Comment to Federal Trade Commission

Non-Competes in the Workplace: Examining Antitrust and Consumer Protection Issues

Kenneth J. Vanko

March 11, 2020

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Introduction

I am submitting this comment to address some, but not all, of the questions on
which the Federal Trade Commission (FTC) staff is seeking public comment.

By way of background, I have practiced primarily in the field of employee restrictive

covenants and trade secrets for 22 years. Most of my practice concerns the
representation and counseling of employees, but I have many employer clients as well.
Those clients range from publicly traded corporations to small, family-owned
businesses. The industries in which I represent clients are diverse and include financial
services, manufacturing, engineering, accounting, staffing, and consumer services,
among many others.

For 10 years, I published a website called Legal Developments in Non-Competition

Agreements (www.non-competes.com), in which I wrote over 600 articles on all aspects
of non-competition law, including summaries of legislative updates, case
developments, policy considerations, and proposed solutions for harmonizing or
understanding difficult areas of the law.

My website is geared more towards non-lawyers than lawyers, but nevertheless I

think it was helpful to anyone who read it. I also have published numerous law review
and bar journal articles on various non-compete topics. I thus feel that my experience
and study in this legal area qualifies me to address certain questions on which the FTC
is seeking comment from the public.

Summary Statement

As a general proposition, I wish to emphasize the following principal points about

non-compete agreements and litigation:

• Non-compete agreements have their legitimate place in the economy, but they
should be reserved for an exceedingly narrow class of executives and other

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employees who are able to negotiate for them in exchange for real, tangible
consideration as part of a meaningful and bargained-for exchange.

• Non-compete abuse, or overuse, is a pervasive problem across many sectors of the

economy, and most employees have little recourse to redress a serious problem.

• The principal problems for most, non-executive workers include: (a) intentionally
overbroad agreements in relation to the harm an employee can plausibly inflict after
departure, (b) lack of advance notice that a non-compete is required as a condition of
employment, (c) the ability an employer has to institute litigation and then “ask for
less” than the maximum restraint nominally agreed to, and (d) the absence of
meaningful consideration given in exchange for a non-compete.

• The legal system generally lacks a cost-effective means to expedite review of

overbroad non-competes for employees suffering from job-lock, meaning most
genuine disputes don’t see a courtroom at all.

• Anecdotally, many of my clients who I have counseled have been forced to forego
better employment options, with much greater upside, due to the mere threat of
legal action, which most employees cannot afford to finance.

• Employers who use overbroad non-competes to stifle fair competition and restrict
employee career advancement generally suffer almost no negative repercussions
from their conduct.

• Though state law generally has developed along a consistent path with some
exceptions, choice of law and venue problems in an increasingly mobile economy
suggest that a more uniform legal approach may be warranted; the strongly
preferred way to accomplish this is through federal legislation similar to the Defend
Trade Secrets Act as opposed to agency rulemaking.

• The FTC has an enforcement and adjudicative role to play in preventing the unfair
use of non-compete agreements, such as to fill gaps where state law, or private
actions, provide insufficient redress and to enjoin employers from using coercive
methods to prevent employee mobility on spurious or unreasonable factual
grounds. It seems a stretch to believe that this particular function will fill a much-
needed gap on a case-by-case basis where non-compete litigation itself is inherently
abusive or unfair.

• The FTC’s ability to promulgate, under rulemaking authority, a “legislative”

solution banning non-compete agreements is neither clearly established nor
particularly wise at this time.

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 The Impact of Non-Competes on Labor Market Participants

The FTC record seems replete with some preliminary evidence about the impact of
non-compete agreements on wage rates. Unfortunately, this type of question seems to
require a detailed regression analysis that the literate does not provide. In other words,
as a practitioner who would greatly benefit from a reliable report or set of statistics that
speak to this question, it is not clear to me that such a study exists at this time.

That said, from anecdotal experience and having represented all classes of workers
impacted by non-competes, it seems far more likely that the benefits of non-competes
for workers are directly correlated with status. That is, executives who receive (a) long-
term contracts, (b) some form of equity, or (c) generous severance packages if
terminated, tend to fare well in terms of compensation.

Conversely, I am unaware of any information that suggests that lower- entry- or

mid-level employees have benefited from non-competes in the form of higher wages,
increased job training, or other intangible factors. The FTC could benefit from more
rigorous studies that attempt to isolate the impact of non-competes on non-executives
in terms of wage growth.

The Business Justifications for Non-Competes

I do not believe this topic merits much analysis, because the traditional justification
should be protection of trade secrets. Less restrictive covenants that protect client
goodwill are available to employers and are not the subject of proposed rulemaking.
They do not pose the same concerns, but FTC enforcement actions could prove
beneficial for companies that use these so-called non-solicitation covenants in a manner
that is abusive or anti-competitive. I feel this is so case-specific that rulemaking is
inappropriate.

If the justification for broad, market-based non-competes is the protection of trade

secrets, then FTC rulemaking (which I do not necessarily endorse) could be tailored to
ensure that non-compete agreements do not exceed a certain time period, such as 4 to 6
months. Too often, employers settle for the “most they can get” when they should be
seeking to restrain someone for the least amount of time needed.

All that said, trade secrets do not justify broad, systemic use of non-competes
throughout an organization because many employees lack a meaningful way to retain
those trade secrets or exploit them elsewhere. In the case of true misappropriation (or
theft), trade secret and fiduciary duty law provide ample and indeed more robust
remedies.

Sufficiency of State Law

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 Non-compete disputes typically have been the province of state courts, but that is
changing with the passage of the federal Defend Trade Secrets Act. So too, employee
mobility concerns mean that state law does not typically cover many factual matrices,
such as where an employee works across state lines or for an organization incorporated
elsewhere. This speaks more to the need for federal legislation, rather than rulemaking.

In short, the question of whether state law is sufficient is not necessarily tied to FTC
rulemaking. The questions are unrelated.

Enforcement Patterns

Employers do not “routinely” enforce non-competes. Indeed, the actions that

employers take or don’t take are inherently unpredictable and often are based on
arbitrary whims, personal animosity, the need to “send a message,” or perceived rather
than actual harm.

Non-competes are contained in a variety of contracts that are the subject of

enforcement suits, from stand-alone documents executed before or during employment,
to more fulsome agreements typically signed by higher-level employees, to equity-
based award agreements.

What’s more, no two contracts are alike and so they’re not “standard” in any sense.
Employers have proven marginally better at tailoring contracts that meet black-letter
legal standards. They tend to be more sophisticated entities. Smaller companies use
more sketchy agreements, likely because they do not invest time or money into hiring
good attorneys.

What is even less “standard” is judicial decision-making. Though some patterns can
emerge (such as that involving employee theft and pre-termination malfeasance),
judges often reach the opposite result on nearly identical facts. This creates confusion
and lack of predictability when advising clients.

Enforcement vs. Rulemaking

Recently, a diverse group of public interest organizations and scholars petitioned the
FTC to engage in rulemaking for the purpose of banning non-compete agreements.

For the FTC to promulgate such a rule, it must find “substantial evidence in the
rulemaking record” of a widespread practice before it can be declared unfair or
deceptive, or an unfair method of competition. That likely is the case here, as the
rulemaking petition and the available literature offer substantial evidence of restrictive
covenants’ negative impact on labor markets. As I noted before, I have yet to find the

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definitive source on this, so I do feel that it would be wise to augment the record if such
a study can be conducted reliably.

A more fundamental problem seems to be the non-delegation doctrine and the

availability of Chevron deference. According to the Supreme Court, a statutory
delegation of power is constitutional only if Congress sets forth an “intelligible
principle” to which an agency is directed to conform. The use of employment-based
non-competes, simply as a general proposition, cannot be an “unfair method of
competition” in the abstract if it is freely bargained for, is narrowly tailored to protect a
compelling employer interest, and vested with meaningful, tangible consideration.
Admittedly, that involves a very narrow slice of the non-competes floating around the
labor market. But it does show how broad rulemaking as suggested by the petition can
be problematic. Stated differently, a prohibitory rule could hurt at least some consumers
if those consumers obtain real economic benefit from employers.

Similarly, it is unclear how long of a shelf-life so-called Chevron deference has before
the Supreme Court. This deference would, if viable, enable courts to defer to an
agency’s interpretation of rulemaking power when the underlying statute is
ambiguous, and the agency’s interpretation of that statute is reasonable. Can the FTC
engage in rulemaking to prohibit an unfair method of competition, as Section 5 may
conceivably allow? At best, it’s an open question because the term “unfair methods of
competition” is somewhat vague and ambiguous. The FTC may not enjoy Chevron
deference much longer.

Even so, the question then becomes how to define any rule in a way that addresses
real concerns. Some potential suggestions include:

• Prohibiting non-competes that either (a) lack bargained-for consideration, or (b)

fail to compensate an employee proportionately during a restricted period of
employment.1

• Prohibiting non-competes that are not disclosed before an employee accepts the
job offer.

• Prohibiting non-competes that exceed a defined restricted period, such as 4 or 6

months.

• Prohibiting non-competes for employees terminated without cause, at least where

they do not obtain commensurate severance during a non-compete period.

1 Lawyers like me call these “garden-leave” clauses.

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 These suggestions seem to address rulemaking in a more narrow fashion that could
be aimed at truly unfair methods of competition.