Updated August 7, 2024 (see red below).
Yesterday, July 30, the Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Economic Policy held a hearing entitled, “Banning Noncompete Agreements: Benefits for Workers, Businesses, and the Economy.”
The title says it all.
Opening statements
It started with a seven-minute prepared opening statement by Subcommittee Chair Senator Elizabeth Warren. But, rather than presenting an unbiased introduction to the issues, it was an advocacy piece railing against “powerful corporate interests” while fully endorsing the FTC’s noncompete ban. It may as well have been written by the FTC’s lawyers.
While calling noncompetes “price fixing, but for jobs” and repeatedly congratulating the “Biden/Harris Administration” for the noncompete rule, Senator Warren spent much of the time reiterating the FTC’s dubious findings, as though they were incontrovertible facts.
She then proceeded to deliver a highly one-sided, exaggerated, and inaccurate summary of the challenges to the rule, beginning with, “So, where are our Republican friends on this issue? Once again, instead of standing up for real competition, they are moving nearly in lockstep with the big corporations that hate these rules. Republicans in the house have introduced a congressional review act resolution to try to overturn the FTC’s new noncompete rule.” (That resolution was just filed on July 11, and as Senator Warren noted, even if it passes the House and Senate, President Biden will veto it.)
Senator Warren then turned her attention to the legal challenges to the rule, dismissing them as “giant businesses” engaging in forum shopping to secure “extremist” rulings from “extremist” judges and suggesting that judicial reform is necessary to limit such challenges to government action in court. Setting aside the fact that one of the three lawsuits was brought by a small company with just 12 employees (hardly a “giant business”), a judge’s ruling does not become extremist simply because it clashes with Senator Warren’s views. One could argue that Senator Warren’s assertion — that “any reasonable nonpartisan interpretation of the law would make it clear that congress explicitly gave the FTC the authority to ban noncompetitive restraints of trade including noncompete agreements that keep workers from looking for a better job” — is extremist and biased. (And all this time I had thought that impugning the integrity of the judiciary was just a Trump thing.) To be clear, the two judges who ruled on challenges to the FTC’s rule issued thoughtful, carefully reasoned decisions, whether one agrees with them or not. The notion that the response to a judge’s disagreement with her viewpoint should be court reform is, to say the least, deeply concerning.
After Senator Warren concluded, Committee Ranking Member Senator John Kennedy delivered his opening statement as well. While his remarks also reflected his personal perspective, unlike Senator Warren’s, they were balanced and acknowledged both sides of the issue. Senator Kennedy recognized that there are instances where noncompetes are justified and others where they are not.
Witnesses
The three witnesses who were called to testify were plainly hand-picked for their positions supporting the FTC’s ban.
The first witness to testify was Dr. Heidi Shierholz, Ph.D., President of the Economic Policy Institute, an advocacy group that has been pushing for the FTC’s noncompete ban. Dr. Shierholz spoke passionately about the over-stated problems with noncompetes, relying heavily on academic research that correlates noncompetes with certain unfavorable outcomes. At no point, however, did Dr. Shierholz acknowledge any deficiencies or limitations in the research. Instead, she overstated the findings and made unsupported extrapolations, such as claiming that if noncompetes were not banned, the percentage of people bound by them would increase. (As I have previously explained, the estimates of noncompete usage are flawed and likely overstated, with no actual evidence of an increase in their frequency of use.)
Characterizing Dr. Shierholz’s testimony as “breathless” and passionate, Senator Kennedy did a nice job highlighting her bias and revealing her to be an ideologue.
Next to testify was a doctor who sold his practice to private equity. He testified that his practice was suffering and, rather than close down, he and his partners sold it to private equity. He claimed that only after spending hundreds of thousands of dollars on the deal did he fully appreciate the terms of the noncompete that he would need to sign to receive his portion of the substantial payment for the sale. Accordingly, he knowingly accepted the deal. (I note that, given that the noncompete appears to be from a sale of his ownership of a business, even the FTC’s ban would not have prohibited the noncompete.) Nevertheless, at some point later, he decided to leave for a job that allegedly violated his noncompete (or so the private equity firm claimed), apparently resulting in him having to repay some or all of what he received. Given some of the details (and as the doctor noted), it’s unclear why his noncompete was valid in light of Florida’s 2019 amendment to its noncompete law.1 But the real issue seems to be that his practice was failing, he accepted money from private equity, and he was then dissatisfied with the predictable outcome: the private equity firm would look to cut costs and make the practice more profitable (for the private equity firm). That aside, his story certainly raises questions about whether noncompetes should be usable in the healthcare industry, given the countervailing patient interests. Many states already prohibit them, and many more are considering varying types of prohibitions. It also raises questions about the role of private equity in healthcare — an issue being investigated in Maryland.
The final witness was a well-known dress designer who signed an employment agreement with a noncompete and invention assignment agreement. Her testimony about how she came to sign her agreement was inconsistent. She first stated that she believed the noncompete applied only while she worked for the company (essentially an anti-moonlighting provision), which made sense to her. But she also said that she felt compelled to sign the agreement or she would lose her “big opportunity” to be a dress designer for that company. Either way, she later decided that she had “outperformed” and was entitled to renegotiate her agreement. While she may have indeed exceeded expectations, she doesn’t have the right to unilaterally change her agreement simply because she believes she deserves different terms. Further, based on this article, it appears that she claimed to own the brand — based on her name — that the company used to market her dresses. Accordingly, while the noncompete may have been a factor, the more fundamental issue appears to have been a trademark dispute. To the extent that the noncompete was in fact enforced against her, there are certainly questions about what protectable interest the company had and whether the noncompete was justified. Accordingly, this anecdote, which seems to revolve around an unrealistic claim of ownership of a trademark with incidental noncompete implications, may simply illustrate a misuse of a noncompete rather than provide valid support for banning all noncompetes.
In short, the hearing was a one-sided presentation of the issues, led by a biased ideologue and bolstered by two anecdotes that fall far short of justifying a blanket ban on all noncompetes. As is often the case with anecdotes, these were highly subjective, oversimplified, and not broadly generalizable. The physician’s noncompete (putting aside the sale-of-business context that would render the FTC’s rule inapplicable) reflects broader policy issues specific to the healthcare industry, while the dress designer’s situation seems to be more about securing rights to a trademark than about the appropriateness of the noncompete itself.
Despite the stacked deck presented by the hearing (and its title), I can only hope the Subcommittee will ultimately take testimony from people with unbiased perspectives. Wouldn’t it be nice if rather than using these hearings to push a predetermined agenda, they were genuinely aimed at uncovering the truth?
Seems like maybe it’s time for Mr. Smith to go to Washington.
Lest there be any question that this hearing was designed to be a grandstanding opportunity, Senator Warren’s own website makes that clear: “ICYMI: At Hearing, Warren Slams Noncompete Agreements as Unfair, Un-American, and Anti-Competitive.”
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[1] The law was challenged in 21st Century Oncology, Inc. v. Moody, which provides a fun introduction:
In February 1954, the classic horror film Creature from the Black Lagoon was released.[1] The plot is now a familiar trope: a prehistoric monster emerges from the fetid depths of a jungle swamp to terrorize a scientific expedition, kidnaps the girlfriend of one of the scientists, and is killed only after bringing the majority of the cast to various grisly ends. As the real-world setting for the eponymous lagoon, the filmmakers chose Wakulla Springs, Florida—a state park located less than fifteen miles from this Court’s courtroom in Tallahassee.[2]
Sixty-five years later, Plaintiff contends, another monster has emerged, this time in the heart of Tallahassee itself. The primordial pool in question is the Florida Capitol, and the role of the hadean hominid is played by section 542.336, Florida Statutes, which the Florida Legislature adopted in its 2019 Session. See Ch. 2019-138, Laws of Fla. (2019) (adopting section 542.336). Section 542.336 declares that, when a particular entity employs or contracts with all physicians practicing a given specialty in a given county, any noncompete agreements between that entity and those physicians are void. Plaintiff, a company that employs a variety of physicians in several Florida counties, argues section 542.336 is pernicious special-interest legislation, crafted by lobbyists to allow a small group of its former employees to escape their non-compete agreements without serving any broader public good. Pursuant to 42 U.S.C. § 1983, Plaintiff seeks to enjoin application and enforcement of section 542.336 on the basis that it violates the Contracts Clause, Due Process Clause, and Equal Protection Clause of the United States Constitution.[3] This Court denied Plaintiff’s motion for temporary restraining order, . . . and the matter proceeded to a preliminary injunction hearing on August 9, 2019.[4] This Court concludes Plaintiff’s Motion for Preliminary Injunction . . . is due to be DENIED.
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*Thank you to Erika Hahn for finding the link to the hearing and thank to Sarah Tishler for the article about the dress designer!