The MoFo Competition Podcast: Antitrust & The Workplace – A Conversation on No-Poach and Non-Compete Agreements Part 2

In the second episode of this two-part MoFo Perspectives podcast, MoFo Global Antitrust co-chair Lisa Phelan and of counsel Rob Manoso speak with Employment & Labor partner Andrew Turnbull, along with special guest Matt Bester, Director of Competition Law at Accenture, to discuss the current and emerging trends between antitrust and employment law. In this part, you can look forward to a deeper dive into the FTC’s recently announced plan to ban all non-compete agreements between companies and employees in any context. Our panel discusses what to expect from both state and federal jurisdictions and how companies can best prepare.

 Listen to Part 1

Transcript

Intro: Welcome to MoFo Perspectives, a podcast by Morrison Foerster, where we share the perspectives of our clients, colleagues, subject matter experts, and lawyers.

Lisa: Hello and welcome back to MoFo Competition, a Morrison and Foerster podcast series exploring current and emerging trends in antitrust, and how to navigate today’s shifting competition landscape. I’m Lisa Phelan, co‑chair of MoFo’s Global Antitrust practice group, and today we’d like to continue our discussion on the recent developments at the intersection of employment and antitrust.

This is one of the most active areas in competition, policy, and enforcement in the U.S. and increasingly around the world. In many ways, today’s labor market reflects the volatility and the uncertainty of the broader economy, much of which is still recovering from the lingering effects of the pandemic.

Employee turnover is up, and a low unemployment rate puts pressure on wages. In part one, we discussed how companies are reluctant to invest in training and to share confidential information with employees, including their executives, if they might not be sticking around. We reviewed how the Biden administration has made clear that protecting workers and maximizing competition for talent is a very high priority.

The FTC announced just this month a plan to ban all non-compete agreements between companies and employees, in any context. These agreements are already unenforceable in jurisdictions like California. Also, Canada just changed its competition laws to allow for criminal prosecutions of such agreements, and multiple enforcers have ongoing cartel investigations of wage and hiring agreements.

So, today we want to take a little bit deeper dive into these recent non-compete developments, provide some insights on what could happen this year in particular states as well as nationwide, and finally, discuss how companies can mitigate their risk given this uncertain climate. Before we get started, though, in case you missed our Antitrust + HR Part One, you can catch up by visiting mofo.com/podcast.

I have with me again two of my colleagues, Andrew Turnbull and Rob Manoso. Andrew is a labor employment partner at MoFo. A significant focus of his practice is drafting these types of restrictive covenants and then litigating those covenants, employee, and mobility and trade secret cases. Rob is an antitrust attorney with significant experience assisting companies on managing risk as it relates to antitrust in HR issues.

Matt Bester is back with us as our special guest on this timely topic. Matt is the director of Competition Law at Accenture, which is, of course, a Fortune 500 global professional services company, which specializes in strategy, consulting, technology, and interactive services. During my decades as a prosecutor at the DOJ Antitrust Trust Division, I had the pleasure of working with Matton some cartel matters.

With this great group, let’s jump back in.

Andrew: Well, thanks Lisa. This is Andrew. I think it’d be helpful for us to have a discussion about the increasing hostility we are seeing from lawmakers and regulators at both the federal and the state level concerning employee non-competes. As many of us know, for years employers have sought to protect themselves by having employees enter a non-competes and non‑solicits of customers and employees.

And although there are a few states in the U.S., such as California, that completely ban these types of restrictions, in many states, employers have used these restrictions to protect their legitimate business interests. And even when there are not laws limiting or banning these non-competes, a lot of these agreements have to be narrowly tailored in terms of their duration, geography, and functional scope to be enforceable in court.

But really given this current climate and hostility we’re seeing on non-competes, we’re seeing that even now, some of these narrowly tailored provisions may not be enough.

Matt: Yeah, I mean, it does seem like non-competes are now under attack from a lot of different directions. It’d be great to hear about the updates that you’re seeing and what you expect to see this year.

Andrew: So over the last several years, we’ve seen a number of states across the U.S. pass laws really seeking to limit the use of non-competes and non-solicits with employees, and we expect that this trend will continue. These laws really vary across the board, but there’s a few common trends that we’re seeing.

One of the trends that we’re seeing is this ban on low-wage worker non-competes. So states like Virginia, Maryland, Oregon, and Washington have these types of laws in place, and these really tend to make sense. But for the most part, low-wage or non-exempt workers are typically not able to subject their employers to real competitive harms, and that’s usually because they often don’t have the unique skills or access to a company’s highly confidential or sensitive information to really compete against them.

We’re also seeing another trend of laws that we’re calling the more kind of comprehensive approach to non-competes. So, examples of these are states like Massachusetts, Washington, Illinois, the District of Columbia, most recently Colorado, and these laws really kind of have a couple of different features that place different types of limits on non-competes, and they vary in terms of their context from state to state. But a few of the trends that we’re seeing with these laws, one is, is many of these laws are placing limits on the duration of the non-compete after employment. So, you can actually prohibit the employee competing during their employment. And the question is, how long can the restriction go post-employment?

And some of these states are coming out and putting hard and fast rules and saying no longer than 12 months. We’re also seeing some of these laws requiring companies to provide additional consideration beyond at-will employment to enforce agreements. So, in many states, if you just hire somebody on an at-will basis that can support a non-compete, but some of these newer laws are requiring that—so, you actually pay for the non-compete period called “garden leave,” and other states are also requiring that employees meet certain compensation thresholds before you can even have the non-compete to be put in place. We’re also seeing some of these state laws mandating certain notices to be provided to employees before they enter into non-competes, and there are certain timing requirements for how long employees have to be given to consider the agreements before it goes into effect.

So, I think gone are the days of employers really looking at their non-competes and saying, worst case scenario, this is unenforceable. What we’re seeing now is that companies have real risk for having unenforceable non-competes.

Some of these new state laws allow for enforcement actions by state regulators. That includes significant fines and penalties, and some of these laws also give employees a private right of action to sue their employers and recover attorney’s fees. So it’s really becoming an increasing risk to have non-competes that don’t comply with these laws or are unnecessary.

And in a couple instances we’ve even seen courts that are starting to view non-competes with more scrutiny. In fact, we have a recent case from the Delaware Court of Chancery where it struck down a non-compete with an employee in the sale of business context, and it also refused to modify this agreement.

The court found that the employer or the employee in this instance received significant compensation for the agreement and acknowledged that the employee had actually breached it. But the court found that it was a little overbroad and that given that it was over broad, it didn’t see that it needed to reform this.

And this case was pretty surprising given that it was in Delaware. And Delaware tends to be viewed as a favorable jurisdiction for businesses and non-competes. And it’s also surprising because courts tend to apply less scrutiny to non-competes in the sell-of-business context.

Lisa: Wow. So, the states are really busy, Andrew, and as we noted at the top, we’ve seen the FTC increase the pressure on non-competes on a national basis, and this is really a major shift that can have significant implications going forward.

On July 9, 2021, President Biden issued an executive order that, among other things, encouraged the FTC to ban or limit non-competes. Then last year the FTC issued a policy statement indicating that it was going to increase its enforcement of Section Five of the FTC Act, which prohibits unfair methods of competition.

Just this month, the FTC entered into settlements with three companies over their use of non-compete agreements, which the FTC alleged were in violation of Section Five. This is the first time the FTC has entered into consent orders with companies that were barring the use of non-competes.

Rob: These complaints and the settlements really highlight the different ways the FTC is willing to claim and argue that a non‑compete is unfair in violation of Section Five, one of the cases involved thousands of security guards who were essentially low-wage employees that received little training, but the company had an expansive non-compete and also had a $100,000 liquidated damages provision in place for any violations of the non‑compete.

From the FTC’s view, this was really exploitative. In the other cases, the workers covered by the non-compete at issue were highly skilled employees that were working in the glass manufacturing industry, which the FTC found was very concentrated—few competitors. There, the FTC claimed that the non‑competes locked up the best workers and prevented other companies from being able to compete at the same level.

So rather than being exploitative, it was anti-competitive in its effect on the industry.

Matt: So Andrew, it seems fair to say that the FTC didn’t stop with just scrutinizing these agreements.

Andrew: I think that’s right, Matt. You know, the day after the FTC announced these enforcement actions, it issued a proposed rule seeking to ban non-compete agreements for nearly all U.S. workers.

If this proposed rule goes into effect, it would apply broadly to nearly all types of workers, including all levels, regardless of how much they make—so C-suite executives, and it would also apply to other types of workers, even if they're unpaid, including independent contractors, volunteers, and interns. Now, the rule does seek to exempt non-disclosures and non-solicits from the ban, but a little concerning here is that the FTC says that those agreements would be covered by the ban if they functioned as a de facto non-compete. There are only very limited exceptions from the ban from the FTC’s proposed rule, and those exceptions are for sale of the business and for non-competes entered between a franchisor and a franchisee.

If the proposed rule becomes final, it would not only ban companies from entering non-competes, but it would also require companies to rescind existing non-competes and notify all of their covered workers that they are no longer in effect. Now, we expect that this rule will almost certainly be challenged by business groups, politicians, and others.

And it’s possible that the FTC narrows the non-compete ban and the final rule, so we’ll have to wait and see that. But regardless of the proposed rule survives these legal challenges, I think the FTC is making clear that it’s going to interpret its authority very broadly. And as Rob and Lisa mentioned, FTC has already brought some enforcement actions, and it’s likely that we would see them continuing to pursue those in the near term.

In addition, we also have a lot of other states that are really considering passing additional limitation on non-competes. So for example, New Jersey is considering a law that if it’s passed, would limit non-competes to 12 months post-employment and require employers to provide employees with 100% of their pay infringement benefits during the post-employment period of the non‑compete.

I wouldn’t be surprised if some states were encouraged by the FTC’s recent announcement and the proposed rule to issue kind of their own broader limitations and bands on non-competes, but we’ll have to see if that remains to be the case.

Lisa: Wow. Big changes in the non-compete space, and I know that non-competes are so common in employment agreements.

Matt, what are some of the concerns you can see in-house counsel facing as they try complying with these changing laws while still protecting the company’s interests and ability to hire and do business?

Matt: It’s certainly an interesting time to be an in-house lawyer. The points that Andrew was mentioning about how the interpretation of Section Five is changing or evolving are very apt, and really watching what regulators are doing and saying and looking at our own business to make sure that we’re just keeping pace with all of these changes is really critical.

We’re always just trying to make sure that our policies and our controls and our approach on risk mitigation is as up to date as it possibly can be, so that we can just continually stay on the right side of the law.

Andrew: Yeah, I think that’s certainly what I’m seeing, Matt. And from the employment side, I think it’s becoming increasingly important for a lot of our clients and companies to think strategically about how they plan to use non-competes with their workers.

Obviously, you have to continue to monitor the FTC ruling, but even without that ruling, you’ve heard about all the hostility amongst the states with non‑compete, and so I think businesses really need to ask themselves if a non‑compete is necessary. There are a lot of examples where non-competes with workers don’t really make sense.

For example, the low-wage workers, we’re seeing a lot of activity on that front amongst the states, but even if there’s not a legal ban, we are seeing those agreements are starting to go by the wayside and really can, as we discussed earlier, subject the employer to competitive harms. I think the other thing that companies need to think about too is that having non-competes with these agreements may not only be unenforceable, but there’s also the risk of potential claims and enforcement actions and the ability to collect these types of fines.

So even when non-competes make sense for the type of workers, employers really have to consider having agreements that are narrowly tailored, that fit with the company’s business and complies with ethical laws. We used to see a lot of companies have this kind of one size fits all approach to a non-compete that you would just apply for all employees across the board.

I think that’s becoming riskier and riskier. So, really thinking about coordinated strategy on how you’re going to push your non-compete together with employees at different levels and in different jurisdictions, not only increases the odds of it being enforceable, but also lowers the risk of potentially running afoul of some of these non-compete laws as well as enforcement actions.

Finally, it’s just important to recognize the non-competes are not the only tool in the company's toolbox for protecting against unfair competition. There’s a number of other types of protections at an employer’s disposal—for example, non-disclosure and invention assignment clauses. There’s non-solicits of both employees and customers.

Sometimes, you can include a duty of loyalty, contractual cause in making sure that you have other practices in place, as Matt mentioned, to protect your confidential information and trade secrets.

Lisa: That’s so true, Andrew, and it’s really important right to remember that legitimate interests supporting these restrictions need to be documented in real time.

You want to be sure that there is support. There are clear reasons that you’re putting this restriction in so that if they’re called into question down the line, if a state or a federal enforcer is taking a look at what you’ve written, you can immediately explain it and offer the reasons.

Rob: Matt, from your vantage point, what do you see as some of the compliance priorities for companies this year?

Matt: The things we’ve talked about today are really good examples of big priorities—non-competes, non-solicitation, those things are really emerging issues, and staying on top of those is really important. I think also the recent past practice of a lot more active merger challenge is another issue that’s not going away, and I expect that the regulators will continue to look really hard at companies in acquisitions. There’s always sort of new things. It seems especially true this year to work through challenges to figure out, and that just makes the work really interesting.

Andrew: On the employment front, I think we’re going to expect to see the trend of state laws continuing in 2023 on non-compete agreements.

There’s a number of states with pending legislation on the horizon, including New Jersey, New York, and Connecticut. So, we may see some of those even start to tick up as the FTC rule takes a little bit more steam and some of these states may become more emboldened to pass the broader restrictions, but we’ll have to wait and see.

And then of course, we’ll have to wait and see how the FTC rule plays out for a lot of companies and how that impacts their strategies and be cognizant of the fact that there are federal and state regulators that are looking to bring enforcement action at this point in time. So just being cautious about how you’re putting together these agreements going forward.

Lisa: we have to expect that DOJ is going to continue its aggressive enforcement of agreements that limit employee mobility or compensation. And this is really spreading around the globe, as we said. I think it’s not just a U.S. issue anymore. I think competition for talent is being taken up as a rallying cry by the EU enforcers.

And quite frankly, I think DOJ was surprised when it first began to delve into this issue that these types of agreements are as widespread and as common as they are. And I, at this point, the message does not seem to have gotten through to all companies and executives yet, including HR personnel at companies about the risk when you engage in this kind of behavior. The current broader economic environment certainly creates some temptation on the part of companies that are facing recruiting and retention challenges, as well as facing financial pressure. But companies just have to be cautious and be prepared on these issues. So, now it’s really the time to check their compliance policies and to provide updated training, to check in with the HR team and any recruiting companies they hire, and to take other steps to mitigate this kind of risk.

So, this concludes our chat for today. Matt, thank you again for joining us. And thanks to all of you for tuning in to MoFo Competition. We will be continuing to watch this issue closely and provide updates as they come.

Outro: Please make sure to subscribe to the MoFo Perspectives podcast so you don’t miss an episode. If you have any questions about what you heard today or would like more information on this topic, please visit mofo.com/podcast. Again, that’s mofo m-o-f-o.com/podcast.