FTC’s public forum was balanced, but continues to focus on abuses

As you probably know, the FTC held a “public forum” today on its proposed rule to ban noncompetes.

The agenda was scheduled for an hour and 15 minutes of presentations and an hour and 45 minutes of public comment.

Three speakers from the FTC led off.

Given that the transcript is not yet available, please forgive me if the quotes are not 100 percent correct — though the substance is. Here it goes 

FTC Chair Lina Khan opened the forum. After summarizing the reasons for the rule, Chair Khan introduced the proposed rule and specifically noted that it is “just a proposal.”

Marie Choi, Office of General Counsel, went next and explained the rulemaking process, and that the FTC must and will review all comments. Ms. Choi also walked through the process for submitting comments.

Elizabeth Wilkins, Director, Office of Policy and Planning, then summarized the proposed rule itself.

A panel of FTC-selected speakers followed.

Although I was quite pleased to see that it was a balanced discussion, offering perspectives in favor and opposed to the proposed rule, it was surprising (and disappointing) how many of the comments in favor of the proposed rule were based on misinformation, anecdotes, and emotion. What also came through loud and clear is that the comments were primarily about policy issues and preferences that sound far more like the kind of testimony we heard in Massachusetts during the decade-long legislative process, that has been offered in other state legislatures as well, and that I am sure will continue to be submitted to Congress as it resumes consideration of the refiled federal noncompete bills.

Taking the speakers (bio here) in turn, here is a summary:

Steve Cox. According to his bio, Mr. Cox worked in third party transportation for 28 years in various roles and now is President at a logistics company in Tennessee.

His testimony was largely focused on companies using noncompetes to allegedly “bully” “young people” and low-wage workers. He also touted his company for not doing that. He also sprinkled in accusations about companies that use noncompetes “operating in the shadows,” and bragged about how his company has hired over 100 people in violation of their noncompetes. As for the need for noncompetes, he said that he believes companies can and should protect their legitimate business interests with nondisclosure agreements, and contends that wages suffer from the use of noncompetes and employees have to “go to a different industry” because of noncompetes.

His comments miss the point.

First, there really isn’t much debate about the abuses. It’s a straw man. Abuses should be curbed. There’s really not much disagreement about that, and that really was all he was (seemingly) focused on.

Second, ignoring the law really is not something to brag about. Of course, if his company hires people in violation of other companies’ noncompetes, it begs the question of why he thinks the law that he is already ignoring needs to change.

And third, he offered no actual information about how NDAs are sufficient. They are not. (We have explained why in prior submissions, and will be reiterating the reasons in our upcoming submission.) Instructively, Mr. Cox also acknowledged that his company uses and sometimes needs to enforce nonsolicitation agreements — only highlighting that some people ignore those types of restrictions (nonsolicits as well as NDAs), which is precisely why noncompetes are sometimes necessary.

Johnna Torsone served as Chief HR Officer and a member of senior management team for close to 30 years before her retirement from Pitney Bowes in August of last year.

Ms. Torsone explained that “when used responsibly, . . . and are reasonable in scope and duration,” noncompetes “can help companies protect vital investments in their employees while ensure the security of research and development, trade secrets, strategic plans and institutional knowledge.”

Instructively, Ms. Torsone cited a study that concluded that “large companies typically subject executives and equity recipients to noncompetes for up to one year after departing from a company” and that while negotiation of noncompetes is infrequent, so too are noncompete violations.

Finally, Ms. Torsone explained that “[a] blanket one-size-fits-all regulation prohibiting such agreements across the board, including senior office and employees with access to trade secrets and intellectual property, would have a detrimental effect on the ability of companies to implement leadership structures, invest in new technologies, and retain key executives.”

In response to some later questioning, Ms. Torsone explained that senior executives and employees have competitively-sensitive knowledge that “shouldn’t be carried over immediately to a competitor . . . .” She pointed out that “[n]oncompetes provide . . . a reasonable cooling off period, to protect these investments to allow the executive’s information about the company’s . . . strategy and customers to . . . diminish, to expire. Without these protections the constant churn of talent will negatively impact a company’s [ability] . . . to serve its customers, employees and prevent competitive information from being used against it.”

Sameer Baig. According to his bio, Dr. Baig a hematologist and oncologist in Florida, and “is active in the grass-roots physician advocacy group ‘Take Medicine Back’.”

Before addressing his comments, I should start by noting a few things. First, I completely get why physicians and other healthcare providers should not have noncompetes. (The reasons are very similar to why lawyers do not have them — and perhaps provide an even more compelling case than with respect to lawyers.) Second, the issue has been and continues to be addressed in many states, and more and more are banning noncompetes in the healthcare industry. And, third, I question how the FTC has jurisdiction to regulate healthcare. In fact, given that a large percentage of hospitals are nonprofit, they would not even be covered — which was a problem raised by a speaker later, who observed that the rule would “un-level” the playing field for talent, given that some hospitals could use noncompetes and others could not, based simply on whether they are tax-exempt or not.

Turning then to Dr. Baig’s comments, they spanned a wide range of objections, but seemed to primarily focus on working conditions in hospitals (it is unclear how they specifically tie to noncompetes) and his perspective that healthcare companies are (if I understood him) the equivalent of “drug cartels.” He also suggested that noncompetes are somehow responsible for bad medical outcomes. (I truly have never heard that as a defense to malpractice before.) He also asserted that noncompetes prevent people from whistleblowing, though the connection seems quite attenuated and not directly explained. That said, if there is some causal relationship, it seems that that concern could be easily addressed by laws (through Congress) protecting whistleblowing — to the extent the type of whistleblowing he is concerned about is not already protected by existing whistleblowing laws.

Ross Baird. According to his bio, is a co-founder and CEO of a small venture capital firm, previously “held a fellowship with the Kauffman Foundation focused on increasing access to capital for the vast majority of the country, and chairs the board of the American Economic Liberties Project.”

Mr. Baird stated that “nearly 100% of net new jobs come from new and small businesses.” This contention has, however, been debunked many times in many ways. While the particular contention is not in-and-of-itself important, it is significant in that it highlights a problem with this process. People hear purported facts repeated so often that they come to believe them, and then repeat them themselves. They are then taken as fact and used to support important legislation or rulemaking. But, alleged “facts” need to be checked, because too often they are not correct. (More on that in upcoming comments that we will be submitting.)

Another point that Mr. Baird made to support banning noncompetes was as follows: “If you look at where start-up activity is highest, [it is in] states like California, Colorado, Washington, Massachusetts.” (I have not fact-checked that.) But, he went on to say, “I think it’s no coincidence” that noncompetes are “laxly” enforced in those states, “or in the case of California not enforced at all.”

Here’s the problem: He is more wrong than he is right. Until recently, noncompetes were routinely enforced in Washington and Massachusetts, albeit less so in Colorado – though they were still very enforceable there for executives and management and when necessary to protect trade secrets.

He continued by reiterating that noncompetes in California and Washington were “not enforced for decades and it’s created the next generation of dynamic companies.” While true in California (in fact, for far longer than decades – it’s since 1872), it is not at all true in Washington. As noted above, prior to Washington’s new law, Washington courts routinely enforced noncompetes.

Emily Glendinning. According to her bio, she is the Vice President & Associate General Counsel for Employment and the Chief Privacy Officer at BAE Systems, Inc., a global defense, security, and aerospace company.

Ms. Glendinning provided a great deal of (correct) information about how noncompetes actually work:

Noncompetes protect companies’ confidential information and investment in certain employees. Under current state laws, noncompetes are only enforceable if they protect a legitimate interest, reasonable period in a reasonable geographic area. Employers cannot lawfully use noncompetes to prevent someone from quitting or working in their field or working for a competitor in any capacity.

The question before us is about reasonable enforceable noncompetes. Should the FTC implement a nationwide ban on reasonable noncompetes that are enforceable today in almost every state?

The answer is no. Noncompetes provide vital and unique protections for companies and the evidence does not support this sweeping rule.

The FTC suggests companies don’t need noncompetes because nondisclosure agreements and trade secret laws provide the same protection, but noncompetes provide a different kind of protection.

If you shared your most confidential information with your employee, how do you protect it when she’s working for your competitors? You have her sign a nondisclosure agreement or [you rely on] trade secret litigation, but because you can’t monitor the conduct, you can’t know what she’s disclosing. Even if she wants to comply, she cannot excise your confidential information from [her] brain. She knows what avenues your competitor should follow and blind alleys to avoid. Noncompetes solve that problem.

47 states recognized the protections [noncompetes] provide, . . . and trade secret laws don’t. If you as an employer can show a legitimate interest, your employee cannot do competitive work for a reasonable period.

Case law is full of examples where the employer has not met that test. These should be a highly [fact-] specific inquiry. . . . [There are] too many variables for a blanket ban to make sense.

I think we should address abuses. Every employment lawyer agrees with President Biden [that] fast food workers should not have noncompetes.

[But the proposed rule] would prohibit Jeff Bezos from having a noncompete because he owns less than 25% of Amazon.

If the FTC is going down this path it should tailor the rule to address real harm, prohibiting noncompete for lower-wage or nonexempt workers.

It’s reasonable to require employers to give notice of a noncompete at the time a job offer is made, not after the employee started work.

States are taking the lead on these issues. . . . 27 states have changed their laws. Some require companies to give [advance] notice of a noncompete and many have prohibited them from lower wage workers.

Congress has considered and declined to take action on a noncompete rule.

The academic evidence on noncompetes is limited and mixed and experts disagree on their effect on competition on the market, but agree on the need for more research. [At the FTC’s 2020 workshop, the] experts said more empirical evidence is necessary, and discussed common sense reform of curtailing noncompetes. [No one argued for nationwide ban with retroactive effect.]

Whether the FTC has the authority to make this rule is a different discussion.

Today’s discussion is whether it should, and the answer is no. Noncompetes serve a purpose that states recognize. The evidence is not clear enough to support up ending this developing body of law and invalidating private contracts.

As the FTC continues the rule making process it should focus on common sense reform we see in the state.

In response to some later questioning, Ms. Glendinning urged the FTC to stay focused on the protectable interests, which can exist at different levels. She noted that most high-level executives will have that information, but others may not, and midlevel employees also may have it (or not).

Finally, in response to the protectionist aspects of the proposed rule, Ms. Glendinning noted that we trust people to enter contracts all the time. She gave the example that a mortgage agreement may be confusing, but we don’t ban them; we provide information about them. That same construct should apply here.

Kevin Borowske. According to his bio, he is a residential caretaker. His bio goes on, “Borowske is a recently terminated 8-year employee of FirstService Residential at Centre Village Condominiums in downtown Minneapolis. On top of his departure papers was a copy of a non-compete agreement he signed back in 2014.”

Mr. Borowske’s story sounds compelling and like a circumstance that never should have happened. It seems to highlight an abuse, and something that more and more state legislation, and some federal bills, are addressing. But again, there really isn’t much debate about the abuses. Most people seem to agree that the abuses should be curbed.

After some follow-up questions that elaborated on the points above, the panel discussion ended and FTC Commissioner Rebecca Slaughter provided some observations in support of the proposed rule. She also noted the thousands of comments that the FTC has already received, and expressed that a goal is to “help real people in their everyday lives.”

After Commissioner Slaughter finished, the floor was opened to public comments.

Like the panel, the comments (which were limited to two minutes each) were very balanced, with many people speaking in favor of the proposed rule and many against it.

In total, there were about 46 people who provided comments — too many to discuss in this post.

But, the spit, I believe, was 22 in favor of the ban and 24 against.

There were lots of anecdotes and emotion, and certainly plenty of rhetoric against noncompetes, but most of the discussion was tied to the abuses of noncompetes and sometimes untethered to real world uses of noncompetes.

In contrast, most of the analytical comments were provided against the proposed rule.

But, the line of the day was about the FTC’s lack of authority to promulgate the proposed rule. Quoting the Supreme Court, the comment was, “Congress doesn’t hide elephants in tiny mouse holes,” but this is precisely what the FTC would be doing by seizing power in this way and acting as a “mini-legislature without anyone noticing.” (But people are noticing.)