The FTC's Ban on Non-Competes

Joe Young: Good afternoon, ladies and gentlemen, and welcome to the June edition of GovCon HR Round-Up. So glad you could join us today. Hope you're all coming to us from the air-conditioned comfort zone from wherever you're joining us from. We know it's hot here in the D.C. area where we are. For those who don't know, my name is Joe Young. I am the president of GovConPay. We are the only outsourced payroll and HR Solutions provider focused exclusively on the government marketplace. As always, we are joining you live from the wonderful studios here of BMC Digital Strategies. I want to thank our team and especially the support of our producer, Todd Castleberry. And as always, joined by our partner and friend, Mr. Declan Leonard, Partner of Berenzweig, Leonard LLP. Great to be back with you, Declan.

Declan Leonard: Joe, great to be here again. It's hard to believe we're now halfway through the year. I mean, we started these in January and honestly, I look forward to these every month. It's great to be in the studio with you. Normally, we're joined by my law partner, Seth Berenzweig, who has another commitment today. But happy, I know you and I got this topic well covered.

Joe Young: You've got it. Well, I know that. I know you've got it.

Declan Leonard: Well, I thought I was asking the questions this time. Okay. But anyway, yeah, it's great to be here with you.

Joe Young: So the exciting topic today. So a lot of activity and talk around the topic of kind of navigating the kind of new rules from the FTC regarding non-compete agreements. So we're going to dive right into that. Before we do, I do want to remember our audience out there. We'd love to make this interactive. We're going to go through a lot of topics that's that Declan is going to touch on today. But if you have any specific questions or follow-up to some of the things we discuss, please feel free to put them in the live chat. We'll be monitoring those and we'd love to try and address them before we wrap up at the bottom half of the hour. So with that, let's dive in. What do we what are we talking about here? Declan So what is what are we getting all the publicity about and what's a little recap of, of what's been transpiring and what's coming?

Declan Leonard: Yeah, I feel like we need like, you know, when we say FTC ban, I think we need that duh duh duh. You know, it's like. Like that's all we hear about now. I mean, trust me, we are not the first podcast to be talking about the FTC ban. What we do want to do in the limited time that we have for this webinar is to talk about it and its relevance. First off, what the heck are we even talking about with the FTC ban? What's the current status of it? Because I can't tell you how many times people come up to me and say, Hey, we can't do this anymore because there's an FTC ban. Well, that is not necessarily true. And we'll be talking about that more today. And we also want to hit it in a manner that's relevant to the audience here, which is government contractors. 

I mean, yeah, Joe, your client base is government contractors. The majority of our clients here, Berenzweig Leonard, are government contractors. And so that's what we want to do. If there's any questions specific to government contractors, we'll be talking about some things such as commitment letters and things of that nature that come into play when you're talking about restrictive covenants. But the FTC ban, I mean, really, in its essence, it is a complete ban in the United States all and it's very broad. We'll talk about a few exceptions, but let's just say it's it's very broad. It applies not just to, you know, future restrictive covenants that might be entered into after this, after these regulation has gone into effect, but also passed one.

So it's retroactive in application. They they estimate that it's going to impact about 30 million workers, thousands of companies, including tons of government contractors. It's not just employees, it's also independent contractors. The one key aspect of it, it it only applies post employment. And we'll talk a couple of times today about how that's relevant and how that might give a little bit of strategy for companies as they continue to try to protect their business.

Joe Young: And obviously with a big announcement like this comes scrutiny are challenges. So what's I know there are some things going on out there. What's the status of some legal challenges that are out there?

Declan Leonard: Yeah. So, I mean, you know, you're exactly right. I mean, people had teed up these lawsuits because what happened was Congress passed the law last year and as what so often happens in our government nowadays, Congress passed the law, I should say. So Congress passed the authority to the FTC many moons ago. The FTC, the FTC, which is an executive agency last year, started the process of formulating regulations.

And then when those came out, companies pounced, including the US Chamber of Commerce. But another a small tax company, actually pretty big tax company called Ryan Tax. And Texas filed the first lawsuit The U.S. Chamber of Commerce has since joined it. And where that stands right now is they have filed an injunction, meaning let's stop this FTC ban from going into effect.

It's pending right now before a judge, a federal judge in Texas who has promised to issue a ruling on the injunction by July 3rd, right before Independence Day. So we might have some early fireworks here, you know, who knows?

Joe Young: Yeah, not July 4th. Independence Day may be a little different for people with not compared to whether they're independent or nobody likes it. First.

Declan Leonard: I'll be like, yeah, nobody.

Joe Young: Like the Independence Day. After this rule.

Declan Leonard: People will be policy off resumes on July 4th when they should be sitting by the pool or the beach. But anyway, so we'll see what happens with that. So that the one good thing is the the, the, the ban does not go into effect until September 4th. We will know far in advance by July 3rd. This is what the judge has promised, whether or not an injunction is issued.

And if an injunction is issued, then that ban is really just put very much into question.

Joe Young: Okay. And one thing to you said, you know, through the FTC, a part of the executive branch, you know, impacts of enforcement to in an election year potentially there as well. Yeah. I mean because.

Declan Leonard: There's a question mark really, really hanging over this. This was bold action by the by the FTC, by the Federal Trade Commission. They knew it. It got a lot of publicity. It continues to get a lot of publicity. And so it's not just this Texas federal judge that can stop it, frankly. It will probably be challenged all the way up to the U.S. Supreme Court.

The majority of the justices in the U.S. Supreme Court currently do not like the power of the executive branch right now. And this would be an example of that, because it's pretty pretty potent use of power by the executive branch as opposed to Congress passed into law. And as you just pointed out, if there is a different administration, if the Republicans win the presidential I mean, they now have the executive branch, they can reverse this.

So a lot a lot of question marks. And that's what makes it so hard for companies because people say, well, what should we do? And we'll hit that a little bit later. But all of these factors come into play.

Joe Young: Prepare for all, all contingencies. So if those challenges are not successful, oh, you think you mentioned it would take place September 4th.

Declan Leonard: So yeah, which is you know, which is not not too far from now. And there are some logistics that companies will have to take into account specific notification requirements that they'll have to give to all their employees. I personally will be very surprised that come September 4th, we are sending out those notices. But who knows? I mean, at this point, who knows?

Because the judge can rule whatever they would do and then, you know, we'd have to go up on appeal and stuff like that. So so, you know, it is a little bit of a wait and see type thing. But I think it's important to also delve into, you know, what is timely.

Joe Young: As usual here on the Round-Up

Declan Leonard: Yeah, totally.

Joe Young: Before July 3rd, you as we mentioned it's very, very broad at this point. But there are some exceptions and things for people to know about. What are some of those that people should be aware of?

Declan Leonard: There are some. Yes, exactly. First off, it does You may have heard this that it applies to it excludes senior executives, which, you know, at first blush you might think, well, oh my gosh, I'm just going to make a lot of my upper management senior executives the way the regulations from the FTC read, they want this to be as narrow as possible.

They literally think it's going to be less than 1% of the entire workforce that this exception would apply to. And so I don't think that that's going to be the I don't think that that's going to be sort of the boon to companies to be able to put people into senior executive status. It says you have to be able to make policy for the entire company.

And so you think about that and you're like, yeah, that's going to be pretty high level. I think of C-suite people, you know? CC Sweet people, which ironically, they're not the ones that can usually take business away from the company. It's kind of ironic, the highest level people, it's usually that, it's usually sales directors and things of that nature that are the face of the.

Joe Young: Company facing people are people with the client relationships that they're most people are most scared about.

Declan Leonard: Like a CFO, like, you know, usually is not having a ton of interaction with clients where they can peel those away if they go become CFO of another company. So that's one when you when you're involved in the sale of a company. So these are, you know, if you've ever been involved in the sale of a company, if you sell your interest in a company, that company, the buyer is going to impose a long, usually five year or sometimes longer restrictive covenant.

They say that that's still fine like so because you're not really doing it as an employee, you're doing it as an owner. You're wearing your owner hat. So the FTC says, we're cool with that. They also issued a warning that when you talk about a sale of a company, there's a lot of equity that sits out there. Even in the employment context.

You know, we call it synthetic equity or phantom equity stock. It's stuff like that that also oftentimes is accompanied by restrictive covenants like non-compete. They say that's not what we mean when we say bona fide sale of the company. So those probably are not going to be permitted if this goes into effect. Yeah, So it's not just pure employment agreements.

Joe Young: Have their use a lot of times as a retention tool as well, as well as protecting. So that's a big impact for companies are trying to do executive comp, executive planning type people in but also have some of those restrictions as a part of getting that equity. Yeah. Kind of.

Declan Leonard: Yeah. Not to go off topic, but like, you know, it's interesting to talk about this stuff because I know that the FTC thinks that by doing this they are protecting they're giving free flow to employees and they're protecting them in order to go to the next place. But you just raise a good point. Companies are probably going to be less apt to dole out synthetic equity and things of that nature because they're like, well, why bother if we can't get something in exchange like allegiance through restrictive covenants, then why go down that road? So I think that that's that's that's a little bit of.

Joe Young: Consequence is a little.

Declan Leonard: Bit of Declan on the soapbox. But I think that that's one. And then finally we don't have to spend too much time on this, but causes of action that have already accrued. So causes of action like let's just say right now we're sitting here before September 4th of 2024. If I have a company who knows that one of their one of their employees has breached their restrictive covenant, they can go into court now and even after September 4th, that that's it's almost like grandfathered in that that case can continue on.

Joe Young: And we're talking specifically about non-compete. But I think in the same sentence, a lot of times you hear non solicit and I kind of, you know, confidentiality, they're kind of all rolled up. But how does this apply to those elements of maybe those agreements that are rolled together?

Declan Leonard: Yeah, this is the one I think if it does go into effect, this will probably be the crux of most cases because most companies are going to change any restrictive covenants and not call it anything but non-compete. They'll call it noninterference, they'll call it non-solicitation, they'll call it, you know, just anything under the sun that they can.

But what the FTC, obviously they're wise to it. And they said, look, you know, a moniker that you put on it is not going to be determinative. So it's really they call it the functional equivalency test. If it's the functional equivalent of a non-compete, if it really does stymie an employee's ability to just leave here and go work for a competitor, then you're probably going to fall under this same FTC ban.

And this is all going to be determined by courts across the country, state courts, federal courts. You can just imagine how it's going to be. Again, just so many different judges coming out so many different ways. So it's going to produce a lot of a lot of litigation and probably, frankly, a lot of confusion as to what what constitutes a true non-compete.

Joe Young: Yeah, especially we get in areas like this where you got three jurisdictions and everybody said, oh, you're doing business to the first, you know, the rulings and what could be apply could be different. Yeah. You know, when you cross the bridge.

Declan Leonard: Yes, exactly. I mean, we've talked about this in past roundups. You know, the the challenge for government contractors in particular because of their workforce so spread out on many states once again, they're going to have to, you know, juggle all of these different court decisions. You know, a judge in Colorado says a non-compete is anything like a non solicit or anything and then a judge and, you know, maybe in Virginia says, no, it's got to be a very specific well, then, you know, you're treating now your employees.

You've got to once again treat them differently based on what jurisdiction they're at.

Joe Young: We talk to obviously always looking to highlight what's maybe unique to our our government audience. On the call, you mention a little bit in the brief about commitment letters. So let's dive into that a little bit and something that's pretty unique to the to the GovCon industry.

Declan Leonard: Yeah, I'm sure most, most out there are familiar with these. You know, when you're going up for a bid, you're doing a proposal, you want to do a couple of things. You want to get letters of commitment from your existing employees, particularly like key employees, so that, you know, when you're bidding on something and you can actually sell it as a marketing tool that like, hey, look, you know, Joe Young is going to be all my contract, continue to be on my contract when we win this re-compete and you know him and he's great And so this is supposed to boost our chances of getting it.

I think that those are going to be fine. I think letters of commitment will still be fine for your existing employees because remember, this FTC ban only applies pos- employment. So let's just say you're working for a government contractor and there's a bid coming up and they say, Joe, we need you to sign this commitment letter saying if we win, you're on board with our company and you're going to continue to perform.

I think that that letter is not going to run afoul of this FTC ban because, again, you're still working there. So it by definition is not post-employment. I also think these letters of commitment are not truly binding. I mean, you know, they are a little bit aspirational. I know they say what they say, but they continue upon winning the work.

And so I believe in some respects they could be agreements to agree. So but I think those will be fine. I think what you could also do with these commitment letters is I think you can tell your existing employees, even under an FTC ban, I think you can tell your existing employees that they cannot sign commitment letters with other government contractors who are competing against you on a proposal because, again, they're still your employees.

We're not talking about post-employment restrictions. So I think those are still going to be fine. And again, it's all about it's all about protecting your key personnel. And I think there will be smart avenues for companies to continue to do that.

Joe Young: We touched on this a little bit, as are with regards to this impacting across all state lines. But anything else to kind of add to kind of that element that we didn't touch on just with the disparate workforces that government has? Or is just it just that challenge of depending on where they're located and what laws apply here?

Declan Leonard: Because right now before the FTC's ban, I mean, and we've talked about this, we've touched on this in other roundups, different states have different rules with respect to restrictive covenants. California doesn't want to see, you know, voids out any non-compete. Virginia does allow non-compete in, in limited circumstances says I mean, I never want to say that in a blanket but there are there are sort of variations of non-compete that are very narrowly drawn that Virginia will still tolerate.

And again, it's very specific. One benefit of an FTC ban, if you can call it that, is that it will provide more clarity because what it's going to do, it's going to wipe out basically all 50 state laws related to. So that patchwork will be gone and you will just have, you know, clarity from the FTC that non-compete are banned.

As I said earlier, within that FTC band, you're going to have disagreements among state courts and federal courts across the country as to what constitutes a non-compete. Yeah. So once again, they're almost going to be able to set their own policy, but just not use state law. They're going to be using federal law. So I'm not so sure that that goes away completely.

But again, this is very much a concern for government contractors. Their workforces are spread out. I wish I could deliver better news to the folks out there, but I think that I think they're still going to have to have to keep that matrix on their white board as to what each state is doing in this regard. So, yeah.

Joe Young: So some people are talking about, you know, looking across the pond as some of our friends in the UK and the Brits as a policy of Guardian leave. Yes, Yes. And as those provisions that are utilized over there, are they a way to maybe circumvent the FCC ban with maybe some unique circumstances? Tell us about what you're hearing with regard to that.

Declan Leonard: So first, let's talk about what guard and Leave policies are, because I've been doing this almost 30 years. It was probably ten years into my career as an employment lawyer that I first heard of them. And they are way, as you just mentioned, they're way more prevalent in Europe. They're not used as often here in the United States and guard and leave.

It's, you know, symbolic as to why they call it that. It's basically let's just say you're working for a company and they say we are going to end your employment, you know, but we're going to do so. Where you no longer have to work here, let's say come June 30th. But we're going to continue to keep you on as an employee.

We are going to pay you and we're going to give you benefits for an additional 90 days, 120 days. And the thought behind garden leave is you spend that time out in the garden at home, you know, just kind of collecting a paycheck. So it's not severance because severance is different. Severance is so much more prevalent in the United States.

But that means you're separated from employment, and then you're getting paid. So, the severance period is post-employment. Severance post-employment is important because the FTC ban applies post-employment, garden leave, and you're still employed there. In fact, the FTC talks about guarding leave policies in the regulations and says that because they're not post-employment, they are fine to do so.

I do think you'll find some companies trying to take to make use of those. Here's the problem, though. For most people who are going to leave and go work for a competitor, there's no obligation for them to stay. They already have a paycheck waiting for them, so they don't need your paycheck to go on guard and leave. So I think it's creative.

I just think when I when I when I sort of work it through in my mind as to practicality, why would anyone do this if they have another job lined up? Yeah, it might not work, but it is. It is. It seems like that is something that is acceptable under the FTC ban.

Joe Young: Very interesting. It seems so British.

Declan Leonard: Yeah, that's right. Keep calm and carry on and don't compete.

Joe Young: And don't compete. Keep calm, carry on, and don't compete. Yeah, that's that's the theme here. So, you know, with some of the indecision and things that we're having coming here, we're waiting for these big dates on July 3rd and then the impact on the fourth. What are some of the things, though, that companies can start to be doing already, though, to prepare for this or should be doing?

Declan Leonard: Yeah, I mean, and that's really the impetus for us doing these roundups. It's like to educate, but also, you know, to say, okay, there's a lot of confusion. You could read, you could you could listen to this, and then read this online and read Sherm and all this other stuff. We like to give practical advice, things that you can do right now because it is the age of uncertainty in our law, whether it's pay transparency, whether it's non-compete, everything is sort of, wow, what is this state doing?

How do I keep up with it? So let's talk about some things that you can do right now. First off, you are allowed to have a restricted covenant, a non-compete with a senior executive, as long as it's entered into before September 4th, which is the date we know it goes into effect, assuming these court challenges don't stop it before then.

By the way, you cannot enter into a restrictive covenant with a senior executive after September 4th. So it's not like senior executives are good going forward. It has to be entered into before September 4th. So you should identify who your true senior executives are and make sure that at least you have restrictive covenants that you desire to have with them and make sure those are signed before September 4th.

Joe Young: And those those the definition for senior executives is that been pretty clearly defined.

Declan Leonard: It has as much as a government regulation can clearly define. They set a salary threshold, 151,000, which I think in this area of the DMV is not going to give you too much clarity, unfortunately, maybe. And so there are some other parts, lower cost living places in the United States. It's again, I use the phrase you have to be able to set policy for the entire company.

What that means in in practice, again, so much of the stuff is, you know how it works in practice. Sorry, Todd, I dropped my pen. Next thing, another thing to do before September 4th is if you have existing violations. And you know what? I don't say this gleefully. Let's hope you don't. But if there are existing violations, you should initiate a course of action on those before September 4th or else those are lost.

We talked about this earlier, that if there is a current violation, if you're just sitting on it and saying, you know what, I'll see, you know, a couple of employees left there, a couple of employees left. They don't have to be senior executives because these are like existing cause of action. They left and they took a whole bunch of stuff.

But, you know, let's see how it pans out. Maybe by October, I'll decide whether or not I go after him. You're going to be out of luck if you have not initiated, you know, really kind of a formal enforcement process by September 4th, you're out of luck. Those are going to be waived. You no longer can enforce those. I mean, again, it's hope. You don't have to go down that situation.

Joe Young: But if you're in those areas, you're not sure.

Declan Leonard: Exactly.

Joe Young: Decision point here.

Declan Leonard: Next thing, check your agreements. I mean, so many clients and so many companies, you know, oftentimes they forget, you know, I don't even know the restrictions I have in place because and it's not necessarily their fault. There's been so much change over the years. And what courts will stomach in terms of restrictive covenants that you've gone from pure non-compete don't compete within 75 mile radius.

You know those you haven't seen those in a while, but, you know, they used to have those two, okay, what do we call them now, maybe a non solicit or is it a non-servicing take a look at those and see whether or not they are. I call it the functional equivalent test like whether or not they passed the functional equivalent test, whether or not they don't do what the FTC is trying to ban.

You know what I mean? And if you have to make changes to them to even draft a more narrowly than do, so might as well do so now before these regulations go into effect. Yep. The next one is an audit. Do an audit of your confidential information and trade secrets. And this is okay. So, you know, those are not necessarily subject to the FTC ban.

And what I mean by confidentiality agreement is, look, when you leave here, don't disclose our confidential information. And this is really important for government contractors, especially those that are involved in the proposal, the recap process. You know, I've seen it many times where somebody leaves while that solicitation is pending, and then they go to a competitor who's also bidding on that prime contract and you're just like, oh my gosh, how am I going to, you know, so really try to beef up what you consider your confidential information and if you need them to sign new agreements that are I really espouse to my clients to make them as specific as possible, sometimes I just see confidentiality agreements that say you agree to keep confidential all our business information and our marketing plans and our blah blah blah. It's like, be specific. Like if you're a government contractor, sit down and say, you know what? What are the 20 things that really are our secret sauce here? And then list those out in the confidentiality agreement. I think judges will appreciate it and find that the agreements are easier to enforce.

Joe Young: Yeah.

Declan Leonard: Yep. Educate employees. You know, so often we have them sign these things, restrictive covenants, confidentiality agreements. Here, sign this, you know, Oh, here we updated this sign it would, you know, it's going to be it's going to be important to educate them on exactly what it is that they can and cannot do. And I don't think you're treating them poorly by doing so.

I think many most of them will probably appreciate it and say, oh, okay, you know, I see online that, you know, I can't do anything. But now you're basically just telling me that, like, I can keep my skill set that I gained here. I just can't take my confidential, you know, the company's confidential information. I think, sadly, there's probably going to have to be closer monitoring of what employees are doing.

That's the problem. I mean, when you when you have when you do away with some of these legal protections, such as the FTC being is looking to do, you probably create. I don't want to be too, um, what's the word I'm thinking of? Like, I don't want to be I don't want to be too negative, I guess. But like, you know, that, that, that comfort level goes away and almost creates a little bit more avenue or atmosphere of distrust.

So I think employers are going to have to monitor a little bit more closely, especially those that are involved in the proposal writing. You know, that's the the secret sauce for government contractors and how you get the.

Joe Young: Word what you're saying over and over, which is key for everybody, is the more specifics, the better. Yeah. To enforce, you know what you can do with this broad language that was used before that tried to swoop in everything. Yes. It's going to be frowned upon and is not going to be helpful in enforcement. Protect the things you really that are important to protect.

Yeah. Is it trying to protect everything?

Declan Leonard: Exactly. In some ways, I think it'll be a weird sort of blessing in disguise that the companies will be able to take a look at their internal business operations a little more closely. You know, I think before we've got a question coming in, before they were really thinking of, you know, being very broad based, like you just said. So I think it'll be I think it'll give some internal look into the company.

Joe Young: All right. As Declan said, we do have a question coming in in our remaining minutes here. So let's pose this. So it's being typed up.

Declan Leonard: So I think it's I think the crux of it is what is it, HR Directors? Are they going to be considered.

Joe Young: By director of finance?

Declan Leonard: Oh, yeah. Yeah.

Joe Young: They're not considered senior leadership by governments, but they have policymaking power.

Declan Leonard: Yeah. So, you know, this is a great question because once again, it highlights the fact that you know, the devil is going to be in the details. It's not going to be whether or not a particular title is. It's just a director of finance. Well, okay. Is there a chief financial officer at the company or is that director of finance really the one that's making financial policy at the company?

So it is a case by case basis, but these are great questions. I mean, you're not going to be able to look at a title and say, oh, that's you know, that is automatically going to be considered senior leadership. I would also say that those two positions, HR director and director of finance, they're not the ones I think that are the most people are most like companies are most concerned about when it comes to these restrictive covenants, because they're very internal facing.

You know, most of them are not really dealing directly with clients. Like you said, it's all.

Joe Young: It's business development team. And yeah, people delivering on the front lines, you know, with the client, with the agency.

Declan Leonard: Yes. Yeah, yeah. So let's see. We are about to wrap up, ma'am. This went by quickly, you know, quickly.

So, I do have one more thing I want to say. So,  some companies use, in addition to restrictive covenants and employment agreements and stuff, they have they have conflict of interest code of ethics policies and things of that. Those are all governing when an employee is still working there, you know, you don't have a conflict of interest.

Don't be serving another company out there. You know, I think those are going to get renewed attention because I think those are going to be an avenue in which you can really try to curtail employee free activity that is, you know, designed to compete against the company. So those types of things, again, it's kind of the reminder as you leave this discussion, the ban does not impact what a company does when an employee is still on their watch.

Joe Young: Well, great content. And I tell you, as we had a session recently here on some other topics for our HR Professionals out there in the government space. It's a difficult job you have. Yeah, it's very, very challenging. I just it's like i said that the landscape is always, always moving. We hope you find value in this to to bring to your practice and your company to support the challenging job that you have every day.

Again, thank you for joining us on behalf of Declan, our team here at SB SI Media Companies. Thank you so much for joining us. Our next episode will be in July. We will be moving off our normal third Thursday day to the fourth Thursday. So we will be July 25th. That episode we will be diving into the topic of conducting an HR audit. Oh, very good. So good practical session. There was probably some great tips and takeaways for our audience. So until then, enjoy your summer, stay cool, and we look forward to seeing you next month. Take care.

Declan Leonard: Thanks so much.