[7]     As Terri Gerstein (director of the State and Local Enforcement Project at the Harvard Law School Labor and Worklife Program and a senior fellow at the Economic Policy Institute) commented, training repayment agreements are in some ways even more insidious than noncompetes, because they can effectively lock employees into a company, as opposed simply to preventing them from working for a competitor.

[8]     The video is one that I submitted at the FTC’s invitation, at 2:37:56.

[9]     Recording of the panel, at 2:40:11.

[10]   Marcia Goodman, a partner at Mayer Brown, suggested a broader world view on noncompetes, noting that the United States is at a disadvantage (and needs noncompetes) because it does not allow a buffer before the employee leaves, explaining that in other countries, employers can require lengthy notice periods before an employee may leave a company. Noncompetes are an alternative that fills that void.

[11]   One of the key benefits of noncompetes is the ability for employers to share information with employees and thereby encourage innovation. As observed at the workshop, that only happens when companies know they are protected – and trade secret law simply is not enough, as it often can only close the barn door after the horse has escaped.

[12]   Gerald A. Carlino, Do Non-Compete Covenants Influence State Startup Activity? Evidence from the Michigan Experiment (July 2021).

[13]   https://quoteinvestigator.com/2018/04/14/theory/.

[14]   For more, see Misconceptions In The Debate About Noncompetes and Please Stop Using California as the Poster Child to Ban Noncompetes – Time for an Honest Policy Discussion.

[15]   An old proverb seems particularly appropriate in this context: “Look before you leap, people.” – 14th century manuscript, Bodleian Library, Oxford.

[16]   Indeed, while the focus tends to be primarily on noncompetes given to low-wage, low-skilled workers as part of the terms of their employment, there has been virtually no discussion about noncompetes given in exchange for lucrative stock options, restricted stock units, or other equity or bonus agreements.

[17]   Indeed, at this point, approximately 3/4 of all states have considered changes to their noncompete laws, with 24 states (and D.C.) making changes, three (and D.C.) this year alone (Illinois, Nevada, and Oregon). Further, Congress has three bills specifically focused on noncompetes: two to ban them outright and one to prohibit them for nonexempt workers under the Fair Labor Standards Act. See A Brief History of Noncompete Regulation.

[18]   As noted during the workshop, different states, different industries, different jobs, and different parts of the country (rural versus urban and suburban) may have different implications that need to be addressed differently. Further, as also noted at the hearing, there may be necessary variations in the length, scope, or propriety of noncompetes when these issues are considered on a more granular level.

[19]   There is little doubt that the FTC has authority to regulate intercompany transactions (e.g., noncompetes in the context of a merger). The question about its authority really relates to regulation of intracompany transactions (e.g., noncompetes with its employees).

[20]   The letter is available here.

[21]   Submissions may be made through this link.

[22]   See “Low-wage” employees are now exempt from 10 noncompete laws. Who are these employees and where are they exempt?.

[23]   See Keeping Up With Noncompete Notice Requirements – Seven States Plus D.C. Have Them.