Brooke Chase

Citing its interest in promoting competition and opening up “better employment opportunities” for workers, the Biden Administration is moving forward with a proposal to prohibit a feature of many U.S. employment relationships valued by employers and of significant importance in M&A transactions; non-competition agreements.  Rather than looking to Congress to enact legislation to achieve this goal, the Administration is relying on the authority of the U.S. Federal Trade Commission (FTC) to enforce and engage in rulemaking under existing antitrust laws.

In July 2021, President Biden signed an Executive Order directed at promoting competition in which he encouraged the Chair of the FTC “to exercise the FTC’s statutory rulemaking authority, under the Federal Trade Commission Act, to curtail the use of non-compete clauses and other clauses or agreement that may unfairly limit worker mobility.”  The FTC was listening.  In November 2022, the FTC releases a policy statement to reinvigorate Section 5 of the Federal Trade Commission Act (FTC Act), which bans unfair methods of competition.  Then, on January 4, 2023, the FTC announced that it found that three firms had engaged in unfair competition by using illegal non-compete agreements with their workers.

The very next day, on January 5, 2023, the FTC released a Notice of Proposed Rulemaking (NPRM) proposing to ban all non-competes entered into between employers and workers.  If ultimately adopted, the rule will apply both prospectively and retroactively, including with respect to the estimated 30 million Americans who are currently subject to non-compete agreements.  This proposed rule has implications for companies across the entire country – even companies operating solely in jurisdictions like California that already ban non-competes – and for the merger and acquisition process.  The proposed rule contains only a single, narrow exception for non-competes in the sale of business context: a person selling a business entity, or otherwise disposing of all of their ownership interest in the business entity, may be bound by a non-compete only if they own 25% or more of such business.  This narrow exception is far more restrictive than even California’s sale of business exception.  The proposed rule also applies beyond the employment context, covering workers who fall outside the traditional definition of “employees.”

The FTC voted 3-1 to publish the NPRM, with Commissioner Christine S. Wilson voting no and issuing a dissenting statement attacking the rule as a departure from “hundreds of years of legal precedent” and arguing that the rule “will trigger numerous and likely successful legal challenges regarding the Commission’s authority.”:  The FTC seeks public comment on several topics, including whether the rule should impose a categorical ban on non-compete clauses or a rebuttable presumption of unlawfulness, and whether certain categories of workers should be exempted from or treated differently under the rule, such as senior executives or higher wage workers.  Comments are due within 60 days of the rule’s publication in the Federal Register.

The rule proposes an effective date of 60 days, and a compliance date of 180 days, after publication of a final rule in the Federal Register.

The Substance of the Proposed Rule
According to the FTC, researchers have found that use of non-competes has negatively affected competition in labor markets, resulting in reduced wages for all workers across the labor force, both those with and those without non-competes.  The FTC estimates that the proposed rule could increase workers’ earnings across industries and job levels by $250 billion to $296 billion per year.  The FTC further asserts that researchers have found that non-competes have negatively affected competition in product and services markets and innovation.The FTC, therefore, pursuant to Sections 5 and 6(g) of the FTC Act, deems employers’ use of non-competes an unlawful “unfair method of competition.”  Specifically, the proposed rule provides that it is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker, to maintain with a worker a non-compete clause, or, under certain circumstances, to represent to a worker that the worker is subject to a non-compete clause.  In addition, the FTC intends for this to be the governing law of the United States.  The proposed rule contains an express preemption provision noting that the “Rule shall supersede any state statute, regulation, order, or interpretation to the extent that such statute, regulation, order, or interpretation is inconsistent with the Rule.”

Significantly, the proposed rule applies to “workers,” broadly defined to include any “natural person who works, whether paid or unpaid, for an employer,” even if not a statutory employee.  The term “worker” includes “without limitation, an employee, individual classified as an independent contractor, extern, intern, volunteer, apprentice or sole proprietor who provides a service to a client or customer.”

The proposed rule focuses only on non-competes governing work restrictions post-employment and only on those between employers and workers and not, for example, on non-competition agreements between businesses.  The Department of Justice, however, already takes the position that business-to-business agreements not to poach each other’s workers may be considered unlawful under the Sherman Act.

The proposed rule prohibits non-competes and their functional equivalents.  The Preamble to the proposed rule states that the definition of non-compete clause “would generally not include other types of restrictive employment covenants – such as non-disclosure agreements (NDAs) and client or customer non-solicitation agreements – because these covenants generally do not prevent a worker from seeking or accepting employment with a person or operating a business after the conclusion for the worker’s employment with the employer.”  The Preamble cautions, however, that “such covenants would be considered non-compete clauses where they are so unusually broad in scope that they function as such.”

In addition to prohibiting employers from entering into non-compete clauses with workers, the proposed rule would require employers to rescind existing non-competes and provide notice to applicable workers that their non-compete clause is no longer in force and effect.  The proposed rule includes model language that satisfies this notice requirement and establishes a safe harbor whereby an employer can satisfy the rule’s requirement to rescind existing non-competes by simply providing relevant workers with a notice in compliance with the notice requirement.

As noted above, the proposed rule includes a limited exception for non-competes between the seller and buyer of a business where the party restricted by the non-compete is an owner, member, or partner holding at least a 25% ownership interest in a business entity.  This exception is likely to send shockwaves through the private equity world and will have a profound impact on mergers and acquisitions if the rule takes effect.

The proposed rule unfortunately leaves many questions unanswered.  For example, it is not clear if:

Commenters should request that the final rule address these more nuanced issues.

The Proposed Rule’s Uncertain Future
The substance of this proposed rule is likely to change given the FTC itself is soliciting input on the several key matters, including whether non-competes for senior level or high-wage employees should remain viable.  Moreover, as Commissioner Wilson notes in her Dissenting Statement, the rule is likely to trigger numerous legal challenges.  Indeed, the U.S. Chamber of Commerce almost immediately issued a statement questioning the authority of the FTC to promulgate such a rule: “Today’s actions by the Federal Trade Commission to outright ban non-compete clauses in all employer contracts is blatantly unlawful.  Since the agency’s creation over 100 years ago, Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule.  The chamber is confident that this unlawful action will not stand.”

Commissioner Wilson highlights three likely arguments in response to the proposed rule in her Dissenting Statement: (i) the FTC lacks the authority to engage in “unfair methods of competition” rulemaking under the FTC Act; (ii) under the major questions doctrine, the rule is a major question requiring clear Congressional authorization to impose a regulation banning non-competes and such authorization does not exist; and (iii) under the non-delegation doctrine, Congress cannot delegate its legislative power to the FTC.

These legal challenges could take months, if not years, to reach an ultimate resolution, leaving employers in a difficult position with how to manage non-competes.

Employers Must Ensure Current Compliance with Applicable State Law
Non-competes are not only under attack by the FTC; they are increasingly under attack and disfavored by legislatures across the country.  While waiting for a final answer on the applicable federal non-compete law, employers must ensure that they are compliant with the increasingly varied non-compete state laws across the country.

California, North Dakota and Oklahoma, for example, each have general prohibitions of non-competes (and California and North Dakota also prohibit non-solicits of customers and Oklahoma permits only non-solicits of an employee’s established customers).

An increasing number of states permit non-competes only for exempt employees or employees making more than a statutory minimum.  As of the date of this Alert, these states include Colorado, Illinois, Maine, Maryland, Massachusetts, Nevada, New Hampshire, Oregon, Rhode Island, Washington, and Virginia as well as the District of Columbia. Some of the statutory minimums are quite high.  For example, as of the date of this Alert, employees must make at least $150,000 to have a non-compete in the District of  Columbia, $101,250 in Colorado, and $116,593.18 in Washington.

An increasing number of states also have laws prohibiting forum selection and choice of law clauses designating any jurisdiction other than their own state.  Such laws are currently in place in California, Colorado, Massachusetts, and Washington.

In addition, an increasing number of states have enacted laws prohibiting employers from enforcing non-competes without pay during the restricted period, such as Massachusetts and Oregon.

Next Steps for Employers
In this current climate of remote work and employees working across the country, employers are well advised to work with their employment counsel to ensure that their current restrictive covenant agreements comply with all potentially applicable state laws.

In addition, in preparation for the possibility of a nationwide ban on non-competes, employers should work with their employment and intellectual property counsel to ensure that their existing agreements independently offer sufficiently robust protection of their confidential, proprietary and trade secret information.

By:  Matt Meyers, CEO of Yesler
Yesler CEO Matt Meyers takes a in-depth look at the state of U.S. housing and how we arrived at the current state.

The housing market.  To many, it’s crazy and unknowable.  It always seems in flux and getting more expensive, usually.

The widely accepted narrative is that homes are not affordable, because prices are so high.  But, high prices and affordability are two different things, with the majority of buyers borrowing to purchase their homes.

Can historic data help put our current market circumstances into perspective?  I think so.  Seeing the data will give you a different perspective on the housing market.  For example:

• What is the underlying demand for housing?
• What impact do interest rates have on the housing market?
• Do we have a housing shortage?  Do we have an affordability problem?
• Is it increasing or decreasing?

With an open mind and data, you may come to new conclusions about the current state of the US housing market and what the future holds.

Data sources
Most pundits, forecasters and consultants use U.S. Census Bureau or Housing and Urban Development (HUD) data.  In this article, I rely exclusively on The Federal Reserve Bank of St. Louis (FRED) data, which pulls from these government sources.  They provide an excellent interactive site to review all kinds of U.S. data.

Historic housing starts
About 25 years after the GI bill supported veterans in buying a home, their children, the Baby Boomers, were in need of housing.  The year was 1971, and by that time the US was well suited to supply it compared to the rest of the war-impacted cities of Europe and Asia.  The increase in demand from new households for the Boomer class showed up in new home construction.

Observe the peaks of the market since the 1960s, and you may be surprised to see that the peak wasn’t 2006.  The Baby Boom created the biggest housing boom.  Now draw a line connecting all the peaks since the early 1970s and you’ll see that line is down.  Draw a line connecting all troughs, and that line is down too.

That begs the question: Has the housing market been underbuilding for 50 years through 7 recessions and widely varied fiscal policy?  Or has demand for new U.S. housing starts been declining for decades?

What has happened to home prices over the same period?

Up, up, and up, with a few dips along the way.  How is this possible over a very log period?

Incomes must have risen too.

Note that this chart starts in the early 80s, not the 70s.  Examining the numbers, it looks like home prices (prior chart) have risen faster than incomes.  That must mean homes have become less affordable.  Unless, there is another factor – interest rates.

And interest rates?

The dramatic decline in interest rates created cheap money, for those borrowing on 30-year mortgages.  The recent spike to 6% or slightly higher is still low, from a historical perspective.

One chart that combines the three prior charts.

Here is the narrative: income has risen gently, interest rates have fallen dramatically, and home prices have risen faster than income!

The critical question:
Which has a greater impact on housing prices in the US?

1. Household income,
OR
2.  Interest Rates

Based on this view of the data, I’d guess B – Interest rates.

What has happened to affordability in the US?
The following chart illustrates the relationship between the three variables of US Median Household Income, US Median Home Price, and interest rates.  The data is the same FRED data downloaded into a spreadsheet to calculate what can a buyer afford (the GREEN LINE) under the following conditions:

• 20% down payment
• 28% housing debt to monthly gross income ration (good assumption for mortgage approval) using US median household income reported for the year
• Prevailing interest rate on the first FRED reported day in January of the year

• If median household income increases 5% in 2022 due to inflationary pressures.
• If US Home prices slow their pace of escalation and only increase 5% in 2022.
• If interest rates climb to 6% average for the year.

By:  Kelli Vukelic, CEO of N2Growth

Senior leadership hires can make or break an organization.  Various studies show that the failure rate of executives coming into new companies is 30 to 40 percent after 18 months.  In a hiring market, like the one we’re currently experiencing, finding a true game-changing leader is extremely challenging.  Furthermore, making a hiring mistake is extremely costly in terms of both direct and indirect costs.  So how do you find those top performers and disrupters that can take your organization to new heights?  Internal recruiters do not have the tools or abilities to fill these critical leadership roles, their ‘open requisition’ stack is too full, and all roles get equal attention, whereas the most critical ones need a dedicated team.  Once you recognize that an external search professional is needed, the decision for which one should be solved with a different calculus than in the past.

With demand for top executives outstripping supply choosing the best search firm to partner with can have a critical impact on the future of your organization.  There are thousands of U.S. executive search firms who are looking to help to place talent in organizations.  So how do you decide on which firm is the best fit?  Should you use a large firm whose name is familiar to you because of ads and billboards?  Or should you partner with a more niche, local boutique?  Or should you consider a new emerging category of super elite boutiques that give you the best of both worlds, international reach, and creative, disruptive thinking?  “I would caution that size is not always an indicator of success, and more importantly not a risk mitigator,” said Kelli Vukelic, CEO of N2Growth.  “A small elite class of boutique search firms is achieving this, providing you all of the executive search solutions of larger firms, but with a more hands-on, better resourced approach.  There is no one-size-fits-all solution to placing C-suite candidates.  One-size-fits-one and having worked at both ends of the spectrum, here are my points for your consideration.”

Plethora of Choices
There are countless options when it comes to executive search firms.  On one end of the spectrum are the incredibly large firms, which come with big brand name recognition, high overhead, and revenues reaching into the billions annually, according to Ms. Vukelic.  “Several of these publicly traded firms have good reputations, but they have historically catered to Fortune 500 companies,” she said.  “If your organization is not a Fortune 500 company, your search can easily get lost in the shuffle or pushed down below the partner level, and placement costs can quickly exceed your price range with antiquated administrative fees that cover big overheads.

On the other end of the spectrum, however, are boutique search firms.  “You may be skeptical of these smaller enterprises, fearing that they lack the resources and experience to find the right executive for your organization,” said Ms. Vukelic.  “But these fears are often unfounded – in fact, boutique firms are often better resourced, making them a better fit for your search.”

Personalized Approach
When engaging with a boutique firm, you are more likely to deal directly with the person or team leading your project.  Typically, Ms. Vukelic notes that boutique firms create team structures to work on projects, and their “top-to-bottom” approach offers the client extraordinary attention to detail.  “They can assess a client’s unique needs and then customize their approach accordingly,” she said.  “An agile process allows time for listening, connecting, coaching, and advising.  This personalized approach allows boutique firms to place candidates who are technically, academically, and culturally additive to the organization.  This sets both the client and candidate up for success on the first go-around, saving everyone involved valuable time, money, and energy.”

By working with a boutique search firm on your C-suite placements, it is highly likely that you will interface and deal directly with the senior leadership of the company, according to Ms. Vukelic.  “Direct interaction with the leader of the firm builds trust, allows you to voice any questions or concerns you may have, and get a real-time answer from a key executive,” she said.  “A boutique firm will invest in learning your culture and talent needs.  The senior engagement leader that works with you from the onset of the search will lead the process, speaking to every prospective candidate on your behalf.  In a noisy recruitment market, where candidates have the upper hand, who do you want to tell your story and be that extension of you in the marketplace?”

By contrast, when engaging with a large firm, Ms. Vukelic explains that you may only speak with a partner occasionally as they are likely busy chasing billings and not focused on your search day-to-day.”  Larger firms often delegate key work to less tenured associates that you have never met and who have only second-hand knowledge of your organization and its needs,” she said.  “They also have limited experience, meaning they bring a narrower perspective to the candidate process.  These are the people telling your story in the marketplace.  This can result in candidates whose resumes match your specification on paper but may not align with your goals or add anything new or different to your culture.  Large firms are usually in a constant state of growth, which limits the attention they can pay to your search.  A sizable client base may be great for them, but it might no be best for you.”

Boutique search firms take the time to learn the intricacies of their client’s company culture and goals.  They operate with the understanding that trust is built every day and with each interaction, not bought with brand name recognition.

Greater Candidate Pool
“Executive search firms have an ethical and contractual obligation not to recruit from clients,” Ms. Vukelic said.  “Because large firms conduct business with so many organizations, they have significant hands-off limitations which limit their recruiting strategies.  Candidates that are active on a search within a firm are also off-limits for other searches.  With large firms, this can equate to thousands of candidates who are unavailable to your search, severely limiting the talent pool.”