THE FTC, Noncompete Ban, and the Recent Ruling

Episode Notes

Transcript

Sandeep Vaheesan:

Putting them aside for all other workers, including workers making six figures or above. These are classic take it or leave it agreements. There’s typically little or no bargaining over them. Employers say, if you want to come here, if you want to work with us, sign the non-compete. And that’s a finding that’s supported by a good deal of quantitative and qualitative research at this point. So it isn’t in any way approximating the kind of textbook notion that there is real negotiation or bargaining going on. This is very much a one-sided relationship where the employer has a great deal of power and the employee has very little.

Announcer:

Welcome to the award-winning podcast, Lawyer 2 Lawyer with J. Craig Williams, bringing you the latest legal news and observations with the leading experts in the legal profession. Your listening to Legal Talk Network.

J. Craig Williams:

Welcome to the Lawyer 2 Lawyer on the Legal Talk Network. I’m Craig Williams, coming to you from the East coast of Massachusetts. I write a blog occasionally called May it Please the court and have three books out titled How To Get Sued the Sled and My newest book. How would You Decide 10 famous Trials That Changed History? You can find all three on Amazon. In addition, we have a new podcast miniseries in dispute, 10 famous trials that changed history that’s currently featured here on the Legal Talk Network and on your favorite podcasting app. Please listen and subscribe. On April 23rd, 2024, the Federal Trade Commission issued a final rule to promote competition by banning non-competes nationwide, protecting the fundamental freedom of workers to change jobs, increasing innovation and fostering new business formation. Non-competes are agreements that prohibit workers from leaving their employers to join a competitor or start a rival business for a specific period of time.

However, the ban has been met with opposition. On August 14th, a federal judge in Florida ruled against the FTCs proposed ban on most non-compete agreements. Back in July in the US District Court for the Northern District of Texas, a judge temporarily blocked the FTCs new rule. And yesterday, the day before this podcast was recorded, August 20th, 2024, US District Court Judge Ada Brown found that the FTC lacked the statutory authority to issue the rule set to go in effect on September 4th, 2024 by blocking the rule nationwide. Well, today on Lawyer 2 Lawyer, we’re going to discuss the Federal Trade Commission’s ban of non-compete agreements. We will take a look at the recent court rulings to block the FTCs ban, the impact of the ban, and what this new ruling by Judge Brown means. And to help us better understand today’s topic, we’re joined by guest Sandeep Vaheesan. He’s the legal director at the Open Markets Institute.

He leads open markets legal advocacy and research work, including its amicus program. Sandeep works on a range of anti-monopoly topics, including antitrust law’s, role in structuring labor markets, and promoting fair competition. From 2015 to 2018, he served as the Regulations Council at a Consumer Financial Protection Bureau where he helped develop rules on payday and title lending and debt collection practices. Before that, he worked at the American Antitrust Institute. He also has a new book coming out entitled Democracy and Power, A History of Electrification in the United States. Sounds like a very interesting topic. Well, welcome to the show, Sandeep.

Sandeep Vaheesan:

Thanks so much for having me, Craig.

J. Craig Williams:

Let’s get a little bit of background about you first. Please tell us about your role at the Open Markets Institute and how you became interested in antitrust law.

Sandeep Vaheesan:

So I am the legal director at the Open Markets Institute. We’re an anti-monopoly research and advocacy group, and I get to work on a wide range of advocacy and research projects pertaining to antitrust law, consumer protection, public utility regulation, and corporate law. Our projects include amicus briefs, comment letters, popular pieces, academic articles, you name it. We are likely working on it. And it’s been a very exciting few years with the Biden administration’s renewed interest in antitrust law and competition policy. And we rarely have a dull day.

J. Craig Williams:

Right? We’ve had some not so dull days recently. Let’s talk about non-compete agreements. How did these things come into focus?

Sandeep Vaheesan:

Sure, so non-compete contracts prevent where a person can go and work after they leave a job. And there’s been significant investigative journalism as well as academic research on these contracts over the past 10 years. They were fairly obscure in the early 2010s and now they’re rather well-known, they are ubiquitous. Tens of millions of workers have these contracts and they’ve been widely studied now in a relatively short period of time. And my colleagues and I at the Open Markets Institute more than five years ago, reviewed all this research and concluded this would be a great topic for an FTC rulemaking. These contracts are extremely harmful to workers lock people in place. They depress wages and wage growth and they’re often bad for employers themselves. People looking to get the best talent often can’t because of non-compete clauses. So there’s been a lot of research and advocacy around non-competes. The FTC banned these contracts through a rulemaking in April. And we can talk more about where that rulemaking stands.

J. Craig Williams:

Well, it sure does, and it does stand have been a significant number of challenges to it, including the recent Ryan versus FTC. Tell us about that decision.

Sandeep Vaheesan:

Sure. So the rule has been challenged in four lawsuits. The Ryan Case was the first one filed literally the day the rule dropped on April 23rd. A tax consulting firm called Ryan filed a suit in the northern district of Texas alleging that the FTC did not have the statutory authority to write the rule, did not have sufficient evidence to issue this rule and that the FTC as an agency is not structured in conformance with the constitution. So this was a full fledged challenge to the rule, and I would argue the FTCs very existence. Judge Ada Brown, who heard this case issued a decision on July 3rd pausing the rule with respect to Ryan at least. And she said the rule is defective on two grounds. First, she said that the FTC doesn’t have the authority to write competition rules. She said it can only write procedural rules but cannot actually make substantive law through rulemaking.

And second, she found that the FTC did not have sufficient evidence to support this rule. She said the rule was arbitrary and capricious. She said that this FTC relied on a handful of studies to do this rule. So she issued that decision the day before Independence Day, and then yesterday she granted summary judgment in favor of Ryan. I haven’t actually had a chance to dig into the opinion yet, but I’ve seen a lot of commentary on it. And it looks like she recited the same rationale she offered in her July 3rd decision saying, FTC doesn’t have statutory power to write this rule and it does not have sufficient evidence to support this rule. And she put the rule on pause. The rule was originally supposed to take effect on September 4th, but now it won’t because of Judge Brown’s ruling. There are some questions over whether she can issue a nationwide injunction as a district judge, but that is what she aims to do. So as of now, the rule is on hold.

J. Craig Williams:

Well, since it’s on hold, why should these non-competes be banned? What is the argument in favor of banning the non-competes?

Sandeep Vaheesan:

Yeah, so there’s been a raft of empirical work done since 2015 showing that non-competes deter labor market mobility. A worker under a non-compete clause is more likely to stay on the job even if they’re unhappy with the terms and conditions of work, even if they have better outside employment opportunities. And this reduced labor market mobility has significant adverse effects on wages and wage growth over time. It also discourages the formation of new businesses. Oftentimes, workers may want to leave a job and strike out on their own. They’ve acquired expertise in a particular area, they don’t want to have a boss anymore and say, you know what? I could be my own boss. Let me start a business. And non-competes, discourage both exit to better employment opportunities as well as entrepreneurial options. And this research is extensive at this stage. A number of scholars, notably Evan Starr, Michael Lipitz, have produced a number of peer reviewed papers showing that non-compete clauses have significant adverse effects on workers. Further, they also hurt employers who don’t use non-compete clauses. Oftentimes the best talent in an industry may be locked up under a non-compete clause. So if you’re a small business or a growing business, you may not be able to hire the best people.

J. Craig Williams:

How do companies that ask employees to sign these non-compete agreements go about protecting the trade secrets that they’ve spent time and money and their client lists and their vendor lists and so forth? How do they go about protecting the things that they’ve spent time and money developing?

Sandeep Vaheesan:

Yeah, so you just described the common justifications for these contracts. Employers will say, we need non-competes to protect trade secrets, to protect customer relationships, to protect investment in job training. And these are legitimate interests. I’m not disputing that, but employers have a number of less restrictive alternatives with respect to trade secrets. We have an entire body of law that features criminal sanctions called trade secret law. People have gone to prison over trade secret theft. Employers also have contractual tools like non-disclosure agreements, non-solicitation agreements. And of course, if employers are truly concerned that workers will leave and take valuable firm specific information with them, they have the option of retaining people by paying them well, offering regular raises and promotions and treating them with dignity and respect on the job. So non-competes are by no means the only tool that employers have to protect valuable investment and to retain a loyal and productive workforce.

J. Craig Williams:

Let’s assume then that an employer puts all of these things into play a trade secret agreement, a non-solicitation agreement, and all of the other agreements that you’ve described that they have the power to do. Doesn’t that essentially amount to a non-compete agreement?

Sandeep Vaheesan:

It can. And the FTC was clear that if these other contractual tools like NDAs and the non-solicitation agreements are so broad that they function as non-compete clauses, they will also be covered by the rule and prohibited. So it’s important for employers to use tailored agreements, agreements know broader than necessary to protect things like trade secrets and customer relationships. We should absolutely be concerned about overroad contracts that in practice are indistinguishable from non-compete clauses. And the FTC to its credit recognized that in its rule.

J. Craig Williams:

Well, Sandis, we need to take a quick break for to hear a word from our sponsors. We’ll be right back and welcome back to Lawyer 2 Lawyer. I’m back with Sandeep Vaheesan he’s the legal director at Open Markets Institute. We’ve been talking about non-compete agreements and the recent decision that came out trying to enforce a nationwide ban. You said that the judge may not be entitled to enforce a nationwide ban. Why do you say that?

Sandeep Vaheesan:

So Judge Brown is a district judge in the northern district of Texas. She has a fairly limited jurisdiction. She’s not a Supreme Court justice or even an appellate judge. This is a contentious issue right now. What is the scope of district judges injunctive authority? We’ve seen a number of nationwide injunctions since 2017. It’s not clear whether a district judge sitting in one district, in one part of the country can enjoin a rule nationwide. There’s some ambiguity around the scope of their authority, but for now, judge Brown has attempted to stop the rule from taking effect nationwide. But this is a question that’ll be decided one way or another very soon, probably by the Fifth Circuit in short order.

J. Craig Williams:

Right. Well, isn’t the rule itself nationwide? So in order to stop the rule, it’s the equivalent treatment?

Sandeep Vaheesan:

It is. The difference though is the FTC is a federal agency that has jurisdiction over almost the entire economy. Whereas Judge Brown is one district judge in the northern district of Texas. Her remit isn’t nearly as broad as the FTCs, but you’re right, this is a rule that is nationwide

J. Craig Williams:

Still a federal judge.

Sandeep Vaheesan:

That’s true, but just a federal judge in one district.

J. Craig Williams:

Right. Well, how has the litigation going in the individual states? So there’ve been some actions in Texas and in Florida.

Sandeep Vaheesan:

That’s right. So as of now, there are three pending cases. One in Texas, one in Florida, and also one in the Eastern District of Pennsylvania. I’ll start with the one in Pennsylvania’s. So that case has actually gone favorably for the FTC so

J. Craig Williams:

Far

Sandeep Vaheesan:

In late July. Judge Hodge denied that the challenger’s motion for a preliminary injunction finding that the FTC does have the clear authority to write competition rules under six G of the FTC Act. And further contrary to Judge Brown concluded that there’s ample evidence to support this rule, both academic studies as well as the tens of thousands of comments that the FTC received on its proposed rule. So in a sense, we have a split among judges with Judge Brown ruling against the FTC and then Judge Hodge in Pennsylvania for the FTC, the third case in Florida, judge Corrigan issued a PI against the rule with respect to the Challenger on, I believe it was August 14th or 15th. And his decision is notable in that he sort of split the baby between Judge Hodge and Judge Brown. He agreed with Judge Hodge that the FTC has the authority to write competition rules, substantive competition rules. But he found that this rule constitutes a so-called major question and that the FTC does not have clear authority to regulate this major question. In other words, Congress did not clearly indicate in the FTC ACT that the commission could write this rule. So he put the rule on pause on major question grounds rather than on statutory authority grounds.

J. Craig Williams:

Well, and it also sounds like this ruling is a little bit of a fallout from the loss of the Chev Chevron doctrine by our Supreme Court Supreme Court saying that the federal agencies don’t have the broad rulemaking power that’s only very limited.

Sandeep Vaheesan:

So I would actually say the demise of Chevron has not been implicated in this case so far. So the case you’re referring to Loper Bright overruled Chevron, which was a 40-year-old president saying that agencies are entitled to deference when they’re interpreting ambiguous statutes. That question hasn’t really arisen in this case so far. The big issue that’s arisen has been something called the Major Questions doctrine, which was announced by the Supreme Court in 2022 in a case called West Virginia versus EPA, where the court said if an agency tries to regulate a subject of great economic and political significance, it needs to show that Congress clearly authorized it to do so. Which raises the question well, what is a major question? And I think that has thus far, mostly flummoxed commentators and judges themselves. It’s rather subjective what constitutes a major question. What is a major question for one judge might be a rather minor question for another. So it seems like a major question resembles in many ways what Potter Stewart said about obscenity. You sort of know it when you see it.

J. Craig Williams:

Right? It is a difficult question to try and understand and how it relates to the Constitution, especially since contracting between employers and employees is a private affair. In most instances.

Sandeep Vaheesan:

That’s correct. But Congress and the federal government have authority to regulate contracts under the Commerce clause. We’ve had a number of federal laws regulating private contracts. You can think about the National Labor Relations Act, you can think about the Norris LaGuardia Act. You can think about various consumer protection statutes. So it is true that contracts have traditionally been seen as private relationships governed by the common law, but we also have a number of federal statutes and rules on the books governing the scope of private contracting.

J. Craig Williams:

Well certainly there’s and amendments to the Constitution that also govern those types of contracts.

Sandeep Vaheesan:

Precisely.

J. Craig Williams:

Let’s get into the individual nuts and bolts of how these things work. Employee comes in and initially gets hired. Are they typically informed that they will be signing a non-compete? Is that part of the onboarding process? What’s the protocol? How does that work?

Sandeep Vaheesan:

Sometimes some employers do tell workers upfront that the condition of employment is agreeing to a non-compete clause. But in other instances, employees are not told about a non-compete clause until after they’ve started a job. In some cases, they’re never explicitly disclosed at all. Instead, they’re tucked into an employee manual, maybe dozens or hundreds of pages long that few employees ever bothered to open and carefully read. So in some cases there is upfront disclosure, but in many instances there isn’t. And the contracting around non-compete was studied in a rather influential paper by Bashar Prescott and Starr where they found that in some cases there is disclosure, there is honest communication, but in others there isn’t at all. It’s completely concealed from workers. And to the extent that these contractual provisions are presented upfront, in the vast majority of instances, they’re presented as ticket or leave of provisions. If you want the job, you must accept the non-compete clause. If you don’t like it, find another job. And their survey found that about only one in 10 workers actually attempt to bargain or negotiate around a non-compete. So the vast majority of instances, these are very classic contracts of adhesion.

J. Craig Williams:

Right. And let’s throw into this the arbitration clauses that sometimes employers throw into contracts. How does that play a role here?

Sandeep Vaheesan:

Yeah, so oftentimes employers are using a myriad set of contractual restrictions against workers. It’s not just a non-compete clause. It’s a non-competes often paired with a forced arbitration clause, a non-disclosure agreement, a non-solicitation agreement. And there’s been a good deal of empirical research showing that these contractual restraints are often used as a bundle. It’s never just, it’s rarely just a non-compete or just an arbitration agreement. They’re presented as a suite of contractual restrictions that a worker has to sign to get the job

J. Craig Williams:

Right. Well, Sandeep, it’s time for us to take another quick break, hear a word from our sponsors. We’ll be right back and welcome back to Lawyer 2 Lawyer. I’m back with Sandeep Vaheesan the legal director at the Open Markets Institute. We’ve been talking about non-compete agreements, and particular the suite of types of things that employers do to restrict employees from moving from company to company. But what luck have employees had trying to strike back at these things? What kind of bargaining power do they have?

Sandeep Vaheesan:

Not much. In most cases, these are take it or leave it contracts. There’s research showing that even relatively well paid employees think about doctors or accountants don’t believe they have the bargaining leverage to push back. They fear that if they resist the non-compete clause, they will potentially lose their job offer. It’s really among the very elite workers, the senior executives where non-competes are actually bargained over. So the FTC and its rule actually drew a distinction between senior executives. So think of a CEO or A CFO who may retain a lawyer to negotiate their employment agreement, review their contract on a line by line basis. The FTC found that these workers probably do negotiate over their non-compete. They may even secure some compensation in exchange for signing the non-compete. But this is a very small fraction of the American labor force, fewer than 1% of workers.

So putting them aside for all other workers, including workers making six figures or above, these are classic take it or leave it agreements. There’s typically little or no bargaining over them. Employers say, if you want to come here, if you want to work with us, sign the non-compete. And that’s a finding that’s supported by a good deal of quantitative and qualitative research at this point. So it isn’t in any way approximating the kind of textbook notion that there is real negotiation or bargaining going on. This is very much a one-sided relationship where the employer has a great deal of power and the employee has very little.

J. Craig Williams:

Right. Well, from practical standpoint, let’s say you’re an employee that is subject to one of these non-compete agreements, and given the current flux in the law, what would you suggest they do?

Sandeep Vaheesan:

So my response has changed based on the Ryan decision from yesterday. If the rule had taken effect on September 4th, these workers would’ve been in the clear. Their non-compete would no longer be enforceable. It would be null and void under the FTC rule. So they could safely ignore it. They could leave their current job, take a competitive position, start a new business. But now that the rule is not taking effect on September 4th, this worker is in a more tricky situation. One option is for someone seeking to leave. They could find a lawyer, go to court, try to have their non-compete and validated. But that’s a very costly, time consuming and often stressful process. Litigation is not something most people want to be involved in, which probably surprises lawyers, but litigation is unpleasant. So that’s one possible route. And one thing that’s worth remembering is lawyers are often reluctant to take non-compete cases because the relief is often limited.

The best case scenario in many states is that a non-compete is invalidated worker is free to leave, but there are typically no damages or attorney’s fees. So these are not very attractive cases for lawyers to take apart from litigation. Other options for someone who is truly being mistreated on the job feels like they’re being abused, discriminated against, harassed. They can find a job outside the scope of their non-compete that has its own share of costs. They might have to relocate, they might have to find a new line of work. So this is a long-winded way of saying that if you’re under a non-compete, all your options are rather unattractive. You can try to leave risk facing a lawsuit, you can take a new job and your employer might face a lawsuit as well for tortious interference with contracts, you can move, you can enter a new line of work. So if you’re under a non-compete, oftentimes your best option is just to stay in place and grin and bear it

J. Craig Williams:

Or otherwise you could potentially move to California and get a job here, because there are non-compete agreements in California are illegal for the most part.

Sandeep Vaheesan:

Yeah, that’s true. That is always an option. But if you’re living on the East Coast, if you have family and friends on the East coast, moving 3000 miles away might have its own share of costs and challenges. Sure does. Yes. In theory that is possible.

J. Craig Williams:

Well, let’s talk about your book Democracy and Power, A History of Electrification in the United States.

Sandeep Vaheesan:

Yeah, so my book will be published in December by the University of Chicago Press. And it looks at the history of cooperative and publicly owned utilities in the United States. And believe it or not, at present, about one in four power customers is served by a publicly owned or cooperative utility. So for instance, if you live in the city of Los Angeles, you are served by a publicly owned utility called Los Angeles Department of Water and Power. If you live in Seattle, you’re served by the publicly owned Seattle City Light. And much of the country is served by community owned rural electric cooperatives. And my book looks at the history of these institutions. How did we get to a place where about quarter of Americans are served by a publicly owned or cooperatively owned utility? I look at the origin of these institutions. What were the political fights that created them?

What were the laws that gave rise to them? So my book is heavily focused on the New Deal, which produced institutions like rural electric cooperatives. The Tennessee Valley Authority, which serves a good portion of the southeastern United States, examines that history and then looks at their record. How have they performed? Have they been as small democratic as their proponents claim or have they been less? So I critically evaluate the history. How do we get these institutions, what has worked well, what hasn’t worked so well? And then I also offer a optimistic account of how we might build on what’s already been done to chart a publicly controlled, publicly led approach to the climate change issue. The power sector is one of the biggest sources of greenhouse gas emissions and wide swaths of the political spectrum recognized that climate change is caused by human activity and requires human activity to address. And I offer a path whereby we can collectively decide how we clean up our power system and build a clean, reliable, affordable power supply going forward. So that’s the book, it’s history, it’s critique, and it’s also a little bit of construction. What do we do to build and perfect the institutions that we have today?

J. Craig Williams:

It sounds like a very interesting book. Have you given any thought to looking at the aspect of how the internet and cabling has gone through America

Sandeep Vaheesan:

A little bit. I did some research on the deployment of broadband, how affordable available broadband is or isn’t. I think people interested in telecom policy will find a lot to learn in this book. Thus far, most Americans are served by privately owned oligopolies or monopolies like Comcast, Verizon, and at t. And I think people reading this book will realize, okay, there’s actually another option. We could have publicly provided broadband. We could have cooperatively provided broadband. And we actually do have a number of places in the country where we have just that. The city of Chattanooga, Tennessee has had municipal broadband for almost 15 years now, and they were the first, if not one of the first broadband providers in this country to offer one gigabyte per second service. So we have existing models, just a question of expanding them and making them available to all rather than just a small segment of the population.

J. Craig Williams:

Well, Sandeep, it looks like we’ve just about reached the end of our program. So it’s time to invite you to share your final thoughts, provide your contact information, and tell us where we can buy your book when it comes out.

Sandeep Vaheesan:

Sure. So you can find my book at the University of Chicago Press’s website. It’ll be available on December 3rd. You can pre-order it before then and you can learn more about my book and the work of the Open Markets Institute at my website, www.SandeepVaheesan.com.

J. Craig Williams:

Well great. I’d like to take this opportunity to thank you for being on our show today. It’s been a pleasure having you.

Sandeep Vaheesan:

Thanks so much for having me. It’s been a lot of fun.

J. Craig Williams:

Well, here are a few of my thoughts about today’s topic. California Non-compete agreements, as I mentioned in the close of the program, have been mostly void for a period of time, and we’ve fairly gotten used to it. The FTCs ban to us was not much of a surprise, and the upcoming rule change in September was anticipated. But now to see it ban presents a whole different set of problems for employees, gives ’em rather serious advantages to employers as they’ve had enjoyed for years. So it’s a tough row to hoe on both sides, not really sure which way to go. Well, that’s it for my thoughts on today’s topic. Let me know what you think. And if you like what you heard today, please rate us on Apple Podcasts, your favorite podcasting app. You can also visit [email protected], where you can sign up for our newsletter. I’m Craig Williams. Thanks for listening. Please join us next time for another great legal topic. Remember, when you want legal think Lawyer 2 Lawyer.

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