CURRENT MONTH (April 2024)
Antitrust Law
Urgent: FTC Final Rule Outlaws Nearly All Noncompete Agreements
On April 23, the Federal Trade Commission, by a 3–2 vote along partisan lines, issued a 570-page final rule banning most noncompete clauses in employment contracts as an “unfair method of competition.” The FTC based its authority to promulgate the rule on Sections 5 and 6(g) of the Federal Trade Commission Act of 1914, as amended (the “FTC Act”); Section 5 prohibits “unfair methods of competition,” and Section 6(g) authorizes the FTC to “make rules and regulations for the purpose of carrying out the provisions of” the FTC Act. The rule will become effective (the “Effective Date”) 120 days after publication in the Federal Register, which is anticipated soon—perhaps as early as the first week in May.
The rule threatens to be a seismic event in employment law, antitrust law, and intellectual property law (including protection of trade secrets). Particularly striking is that never before in the nearly 110-year history of the FTC has it asserted jurisdiction over noncompetes or sought in any manner to regulate a company’s relationships with its employees. Challenges to the validity of the rule have already been filed.
If the rule survives, it will interdict most future noncompetes and bar enforcement of preexisting noncompetes by employers (individuals, partnerships, associations, and other juridical persons—including corporations, LLCs, and divisions) across a broad swath of commercial and professional enterprises subject to FTC jurisdiction. In general, the business entities falling outside that jurisdiction include air carriers; common carriers; various meatpacking, livestock, and poultry dealers and related entities; certain tax-exempt nonprofit entities; depository institutions; and credit unions. With depository institutions, however, the FTC has in the past asserted jurisdiction over holding companies and nonbank affiliates.
The rule defines a noncompete as a “term or condition of employment”—whether written or oral and whether contractual or simply a workplace policy—“that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (i) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (ii) operating a business in the United States after the conclusion of the employment that includes the term or condition.” For the majority of workers, the rule asserts that it is an unfair method of competition to enter into or attempt to enter into a noncompete, to enforce or attempt to enforce one, or to represent that the worker is subject to one. The term “worker” is defined extremely broadly to go well beyond the traditional employer-employee context, and it includes persons, whether paid or unpaid, regardless of their employment status under state law, to wit: “an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”
A limited exception has been carved out for the enforceability of preexisting (i.e., before the Effective Date) noncompetes with “senior executives.” This term is defined as a person in a “policy-making position” who earned total compensation of at least $151,164 in the preceding year. “Policy-making positions” include a president or chief executive officer and any other person who has “policy-making authority.” The latter means final authority to make (but not merely advise on or exert influence on) policy decisions that control significant aspects of a business entity. An officer of a subsidiary or affiliate of a business entity that is part of a common enterprise will qualify if deemed to have a policy-making position for the common enterprise but will not qualify if the policy-making authority is limited to the subsidiary or affiliate.
An important exemption exists for a noncompete entered into “by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.” Under the proposed rule, this exemption would have been inapplicable when the person restricted by the noncompete had a less than 25 percent ownership interest in the business entity or assets being sold. That qualification was eliminated in the final rule.
The rule may also extend to other types of agreements, clauses, and policies—what the FTC refers to as “de facto” or “functional” noncompetes. These could include certain confidentiality agreements, nondisclosure agreements, nonsolicitation agreements, “forfeiture for competition” provisions, and training repayment obligations.
On or before the Effective Date, a person who entered into a noncompete, as to which it is an unfair method of competition under the rule to enforce or attempt to enforce, with a current or former worker (other than a “senior executive”) must provide a clear and conspicuous written notice that the noncompete will not be, and cannot legally be, enforced. Such notice may be via hand delivery, mail, email, or text message. The rule provides model language that will satisfy this notice requirement.
Given the short fuse between now and the Effective Date, readers will want to consult with affected clients about inventorying existing agreements and workplace policies that might trigger the notice requirement. That urgency might possibly be ameliorated should a preliminary injunction issue in one of the cases challenging the rule, but having such an inventory ready in case the FTC should ultimately prevail would probably be prudent.
The rule is vulnerable to Administrative Procedure Act challenges and a variety of other arguments, including federalism issues, retroactivity issues, and arguments that the rule runs afoul of limitations imposed by the Supreme Court under the “major questions doctrine” and the nondelegation doctrine.
Implications of the FTC’s Noncompete Ban for Financial Institutions
By Barbara Sicalides, Troutman, Pepper, Hamilton, Sanders, LLP
The vote of the Federal Trade Commission (“FTC”) to ban employee noncompetition provisions and policies was along party lines, with the two Republican commissioners dissenting based on concerns that the FTC does not have the authority to issue the rule. The first lawsuit challenging the FTC’s ban was filed the same day that the agency announced it.
Banks, savings and loan institutions, and credit unions are generally excluded from FTC jurisdiction. In other contexts, federal banking regulators take the position that the Federal Deposit Insurance Act authorizes them to enforce the FTC Act against banks. Historically, federal banking regulators exercised this authority to apply the FTC Act’s prohibition of “unfair and deceptive acts or practices,” not “unfair methods of competition” (“UMC”). It is unlikely that banking regulators will attempt to apply the FTC’s noncompete ban to banks unless and until the lawsuits challenging the FTC’s authority to promulgate UMC rules are resolved in the FTC’s favor. Given the significant likelihood of a preliminary injunction while these challenges proceed, no quick action is likely required. On the other hand, the FTC expressly declined to exclude bank holding companies, subsidiaries, and affiliates of excluded financial institutions from the rule if those entities otherwise fall within the FTC’s jurisdiction. Thus, while banks and credit unions will likely not be subject to the rule for some time and may be excluded completely, these affiliates are subject to the rule.
Noncompetes in place before the rule’s effective date (120 days after publication in the federal register) are unenforceable and banned unless the employee is a senior executive. In the case of senior executives, noncompete clauses in existence at the time the ban becomes effective remain enforceable. However, if that same senior executive enters into a new agreement after the rule’s effective date, the employer should assume that the new agreement may not include a noncompete.
The FTC rule established a two-prong test to determine which employees are senior executives: (1) annual compensation of at least $151,164; and (2) a policy-making position. The compensation portion of the test is based on the annualized compensation for the preceding year and excludes health insurance and similar payments. The term “policy-making position” means president, chief executive officer or the equivalent, or any other person who has “policy-making authority” for the business like that of an officer. “Policy-making authority” means final authority to make policy decisions that control significant aspects of a business entity or common enterprise and excludes authority limited to exerting influence over policy decisions or having final authority to make policy decisions for only a subsidiary of a common enterprise.
The FTC stated that nonsolicitation provisions “are generally not non-compete clauses under the final rule because, while they restrict who a worker may contact after they leave their job, they do not by their terms or necessarily in their effect prevent a worker from seeking or accepting other work or starting a business.” However, whether a nonsolicit has the practical effect of a noncompete is a “fact-specific inquiry” and likely to be uncommon.
Regardless of the pending and future legal challenges to the FTC’s noncompete rule, confidentiality and customer and employee nonsolicitation agreements continue to be important tools for employers to protect their valuable information as well as customer and employee relationships.
Insights from FTC and DOJ’s Spring Enforcers Summit 2024
By Barbara Sicalides and Millie Krnjaja, Troutman, Pepper, Hamilton, Sanders, LLP
On April 8, 2024, the Federal Trade Commission (“FTC”) and the Justice Department’s Antitrust Division (“DOJ”) hosted a summit for international and state competition enforcement officials. The enforcers summit included publicly streamed plenary and closed-door sessions. The public sessions were remarks from agency leadership, and two panel discussions focused largely on cooperation on competition issues.
FTC Commissioner Rebecca Slaughter began by addressing certain critics’ allegations that U.S. officials have colluded with European officials to punish U.S. companies, noting that the initial push for cooperation came mainly from the U.S. legal and business community. She added that it is in the interest of nation-states and their commercial markets to have “consistency and harmony” across legal regimes.
The summit featured a conversation between FTC Chair Lina M. Khan and Assistant Attorney General (“AAG”) Jonathan Kanter highlighting the 2023 Merger Guidelines, particularly platform economics, labor monopsony, serial acquisitions, and zero-price markets. They discussed the FTC’s focus on healthcare, private equity’s role in healthcare markets, challenging pharmaceutical patent abuse, and their increased collaboration with state and international enforcers.
The first panel—Kanter, Secretary of Agriculture Thomas Vilsack, U.S. Trade Representative Katherine Tai, Consumer Financial Protection Bureau Director Rohit Chopra, Securities and Exchange Commission Chair Gary Gensler, and Surface Transportation Board Chair Martin Oberman—discussed the Biden administration’s whole of government approach to competition policy. They described interagency coordination through information sharing, collaboration, reciprocal trainings, and regular meetings of President Biden’s Competition Council.
Chopra emphasized the value of regulatory rules as a tool to accelerate competition. He pointed to the CFPB’s work eliminating junk fees and on open banking standards. Chopra also advocated for stopping the “creep of consolidation” tied to bank mergers and in digital markets.
Tai stated that U.S. Trade works with a broad range of stakeholders, including startups and smaller companies. Tai also remarked that there are similarities in the concentration levels domestically and internationally and that both U.S. and international enforcers are concerned about preserving security and liberty. She added that the supply chain challenges that we have today, marked by concentration and consolidation on the supply side, inspire them to carry over the principles from the domestic competition fight into the international context.
Vilsack pointed to the Agriculture and Justice departments’ Farmer Fairness website, which allows farmers to submit complaints about potential violations of the Packers and Stockyards Act. DOJ brought its first Packers and Stockyards Act case because of these efforts.
Gensler identified concentration in cloud services and artificial intelligence as frequent areas of discussion between the agencies. He emphasized the importance of collaboration on important topics such as changes in technology.
The second panel covered competition in the food supply chain. It included Senior Enforcement Counsel at the Office of Minnesota Attorney General Zach Biesanz, Competition Bureau of Canada Commissioner Matthew Boswell, Senior Advisor for Fair and Competitive Markets for U.S. Department of Agriculture Andrew Green, Deputy Assistant Attorney General Michael Kades, Competition Commission of India Chairperson Ravneet Kaur, Chief of Antitrust Division of Maryland Office of the Attorney General Schonette Walker, and FTC Commissioner Alvaro Bedoya.
Bedoya noted that the FTC and DOJ have investigated pesticide manufacturers, food distribution, food processing, restaurants, and retailers. The panel discussed consolidation’s negative impact on food prices and labor conditions and highlighted the importance of a multifaceted approach to addressing the food supply chain, including robust antitrust enforcement, advocacy for regulatory reforms, and cooperation with international partners.
Banking Law
FinCEN Seeks Information in Efforts to Modernize CIP Rule
By Rachael Aspery and Aaron Kouhoupt, McGlinchey Stafford, PLLC
On March 29, 2024, the Financial Crimes and Enforcement Network (“FinCEN”) in collaboration with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Board of Governors of the Federal Reserve System (collectively, the “Agencies”), published a Notice for Information and Request for Comment (“RFI”). Specifically, the RFI seeks information from interested parties regarding the Customer Identification Program (“CIP”) Rule requirement for banks to collect, among other things, a taxpayer identification number (“TIN”) or Social Security number (“SSN”) for U.S. persons prior to opening an account (“TIN Collection Requirement”). Currently, the CIP Rule requires that for U.S. individuals, banks must collect a full SSN from the customer prior to opening an account.
Recognizing the significant changes in technology and financial services that have occurred since the CIP Rule’s promulgation, FinCEN is exploring ways to modernize the U.S. anti-money laundering/counterterrorism financing regime. To do so, FinCEN seeks information in order to assess and understand risk, benefits, and safeguards that could be established if banks were permitted to collect partial SSN information directly from the customer for U.S. individuals, and then use reputable third-party sources to obtain the full SSN prior to account opening. Additionally, FinCEN intends to use the information obtained to evaluate and enhance its understanding of current industry practices and perspectives related to the CIP Rule’s TIN collection requirement. Further, it will use that information to assess potential risks and benefits associated with the change to the TIN Collection Requirement.
Comments are welcome and must be received on or before May 28, 2024.
Consumer Finance
New Legislation Could Rein in the IL Biometric Information Privacy Act
By Jim Morrissey, Pilgrim Christakis LLP
The Illinois Biometric Information Privacy Act (“BIPA”) prohibits obtaining a person’s “biometric identifiers”—such as a fingerprint, voiceprint, or face scan—unless the person first executes a written release. Although BIPA exempts “financial institutions” that are subject to the Gramm-Leach-Bliley Act, courts have held that this does not extend to a financial institution’s service providers, and the exemption is an affirmative defense that typically cannot be resolved on a motion to dismiss. BIPA also provides that for “each violation,” a plaintiff can recover statutory damages of $1,000 for negligent violations or $5,000 for reckless violations plus attorneys’ fees and costs. These damages accrue with every scan or transmission of a person’s information and can result in eye-watering liability. For example, Facebook settled a BIPA class action for $650 million, and the restaurant chain White Castle estimated that its exposure in a pending lawsuit exceeds $17 billion.
In light of several “excessive” BIPA settlements and judgments, the Illinois Supreme Court “respectfully suggest[ed]” that the legislature revise the statute’s language to “make clear its intent regarding the assessment of damages.” On April 11, the Illinois Senate did just that when it passed Senate Bill 2979. This bill would amend BIPA to clarify that there can only be “one recovery” of statutory damages if the same information is obtained from the same person multiple times. However, the bill does not expressly provide that this amendment would be retroactive, so companies could still face ruinous exposure for years to come. Senate Bill 2979 now heads to the Illinois House of Representatives for further consideration and possible revisions.
Intellectual Property Law
By Emily Poler, Poler Legal, LLC
In March 2018, iconic fashion house Chanel sued What Goes Around Comes Around (“WGACA”), a reseller of luxury goods à la Poshmark and The RealReal (which Chanel has also sued). These retailers are essentially online thrift stores (WGACA is also brick-and-mortar), solely trafficking in high-end designer goods and apparel instead of ratty Wranglers and stained JCPenney tops.
WGACA, Poshmark, The RealReal, and others of their ilk tout how recycling luxury items is good for the environment (not to mention their bottom lines); Chanel, however, finds their practices less than noble. In its lawsuit, Chanel accused WGACA of trademark infringement and false advertising by selling unauthorized Chanel products and using the Chanel trademark too prominently in its marketing.
The case—Chanel, Inc. v. WGACA, LLC—went to trial in January of this year. On February 6, the jury returned a verdict for Chanel and awarded it $4 million in statutory damages for willful trademark infringement.
By way of background, under the first sale doctrine, once a genuine product is sold, the person who purchases it is free to resell it without risk of liability to the brand owner. This includes using the brand name or trademarks associated with a pre-owned item in sales materials. In other words, it’s totally fine to sell a genuine Birkin bag on eBay using relevant trademarks or the brand name so long as the trademarks or brand name are only used to the extent necessary to describe the item and there’s no suggestion that Hermès is involved in the resale.
While there was no question that many (although not all) of the goods WGACA offered were genuine, WGACA ran into trouble with Chanel because there was significant evidence that WGACA used Chanel’s marks too prominently and too often. For example, on social media, WGACA used the hashtag #WGACACHANEL. Elsewhere, it featured a Chanel mark more prominently than its own brand mark. Moreover, WGACA’s website and other communications included the statement “WGACA CHANEL – 100% Authenticity Guaranteed.” The jury appears to have viewed this as WGACA suggesting it was endorsed by or had a relationship with Chanel, and on this basis, ruled for Chanel.
WGACA ran into problems because it sold items that, according to Chanel, were never approved for retail, including handbags with voided or pirated serial numbers as well as decorative items Chanel lent to retailers. On this issue, the District Court granted summary judgment in favor of Chanel, finding these items were never authorized for sale by anyone, much less WGACA.
But the case isn’t closed yet. It remains before the District Court on Chanel’s request that WGACA be prevented from, among other things, using Chanel’s marks to promote WGACA’s business; including the word Chanel in any hashtags; and using in its advertising any Chanel-branded items other than items actually for sale by WGACA.
Labor & Employment Law
US Supreme Court Holds Harmful Job Transfers May Alter Terms and Conditions of Employment in Title VII Discrimination Cases
By Taylor Graham, Boulette Golden & Marin L.L.P.
In Muldrow v. City of St. Louis, No. 22-193, 601 U.S. — (2024), a City of St. Louis police officer sued her department alleging sex discrimination under Title VII with respect to the “terms and conditions of her employment.” Specifically, the officer maintained her employer transferred her due to her sex from a more prestigious unit—one deputized by the Federal Bureau of Investigation (“FBI”) and carrying advantages including a more consistent weekday work schedule, take-home car, and high-level networking opportunities—to a less prestigious administrative role without those advantageous terms and conditions of employment. The District Court granted the City’s motion for summary judgment, relying on Eighth Circuit precedent holding that the transfer must “significantly” alter the terms and conditions of employment and noting the officer’s pay and rank remained the same. The Eighth Circuit Court of Appeals affirmed the District Court’s decision, applying the significant harm standard and emphasizing that the officer’s pay, rank, and duties remained essentially the same.
The Supreme Court held 9–0 that the “significant” heightened threshold of harm did not apply to Title VII’s antidiscrimination provision. In other words, the text of Title VII’s antidiscrimination provision does not include any language to support a heightened standard of “significant harm,” and instead only requires “some harm,” motivated by discrimination against a protected characteristic, that affected a term or condition of employment. Here both the officer and the City agreed that the transfer affected a term or condition of employment.
The Court rejected the City’s arguments that its position was supported by Title VII’s text, precedent, and policy. The Court found no basis to read “significant” into Title VII’s antidiscrimination provisions, no Title VII discrimination precedent that supported applying the antiretaliation provision’s heightened standard to discrimination claims, and no policy considerations other than those evident from Title VII’s plain language that supported importing an antiretaliation standard into discrimination claims. The Court tempered its ruling, first by noting some evidence of discriminatory animus based on a protected characteristic must exist from the job transfer to sustain a Title VII discrimination claim, and second by recognizing that in this case, the Eighth Circuit still had issues of argument forfeiture and proof to consider on remand.
Though this was a 9–0 decision, three Justices filed concurrences questioning the necessity of the Court’s holding. Justices Thomas and Alito questioned what, if any, part of the preexisting standard was disturbed by the shift away from “significant harm” to “some harm,” and Justice Kavanaugh disagreed with the new “some harm” standard while predicting the new standard would do little to change the outcomes in Title VII discriminatory job transfer cases.
Urgent: FTC Final Rule Outlaws Nearly All Noncompete Agreements
Refer to the Antitrust Law section of this month-in-brief to read the full entry on this final rule.
Sports Law
Why Am I Seeing “Prop Bets” Everywhere?
By Megan Carrasco, Snell & Wilmer LLP
Following the March Madness tournament, headline after headline clashed over the propriety of prop betting on college athletes.
For those unaware of the gambling term, “prop bets” are generally regarded as betting on aspects of a game unrelated to the game’s ultimate outcome. There are endless combinations. For example, in mixed martial arts, a prop bet could be how many takedowns a given fighter secures during a fight. In baseball, a prop bet could be whether a certain team hits a home run. But in college sports, a new debate rages on whether fans should be able to bet on the individual performance of college athletes.
Gambling is regulated individually by each state. This explains why ads for sports betting include a disclaimer for all the states addressing whether a state allows or disallows sports betting. A state’s geographic boundaries mark the reach of their betting laws and regulations.
This month, Louisiana announced that starting in August, it will ban prop betting on college athletes because doing so will provide college athletes more safety and will protect the integrity of sports. This is driven in part by the fact that college athletes are being harassed over their performance. When the National Collegiate Athletic Association (NCAA) shared similar concerns, it sparked a state-by-state debate. All states are not following Louisiana’s approach. For example, although Montana acknowledged that other states have issues, it explained that neither of its two state universities have had college athletes harassed as has occurred at other schools.
Prop bets for professional athletes generally do not face the same controversies. As a result, to date, when it comes to professional athletes, states have made the determination that since professional athletes are well-compensated adults, any harassment they do face from unhappy bettors is part of the landscape.
Similarly, institutions like the NBA have held professional players accountable when they alter their performance to accommodate bettors. Jontay Porter’s lifetime ban from the NBA made headlines this month, when an internal investigation found that Porter evidenced a “willingness to change his gameplay to assist with certain bets.” In Porter’s case, he “took himself out of [a] game after less than three minutes,” leading a bettor to win a $1.1 million payout on an $80,000 bet, which media reports indicate may have been subsequently frozen by the betting platform. The NBA’s ban does not even begin to cover the array of potential criminal consequences.
But the patchwork of federalism prevails. Ohio, Maryland, and Vermont moved swiftly to ban prop bets for college sports. On deck are states like Kentucky, which the NCAA is pushing to reexamine its policies. Other states, like New Jersey, ban prop betting for in-state college athletes, but permit it for out-of-state college athletes—presenting a hybrid approach to the issue.
In sum, the issue is far from settled. Professional prop betting seems here to stay, but on the collegiate level, everyone is watching the state-by-state developments.
