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Welcome to AccelPro Employment Law, where we provide expert interviews and coaching to accelerate your professional development.
Today we talk about the future of noncompete agreements. The Federal Trade Commission (FTC) voted to ban them in April 2024, but are they really dead? That’s the question everyone is asking, and we put it to Stewart Schwab, a former Cornell Law School Dean who, in his 40 years as a professor, has taught and spoken on this topic frequently.
Schwab believes the Supreme Court will ultimately rule that the FTC overstepped its bounds in banning noncompetes. In the meantime, he advises companies to rethink how they use noncompete agreements.
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Interview References:
Stewart Schwab’s Cornell Law School profile.
2:03 | Non-Compete Clause Rule, BILLING CODE: 6750-01-P, 16 CFR Part 910, RIN 3084-AB74. Federal Trade Commission.
12:21 | Bostock v. Clayton County, Georgia, No. 17–1618. Supreme Court of the United States. (2020)
12:27 | Title VII of the Civil Rights Act of 1964, § 7, 42 U.S.C. § 2000e et seq. US Equal Employment Opportunity Commission. (1964)
13:18 | The Equal Pay Act of 1963. (Pub. L. 88-38) (EPA), as amended appears in volume 29 of the United States Code, at section 206(d). (1963).
15:32 | Uniform Restrictive Employment Agreement Act. (2021) Uniform Law Commission.
17:09 | Federal Trade Commission Act 15 U.S.C. §§ 41-58, as amended.
19.05 | Wofford, Chris (Host).(2024, May 21). Are Noncompetes Really Dead? [Audio podcast episode]. Cornell Keynotes.
Supplemental Materials:
Prescott, James. Understanding Noncompetition Agreements: The 2014 Noncompete Survey Project. (2016). Michigan Law Review, No. 2: 369-464.
TRANSCRIPT
Matt Crossman, Host: You’ve taught at Cornell since 1983. You were Dean of the law school from 2004 to 2014, and now you’re the Jonathan and Ruby Zhu Professor of Law at Cornell Law School. What courses do you typically teach in a term?
Stewart Schwab: Recently, I have taught Torts as a first-year course and teach Employment Law, as well as a specialized seminar in noncompetes.
MC: Well, that’s convenient, isn’t it? The FTC voted in April to ban noncompetes. What exactly does the ban cover?
SS: There’s two parts to the answer. First, the Federal Trade Commission doesn’t have authority or jurisdiction over all businesses. It covers most businesses, but not banks or banking institutions, and not non-profits like hospitals or other health-care institutions. Those are two important limitations, but otherwise it broadly covers the United States.
As far as the substance, it bans virtually all noncompete agreements. That is an agreement that says, after I leave this employment, I won’t work for a competitor for a certain amount of time. Those are banned, with the one exception, if it’s in the context of selling a business, they will allow that noncompete.
MC: This news was all over the legal news world when it first came out. Now that we’ve had a bit of time to digest it, does anything jump out at you that we either talked about too much or didn’t talk about enough?
SS: I think we’re talking about a lot, and I hope we get into it on whether this exceeds the jurisdiction of the FTC and how long it’ll last. I think I’d flag that there actually are a lot of other restrictive agreements that this rule doesn’t cover.
Most importantly, it doesn’t cover non-solicitation agreements, where a worker agrees not to contact former customers of a company. It doesn’t cover non-recruit agreements, where you won’t recruit employees from your former employer. And it doesn’t cover training reimbursement agreements, where you agree in return for training to pay your former employer if you leave early.
The FTC rule also bans any agreement that functions as a noncompete. If a non-solicitation agreement in effect means you can’t work at all, the FTC will ban that. That’s been criticized as being a fuzzy rule that will undoubtedly lead to litigation.
MC: One of the things that I thought maybe didn’t get talked about enough that I discovered in listening to interviews with you and my own research is how many people have noncompetes. It could be as high as 20 percent. If it is that many, as big of a deal as we made of it in April, we might’ve undersold it. Am I right there?
SS: That is the number that’s the most accepted number from the social science world, that roughly 20 percent of the workforce operates under a noncompete. Even more dramatically, about 40 percent of the workforce sometime in their working career will have a noncompete agreement. This data comes from 2014, which was the first time there was a comprehensive survey that showed this.
There’s been other surveys and other evidence since that shows how widespread this is. I think this took a lot of people by surprise. It certainly took me by surprise. I studied and taught about noncompetes for a long time, but I thought they were really reserved for high-level employees or specialized employees. 20 percent of the workforce is starting to be a lot of people.
MC: Now after all that talk in April, I feel like the next big development on this subject got buried because a ruling came out the day before the 4th of July when nobody was paying any attention. What happened there?
SS: A district court in Texas enjoined the FTC rule, meaning prohibited it from going into effect on September 4th. It was only a preliminary ruling, and that court in Texas will have further briefing and says it will do its final ruling by the end of August. But courts rarely change a preliminary ruling in the final ruling.
It’s now looking very likely that that court will issue an injunction. There’s also other litigation going on, particularly in Pennsylvania where the same basic issue, did the FTC overstep its authority, is being litigated.
MC: So for a while there, the question was, are noncompetes dead? Now the question is, have noncompetes come back to life? So what’s happening?
SS: Who knows where it will end. My prediction, and, of course, it’s dangerous to predict when courts in a week or two can be ruling otherwise, but my prediction is that these injunctions will hold while the process plays out. That could take up to a couple years, possibly even reaching the U.S. Supreme Court on whether the FTC went too far.
Time will tell, and in the meantime, we are in limbo. I think the wiser course of action will be to keep the old status quo while the courts decide whether this new total ban is lawful or not.
MC: We’ll dig into that more in a second, but I want to play in this in-between space we are in now. If I’m an employment attorney, and the company I represent typically uses noncompete agreements, should I tell them to stop?
SS: This is the big question. I think it’s an important one and a tricky one. I would urge the company to rethink what you’re doing. Do the pros as you currently see them outweigh the cons, particularly for lower-level workers. I think there should be a lot of skepticism of continuing to use these.
On the other hand, and there may be a rush on this, for senior executives, their current noncompete agreements will remain enforceable after September 4th. For your current senior executives, which has a definition of making more than $151,000 and in a policy-making position, those we’ll be grandfathered in. The ones that are done before September 4th will remain valid, but there can be no new ones after that.
That’s another wrinkle of who can continue to use them. I think the basic advice from everyone in this field should be to scrutinize these again, regardless of the ultimate fate of this FTC rule.
MC: This is the fourth interview I’ve done on this topic, and on the one side I hear from people who represent companies that typically have them, that their best advice is to not overdo it, to only use them when you really need them.
But then I also hear that 20 percent of workers have them and as you just said, 40 percent of the people might over the course of their career. Those two facts—those who use them say they should be used sparingly but lots of people have them—don’t seem to align here. Is there some dissonance? Is there some noise in the system?
SS: We didn’t have good data before 2014, so it's hard to know how common they were pre-2000s. But the common understanding, certainly my view, is that they did increase dramatically for lower-level employees.
The famous example, the poster child, is the Jimmy John’s sandwich artists making barely minimum wage that were required to sign noncompetes. I think the general feeling is that it's ridiculous. Jimmy John’s suffered a lot of bad publicity and has rescinded that policy. They aren’t alone. There’s a number of other companies with low-level workers who have noncompetes, and to an extent, that’s where this 20 percent is coming from. There should be a cutback in those.
Traditionally, high-level executives who know your business strategy and people in your research and development department have had noncompetes. The third big category of workers who have them are salespeople with extensive contact with a customer. So noncompetes protect customer relationships. Not in the way of a Jimmy John’s. Sure, the person making sandwiches has contact with customers, but no one goes to Jimmy John’s over any other fast food place because of who’s making the sandwiches for them.
But in other contexts, I think protecting customer relationships is what was generally regarded as a protected category. Often it was professionals covered by noncompetes—dentists, doctors, but never lawyers by ethical rules, lawyers never were allowed to use noncompete agreements.
Traditionally it was thought that these categories of workers, who don’t add up to 20 percent of the workforce, are the ones that people would nod and say, oh, yes, noncompetes are OK for them. Again, it had to be reasonable, it had to be tailored, it had to be not too long, but those were legitimate in most states. The real bite of the FTC rule is going to be for those classes of workers.
For the other classes of workers, I think the general thought was, a company shouldn’t really be using noncompetes anyway. The negatives outweigh the positives. What you’re really trying to do is just constrain good workers from leaving. You want to keep them and not compete against you. There are other ways to do that.
MC: You’ve been immersed in employment law for more than 40 years. You’ve seen tons of changes. I’m hoping you could put this in context for me. Is there an example of a similar change where there was an in-between time like this and what can we learn from that?
SS: I think there have been periods of uncertainty, if we can label that’s what this is right now, when an agency has come out with a rule and it’s yet to be tested in the courts. While in some ways this is unique, there are analogs.
The Bostock case, for example. The question was, can gay and transgender people be discriminated against or are they protected by Title VII. The first 25 years I taught that, I said, “Title VII absolutely does not cover that.” Then there was a period of uncertainty. It lasted a few years. First the Equal Employment Opportunity Commission changed its ruling, and then a couple of circuit courts also held that gay and transgender people were protected under Title VII. But it was still thought to be a gray area. And then the Supreme Court confirmed that they were protected. And so now everybody understands that. That’s one example.
MC: You also see the doctrine of comparable worth as an analog for this. How so?
SS: I was trying to think of a doctrine that had its day with pushing boundaries and then later was found to not be within the text of the statute. And in the case of comparable worth, the question was while it was clear under the Equal Pay Act as well as Title VII that women had to be paid the same as men for doing the same work, what about when they're doing comparable work but not identical work?
That got a lot of traction, a lot of litigation and academic writing and policymakers were thinking about this. It had a major effect as large businesses and also the government agencies really did a lot of re-evaluating of their pay scales.
Should tree trimmers be paid more than secretaries, one being a mostly male job and the other mostly female? And it really changed the labor market in rather significant ways, even though as time went on, it became fairly clear that this interpretation of comparable worth was going too far and was not within the command of Title VII.
Nevertheless, it had a major effect. I think the analogy here is that people are saying the Federal Trade Commission has gone too far in banning all noncompetes. Nevertheless, the hoopla and the discussion and the advising of clients may have a major effect in cutting back the use of noncompetes, even if ultimately, as a strict legal matter this comes to little.
MC: We talked about the Jimmy John’s case where people who make sandwiches were forced to sign noncompetes. I read in the New York Times about hairdressers. I’ve heard the same thing about local TV reporters.
But then on the other hand, you do have R&D positions and executives where you can see why a company would have a valid reason to protect trade secrets.
Is it possible we’ll end up with something reasonable where a company who wants to protect its trade secrets can, in a reasonable way, but a company cannot be overbearing toward people who make our sandwiches and cut our hair?
SS: The Federal Trade Commission has gone all in, and they are banning all noncompetes. The chance for compromise was during the time between the proposed rule and the final rule. And they made slight changes, but not truly major ones.
There are other statutes and approaches. About a dozen states at least have recently passed their own statutes. The Uniform Law Commission has proposed a model rule regulating not just noncompetes, but all of the restrictive agreements. The basic idea is to ban them for low-wage workers, where the minuses just outweigh the pluses. And I think there’s a rather large consensus on that point.
A secondary problem is defining low wage and high wage. Certainly that’s an important detail. But for higher-wage workers, let’s retain more of what the traditional rule is and regulate them. For example, the Uniform Law Commission proposed statute says restrictive periods can last no more than one year. They also can ban you for a year from soliciting clients with whom you worked personally, but not other clients that the business has a relationship with, but the worker did not have a personal relationship with.
That level of nuance in the regulation gets to the compromise point you make. I think there’s other statutes out there, and I would flag this proposed uniform rule as one that might reach that ground. But the FTC has definitely gone all in and banned all noncompetes.
MC: And you think the Supreme Court will ultimately decide that the FTC overstepped its bounds? Make that case for me.
SS: The basic argument is that the congressional setting up of the statute, the Federal Trade Commission Act, which created the agency and told the agency what it was supposed to do, didn’t go this far.
Now, part of it is technical. There’s Section 5 of the FTC Act. There’s Section 6 of the FTC Act. Rulemaking authority is fairly clear under Section 5, but less clear under Section 6, they’re going under Section 6, that depends on the wording and the history and subsequent amendments by Congress. And so we’ll see, although ultimately that is pretty persuasive. And those are just technical arguments.
In the background now is the major questions doctrine. This is a relatively new pronouncement by the Supreme Court that basically says when agencies do actions that are of national significance, there has to be clear authority from Congress. So that’s argument two. It meshes with argument one, just technically if you look at the statute, the FTC can’t do this. Argument two is under the major questions doctrine, if it’s not clear, they can’t do this.
The third doctrine, which I think would be more dramatic, is the constitutional nondelegation doctrine. Congress has to be making the major decisions. It can’t delegate major decisions to the agency. Not since the 1930s has this been fully invoked. But there’s rumblings that Congress has to decide whether noncompetes should be banned. It can’t delegate that to an agency.
MC: I heard an interview you gave on this topic where you made an interesting point that most employment law disagreements are perceived as right versus left. But this one isn’t. Explain why you think that.
SS: It’s one reason I think this is a particularly fascinating topic within employment law. Employers want to keep their talented good workers who have trade secrets, or have customer relationships, and they want to put in a noncompete agreement. But employers also want to hire experienced workers with relevant experience, and so they do not want to have to overcome someone else’s noncompete.
From the employer’s perspective they will want a reasonable noncompete rule because that will protect their workers. Certainly from any individual employer, the first best solution is, you, Matt, cannot do any noncompetes on your workers, but I can on mine, so I can steal all your workers and you can’t steal mine. It doesn’t take more than a moment’s reflection that this is the whole source of the problem and why some regulation is needed here.
But if you say a reasonable noncompete should be allowed, I think employers themselves nod. When pushed, they will say unreasonable noncompetes should not be allowed. In that sense, it’s not just a left vs. right, management vs. employee issue like so many employment issues are.
MC: You teach noncompetes often. How do you teach something that’s so up in the air like this?
SS: I’ll probably get one more year where I can more or less teach the similar doctrine, although I’ll probably get a little bit more into the question of is an overall ban on balance a good thing.
The other thing I will emphasize is there are other restrictive agreements out there other than noncompetes; the non-solicits and training reimbursement agreements being the most prominent other ones. And those have distinct issues but are certainly in the same family. And I’ll probably emphasize that a little bit more. Otherwise it becomes a legal history topic for me.
MC: Now I want to pivot and ask you professional development questions. In addition to teaching at Cornell and being the Dean at Cornell, you’ve taught all over the country and the world, including New Zealand, China, Australia and Israel. What, if anything, did you learn about their approach to employment law that we should borrow?
SS: I really enjoyed my time in those various places. As I try to understand the other system, it actually helps me understand the U. S. system a little bit better.
I think the whole concept of employment at-will is distinctively American. In subtle ways, as well as not subtle ways, it really affects a lot of thinking here. The American scene is quite different.
Often when I get to talk to employers or HR professionals, they’ll complain, “Oh, it’s impossible to fire a worker here in America.”
And I’ll say, “OK, we can talk about this rule and that rule and the third rule. But go over to Europe and most of the rest of the world. And it really is significantly different.”
MC: One of our philosophies here at the AccelPro employment law community is that peers talking to peers can be a really valuable way to develop professionally and gain important insights.
Throughout the course of your career, both as a law professor and as a Dean and as a law professor again, how you've relied on peers both inside and outside of Cornell to deal with tough situations and manage career decisions.
SS: I think it's absolutely critical in a professional career to rely, interact, learn from others, and bounce ideas back and forth. I’ve done it really at all stages of my career.
Certainly, when I first became an assistant professor I made friends with many of my colleagues, and they were very helpful and generally encouraged me. But I think it’s also important to embrace criticism and not get too defensive when they suggest ways to do better, either in the context of a particular article or how I’m teaching classes, and use that as learning experiences.
When I became Dean, I very much relied on some of my friends who had also become Deans and asking them how would you handle tough situations? That was just invaluable.
More broadly colleagues, not just at Cornell, but other places too, have been very helpful to me over the years and decades. It’s one reason why I think going to conferences is so valuable. It’s not what you learn at the actual programs. People often say, “oh, this is dull”. Some of them aren’t dull. But I would come back from the event having made new contacts, just being inspired by some people and refreshed and enthused that there's more here going on than just our individual day-to-day operations.
And then, going back to those colleagues, new or old, and asking them questions and seeing them again in the next year or two as our paths cross, I've always just found that inspiring that we’re part of a larger process here of just trying to figure out how the legal world works.
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This AccelPro audio transcript has been edited and organized for clarity. This interview was recorded on June 21, 2024.
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