Five amicus briefs filed in FTC noncompete litigation

So far, five groups of amici curie (meaning “friends of the court”) have filed amicus briefs (or motions to file amicus briefs) in the Ryan, LLC v. FTC noncompete rule case.

Each of the five amicus briefs supports Ryan’s challenge the FTC’s noncompete rule.

Who are the amici?

The five groups of amici are as follows:

  • National Retail Federation, National Federation of Independent Business Small Business Legal Center, Inc., International Franchise Association, Associated Builders and Contractors, Inc., American Hotel & Lodging Association, National Association of Wholesaler-Distributors, Independent Electrical Contractors, Consumer Technology Association, United States Council for International Business, The Home Care Association of America, and The Restaurant Law Center (collectively, the “NRF amici”); and
  • National Association of Manufacturers (NAM);
  • The Securities Industry and Financial Markets Association (SIFMA), the Futures Industry Association (FIA), the Managed Funds Association (MFA), and the American Investment Council (AIC) (collectively, the “Financial Services Industry amici”);
  • The Society for Human Resource Management (SHRM); and
  • The Partnership for New York City (PNYC).

TL;DR

The five briefs essentially argue (1) that the FTC lacked authority to issue the rule for various reasons (i.e., lack of delegated statutory authority to make substantive rules like this and the rule violates the “major-questions” doctrine) and (2) that the rule itself is arbitrary and capricious, internally inconsistent, and not supported by the evidence it claims to rely on.

The main points of each brief are address below.

Sit back, there’s a lot to read…

The NRF Amici Brief

The amicus brief filed by the NRF amici argues two main points: (1) the FTC’s noncompete rule is arbitrary and capricious and (2) the FTC did not have the authority to issue the rule at all, much less in the manner it did.

As to the argument that the rule is arbitrary and capricious, the NRF amici essentially argues (1) that the FTC ignored the historical treatment of noncompetes and legal limitations historically imposed on noncompetes by the states and (2) that the “Commission’s stated reasoning . . . is incoherent, relies on cherrypicked data, and ignores the myriad concrete benefits of noncompetes.”

The NRF amici challenge each of the FTC’s key reasons for the rule as follows:

  • FTC’s Reason: “noncompetes are regularly used for low wage workers
    • Response: The NRF amici represent thousands of companies with millions of workers. Based on that, they state, “In the amici’s collective experience, low wage workers are almost never subject to noncompetes in their respective industries. . . . While there are always outliers, the Commission cites no empirical evidence that the use of noncompetes with low wage workers is the norm, only anecdotes. But low wage workers are only one facet of the workforce. And anecdotes are not evidence of a systemic issue.”
      • While I agree with the NRF amici’s experience and conclusions, to give the devil its due, the FTC did cite empirical evidence that noncompetes are widely used with low-wage workers. However, as I (along with over 100 other lawyers) previously explained to the FTC in a 2023 submission and as I will be posting about shortly (no surprise, I have a very long blog post that I am trying to shorten before I post it), the studies the FTC relies on (which are widely cited) are based on survey data that is inherently flawed. It is also directly contrary to the experience of the thousands and thousands of members of trade organizations like the NRF amici and others, as well as the collective experience of the over 100 lawyers referenced above, who include some of the most experienced lawyers practicing in the trade secret / restrictive covenant / employee mobility space.
      • The problem is that, much like in other aspects of the FTC’s rule (e.g., how it understands the law governing nondisclosure disclosures agreements), the FTC confuses the exception with the rule. There are most certainly abuses of noncompetes. But that is simply not the norm, despite the flawed surveys to the contrary. If the FTC listened to the people with deep practical experience — instead of relying on inaccurate theory — it could have developed a rule that most people would think is fair and addresses the actual, real-world problems with noncompetes.
  • FTC’s Reason: “noncompetes reduce workers’ wages
    • In response to this, the NRF amici raise a point that I have been asking about the financial impact of the rule since just after the FTC announced it. (I will also be raising it in my forthcoming blog post.) My question — which I emailed to the FTC in advance of their webinar — was as follows:

In the January 2023 Notice of Proposed Rule Making, the Commission estimated that workers’ wages would increase by $250 to $296 billion per year. In the commentary to the final rule, the Commission estimates that number at $400 to $480 billion over 10 years. What is the reason for the difference?

      • I had mistakenly assumed that the FTC would do what they said in their announcement about the webinar, and answer questions from the public that were submitted in advance of the webinar. Needless to say, though ending the webinar 15 minutes early and stating that they were out of questions, the FTC did not answer my question.
    • The NRF amici made the same point:

“[T]he Commission estimates that the final rule will increase workers’ total earnings by an estimated $400 billion to $488 billion over ten years, at the ten- year present discounted value. In other words, $40 to $48.8 billion per year. As an initial matter, this is a far cry from the Commission’s initial estimate just last year in the NPRM that the proposed rule ‘would increase workers’ total earnings by $250 to $296 billion annually.’ The Commission attempts surreptitiously to bury this six-fold decrease in estimated increased earnings to employees in the middle of its 570-page Final Rule without any explanation for the discrepancy in a number that the Commission initially touted as one of the primary bases for the purported need to ban noncompetes . . . .”

    • The NRF amici make the further point (a point included in our 2023 submission to the FTC) that the Commission has ignored the positive compensation effects. As we previously said in the letter, and the amici highlight has been ignored by the FTC:

But sometimes . . . the consideration for the restrictive covenants is more direct and obvious. For example, employers often provide bonuses, stock awards, and options in exchange for an employee’s acceptance of a noncompete and other restrictive covenants. Further, at the time of departure, employers will sometimes provide separation payments conditioned on the employee’s agreement to a noncompete. Whatever the form – whether part of the overall compensation and benefits or in the form of a bonus, stock award, option grant, or something else – the employee has received something in exchange for the noncompete and other restrictive covenants.

  • FTC’s Reason: “noncompetes stifle new business and ideas”
    • The NRF amici respond in two ways.
      • First, they note:

        If noncompetes really did make markets less competitive and discourage new ideas, then, until recently, most innovation in the U.S. would have come from California, North Dakota, and Oklahoma—the only states prohibiting post-employment noncompetes until Minnesota passed legislation doing so in mid-2023. But that is not the case, with many of the more recent hubs of innovation being in states that enforce noncompetes, including Arizona, Massachusetts, Texas, and Utah.

      • To this point, the FTC has (like many others) made a complementary point: California is proof that innovation can thrive without noncompetes. The fact that innovation can flourish without noncompetes is not debated. It can. But California is not proof of that that banning noncompete is the right answer. There are realities of California that show it is not as simple as proponents of that argument would have you believe:
        • The FTC’s argument ignores that there are consequences to banning noncompetes, including increased trade secret litigation.1
        • It also ignores that, according to a study relied on by the FTC to estimate the extent of noncompetes are used in the U.S., noncompetes are supposedly2 used in California at the same rate as they are used in other states. If true, then the FTC should explain how it can point to California as the paradigm of the benefits that supposedly accrue from a ban of noncompetes when the ban doesn’t actually prevent their use.
        • It also ignores that California companies use the LLC member exception and partnership exception to the noncompete ban as a method to use noncompetes in California.
        • It also ignores that for years, California companies used B2B no-poach agreements as a substitute for noncompetes. (Those practices likely ended relatively recently — sometime after 2009, at the earliest, when they were challenged by the Department of Justice in 2009 and then made the subject of Antitrust Guidance for Human Resources Professionals in 2016.)
      • Second, the NRF amici reiterate the point made by Ryan that “the Commission’s claim that abolishing noncompetes fosters innovation by removing barriers to information sharing is self-defeating because the Commission simultaneously claims that employers will mitigate the damage a prohibition on noncompetes would cause by swapping noncompetes for other barriers to information sharing, such as non-disclosure agreements (‘NDAs’) and trade secret protections, without any cogent data to suggest that such other barriers affect innovation differently than noncompetes.”
  • FTC’s Reason: “employers regularly coerce workers into signing noncompetes”
    • The NRF amici argue essentially that (1) the claim is false and undermined by the fact “that employees often receive substantial consideration in exchange for signing”; (2) the FTC provides no evidence of its claim; and (3) the paradigm has shifted post-COVID with more jobs than workers and states have been moving toward requiring companies to provide advance notice that a noncompete will required for the job.
      • I cannot say that I entirely agree with this argument, though it is true for some.
  • FTC’s Reason: “noncompetes harm consumers
    • In response, the NRF amici make two main points.
    • First, they highlight comments made by former Commissioner Christine Wilson in her dissent to the initial Notice of Proposed Rulemaking (NPRM), that the rule ignores studies that show that any wage increases will result in higher — not lower — costs to consumers.
    • Second, they point out the obvious: “[I]f noncompetes are prohibited, any increase in the cost of wages will likewise be passed along to consumers in the form of higher prices.” This is somewhat acknowledged by the FTC in two statements. (1) “By suppressing workers’ earnings, non-competes decrease firms’ costs, which firms may theoretically pass through to consumers in the form of lower prices.” (2) “[I]t is theoretically possible that higher labor costs could be passed on to consumers in the form of higher prices.” But, as the amici note, the Commission “quickly and curiously dismisses that possibility, summarily concluding that “there are several countervailing effects from prohibiting non-competes that would tend to lower prices.” (The FTC’s acknowledgements were included in my upcoming draft post, but may ultimately be omitted, given that the amici made the point effectively.)

The NRF amici also assert, “The Commission’s ‘Reasoning’ is Fallacious, Internally Inconsistent, Confirmation Bias Dressed as ‘Empirical Evidence.’”

  • Much of this argument is summed up with their two following observations:

[W]hen commenters pointed to academic writings, including 2019 research by one of the Commission’s own economists stating that there was limited evidence about the effects of noncompetes, the Commission responded by noting dismissively that the author wrote in his personal capacity and that “[t]he Commission finds these writings are generally outdated and disagrees with them,” despite being from 2019 and that the Commission relied on far older data. Yet when faced with anecdotes and conjecture from anonymous and unverified individual commenters that support its preordained outcome, the Commission has no such reservations.

* * *

This informational bait-and-switch occurs with so much frequency, the amici have difficulty identifying the “empirical evidence” that the Commission actually relied on to pass the Final Rule.

  • The NRF amici make the following additional main points about the FTC’s noncompete rule:
    • The FTC admittedly relies almost exclusively on studies showing only a correlation between noncompetes and their supposed effects (not causation of these effects by noncompetes), yet dismisses studies that show opposite effects as merely showing a correlation. The NRF amici note in this regard that the Commission fails to explain why it relies on outdated data and gives an unconvincing rationale for how it made its choices accepting some correlation in some studies, while dismissing others — including in the very studies it relies on.
    • Pointing to what appears to be our 2023 submission to the FTC concerning the NPRM, the NRF amici note that the survey data is inherently unreliable.3
    • Reliance on comments from individuals on their experience with a noncompete is misguided. The NRF amici note in that regard (among other things) both that it is “far simpler to email a one or two sentence message of support, as many of these 25,000+ commenters did, than to prepare a thoughtful, substantive opposition, as most of the opponents did” and that “companies that oppose the Commission’s efforts are all possible targets of the Commission’s enforcement activities.” As to the latter, the amici identified the irony: “This is likely another reason the Commission announced the resolution of several enforcement actions just one day before announcing the NPRM—ironic, indeed, given the Commission’s stated distaste for the purported in terrorem effects of noncompetes.” Relatedly, the NRF amici note that the negative comments from individuals likely reflect participation bias “because only workers with strong negative experiences are likely to comment publicly” and ignore that they are likely not a representative sample of the rest of the supposed 30 million people subject to a noncompete (according to the FTC’s numbers).4
    • The exception for senior executives — and the manner of its operation — was not in the NPRM and was not subject to public comment, as required by the Administrative Procedure Act. The NRF amici note the inexplicable disconnect between the rule’s narrow exemption and Chair Khan’s expansive interpretation in response to questions about it during a TV interview two days after the rule was announced.

The NAM Brief

The amicus brief filed by NAM makes two main points:

  • Trade secrets are critical to innovation and must be protected, and noncompetes are a necessary tool. In this part of their argument, NAM highlights the shortfalls of trade secret litigation and nondisclosure agreements (the principal tools the FTC suggests companies can rely on) that noncompetes tend not to suffer from.
  • The FTC arbitrarily and capriciously ignores the justifications and need for noncompetes.
    • NAM explains in this regard that the FTC “recounted commenters’ concerns that these alternative tools are not effective on their own, but then dismissed them with a single conclusory statement: ‘[t]hat employers prefer to wield non-competes as a blunt instrument on top of or in lieu of the specific legal tools designed to protect legitimate investments in intellectual property and other investments cannot justify an unfair method of competition.’”
    • NAM likened the FTC’s rational that “because trade secret misappropriation litigation is widespread, it must be sufficient on its own to protect companies’ proprietary information, and that other tools commonly used to do so—like non-competes—are therefore unnecessary” to the following reasoning: “because lots of people wear raincoats when it rains, umbrellas are unnecessary and can be banned with no negative consequences.”
    • NAM also highlighted a concern raised by many: With one hand, the FTC gives companies nondisclosure agreements as a substitute tool, but takes it away with the other hand in the form of the breadth of the functional test that would make them unenforceable if they afforded all of the necessary protections.

The Financial Services Industry Amici Brief

The Financial Services Industry amici consists of member “banks, broker-dealers, trading firms, asset managers, funds, futures commission merchants, and other organizations that collectively employ over a million people in the United States.”

Their brief makes the following main points:

  • “[N]oncompete agreements . . . protect their [members’] investment in their employees and to safeguard the confidential information that gives them a competitive edge. Those protections help competition, because they ensure that companies in the industry can invest time and money to develop their people, products, and processes to better serve their customers, investors, and shareholders without fearing that competitors will free-ride on their efforts. The Rule thus would significantly harm competition in the industry.”
    • The brief cites comments previously submitted to the FTC by SIFMA identifying research that suggests (through correlation) that noncompetes “increase employee human capital investment.”
    • The brief notes that, despite the FTC’s assertion “that there are viable alternatives to noncompete agreements to protect employee training and development, . . . the FTC proposes only two supposed alternatives – ‘fixed duration contracts’ and ‘competing on the merits.’ Neither is an adequate substitute for noncompete agreements.”
      • The brief explains that “at-will employment is the norm in 49 states; it simply is unrealistic to propose that companies ‘forgo[] at-will employment’ and enter into fixed-duration contracts every time they provide employees with training.”
      • As to competing on the merits (i.e., the FTC’s descriptor for not using noncompetes), the brief explains, “that would just add to the costs of training employees. And the employer providing the training would be at a disadvantage in seeking to retain an employee, because a competitor could offer higher wages without also bearing the costs of the training in the first place. In other words, it always would cost less for the competitor that did not provide the training.”
        • It’s worth pausing on this for a moment to note that this free-rider issue may explain why some of the studies show that noncompetes depress wages — it’s because companies use some of that money to train the employees, while other companies can benefit from it to use the savings to pay the workers more money.
      • The brief also makes another point that I (and over 100 other lawyers) previously tried to explain to the FTC: “Even when employees do not intend to misappropriate trade secrets, they retain opinions, insight, and other information learned from their former employer that subconsciously influence their behavior and decision-making – and in the financial-services industry, even remembering the slightest detail of, for example, a trading strategy can make all the difference. Noncompete agreements act as a ‘prophylactic measure’ to ensure that executives and employees cannot use confidential information to benefit competitors.”
    • The brief notes that the FTC contends that trade secret laws and NDAs are an adequate substitute for noncompetes. The FTC is wrong. As the brief (and many others before it) explained to the FTC, neither of those tools (which work together, not independently) provides a method to prevent use and disclosure of information or to prevent the new employer from becoming aware of it. They are inherently after-the-fact (partial) remedies.
      • As the the brief explains, litigation under these theories takes far longer, is more complex and uncertain, and more expensive than noncompete litigation. As I (and the 100 other lawyers) explained to the FTC, this hurts the former employer, the employee, and the new employer; it helps only the lawyers.5
      • The brief also explains that companies will need to restructure and silo information, leading businesses to innovate less and be “less efficient, ultimately harming productivity and increasing costs – all of which would hurt competition.”
  • “The Rule also would harm employees in the financial-services industry. Employers share information with employees more readily when they can rely on noncompete agreements. Employers in the industry also typically pay employees for not competing during their noncompete period, even if those individuals work for other companies or organizations that do not compete with the employers. The Rule would deprive employees of those benefits – in fact, it would deny employees the choice to enter into noncompete agreements altogether. Further, the Rule likely would force employers to re-negotiate existing agreements to include new provisions to safeguard confidential information, which could leave employees worse off than they were before.”
    • The brief notes, in this regard, that the noncompetes used in the financial services industry are frequently negotiated with assistance of counsel.
    • The brief also notes that many companies use forfeiture-for-competition agreements, which allow the employee to make a choice about which is more beneficial for them (retaining benefits or a new competitive job) and, as a result, some courts (including most recently the Delaware Supreme Court) don’t even view those types of agreements as noncompetes — contrary to the FTC’s perspective. Employees will lose this option – and the substantial compensation they provide, that many employees chose to keep.
    • The brief also cites to industry rules and regulations (FINRA rule 2040) and (SEC No. 34-73954; File No. SR-FINRA-2014- 037, at 9-10 (Dec. 30, 2014)) governing the use of noncompetes, suggesting that they are already approved and regulated by other regulatory bodies in the financial services industry.
  • The rule is invalid under the APA for various reasons. Essentially, the brief makes arguments similar to those already before the court: The FTC does not have authority to make substantive rules like this and it violates the “major-questions doctrine, particularly since the Rule has retroactive effect.” The brief make some interesting points on these issues:
    • The brief points out that, in “1922, just eight years after the passage of the FTC Act, the Commission told Congress that it would be a ‘mistake’ to ‘suppose’ that the FTC could ‘issue orders, rulings, or regulations unconnected with any proceedings before it.’ Annual Report of the Federal Trade Commission 36 (1922) (emphasis added).”
    • The brief continues, “In 1938, Congress amended Section 5 to allow the FTC to regulate ‘unfair or deceptive acts or practices.’ Then in 1975, Congress enacted Section 18, which expressly authorized the FTC to issue binding regulations related to those acts and practices if it followed certain procedural requirements. That Congress expressly granted the FTC the power to promulgate rules with respect to unfair or deceptive practices, but not with respect to unfair methods of competition, shows that it intended to exclude the latter.”
    • The brief notes that the “FTC principally relies on a fifty-year-old D.C. Circuit decision, National Petroleum Refiners Association v. FTC, 482 F.2d 672 (D.C. Cir. 1973), to support its view of Section 6(g). That decision is not binding on this Court and is out of step with modern jurisprudence. [And the rationale] has long been repudiated by the Supreme Court, which recognizes that agencies have only the powers that Congress expressly granted to them.”
    • The brief also walks through various assumptions made by the FTC that are untethered to reality, including, for example, failing to account for the increased cost to businesses of enhancing protections of their trade secrets (and goodwill); assuming that the cost of trade secret litigation will be balanced out by the cost of the noncompete litigation it will replace; refusing to quantify and consider the cost to companies of having their information shared with competitors, and woefully underestimating the cost of complying with the order.

The SHRM Brief

SHRM describes itself as “the foremost expert, researcher, advocate, and thought leader on issues and innovations impacting today’s evolving workplaces. With nearly 340,000 members in 180 countries, SHRM touches the lives of more than 362 million workers and families globally. SHRM’s membership of HR professionals and business executives sits at the intersection of all things work, helping to set positive collaboration and workplace cultures where workers and employers thrive together.”

SHRM summaries its position as follows: “blanket bans stifle innovation, limit training opportunities and harm businesses and workers alike. The FTC’s Rule fails to strike an equitable balance between the interests of the employer and the employee and upends the current system which affords states the authority to determine what is best for their residents.”

SHRM’s key points are:

  • The rule “has already begun to have an adverse effect on human resources professionals presently faced with uncertainty by placing the employment agreements that are a central part of the regular hiring process in flux.”
    • SHRM asks the following questions (for which I provide some temporary solutions in italic):
      • Should noncompetes be entered into with employees during the pendency of this litigation due to the lack of certainty caused by the Rule? Yes. I would continue to use noncompetes for employees in roles that require them, tailor them as narrowly as possible (which is not a new suggestion), update other available protections as appropriate, and, if warranted, address how consideration paid for the noncompete will be handled if the FTC’s rule takes effect and the noncompete is rendered unenforceable.
      • What is the scope of restrictive covenant agreements that employers and employees should enter into during litigation? See above.
      • Will noncompetes entered into prior to the Effective Date be rendered invalid and require rescission or be deemed unenforceable ab initio? They will not require recision; that was in the NPRM, not the rule. But they will be deemed unenforceable and employees will need to be notified, so it’s a difference without a distinction. Only noncompetes with the narrowly defined group of senior executives and noncompetes that have been breached before September 4 will survive the ban.
      • After the Effective Date, will employers be required to furnish new consideration to employees who would otherwise have been party to noncompetes (due to role or function) if the Rule is later invalidated? This should be something that can be in part addressed in the agreement, as the remainder of the agreement will not be affected by the rule.
      • What tools are available to human resources professionals to protect their investments in training and human capital, such as garden leave arrangements or specific term employment agreements, during the pendency of litigation? “True” garden leave clauses (i.e., where the employee remains employed) and term agreements are available.
      • Are employers better off not hiring employees while litigation challenging the enforceability of the Rule is pending? No. Employers should continue to hire just as they would absent the rule. The worst case is that noncompetes will be invalidated – which would be the new norm anyway – and unless hiring would otherwise cease permanently, there is no reason to pause it.
    • SHRM also identifies several benefits of noncompetes based on positive correlations found in studies: “higher wages and opportunities for job training and education”; and “increases in employer-sponsored training, investment in capital equipment, and research and development (R&D) expenditures.”
      • SHRM observes that “[w]ithout noncompetes, employers are faced with an ‘investment hold-up’ problem in which employers are disinclined to invest in training, education, and worker human capital for fear that the worker will depart and another employer will reap the benefit of the prior employer’s investment. The disincentive is not limited to training and education, but also the creation and sharing of trade secrets or other confidential information with workers, which leads to reduced innovation and efficiency.”
      • I do not believe that we have enough information to understand the action scope or severity of the rule’s impact — good or bad. The studies identifying benefits of noncompetes are nuanced and subject to the same criticisms as the claimed detriments of noncompetes found in the other studies: They are inherently unreliable (showing only correlation, not causation, or based on inherently flawed survey data) or too focused and therefore not generalizable.
    • SHRM makes the following additional valid point that is often ignored: “Training and educational development go well beyond formal training programs; they extend to on-the-job learning, promotional and credentialing activities, mentorship, and other opportunities.” SHRM argues that future investments will significantly diminished if the employer cannot expect a return on that investment, thereby harming each affected individual, the company, and, ultimately, the country’s workforce as a whole.
  • The rule is arbitrary and capricious for multiple reasons, including the following:
    • “[I]n the only study acknowledged by the Commission as examining the causal link between noncompetes and worker human capital investment, researchers indisputably found that noncompetes directly lead to increased investments by employers in their workers. Evan Starr, Consider This: Training, Wages, and the Enforceability of Covenants Not to Compete, 72 I.L.R. Rev. 783, 796-97 (2019). The FTC quickly dismissed the study’s findings without a clear, objective basis for doing so.”
    • “[T]he FTC similarly discounted other empirical evidence that suggested that noncompetes do not reduce workers’ wages, stifle new business, or increase consumer pricing, which ran contrary to its pre-ordained course of action.”
    • Echoing the NRF amici, SHRM argues that “the FTC not only selected the studies it chose to credit based on whether the outcome supported its agenda to ban noncompetes, but also cherry picked which individual findings of those studies to credit.”
      • As to this, SHRM “express[es] concern about the appearance that the FTC may have overlooked the work of qualified economists who studied the effects of noncompetes on the labor markets (and on whose studies the FTC has at times relied), as well as courts who cited to these justifications when upholding noncompetes under state common law or challenging noncompetes under the Sherman Act by claiming that they have failed to consider the aggregate harms of noncompete agreements.”
        • In fairness, the cases cited by SHRM (from 1898 and 1985) long pre-date the economic research. If you credit the research (which I do not think is warranted), this limits the strength of that argument.
    • SHRM’s penultimate point is that the FTC failed to choose less onerous alternatives. SHRM identifies as examples, wage thresholds or other criteria existing in various states, prohibiting or limiting the use of noncompetes in certain industries (in place in many states), creating presumptions of enforceability (like those we included in the Massachusetts legislation and in many other states), and requiring consideration beyond employment for mid-term noncompetes (like we do in Massachusetts and as is done in many other states).
    • SHRM’s final point is another that is often made: Congress has been trying to act on this issue since 2015. It has not yet done so. This supports the notion that, if this matter should be addressed at the federal level at all, Congress seems to expect that they (i.e., not the FTC) will address it.

The PFNYC Brief

The PFNYC describes itself as “a nonprofit membership organization representing New York City’s business leadership and its largest private sector employers. The Partnership’s membership comprises a wide variety of industries, including accounting, advertising, arts and entertainment, consulting, hospitality and retail, education, energy, engineering, financial services, health care, insurance, law, manufacturing, media, real estate, technology, telecommunications, and transportation. Partnership members employ nearly a half million workers in New York City and support over one million jobs citywide.” Instructively, the PFNYC represents about “20% ($236 billion) of the gross city product of New York City.”

The PFNYC says that it “has a strong interest in the outcome of the litigation because noncompete agreements play an important role in the New York City business environment and . . . [n]oncompete agreements promote stability in highly competitive industries.” The PFNYC explains, “Many New York employers rely upon noncompete agreements with their senior employees to protect their intellectual property, proprietary information, and client relationships. Without these agreements, employers will be discouraged from disclosing confidential information to key employees and investing in their training and will need to rely upon litigation to protect their confidential information.”

The PFNYC summaries its position as follows: “First, the FTC lacks statutory authority to create substantive UMC rules under the FTC Act. This alone must invalidate the Rule. . . . Second, . . . the FTC’s wide-ranging Rule, which purports to upend the contract employment arrangements of 30 million American workers, would violate the ‘major questions’ doctrine. The decision to ban noncompetes nationwide addresses the type of ‘major question’ of vast economic and political salience that requires clear and direct authorization from Congress for the FTC to act. Congress has not provided such authority. . . . Third, . . . the Rule itself is arbitrary and capricious because it does not stem from reasoned decision-making. The FTC misrepresented the evidence it relied upon and cherrypicked data, resulting in its fatally flawed cost-benefit analysis (which was also internally inconsistent).”

As to the third argument, the PFNYC’s key points are:

  • The rule “relied predominantly upon a 2023 study co-authored by an FTC employee, purporting to ‘find[] that non-competes limit workers’ ability to leverage favorable labor markets to receive greater pay.’ The FTC contends that ‘this study has the broadest coverage’ and ‘is very robust.’ But what the FTC did not say is that in an earlier version of this study—the version cited in the Notice of Proposed Rulemaking—the authors acknowledged that noncompetes ‘might increase incentives for firms to invest in training, knowledge creation, and other portable assets . . . that could increase their workers’ productivity and earnings.’ Matthew S. Johnson, Kurt Lavetti, and Michael Lipsitz, The Labor Market Effects of Legal Restrictions on Worker Mobility. SSRN (2021), https://ssrn.com/abstract=3455381. The same study admitted that its findings with respect to the effect of noncompetes on wages were based on a ‘back of the envelope calculation using an out-of-sample extrapolation,’ and even then, the study only ‘implies’ that banning noncompetes could increase wages.”
  • “[T]he FTC acknowledges (but then summarily dismisses) that there are highly reputable studies showing exactly the opposite of what the FTC claims— i.e., that workers who are presented with noncompetes before accepting job offers receive higher wages and more training and are more satisfied in their jobs than those who are not bound by noncompetes. Evan P. Starr, et al., Noncompete Agreements in the U.S. Labor Force, 64 J. L. & ECON. 53, 53 (2021).”
    • In fairness, the study also states that the apparent increase in wages is mitigated as enforceability of noncompetes increases. (The other benefits identified in the study do not diminish with increased enforceability.) That said, as I (and 100 other lawyers) explained to the FTC in our 2023 submission, limiting enforceability in the manner we had identified in that letter would have preserved the positive wage correlation.
  • “[T]he FTC’s assertion that employers regularly or often coerce employees to sign noncompetes is unsupported by any evidence in the record. Importantly, any bargaining power disparity that the FTC cites does not apply in situations involving high-level employees like executives, yet the Rule nonetheless applies to such individuals. And to take another example, the FTC even acknowledges its claims regarding the impact of noncompetes on consumer pricing are thin. These points are emblematic of a broader pattern in which the FTC pre-determined an outcome and then ignored or minimized evidence to the contrary, which is the hallmark of arbitrary and capricious decision-making.”
    • It bears nothing in this regard that, as I (and 100 other lawyers) explained to the FTC in our 2023 submission (citing the same Noncompete Agreements in the U.S. Labor Force study), “more than half (52 percent) of people presented with a noncompete chose to ‘forgo[] the opportunity to negotiate [because] the terms were reasonable,’ while 41 percent assumed they were not negotiable, id. at p. 9, the latter of which could be addressed with advance notice. Indeed, 55 percent of people presented with a noncompete before they accepted the offer thought it was reasonable and 48 percent thought they could negotiate it. Id.” Accordingly, the FTC had a very viable option to address many of the supposed negative impacts.

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I expect that the court will accept each of the five amicus briefs.

Stay tuned… the FTC will be filing its opposition brief (Wednesday, May 29)!

Correction: I initially mistakenly said the FTC’s brief was due May 28 (that was from the original deadline for a different filing). The correct date is May 29th. Stay tuned!  

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[1]  This is a point I have fleshed out in a forthcoming blog post.

[2]  While I do not believe that the study accurately reflects the use noncompetes (because it relies on employee surveys which are inherently of little value), I raise to it only because the FTC relies on it.

[3]  In our 2023 submission to the FTC, we explain: “An additional global problem with the research is that many of the studies are the product of surveys and questionnaires of individual workers. This creates a potential minefield of errors undergirding many of the studies.” See the submission for a full discussion of the errors.

[4]  The FTC’s estimates of the prevalence of noncompetes rely on inherently faulty survey data. See 2023 submission.

[5]  People have asked me if my practice will slow down if the FTC’s rule goes into effect. It will not. Just the opposite. The FTC’s rule will increase the amount of work I (and other lawyers who handle trade secret, restrictive covenant, and employee mobility matters) will have to do. Without noncompetes, a greater number of employees will move. Many of those people will take jobs that would have (properly) been prohibited under a noncompete, thereby creating significant risks for their former employers that will need to be addressed. Except now, we cannot rely on a noncompete, which means it will be a more involved process. This why I have – for years – been urging companies to take proactive measures to enhance their trade secret protection programs to limit the risk of loss in the first place. The bottom line is that with more people changing jobs with fewer restrictions (thanks to the FTC’s rule), lawyers like me will have more work than we already have. Nevertheless, despite the rule benefiting me, I believe that it is a mistake and should be enjoined. In the meantime, I cannot emphasize enough the importance of: