FTC’s Sweeping Non-Compete Ban: Summary, States’ Views, and Litigation Challenges

Emily Manning: Hello everyone, and welcome to this Federalist Society Virtual Event. My name is Emily Manning and I'm the Deputy Director of Strategic Partnerships with the Federalist Society. Today, we're excited to host a discussion on the FTC's sweeping non-compete ban, including a summary, state's views, and litigation challenges. We have an excellent panel today moderated by Alexander P. Okuliar, who I will introduce briefly. Alex is Co-chair of the Global Antitrust Law Practice Group at Morrison Foerster. He is the former Deputy Assistant Attorney General for Civil Antitrust Enforcement at the US Department of Justice, and a former Advisor at the Federal Trade Commission. After our speakers give their opening remarks, we will turn to you, the audience, for questions. If you have a question, please enter it into the Q&A function at the bottom of your Zoom window, and we will do our best to answer as many as we can. Finally, I'll note, as always, all expressions of opinion today are those of our guest speakers, not the Federalist Society. With that, thank you for joining us today and Alex, the floor is yours.

 

Alexander Okuliar: Well, thanks so much Emily, and welcome again everyone to today's webinar which is sponsored by the Federalist Society's Corporation Securities and Antitrust Practice Group. We have an excellent panel for you today. I'm going to give some introductions now. The panel includes Chris Mufarrige. Chris is Chief of Staff and Attorney Advisor to FTC Commissioner Melissa Holyoak. Chris counsels the commissioner across both consumer protection and competition matters. He joined the FTC from Marqeta, where he was an Assistant General Counsel focusing on product and regulatory matters related to bank partnerships and digital wallets. Chris was previously an associate with Wilson Sonsini, and earlier in his career, he was a senior advisor in the director's office at the CFPB and also spent time in OIRA, the Office of Information and Regulatory Affairs. We're also joined by Tyler Badgley. Tyler is a Senior Counsel at the US Chambers Litigation Center, where he focuses on capital markets, competition, and consumer protection among other issues.

 

Before joining the Litigation Center, Tyler clerked for Judge Edith Jones. He also worked as a Special Counsel at the Senate Judiciary Committee and as an associate at Sullivan & Cromwell. Before his legal career, Tyler worked as a policy aide for Senator Pat Toomey. We're also joined by Gwendolyn Cooley. Gwendolyn is Wisconsin's Assistant Attorney General for Antitrust and leads the State Attorneys General as Chair of the Multi-State Antitrust Task Force. And finally, we have Julian Kleinbrodt, Julian is an antitrust and labor and employment partner in Gibson Dunn's San Francisco office. So welcome to all of you. Thanks for being here today. As the name of today's program suggests, you know, we plan to discuss the FTCs recently issued final rule prohibiting most employee non-compete agreements. We'll be discussing the rule from a number of different perspectives, and I'll actually start with a brief background on how we got here.

 

So, after decades with little enforcement activity in the labor space, the federal antitrust agencies actually began seriously thinking about how to apply antitrust and unfair competition laws to labor issues to worker mobility almost 15 years ago. In 2009, the DOJ began investigating a series of bilateral agreements among tech companies, not to cold call one another's workers. That investigation ultimately resulted in a settlement, US v. Adobe Inc., et al. The agency claimed at the time that those agreements were facially, anti-competitive and harmed workers. And there it was mostly software engineers because they were deprived of competitively important information about their job prospects their value in the market, and they also lost access to potentially better job opportunities. The resulting case against Adobe and the other tech companies, you know, ultimately was settled, but was followed by class action activity as well as several speeches that began to warn that the DOJ saw worker mobility as an enforcement priority.

 

So I was on the defense side of that case before I served at DOJ. I recall at the time the Defense Bar actually viewed it as a controversial move, because DOJ was wading into labor issues with the antitrust laws. But some of those legal theories began to take hold and build momentum, both among private plaintiffs as well as government enforcers. Indeed, in 2016, the two agencies took things a step further. They issued a new policy that the DOJ would now criminally prosecute certain standalone agreements between employers not to solicit employees or to fix wages or really fix any elements of employee benefits or terms of employment. So following this announcement, the DOJ began to investigate and criminally prosecute these agreements among employers not to steal one another's employees. Now, those cases, by and large, fell flat. I think one resulted in a plea deal.

 

The others resulted in acquittals or dismissals. The DOJ dismissed the last of these cases late last year. Now, the Biden Administration is really taking another approach to worker mobility, and rather than pleading under the antitrust laws to the courts and juries, President Biden issued an executive order on competition. It was about three years ago in July of 2021, that invited the FTC to consider rulemaking, which is a mandate that led the agency to notice the proposed rulemaking in January of 2023 receive more than 26,000 comments and then vote on an issue, the final rule on a party line vote just a couple of weeks ago on April 23rd. The final rule, as I'm sure most people are familiar, is quite sweeping in its breadth. It essentially voids 30 million or more non-compete agreements implicates conduct and agreements that have been freely negotiated across the economy for hundreds of years. So that's a short version of how we got to where we are with this rule. Let me turn over to Julian. Julian, can you walk us through the key features of the rule, you know, what it covers, any exceptions, other key points that we should be thinking about?

 

Julian Kleinbrodt: Thanks, Alex. Happy to set the table for us today. As you noted you know, this is, this is the first unfair competition rule in decades, but the FTC is back in a big way here because this is a sweeping rule that it estimates will affect 30 million Americans. And the headline, as you noted, is that it is a ban. It will be a violation to enter into a new non-compete clause. It'll be a violation to enforce or attempt to enforce a non-compete clause, and it will be a violation to represent that a worker is subject to a non-compete clause. And the scope of the rule is quite broad. The definition of non-competes, it's a functional definition. So it doesn't have to be what we all think of when we think about a traditional non-compete clause in an employment agreement or, you know, a severance provision.

 

It is any term or condition of employment that prohibits, penalizes, or functions to prevent a worker from seeking or accepting work with another person for work that would begin after their current employment. And you may have picked up on the phrase "term and condition of employment", and those in the employment space know that. But it's important to call out that, you know, that means it doesn't have to be in the official agreement or contract itself. It is a term of employment if it's in the handbook. And that can come within the rules ambit. And the definition of worker is also very broad. It is not just employees. It is independent contractors, interns, volunteers, apprentices. They all potentially fall within the rules. So on all kind of the key definitional provisions, the FTC has gone broad here. And that is, you know, in part how it is sweeping so, so much potentially within its ambit.

 

In addition to the kind of restrictions that I just mentioned, there's also a notice requirement. So employers must notify workers that existing non-competes are void. The FTC has published a template notice, and this can be done by mass blast, which may be welcome news for those working at or advising large companies. You don't have to necessarily email everyone individually. But you know, that is a significant requirement to figure out who is subject to a non-compete or blast it out at least over-inclusively. And I will flag that this is a change though from the proposed rule. The proposed rule would have required actual rescission of existing non-compete clauses. The FTC in its published final rule, decided rescission was more trouble than it's worth, and has instead required this notice. All of this is set to go into effect on September 4th, 2024.

 

There are some legal challenges that could potentially disrupt that, that we'll get to. But right now, September 4th is D-Day. There are a couple exceptions as, as Alex alluded to. And so the two primary ones I think I'll, I'll just briefly touch on, the first one is for non-competes with senior executives. Those are individuals who meet an annual compensation threshold and have significant public policymaking authority within an organization. But that is really a grandfathering provision even for senior executives. New non-competes won't be allowed after September 4th. The second exception is the sale of business exceptions. Without going through all the technical aspects of that one, essentially the rule won't apply to non-competes entered into as part of a bona fide sale of a business entity. And this, again, these two exceptions are both areas that have been changed since the proposed rule.

 

The exceptions are, are either, you know, new or slightly more expansive than they were in the proposed rule. The last thing I, I just want to flag too is the interplay between the rule and state law. You know, state law has historically governed and regulated non-competes. The FTC's rule creates a regulatory floor, so it preempts state laws that take a more relaxed approach, but it does not preempt stricter state laws. So, for example, we've already seen some sabre rattling in my home state of California about how our state law is broader and stronger than the FTC's rule. But, you know, so state law remains something that folks need to keep in mind, but you can't rely on it if it is more permissive than the FTCs rule. So that I think in broad strokes is, is the playing field. You know, the, the final rule's over 500 pages, every commissioner issued a statement. There's lots more that we could say, but let me stop there so that we can get everybody's insight and takes on this.

 

Alexander Okuliar: Well, thanks, Julian. And let me ask you just a follow up question. I mean, you said that the definition of worker is incredibly broad. And from what I can see in having looked at the rule, it certainly is, but, so it'll cover obviously employees, independent contractors, interns, unpaid right, interns, volunteers, potentially, right. Sole proprietors, is that, is that correct?

 

Julian Kleinbrodt: Yeah, the, I mean, they're all of the kinds of distinctions that we often see in employment law, you know, are, are not distinctions that matter here. It's paid or unpaid. It's, you know, employee, independent contractor, volunteer, intern, even, you know, someone doing work for a sole proprietor, as you said they do need to be working in the United States. It does have a limit to the, the geography in that way, but it is, you know, I think intentionally cast to be very expansive in the way it describes "worker."

 

Alexander Okuliar: Thanks. And so it looks like the exceptions, you know, some of them, I remember the, the bonafide sale of a business - I think a lot of people are thankful that it didn't get encapsulated in the final rule the way it was in, in the draft rule which would've allowed for that. Now what about sort of non-competes between franchisors, franchisees? I assume those, are those accepted, or is that part of the, is that covered by the rule?

 

Julian Kleinbrodt: So the rule does, you know, clarify that it's not applying to non-competes between the franchisors and franchisees specifically. You know, some of the statements you read say those are going to be subject still, of course, to case-by-case scrutiny, but to be clear, you know, any non-competes imposed by a franchisee on one of their employees, that would be encapsulated by the rule.

 

Alexander Okuliar: Okay. Okay. And then what about other typical agreements that we'd see, you know, non-solicit agreements with employees, non-disparagement, things like that. And you, you discussed a little bit about that. How, how broad are those exceptions and how are people supposed to be thinking about those exceptions?

 

Julian Kleinbrodt: Yeah, so this goes back to the, you know, the, the broad functional definition of what a non-compete is. It is intentionally, you know, cast not to just target what we traditionally call a non-compete, but anything that functions like one and the rule, you know, mentions that everything from a non-solicit to even, you know, potentially garden leave or a no-hire restriction or a liquidated damages clause or some kind of clawback clause. I mean, all of these, if they would prevent someone from, you know, practically starting their own competing business or going to work for a competitor, would be defined as a non-compete. And I'm sure we'll talk about this more, but you know, that ambiguity of, well, what we would not call a non-compete generally, but, you know, might be a non-compete under this rule. That's something that everybody is, you know, figuring out, and certainly, you know, is kind of working under the gun for, given that we've gotta figure that out by September 4th.

 

Alexander Okuliar: Okay. Okay. Seems like it's (laughs) an opportunity for a lot of litigation with respect to the scope of what constitutes a non-compete or not. So well, let me ask Chris, let me turn it to you for a minute here. Commissioners Holyoak and Ferguson actually both dissented on the rule. Why, why was that?

 

Christopher Mufarrige: Thank you Alex. And thank you to the Federalist Society for inviting me today to join this great panel. I'll start with a bit of housekeeping. The views I express today are my own, and they do not necessarily represent those of the Federal Trade Commission. I'm sure many of you have read Commissioner Holyoak's remarks on the non-compete rulemaking. My remarks today are gonna focus at a high level on the key issues that animated her concerns with the rulemaking. Her dissent is principally animated by four key issues, the importance of separation of powers, the plain text of Section 6 and Section 5, Congress', and the Commission's historical interpretation of the FTC's competition rulemaking authority, and how traditional antitrust tools are a better vehicle by which to prosecute anti-competitive non-competes. Beginning with separation of powers,her remarks begin with "Article One of the Constitution vests all legislative powers in Congress."

 

Respecting Congress's exclusive authority to legislate has both separation of powers and democratic implications. Executive branch agencies must be able to clearly identify delegated authority before proceeding with legislative rulemaking. This ensures that the executive branch does not infringe on Congress's authority to legislate, and it also ensures that the people's representatives, not executive agency personnel, make new law. Because Commissioner Holyoak does not read section 5 and Section 6-G of the FTC Act to provide authority to the Commission to issue competition rulemaking, the non-compete rulemaking exceeds the Commission's authority and infringes on Congress's authority to legislate. Turning to the text of Section 6 and Section 5, Commissioner Holyoke is a textualist and begins and ends her analysis with the plain text of the statute she's reviewing. And a review of both Section 5 and Section 6-G suggests the commission has no authority here to issue competition rulemakings. Beginning with Section 5, it provides the Commission with the authority to do many, many things, including issuing cease and desist orders. It does not, however, mention rulemaking. The commission therefore looks to section 6-G, and the critical language there that it relies on, suggests that the commission may, from time to time classify corporations and make rules and regulations for the purpose of carrying out the provisions of the act. Critically, this language does not express a clear expression of Congressional intent to confer the power to issue legislative rule makings that carry the force of law. Here, in her remarks, if you look at them she cites to literature within the administrative procedure world where there's been critical analysis of where and when agencies have been provided or conferred the authority to issue legislative rulemakings. 

 

Here, Section 6-G just simply doesn't have it. The rule also turns to Section 5, and argues that it provides the commission with the authority to enforce Section 6 rules. But this also has significant problems. The final rule maintains that Congress's Section 5 delegation of adjudicated authority implies that Congress has delegated authority to enforce legislative rulemaking, but that inference is mistaken. Legislative rulemaking is by definition, creating law and adjudication by contrast, enforces pre existing law. In other words, competition rulemaking would fundamentally expand, relative to the case by case adjudication that Section implies the Commission's delegated authority to prevent unfair methods of competition. Turning to the historical interpretation of the FTC Act, here, the Commission's own interpretation of the FTC Act, as well as Congress's interpretation suggests that the Commission doesn't have the authority to issue legislative rulemakings in the Competition space. For many decades after 1914, the commission itself never suggested that it had authority issued to issue rulemakings generally, much less for competition rulemakings. Beginning in 1940, congressional action also suggests that Congress itself did not believe the agency has authority here, they provided the authority to pass the Wool Products Labeling Act and the Fur Products Labeling Act in addition to several other, other legislative rulemakings, the Commissioner's remarks also touch on the non-compete rule's reliance on National Petroleum Refiners Association. While her dissent goes into great detail on this issue, Commissioner Holyoak does not believe that the statutory interpretation used to advance the holding in National Petroleum is likely to be used by a reviewing court today. 

 

Finally, turning to the focus on traditional antitrust rules over competition rulemaking, the non-compete agreements do present complex policy questions. And Commissioner Holyoak is sympathetic to many of the comments that she read, including those that suggest that some employees feel like they are stuck in a job and they're unable to go and seek other opportunities.

But she's equally sympathetic to the small business owner who invests in her new employees just to watch them potentially walk away to their biggest competitor with valuable training and trade secrets. Relatedly, commissioner Holyoak fears that banning non-competes may potentially deprive employees of important training and other tangible benefits, which itself could potentially impede career progression. Non-Competes involve a case-by-case weighing of the cost and benefits to not compete, and that case-by-case analysis is critical here. The reciprocal nature of agreeing to stay with an employer for a period of time in exchange for the employer's investment in training and related services only underscores the inherent difficulty of condemning non-competes generally. That is why Commissioner Holyoak supports using the FTCs antitrust tools to examine non-competes on a case-by-case basis, and would be in favor of the FTC dedicating resources to investigating potentially anti-competitive non-competes. Thank you for my time and I look forward to your questions.

 

Alexander Okuliar: Thanks, Chris. And look, I mean, I think that a lot of people, I agree with a lot of the views that you know, it's, it's sort of like hiding an elephant in a mousehole is what they always say, right? That, that it's difficult to kind of interpret the agency's rules as supporting in the, in the, the statute as supporting this kind of a broad action. But there is the precedent that you refer to the National Petroleum Refiners Association case. I mean, how do you contend with that? I know you said that, you know commissioner Holyoak thinks that that type of a decision would be made differently, be analyzed differently by court today, but can you expound on that a little bit?

 

Christopher Mufarrige: Sure, sure. And I think Commissioner Holyoke's remarks that they touch on this particular issue, I think first of all an important point here is that the manner in which courts employed statutory interpretation tools is very different back then than it is today. I think that's just, that's a general consensus among Administrative Procedure Act scholars. I think also there's been recent scholarship by Professor Merrill and Professor Pierce on this particular issue that being when and where agencies have been conferred the authority to issue rulemakings. And I think turning in particularly to Professor Merrill's arguments and scholarship I think actually this was with Marilyn Watts in particular. You know, their discussion of these issues I think is critical in terms of understanding when and where agencies were conferred the authority to issue rulemakings and this language of, you know, rules and regulations in terms of, you know, internal housekeeping. You know, this is found in other, you know, grants of authority to agencies and I think Professor Merrill's scholarship suggests, you know, there has to be a sanction and a, a clear conferral of, of authority to legislate on rulemakings. And that just doesn't exist here.

 

Alexander Okuliar: Thanks, Chris. So the Chamber, you know, challenged the rule shortly after adoption. Tyler, you know, what were the main concerns that the Chamber raised there? And are those concerns, you know, limited to this particular rule? Are they broader? You know, Chris was alluding to some broader concerns here. Talk to us a little bit about what's going on with respect to the Chamber's case and what its concerns are here.

 

Tyler Badgley: Yeah, thank you Alex for your introduction and for moderating this panel. Thank you to the Federalist Society for hosting this conversation. And thank you, of course, to my fellow panelists. I really appreciate the opportunity to get to be a part of this important conversation with each of you. I also need to say at the outset that my remarks are purely in my personal capacity and do not necessarily reflect the views of the US Chamber of Commerce or its members. 

 

So with that disclaimer out of the way, happy to discuss the Chamber's challenge to the FTC's final rule. As has already been mentioned, the FTC finalized this sweeping ban of non-competes on April 23rd. The chamber in our coalition filed a complaint in the Eastern District of Texas the next morning, and our motion for stay and preliminary injunction that evening. As an aside and what we understand to be a novel application of the first-to-file doctrine, our judge actually stated our case and directed us to intervene in a case filed the night before ours in the Northern District of Texas.

 

So we're now consolidated there working to get consolidated there. Our challenge really focuses on four core concerns, and I don't think anyone will be terribly surprised to hear me pull on some of the same threads Chris just did when discussing Commissioner Holyoke's dissent. The first is that the FTC lacks the statutory authority to define and prohibit unfair methods of competition by rulemaking. Second, the FTC fails to establish the non-compete agreements are, per se, antitrust violations such that they can be deemed categorically unfair. Third, if a court were to find such a broad grant of authority sufficient to justify the rule that grant of authority would itself violate the non-delegation doctrine. And finally, that the rule violates the Administrative Procedure Act in a variety of other ways. So as I mentioned, I am aware of at least two other challenges to the FTCs rule, including the one we sought to intervene in.

 

 And the one we intervened in that case adds the argument that the FTC is unconstitutionally structured. I'm not gonna touch on that, but the Federalist Society did recently host a conversation about the ongoing viability of Humphrey's executor at its recent Executive Branch Review conference. So if you are interested in digging into that issue more, I'd encourage you to watch that program. So first, can the FTC even do this? Does section 6-G of the FTC act, which the FTC cites in the rule actually provide, provide the FTC, the authority to issue competition rules? We think the answer is clearly no, and that if it's even a close question, then the major questions doctrine operates to reject attempts like this by administrative agencies to take unprecedented actions with vast economic and political significance based on nothing more than ambiguous and ancillary statutory text.

 

Just to get into a little bit of the history of the FTC Act the House of Representatives originally envisioned the commission as a purely investigative body which would gather information, produce reports, and make recommendations to the Attorney General regarding suspected violations. The House then drafted the statutory text that became Section 6, including its reference in 6-G, to rules and regulations necessary to carry out its investigative functions. With that specific envision in mind. By contrast, the Senate envisioned the commission as an enforcement agency and wrote what became Section 5 to empower the commission to enforce the law through case-by-case adjudication. Following negotiations between the two chambers, the FTC Act ultimately included both provisions. But at no point during Congress's deliberations did the House or Senate ever suggest that the newly formed commission would have substantive rulemaking authority over the entire economy; that proposition would've been unheard of in 1914, decades before the creation of the modern administrative state.

 

Now, Congress has repeatedly amended the act to grant rulemaking authority in certain limited circumstances, but these grants of specific rulemaking authority to the commission only further underscore that it lacks general rulemaking authority. These amendments clearly run counter to any suggestion by the Commission that the broader authority has just been there all along, and the Commission has long understood the limits on its authority, which is why for 50 years after the FTC Act's passage, it never attempted a rulemaking under Section 6-G. Now, the Commission now cites an experimental and short-lived effort to issue joint deceptive practices and unfair competition rules. In the 1960s and 1970s, those actually prompted Congress to specifically cabin the Commission's rulemaking authority through Magnuson-Moss to rulemakings for unfair or deceptive acts or practices. And the commission seemingly understood those limits for another 50 years, in what appears to now have become a bit of a cycle for the FTCthe Commission cites National Petroleum Refiners, which I know Chris touched on, and you guys have discussed already, but it's a single decision out of the 1970s DC Circuit.

 

That decision rested on the fact that Congress had not expressly excluded the authority, but agencies do not have unlimited power to accomplish their policy preferences up to the point that Congress stops them, they have only the powers that Congress grants through a textual commitment of authority. That decision flipped the proper analysis on its head. It was wrong at the time and is obviously wrong now. Now, to the extent there is any confusion under the major questions doctrine, the more expansive the agency's claim of authority, and here, the newfound claim of long-dormant authority is quite sweeping, the clearer the textual commitment must be. So in short, you know, whatever persuasive authority National Petroleum Refiners might have had in 1973 has long since evaporated. But what if the court disagrees with that frontline position? Well, it has long been settled that to bring an enforcement action against conduct under Section 5's unfair methods of competition authority, the FTC must show that the conduct at issue harms competition more than helps it.

 

I don't want to speak for the other panelists, but I, I doubt anyone disagrees that some individual non-compete agreements impose harms that are not outweighed by pro-competitive benefits. But plainly, not all of them do. And it's important to note here that it's the FTC, not its challengers, who are taking an absolute approach to this issue and have the obligation to justify it under Section 5. In order to show the non-compete agreements constitute per se unfair methods of competition, the Commission must show that every non-compete agreement causes competitive harm that is not outweighed by pro-competitive benefits, and the commission did not even attempt to do so.

 

It does attempt to make an argument based on aggregated harms, which is an approach courts have routinely rejected. It then acknowledges that non-competes serve many legitimate business interests, but it never actually attempts to show that those benefits are outweighed by the anti-competitive harms for every non-compete agreement prohibited by its rule. Section 5 does not allow the Commission to designate a common business practice as unfair if only some instances of that practice unjustifiably harm competition, all of which is unsurprising as at least 46 states have for hundreds of years relied on case-specific or context-dependent determinations that have upheld non-competes in certain circumstances, and found others unenforceable. So those all lead directly into the non delegation doctrine argument. 

 

If, if the Commission's interpretation of unfair methods of competition is correct, Section 5 would amount to an unconstitutional delegation of legislative power. Breaking with decades of case law interpreting Section 5, the Commission's 2022 policy statement says that the commission may determine the conduct is unfair if it is restrictive or exclusionary, and it tends to negatively affect competitive conditions. If those, you know, vague requirements are all that is necessary to declare a longstanding business practice unlawful, then there are no meaningful guardrails on the Commission's power.

 

It has a roving mandate to condemn any commercial conduct that it dislikes, and that tends to negatively affect competitive conditions. It does not need to show any evidence of actual harm, define a relevant market, prove market power, or consider procompetitive justifications. Understood that way. Section five lacks any intelligible principle to guide the Commission's discretion. And I think this is a good place to answer your question about why the Chamber sued and whether the concerns are broader than just this rule. In that 2022 policy statement, the FTC laid out its intention to outlaw a litany of other actions that businesses take to remain competitive from loyalty rebates to entire classes of mergers and acquisitions. All those aspirational bans turn on whether the FTC has the power to undertake these rulemakings and what they would be required to do if they do have that power. The FTC has been very upfront that this is just the appetizer and their focus is on concerns far broader than this rule, and on at least that we agree.

 

So the unifying theme behind each of these arguments is quite simple. Over a hundred years ago, Congress did not silently give the FTC the authority to unilaterally rewrite tens of millions of contracts to eliminate a practice that preceded the FTC in this country by more than a hundred years. And just to really briefly touch on the APA, and you know, in the interest of time, I won't dig too deeply into these, but first the rule is impermissibly retroactive. The Supreme Court held that a statutory grant of legislative rulemaking authority will not, as a general matter, be understood to encompass the power to promulgate retroactive rules. Second, the Commission relies on inadequate evidence to support the broad sweep of its categorical ban. I know Julian mentioned that California thinks their ban is actually broader, but I would argue that even California's ban defines non-competes more narrowly than the Commission's functional test.

You know, the Commission needs to show a reason for painting with such a broad brush rather than targeting those non-compete agreements that are actually harmful. Third, the Commission failed to meaningfully engage with more tailored alternatives raised by commenters. Instead, flippantly relying on single sentence, unexplained assertions and employers had other means for protecting their interests or that business justifications were not sufficient. And finally, the Commission relied on flawed cost-benefit analysis, ignoring certain costs such as the litigation costs to protect, or the cost of the business's inability to actually protect their confidential information altogether in many instances. And it relied on outdated data sets that examine narrower bans to justify the rules benefits. So, you know, I would commend everyone, reading commissioners Holyoak and Ferguson's statements on the rule, their incredibly well thought out and well footnoted. And with that, I think I'll turn it back to you, Alex.

 

Alexander Okuliar: Thanks Tyler, for all those insights. Very, very helpful. I wanted to ask you just very quickly, kind of bottom-line this for us. When, when are we gonna get an answer? Like, when do you think we'll actually get a decision from a court that will instruct us all as to either the scope of the rule, the viability of the rule really any kind of guidance on this?

 

Tyler Badgley: Yeah, so the case that we were directed to intervene in in the northern District of Texas just last week, I believe Judge Brown entered an order that committed to resolving the preliminary injunction by July 3rd. So I think that would probably be the first time we would see a definitive ruling at least on the PI posture. And then I assume the Fifth Circuit will be asked to take it up, kind of regardless of how that turns out.

 

Alexander Okuliar: Well, thanks again, So Gwendolyn, you've been waiting patiently. Thank you so much. So I wanted to ask you, given you know, your work and your position, the states had competing views on the original FTC proposal. What were, what were some of those views that the states had put forward?

 

Gwendolyn J. Lindsay Cooley: Sure. So like you said, I'm the Chair of the Antitrust Task Force, which means that I represent all the attorneys general and all of their various views. And so I'm just gonna give you a little bit of an idea about what both sides had to say about this. But first I need to make somewhat of a gentle correction to my co-panelists. State antitrust laws are not preempted. And let me tell you what the statute, when you actually look at it expressly recognizes state authority and the existence of private rights of action unless a state law conflicts with the final rule. So what does this mean? That in contrast with the FTC Act, which can't be enforced by private persons or by state authorities, non-compete laws of the various states provide for that enforcement. So there are state penalties or there are penalties in the state statutes.

 

Those are still in place. And really I think the way to really look at it is it's really the nuance of preemption, right? And frankly, we're gonna talk about disparate views. The Democratic State Attorneys General who commented on this, and not all Democratic AGs did comment on this but they were arguing for essentially what you guys are talking about, right? They were arguing for a "more than" standard, and then if FTC had said this is going to be a "more than" standard, I think that the arguments about whether California would be "more than" are legit arguments. But when you actually look at the language, the preemption language in the statute is impossibility preemption. In other words, if any state did - and no state does - had a statute that said non-competes are pro-competitive. And I don't think anyone's gonna do that because of the reasons you mentioned, right?

 

Like some of them I think we can all probably agree, but like, if you work at Subway, you probably don't need a non-compete, right? It's not really that specialized, et cetera, right? So, unless it is impossible to comply, those state laws are still in place. So that's my slight disagreement with you. But I will say that there are lots of places where we agree. I think that this group in particular will love - all the states love federalism, obviously, right? Like that's what we're all about. So even the Democratic State Attorneys General comments talked about this preemption issue. I think if you look at those existing state non-compete statutes, you are gonna still see, and I would certainly advise your clients, if you're figuring out what you're gonna do about this federal overlay, regardless of what happens with the challenges to the statute, you're still gonna wanna make sure that you're complying with those state statutes because of this impossibility preemption, you are going to still see enforcement by some states for time, space, and scope type non-compete rules.

 

Wisconsin has a time, space and scope statute low income, like the 400% of the poverty line in Maine, $75,000 threshold in Illinois, $113,000, nice round number in Oregon. You're gonna wanna look at specialist exemptions in the various states, right? You're still going to be wanting to make sure you're complying with those as well. So I wouldn't say they're gonna challenge this, this is gonna go away. We don't have to worry about it. So I would still continue to advise you to comply. And the reason why in particular Alex talked a little bit about some of the successes and challenges that the Feds have had with these cases. Well, the states have been a lot more successful. You think about how Washington State had a number of challenges to non-competes. New York has had some challenges, right? So Washington was focusing a lot more on those sandwich shop type folks.

 

But you see that also more at the high end. In New York, they were challenging a lot of non-competes in, in banking and in higher end businesses like WeWork and Reliance Payment and folks like that. Okay, so that's kind of the lay of the land. Let's talk about the comments. This is your original question. And being a typical lawyer, I have given my own preamble first, but here's your - back to your question. The Dems, there were 18 states - all Democratic - who really got into the weeds on the comments, right? I talked to you about the preemption issue. They were like, please don't preempt us. It should be "more than" fortunately, the FTC came to its senses and said, impossibility, preemption. That's gonna be much more straightforward. So then you're not gonna be litigating what's more than. The Dems were worried about choice of law to evade enforcement of specific state statutes because obviously, right, like California, let's assume that you agree that California's non-compete law exists and is enforceable, right?

So obviously if you've got California and Wisconsin employees and you have a choice of law for Wisconsin, with our extremely lowercase liberal policy on what businesses can do in terms of non-competes, that's obviously a problem if you're California - a Californian rather Dems pointed out that some non-competes can benefit businesses by increasing entrepreneurship, right? The idea that if I'm in a position that I can decide to take my business elsewhere and then open my own shop, it's going to increase entrepreneurship. And they also really got into the weeds on the actual rule itself about de facto non-competes versus express non-competes - and Julian talked about this a little bit - about non-solicitation clauses about the definition of "worker." And I won't repeat what Julian said, 'cause I think he articulated that whole discussion very well. Republicans, it's great because everybody else has already gone since you've kind of laid out the land, right?

 

So the Democrats really had those in the weeds comments and the, and concerns about preemption and the Republicans including Commissioner Holyoak's former state of Utah, they were really concerned about the inability to promulgate rules under the FTC Act, right? And so they raised a lot of the same concerns that you've heard today about whether the FTC really does have that authority. And so I suspect, although I don't know, you'll note I didn't give a disclaimer at the beginning, but I suspect that you will likely see folks weighing in on the situation in terms of the challenges to the FTCs authority because there were those, those serious concerns about whether the FTC really had the authority to do this in the first place. So next steps, right? There's no concurrent enforcement. In other words, the states can't enforce the FTC Act statute. I would expect you'll see more of the same.

 

And I'm going to anticipate a nuanced question about this that I actually got from a citizen, and I'll share it with you guys. What about states that don't have a really strong non-compete statute? Are they going to interpret their mini FTC acts consistent with the Federal FTC Act, if this non-compete rule continues? My answer to that is actually twofold. I would expect that you'll see, first of all, it's more likely that states are just gonna pass the statute, because typically in order to get a rule done, those still need to go through a process, right? Like you do still need to have a rulemaking, particularly for those states that have enumerated FTC Act statutes, like this particular thing is illegal, this particular thing is illegal. Those are gonna probably need a rule. Those states that have kind of grab bag FTC Act statutes, those, you may see some court challenges, but the number of states that have those, I would say still unlikely to see that adoption of the mini FTC Act as the the pathway, because a lot of those states already have non-competes, right? If you think about the states that have brought challenges on non-competes, it's not all AGs. So that's kind of an overview of where they're at, but that, that misreported setting a floor idea, it, it, I don't think it understands the nuance of, right? Like there's no private right of action. So that would be the thing I really wanna just emphasize for all of you.

 

Alexander Okuliar: Okay. And thanks, Gwendolyn. And I don't know if anyone wants to react to that last point, Tyler or Chris or, or Julian about the misconception that Gwendolyn's pointing out that she perceives with respect to setting a floor. But if not, I have a follow up question for you, Gwendolyn. So you talked a little bit about the future possible legislation in some states. What do you envision, and really, I'm, I'm thinking about state federal enforcement, but what do you envision sort of state enforcement to look like on a go forward basis? Just speaking at a high level you know, are you envisioning a lot of state-FTC interaction with respect to investigations and enforcement? And this assumes that the rule is, you know, validated right? By a court. And are there particular areas you know, as we've talked about, I think everyone would agree, the rule is really broad. It covers, you know, potentially lots and lots and lots of workers, essentially everyone. Where might the states look to enforce first or most frequently? You mentioned sandwich shop employees multiple times. Any thoughts on that?

 

Gwendolyn J. Lindsay Cooley: Yeah, I think it's a fantastic question. I would say the states are gonna continue to look at the folks that are in their borders, would be the place that I would look at first, right? How I expect it will go forward, assuming that you, the chamber loses, sorry. Assuming that the rule continues to exist, I would expect that you're going to see maybe some cooperation amongst those states that have if let's say we're taking a giant big tech company, right? Talking about some of these early ones, you're taking a giant big tech company that's got non-competes and it's got workers all over the country, okay? I expect you're gonna see the FTC would take a lead in that case. And then maybe some of those states that have non-competes would join. I think you'll see a framework that's very similar to the, if you think about existing multi-state cases and existing federal state partnership cases, right?

 

If the case is a giant case, then it's possible you would see some kind of cooperation. But I would expect that, for example, if there's bid-rigging in Wisconsin, that's likely gonna be a Gwendolyn case. Whereas if there's bid-rigging in Wisconsin and Illinois, it's possible we might get the Feds involved. 'cause You've got that interstate angle. So that would be what I would expect for the division of labor. I would be, but I would again, continue to be very careful if you're advising your clients on how you guys deal with non-compete statutes, because I think there is definitely much more likelihood of having federal interaction, right? If you are saying, oh, we're gonna put in a Wisconsin - a choice of law for Wisconsin because Illinois' non-compete is at $75,000 - I, I would just be very careful about that.

 

Alexander Okuliar: Well, again, thanks Gwendolyn for really helpful insights. We do have several questions that have rolled in. I'm gonna get to those in just a minute, but Julian, I wanted to give you an opportunity to talk a little bit about you know, Gwendolyn was giving some, some helpful advice you know, potentially to, to, to clients out there. What are you telling clients these days in terms of, you know, what should they be doing now? How should they be approaching this, this rule as we move towards potentially becoming effective this fall?

 

Julian Kleinbrodt: Thanks, Alex. I'll, I'll be brief so we can get to those questions. Certainly after what I hear from Gwendolyn, I'm gonna tell 'em to watch out for the states. No, I'm kidding. I, I think Gwendolyn and I actually probably agree on a lot of what we're talking about here. But you know, I, I think first and foremost you know, clients are watching the lawsuits very closely right now. You know, we have this period until September 4th to get ready to do all of these things. And so, you know, as Tyler mentioned, we're kind of expecting a ruling, at least in preliminary posture by July 3rd. So, you know, lots of clients are kind of moving forward with preparatory work, but maybe, you know, waiting to hold the trigger on things until we see if the September 4th date is going to hold or not. 

 

You know, in terms of what clients are doing right now, what they're asking about, I think, you know, there are big workflows to get ready to do this notice requirement, especially for large organizations. It's just a big administrative, you know, thing to do - figure out who has non-competes in your organization and, you know, get ready to send a notice lots of folks know that's not something that happens overnight. You know, I think the other couple things that I'm seeing a lot about are between now and September 4th is the opportunity to get non-competes in place with senior executives that could be grandfathered in under the rule. And so to the extent you know, people wanna put a new non-compete in or even amend one, this is kind of a safe harbor window to do that. You know, notwithstanding state law, keep it in mind folks.

 

 But you know, it's not even clear, I think under the FTCs rule, whether an amendment of an existing non-compete after September 4th would be deemed a new one or not. So people are using this window to think about that. And then I think, you know, hitting on another thing we've touched on a couple times is, it's one thing to review your employment agreements and your handbooks and say, okay, here are my non-compete provisions. I gotta email, you know, all of these employees or even former employees if they're still subject to them. But what about my non-solicitation provisions? What about my non-disclosure provisions? What about training, repayment, forfeiture, clawback, liquidated damages? I mean, all of these things could conceivably be subject to the rule depending on it. And so I think that is an area with a lot of ambiguity and that we are getting a lot of you know, questions from clients about, and, you know, sometimes the question is, I have this, is this a problem? Or is this going to be a problem under the rule? And sometimes the question is, okay, I can't do a non-compete but I still have these legitimate business interests that, you know, Tyler was talking about. What else can I do to best protect that? And I don't wanna suggest that any of these things are necessarily as effective or, or close to as effective as the non-competes that many businesses have used historically. But, you know, trying to figure out other ways to, as best as we can protect, protect trade secrets, protect legitimate, you know, free writing concerns or the sim or similar and, and, you know, compliant with the FTCs rule and state law, that's another area of a lot of activity.

 

Alexander Okuliar: Thanks, Julian. And let me follow it up with some of the questions that we've been getting which really are directed to some of what you were just discussing. And one of them, we've actually got two questions related to the, essentially the definition of "senior executive" under the rule. You know, one asks in terms of what constitutes or who co who can be a senior executive, has policymaking authority ever been defined? Is that sort of a defined term that we should be looking to? And if not, is there further guidance anticipated on that aspect of the rule?

 

Julian Kleinbrodt: Yeah, I think that is actually one of the more, you know one of the more ambiguous terms in the rule that is giving, you know, clients a lot of uncertainty to deal with right now. It is not, you know, defined in any way that I think creates crystal clear boundaries. There is some discussion of, you know, what are officers under other laws and, and analogizing to the way that we define executives or officers and other acts. But those are not dispositive designations necessarily. I think I would just generally say that the way I think most are reading the rule right now is that the definition of senior executive is pretty narrow. So, you know, policymaking, it's not, you know, it's not every middle manager that may be making policies for a team or a small group. You know, we are looking really at, I think, closer to the top of organizations, probably mostly in the c-suite as people who are gonna be likely to, to be deemed senior executives under the rule.

 

Alexander Okuliar:And, and this goes to a second question that we received. Is it both policymaking authority and a certain level of compensation that would qualify someone as a senior executive under the rule, or is it not?

 

Julian Kleinbrodt: It's "and" and not an "or". You know, and there, there's a very specific number. I think around $150,000 is the threshold, but it's not a round number, so I don't have it off the top of my head.

 

Alexander Okuliar: Fair enough. So another question that we received that I think that the group really could speak to, but Chris, I'm gonna maybe ask that you start is, you know, how would enforcement of the rule as a practical matter work?

 

Christopher Mufarrige: Well thanks. I, I'm not sure I wanna speculate about what the next steps would be, but I mean, I would think it would, you know, it would, I I would imagine that it would be a priority moving forward in terms of making sure that making sure the business are complying with the rule, assuming it it's, it remains valid. Yeah, I expect some resources to be dedicated to that, certainly.

 

Alexander Okuliar: Sure. And I think, I think the question also goes to really you know, how will the FTC approach enforcing this rule? I mean, we have some analogous experience with the agency enforcing in the consumer protection space, right? With rules that it promulgates there and the means of investigation and enforcing typically involve, you know, a complaint to the agency. It gets, you know, routed to the correct shop within the agency. Then there is a subsequent investigation that involves subpoenas, civil investigative demands investigational hearings or depositions so on and so forth, up to the point where there's either a settlement that's filed in, in court or that ultimately is agreed to between the parties and the agency. How do we envision, I mean, is it, is that gonna be the model for enforcing this rule? In other words, are people gonna be getting calls from what the Anti-Competitive Practices Division over at the FTC? Is that kinda how this is gonna go? Or do you not have those details yet?

 

Christopher Mufarrige: Yeah, no, I don't think I have those details, but I think the question highlights in an important way, the novelty of the competition rulemaking itself, right? It's enforcing rulemakings is not a muscle that the Bureau of Competition currently has, but of course, they could, they could quickly develop that muscle and get in the weight room, I'd expect, and I mean, obviously, and sister agencies have rulemaking authorities and BCP has rulemaking authority, and they'll, I'm sure they'll quickly be able to you know, get up to speed and develop that and, and push out resources to, to prosecute violators of the rule, assuming it remains valid.

 

Alexander Okuliar: Okay. Yeah, it doesn't seem that there is very clear authority for how to enforce, you know, this, this type of an unfair method of competition rule. But let me ask the question that I think is nested within this question, would, how would the rule enforcement take place? Would they go - and maybe Tyler or others know this - would the agency have to go to federal court to get this enforced? Would there be civil penalties involved? You know, can people speak to that? Or again, is that still a bit of an unknown?

 

Christopher Mufarrige: Well, I think, I think that I'll speak to Commissioner Holyoak's dissent in this regard. I think that one of the outstanding questions is the plain language of Section 5 envisions, you know, cease and desist orders, but even those cease and desist orders, if they're challenged, need to go to court in order to be enforced. It doesn't speak to, you know, what would happen in a rulemaking setting. And I think that's part of the nebulous, you know, issue here about what would happen. And you know, I think Commissioner Holyoak's remarks suggest that because that enforcement mechanism isn't there, it's not a valid use of rulemaking authorities. And I'm not sure what would happen, frankly, if you know, if it remains valid and what would, how enforcement would proceed then. Curious Tyler, if you have any thoughts?

 

Tyler Badgley: No, I mean, I really think this is an area of tremendous uncertainty, both what will be the enforcement priorities under this rule and how it will actually happen. I mean, you talked, Chris, about the FTC not having the, the muscle here I mean, I have also sued the SEC a number of times, which does have rulemaking authority. And the SEC defends its own suits. The FTC, however, kicked this one over to the DOJ Federal Programs Branch, which I think just continues to go to, like, they just don't have the, the experience in this, in this area. And there's just a lot that needs to be figured out.

 

Alexander Okuliar: And thank you Tyler, and thank you, Chris. Another question that's come in is maybe Gwendolyn, more directed to you, which is that a question as to whether the rule would preclude state courts from enforcing non-competes?

 

Gwendolyn J. Lindsay Cooley: So if, if a state statute says you go to state court to invalidate a specific non-compete, let's take Wisconsin for example. Let's say it's unreasonable in terms of time scope. Yeah, that state court is gonna be the one that's got jurisdiction over that. We're not gonna be, let me rephrase that. The worker would not be doing that in federal court under the FTC statute 'cause right? There's no private right of action there. So we don't have the full "lay of the land" on how this is implemented, but right? It would be in Wisconsin only. Right? It would just be the worker who'd have that ability to go into state court. Wisconsin, the AG's office doesn't have that, but if you're in California, right, that would be in California state court and the could be the AG , it could be the worker or whatever.

 

Alexander Okuliar: Thank you, Gwendolyn. So let me, we are almost outta time, but let me see if I can get through a couple more questions just very quickly. One, one, actually more than one question focuses on the fact that non-compete agreements often are used to protect trade secrets for companies. And maybe Chris, this is best directed to you because you were right in the thick of things. Did the FTC think about the potentially adverse impact on companies relying on non-competes for purposes of trade for protection?

 

Christopher Mufarrige: Sure. Yeah. No, the staff did a great job in terms of working through the relevant materials and the economic literature. You know, I think it just comes down to weighing, you know, the cost and benefits. And I think in Commissioner Holyoak's remarks, you know, she, you know, she suggests that you know, the manner in which we prescribe non-competes in the rulemaking doesn't necessarily provide enough incentive, you know, on those issues of how do you invest in employees, trade secrets trainings for employees, you know, of sometimes employers provide you know, trainings and, and educational subsidies, et cetera. So yes, I think the staff did a great job in terms of the analysis here, but I think Commissioner Holyoak is concerned that, you know, just simply creating a per se rule here invalidating all non-competes can introduce some problems in terms of the incentives employers will have for future employees.

 

Tyler Badgley: Yeah, and, and just to flag, I mean, we are certainly making the argument in our, in our litigation that, you know, they violated the APA by not adequately, you know, considering the alternatives that would've resulted in more tailored solutions that would've been better able to preserve trade secret protection you know, they failed to, to do an adequate cost benefit analysis because of this very issue among many others. So it's certainly an active part of litigation as well.

 

Alexander Okuliar: Well, thank you, Tyler. Well, thanks everyone. We're now at one o'clock. I'm for the audience, sorry if we couldn't get through all the questions. I know we were able to provide some answers. There's still a lot of unanswered questions, generally speaking, but hopefully over the next year, we'll, we'll get some answers, hopefully before September 4th ideally. But anyway, thanks again to everyone. Emily, right back to you.

 

Emily Manning: On behalf of the Federalist Society, thank you all for joining us for this great discussion today. Thank you also to our audience for joining us. We greatly appreciate your participation. Check out our website fedsoc.org or follow us on all major social media platforms @fedsoc to stay up to date with announcements and upcoming webinars. Thank you once more for tuning in and we are adjourned.