Interpreting antitrust law

Heather Graves

Staff

February 9, 2023

WISCONSIN – A recent proposal from the Federal Trade Commission (FTC) is creating murmurs throughout the business community.

The proposal, presented by the FTC last month, would ban all non-compete clauses – noting it would, “among other things, provide that it is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; to maintain with a worker a non-compete clause; or, under certain circumstances, to represent to a worker that the worker is subject to a non-compete clause.”

According to the FTC, a non-compete clause is a contractual term between an employer and a worker that blocks the worker from working for a competing employer or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends.

The commission voted 3-1 (with Commissioner Christine S. Wilson the lone dissenting vote) to publish the Notice of Proposed Rulemaking Jan. 5, the first step in the FTC’s rulemaking process.

“The FTC has released a Notice of Proposed Rulemaking stating they intend to publish a rule in the future that would restrict non-competes, basically invalidate existing non-competes and prohibit them going forward,” Lora Zimmer, an attorney with McCarty Law, said.

In a statement of support, Commission Chair Lina M. Khan wrote “non-compete clauses generally restrict a company’s workers from working for – or launching – a competitor for a period of time even after they have stopped working for that company.”

According to Khan’s statement, researchers estimate about one in five American workers are bound by a non-compete clause.
“By design, non-competes often close off a worker’s most natural alternative employment options: jobs in the same geographic area and professional field,” she wrote. “These restrictions can undermine core economic liberties, burdening Americans’ ability to freely switch jobs.”

In her statement of dissent, Commissioner Wilson wrote the proposed non-compete clause rule represents a “radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a non-compete clause is unreasonable in duration and scope, given the business justification for the restriction.”

Lora Zimmer

The commission is now looking to the public for feedback on the potential rule change.

The comment period is open through March 10 and can be done through the FTC’s website at ftc.gov.

“The FCC will look at all of those comments and decide whether any changes to the rule are appropriate based on the comments,” Zimmer said. “They would then decide whether to publish that rule in some form – whether it be changed based on the comments, in its current form or completely different. And then at that point, is when it would theoretically go into effect.”

Zimmer said the process is likely to take some time.

“There would probably not be a publication of the rule until late this year,” she said. “It’s difficult to figure out how long the FTC will take with this whole process. My best guess is it would be late this year.”

Zimmer said that would also likely be only the beginning.

“At that point, there likely would be a legal challenge, and then the whole thing would go to court, and potentially end up before the U.S. Supreme Court to determine whether the FTC has this power to make such a sweeping rule that would apply across the country in nearly every sector,” she said.

Zimmer said again, when that would happen is also hard to predict.

“It’s hard to say the timeframe for that,” she said. “If I had to guess, I’d probably say it would be sometime in 2024 before the Supreme Court would weigh in on that. Again, it’s all speculation, but for businesses trying to determine what sort of timeframe to look at, that would be my best guess.”

Tony Steffek, attorney and partner with Amundsen Davis, LLC, said he, too, anticipates legal challenges.

Joe Kirgues

“Any such challenge likely would include requests that the presiding courts stay or enjoin enforcement of the rule until its legality is finally determined,” he said. “If such a stay or injunction is issued, that would further push out any required compliance.”

Its importance
So, why is the proposal by the FTC important?

Matthew Geimer, associate teaching professor of business law at the University of Wisconsin-Green Bay, said the conversation is relevant in Wisconsin because it would be a major departure from current state law.

“I think there are two main takeaways from it,” he said. “One is (businesses) should reach out to their attorney to talk about how it may affect them.”

Geimer said the proposal doesn’t just cover perspective or incoming non-compete clauses.

“It also includes any non-competes currently in place,” he said.

The second takeaway, Geimer said, is realizing it isn’t a done deal yet.

“It is a proposed rule from the FTC,” he said. “They could of course change. But even if it does move forward as proposed, I think it’s likely it would be challenged.”

Zimmer said the proposed rule does not prohibit non-compete clauses with individuals who have a 25% or greater ownership interest in the entity when that person is selling their ownership interest in the entity or selling substantially all of the entity’s assets.

She said it also doesn’t prohibit employers from having non-competes with employees who apply only to competition during their employment, rather than after it ends.

Significant change?
Geimer said what the FTC’s proposal calls for isn’t unheard of.

“I know a few states have banned non-compete clauses or have enacted significant restrictions,” he said.

Geimer said it actually isn’t a completely foreign concept in the Badger state either.

“Under Wisconsin Supreme Court rules, attorneys are not allowed to have covenants not to compete,” he said. “So, we do at least have one industry in Wisconsin where non-compete clauses are not there. But yes, it would be a significant change for businesses using non-compete at this point.”

Zimmer said it would impact how some businesses – noting several Wisconsin companies utilize non-competes – do things.

A non-compete clause, according to the FTC, is a contractual term between an employer and a worker that blocks the worker from working for a competing employer or starting a competing business, typically within a certain geographic area and period of time after the worker’s employment ends. Stock Photo

“(The proposal would have) a real impact on the ability of those employees to leave employment and stay in the area and compete with the employer,” she said. “If those were invalidated, it would definitely change the power dynamic between employers and employees, and the flexibility and mobility of those employees to be able to leave employment, go across the street and do the same work, potentially for the same customers, clients or patients. That would certainly have an impact on those businesses trying to prevent that.”

Joe Kirgues, co-founder of gener8tor, said banning non-competes is a step in helping the job market “align people with their highest and best use” in order for the “economy to reach its full potential.”

“As employers are trying to hire, they want the best labor pool possible,” he said. “And as individuals looking for a job, certainly they’d like to take one with the highest pay that uses their highest talents.”

Kirgues said struggles aren’t a theoretical issue.

“It directly impacts issues, like the quality of care and communities, when we’re inhibiting people from having the job that best serves their community,” he said. “This is relevant to communities around Northeastern Wisconsin. For example, a doctor who leaves a job in a rural hospital may be forced to leave the community to be employed, because the only other employers in the region are prohibited from hiring them (because of) non-compete.”

Kirgues said he has often witnessed similar struggles with startups he works with through gener8tor.

“We saw with our startups, where we would want to hire someone who could make a difference, but they weren’t able to use their talents because of these non-compete issues,” he said.

Kirgues said the rule has lived up to its title “non-compete” – which he said the FTC’s proposal argues is no longer a good fit for today’s job market.

“Non-compete put its anti-free market nature in the title of the contract,” he said. “We believe those are restraints on trades the federal government probably decided were no longer reasonable in order to best suit the country.”

Kirgues said in many ways, non-compete agreements are a way for “employers to band together to keep labor from working in the workforce.”

Matthew Geimer

“As a result, it was reasonable for the FTC to take action,” he said. “Interestingly, in California, the state statutorily prohibited the use of non-competes, and when tech companies use them to limit hiring and pay raises, they are penalized under state statute as a cartel really, for coordinating (that). In other states, they are expressly permitted by current law. For the federal government to use this intervention from the FTC now is welcome.”

On the flip side, Steffek said he doesn’t anticipate much of a change if the FTC’s proposal becomes rule.

“It has been the law in Wisconsin for quite some time that restrictive covenants, such as non-competition agreements, are disfavored and are only upheld as lawful if they are ‘reasonable’ in several respects,” he said. 

Steffek said non-competes are used in all types of businesses but are generally not used throughout the entire business itself. 

“Non-competition agreements frequently are required of high-level executives who possess an intricate knowledge of the business,” he said. “Revenue-generating employees are also often asked to sign them – for example, sales employees or others who maintain strong relationships with a business’s customers, etc.”

In addition, Steffek said “true non-competition agreements,” meaning agreements that specifically preclude an employee from working, in any capacity, for a competitor of the former employer, are not often used.

“The exception being high-level executives and other similar-type employees,” he said. “Rather, many employers instead utilize non-solicitation agreements (i.e., the employee won’t solicit specific customers, employees, etc.) and confidentiality agreements to protect themselves. These types of agreements would not be included under the proposed FTC rule in its current form.”

Why now?
While campaigning and after taking office, Steffek said President Joe Biden’s administration vowed to review employment-related issues, all with an employee-friendly eye.

Taking that promise one step further, Geimer said Biden issued an executive order in the summer of 2021, saying he wanted the FTC to explore options regarding competitive restrictions.

“I think the rationale or the motive behind it is that some believe, and evidently President Biden believes, that this would promote workers to be able to have more freedom of movement and not be restricted in their current employment,” he said.

Kirgues said Biden’s administration and the FTC are looking at this “as much of a symbolic step, I think, as a policy one.”

“It makes it interesting because what other issues are there like this, we can use to encourage free-market competition in a way that may be atypical from our past dialogue,” he said.

Steffek said the younger generation currently entering the workforce certainly places more value on mobility than perhaps earlier generations.

Tony Steffek

“It wouldn’t be too far off base to think this effort caters, in a way, to that younger generation,” he said. “I don’t know, though, how big of an impact this will have, as it is rare that younger workers, newer to the workforce, are asked to sign true non-competition agreements.”

Preparation
Steffek said he has had several clients ask for recommendations on what to do at this point in preparation for what may happen.

“The best step to take at this point is to monitor any developments relating to the proposed rule and be ready to act in the event it is formally published,” he said. “That would include reviewing, if any, their current non-competition agreements and having initial discussions about whether they are truly necessary. And, if so, (having discussions on) other ways in which the employer can protect itself. Otherwise, we are quite a ways away from this rule going into effect, and it likely will change before then, so taking action now would not make much sense.”

Zimmer said she personally represents clients in both positions.

“I represent clients who are the employees, and I represent clients who are the businesses with these restrictive covenants,” she said.

Zimmer said the effect on each would “clearly be very different.”

“It would give those employee clients much more flexibility to be able to make decisions about where they want to be and whether they want to change employers and remove some of the potential risks that would be involved (with potential moves) right now,” she said.

Zimmer said for employer clients, the proposal could take “one weapon out of their arsenal, basically” and make it more difficult to prevent unfair competition.

“Which may cause them to have to look at what else they’re offering their employees to maybe try to do a little bit more to keep them happy and keep them where they are,” she said.

Kirgues said in the interim, while the FTC works its way through the process, “it’s definitely going to be a weaker case for employers to pursue these types of cases.”

“It used to be, you go to court, you’re going to get somewhere,” he said. “Because, the way litigation works is, if (the employer) survives a motion to dismiss, which is like the first review, then you can usually drain this person’s bank account. They don’t have the money to pay a lawyer, so they’ll likely fold. So, typically, if you can survive the early litigation, you win.”

With the conversations around non-competes going on right now, Kirgues said it now “makes it a high-stakes game for employers to pursue these claims against former employees.”

“They might not survive the early litigation anymore, and in fact, they might lose their rights to enforce it on any other employee if they do,” he said. “If you win, okay. But if you lose, every employee knows they lost, and they sued an employee.”

Zimmer said the proposed rule by the FTC is a regulation, not law or statute – therefore, it would not need to be voted on and passed through Congress and signed by the president.

“It is an administrative regulation that would be published by the FTC,” she said. “What they’re doing, basically, is interpreting the current antitrust laws and making the determination these non-competes are a form of unfair competition under those existing laws. That’s what gives them the ability to issue this regulation. It’s their interpretation of current law.”