ContractsProf Blog

Two District Courts Weight in on the FTC's Ban on Non-Competes

Back in April, we posted about the new Federal Trade Commission (FTC) rule that bans most non-competes and may also ban some other restraints on the ability of employees to leave their jobs.  The response was quick and predictable.  Ryan, LLC v. Federal Trade Commission was filed pretty much immediately in the Northern District of Texas.  ATS Tree Services, LLC (ATS) filed its claim in the Eastern District of Pennsylvania two days after the new rule was promulgated.

The Ryan court struck first, issuing a preliminary injunction in early July.  The Eastern District denied ATS's motion for a preliminary injunction in ATS Tree Services, LLC  v. Federal Trade Commission in late July.  Then, on August 20th, the District Court in the Ryan case granted Ryan's motion to set aside the non-compete rule and enjoined it from going into effect on its effective date of September 4th or thereafter.

In the Pennsylvania case, ATS claimed that it would be irreparably harmed if it could not require that its employees sign non-compete clauses prohibiting them from working for rival tree-trimming services for one year after leaving ATS.  ATS claimed that is non-compete clause is necessary to enable ATS to recoup its investment on the specialized training that its employees receive.  ATS argued that the FTC either lacked regulatory power to ban non-competes or exceeded that power.  In the alternative, ATS argued that the ban was arbitrary and capricious.  If none of those things are true, ATS maintained that the FTC Act is an unconstitutional delegation of legislative power to the agency under the major questions doctrine.

In denying ATS's motion for a preliminary injunction Judge Hodge (left) first found that ATS would suffer no irreparable harm from the non-compete ban.  Moreover, she concluded that ATS had not established that it would likely win on the merits.  ATS could not establish irreparable harm because its alleged losses were either de minimis or in any case insufficient to amount to irreparable harm.  Moreover, ATS  failed to make a credible factual  allegation that there was any danger that it would lose employees once the ban goes into effect. 

Judge Hodge was no more impressed with the somewhat exotic argument that the rule would strip ATS of its contractual rights.  She did not find any binding caselaw endorsing the argument that loss of contractual rights amounts to irreparable harm. To the extent that the harm related to employees using their ATS training to benefit rival businesses, she did she not see why ATS could not protect its contractual rights through the less onerous mechanism of non-disclosure agreements.

On the merits, Judge Hodge was satisfied that the FTC had power to enact the law and that doing was was not arbitrary and capricious.  She also found that the FTC had previously issued equally sweeping rules without implicating the major questions doctrine and that this situation was thus distinguishable from recent cases in which SCOTUS invoked that doctrine.  Finally, Judge Hodge rejected ATS's argument based on Schechter Poultry  because it's not 1935, or at least not yet.

Things went differently before Judge Brown (right) in the Northern District of Texas.  Having already granted the motion for a preliminary injunction, it is hardly surprising that Judge Brown went ahead and granted the full injunction.  Unlike her preliminary injunction, however, which applied only to the named plaintiffs and intervenors, this injunction is nationwide.

She granted the motion for an injunction on multiple grounds.  First, she concluded that the FTC  lacked substantive rule-making authority with respect to unfair methods of competition and thus lacked authority to create the non-compete ban. In addition, Judge Brown found that the FTC acted arbitrarily and capriciously in creating the ban.  She found that the ban was "based on inconsistent and flawed empirical evidence," and that the FTC failed to consider the upside of non-compete agreements, disregarding substantial evidence supporting such agreements.  Just as Judge Hodge chided ATS for failing to consider how it might use devices other than its sweeping non-compete to protect its investment in its employees, Judge Brown faults the FTC for failing to consider less sweeping alternatives to the ban it imposed.  Having ruled on statutory grounds, Judge Brown did not address Ryan's constitutional claims.

Both opinions are persuasive in their own terms and they reach their conclusions categorically and without acknowledgment that the case is a close one.  It is challenging for a non-expert in administrative law to know which judge got it right.  My hunch is that this challenge would have been dismissed without much fanfare in the period between Schechter Poultry and the Roberts Court, and I suspect that an opinion like Judge Brown's would have been hard to imagine before Gundy. It may also be that executive agencies have gotten much more ambitious in this era of Congressional gridlock.  And so perhaps rules like this one were relatively rare before, say 2009.

Georgia Law Governs Non-Competes Even Notwithstanding Choice-of-Law Provision

Back in 2016, Edmund Burbach was living the dream, first working for six Georgia Harley-Davidson Dealerships under common ownership and then soon promoted to Chief Operating Officer.  He executed employment agreements with two of the dealerships, which included restrictive covenants (the non-competes).  During his employment and for three years thereafter , Mr. Burbach was prohibited from working for any competitor within a 120-mile radius of any of the six dealerships. These agreements included included a choice-of-law provision stating that they were to be governed by Florida law.

In 2019, Mr. Burbach left his employment and moved to another Harley-Davidson dealership located within twenty miles of one of the six dealerships that formerly employed him.  Warned that his previous employer would seek to enforce the non-compete, Mr. Burbach took no action, and his former employer sued him.  The Georgia trial court applied Florida law and, finding the non-competes reasonable, enjoined Mr. Burbach from working for a competitor within 120 miles of the six dealerships.

A Georgia court of appeals reversed.  It found that the choice-of-law clause, which it called a choice-of-forum clause, was procedural rather than substantive.  It found itself obligated to apply Georgia substantive law on non-competes, the Georgia Restrictive Covenants Act.(GRCA), OCGA § 13-8-50 et seq. Applying that law, the court of appeals found the non-competes unreasonable.

In Motorsports of Conyers, LLC v. Burbach, the Supreme Court of Georgia first noted that Georgia law generally requires courts to enforce parties' choice-of-law provisions.  However, they will not do so if prohibited by statute or if the result is "contrary to the policy or prejudicial to the interests of this state."  Unreasonable restrictive covenants are, as a matter of statutory law, contrary to public policy and unenforceable in Georgia.  

The Court then recounts the history of Georgia's statutory restrictions on non-competes.  There have been twists and turns, but the general principle abides: unreasonable restrictive covenants are general restraints of trade that contravene public policy. However, Georgia's recently revised statute on restrictive covenants is more permissive, allowing for blue-lining so that a court can edit an unreasonable non-compete to eliminate its unreasonable components.  As result, the Supreme Court issues a very complicated set of instructions for the trial court on remand:

[T]he trial court must first apply the GRCA to determine whether the restrictive covenants in Burbach's employment agreements comply with it. If the covenants are reasonable under Georgia law, . . . the court must then apply the parties' chosen law—Florida law—to determine their ultimate enforceability.  If the covenants as written do not comply with the GRCA, then enforcing them would violate Georgia public policy, and so the court may not apply foreign law to enforce them. Instead, Georgia law would govern the covenants, and so the trial court would apply our law, including the GRCA's blue-penciling provision, to determine whether the restrictive covenants may be enforced in part.

The Supreme Court of Georgia decided this case in September 2023.  It took until January, 2024, for the intermediate appellate court to vacate its 2022 decision and remand the case to the trial court to reconsider in accordance with the Supreme Court's instructions.  I wonder what effect that trial court can give to the non-competes given that their three-year term expired in 2022.  Mr. Burbach's LinkedIn page indicates that he has been employed in Florida since 2021.

11th Circuit Grants Injunction 42 USC § 1981 Against Venture Capital Support for Black Women

Early in my contracts course, I cover freedom of contract.  I teach a case about the common law right to refuse to enter into a contract if you don't want to do so.  I follow that up with two cases, Barfield v. Commerce Bank & Gregory v. Dillard's, Inc., both discussed in this guest post by Charles Calleros. Those two cases are about 42 U.S.C. § 1981, which provides that “[a]ll persons . . . shall have the right to make and enforce contracts . . . as is enjoyed by White citizens.” 

Thanks to Melissa Murray and Kate Shaw and last week's episode of the Strict Scrutiny Podcast, I just learned of a new case out of the Eleventh Circuit interpreting §1981 in a new context. The case is American Alliance for Civil Rights v. Fearless Fund Management, LLC, and it involves a § 1981 challenge to the Fearless Strivers Grant Contest (the Contest), an entrepreneurship funding competition open only to businesses majority-owned by black women.  The Contest awards winners $20,000, plus access to digital tools and mentorship.  The plan was to run the Contest four times, with each iteration of the Contest open to applicants for one month.

The Eleventh Circuit panel determined first that the plaintiffs had standing and second that the Contest is substantially likely to violate § 1981. The panel remanded the case with instructions to the District Court that it preliminarily enjoin the Contest. The standing issue is an important one and the basis for an eloquent dissent in the case.  In order to claim that one was denied opportunity to "make and enforce a contract" under § 1981, a plaintiff has to show that they were "able and ready" to enter into a contract.  

Plaintiffs presented evidence that they were willing and able to enter the contest.  The unnamed plaintiffs were business owners that could use $20,000 and specified how they would use the grants if successful.  However, they never entered the contest because they are not majority-owned by Black women.  The Dillard's case is interesting because the plaintiffs there had their claims dismissed because they left the store (after being surveilled, harassed, insulted, or denied counter service) without attempting to buy something.  The court required them to take the next step, despite the fact that it may have been impossible to them buy anything if, for example, the employee at the jewelry counter wouldn't show how them anything.  Here, the plaintiffs had not in fact attempted to enter the Contest. 

Moreover, while anonymity is not a bar to recovery under § 1981, it seems to me that it raises certain issues of redressability not addressed in the opinion.  In order for plaintiffs to have a redressable injury, they need not merely have a right to enter the Contest but have a reasonable shot at winning it.  Unless we know more about the corporations and their suitability as applicants, how can the court determine whether they suffer any injury by not entering the contest. There wasn't any doubt that, but for Dillard's alleged discriminatory conduct, plaintiffs were able and ready to make purchases there.  Enter. Lose. Sue.  Why don't these corporations have to jump through the same hoops as natural persons? 

Moreover, there is a recognized exception non-discrimination laws in the affirmative action context.  The majority breezily concludes that the Contest does not fall within the exception because it creates an "absolute bar" to applicants other than Black women.  That seems a bit much, as it would prohibit all grants and awards that target a particular racial group.  As the dissent notes in a footnote, "Black women received only .0006% of [venture capital] funding raised by startups between 2009 and 2017.” That vital information is nowhere acknowledge in the majority opinion.  Viewed in context, the Contest is very far an "absolute bar" to people other than Black women receiving venture capital funding.  In fact, initiatives like the Contest may be the only way that Black women entrepreneurs may have access to capital.

The Fearless Fund (Fearless) contended that its Contest was not a contract. That argument was pretty weak, given that the Contest rules specified "“BY ENTERING THIS CONTEST, YOU AGREE TO THESE OFFICIAL RULES, WHICH ARE A CONTRACT.” Rather clumsily, Fearless tried to amend its rules after getting sued, but a rose by any other name . . . .  Fearless next attempted to argue that it was engaged in expressive conduct protected by the First Amendment, an argument to which the Eleventh Circuit was unsympathetic. I too would be concerned if the First Amendment could become a justification for race-based discrimination.

This seems like it might be a nice case to teach with Barfield  and Gregory. The challenging issue here, which is not really a contracts issue, is whether a remedial statute such as § 1981 can be used to enjoin a Contest designed to give Black women, the very people § 1981 was passed to protect, the opportunity to compete for venture capital funding.  As it turns out, the Supreme Court determined long ago that § 1981 prohibits all discrimination based on race, including  discrimination against white people.  The opinion made that determination was authored by Justice Thurgood Marshall (right)!

My instinct is not to try to apply a statute that expressly states that its about race in a color-blind way, but Justice Marshall provided a discussion of the legislative history behind the statute and is quite convincing that it was designed to protect all people from discrimination on the basis of race.  In any case, the Eleventh Circuit is bound by his decision.  The concurring opinion from Judge Rosenbaum (left) points towards a way out, at least in this case.  Her introduction is worth quoting at length:

No one doubts the sincerity of an Arsenal (soccer) player’s desire to beat Tottenham. But he can’t be allowed to try to win by flopping on the field, faking an injury near Tottenham’s goal. . . . Referees’ vigilance prevents players who have a sincere desire to defeat their opponents—but who try to do so through manufactured fouls— from commandeering referees to improperly exercise their adjudicatory authority to award unwarranted penalty kicks. . . .

Here, no one doubts the sincerity of American Alliance for Equal Rights’s desire to challenge what it views as “distinctions and preferences made on the basis of race and ethnicity.” . . .  But as American Alliance has portrayed its members’ alleged injuries, it has shown nothing more than flopping on the field. Although three of American Alliance’s members pay lip service to the idea they are “ready and able” to participate in Fearless’s Contest, their declarations show, in context, that none has a genuine interest in actually entering the Contest. Indeed, not one has established that she is, in fact, able and ready to enter the Contest and would do so in the upcoming period if the Contest were open to non-Black women. So American Alliance’s alleged injuries don’t show “a real controversy with real impact on real persons” among its membership. . . . Rather, they reflect an attempt to manufacture an “injury” to allow American Alliance to challenge the Contest. That is not enough for standing. 

There was an nteresting lone concurrence from Justice Thomas in last week's mifepristone case indicating his skepticism about associational standing generally.  He specifically references last term's Students for Fair Admissions case, brought by the law firm that brought this one.  Justice Thomas has got me thinking about why associational standing is appropriate here.  Why can't these injured parties bring the case on their own with the law firm acting as counsel of record rather than party of record?

SCOTUS Issues a Contracts-Related Opinion on an Indian Law Issue

Living as I now do in Oklahoma, I have learned two very important things about Indian law: 1) I know next to nothing about Indian law; and 2) Indian law intersects with almost every substantive body of law.  If you teach in Oklahoma or other states with significant Indian populations, you should consider adding some cases on the interaction of Indian law and your doctrinal subject matter to each course. It will be enriching for all.

Artwork “Love” by Brent Learned, member of the Cheyenne/Arapaho Tribes

With the first of those lessons firmly in mind, it is with some trepidation that I approach SCOTUS's opinion in Becerra v. San Carlos Apache Tribe, issued last week, in advance of this week's Sovereignty Symposium, hosted by the Oklahoma City University School of Law! 

Following Chief Justice Roberts opinion for the 5-4 majority, we learn that the Indian Self-Determination and Education Assistance Act (ISDA), 25 U.S.C. §5301, et seq., enables Indian tribes to enter into contracts with the Indian Health Service (IHS) to assume responsibility for administering the healthcare programs that IHS would otherwise operate for the tribe.  IHS turns over to the tribes funds to cover such healthcare programs plus funds to cover administrative costs that the tribes take on. 

When tribes take on responsibility for providing health care through contracts with IHS, they incur overhead and administrative expenses that IHS would not incur were it providing healthcare services to the tribes. IHS, as a federal government agency, is exempt from some expenses; other federal agencies provide ancillary services to IHS that the tribes have to cover themselves.  The issue in the case was whether ISDA requires IHS to pay contract support costs to cover these costs that IHS would not have to pay.  

Two self-determination contracts were at issue in the case, one with the San Carlos Apache Tribe and the other with Northern Arapaho Tribe.  In 2019, the San Carlos Apache Tribe sued the Government for breach of contract, alleging that IHS had failed to pay roughly $3 million in contract support costs for the Tribe’s healthcare services over a three-year period.  A District Court dismissed the case, but the Ninth Circuit reversed and remanded.  It found the relevant statutory provisions, 25 U.S.C. § 5325, ambiguous on the question of whether the tribes had to shoulder the costs associated with third-party revenue funded aspects of the tribe's healthcare program.  Applying the Indian canon of construction, the Ninth Circuit resolved the issue in the Tribe's favor.

The Northern Arapaho Tribe entered into a self-determination contract with IHS in in 2016.  The Tribe sued IHS in 2021, alleging that IHS had failed to pay $1.5 million in contract support costs over a two year period.  A district court dismissed the claim, but the Tenth Circuit reversed, with each judge writing separately.  One judge found that the statute ambiguous and applied the Indian canon.  One judge found that the statute unambiguously supported the Tribe's interpretation.  A third judge dissented in part, focusing on 25 U.S.C. § 5326, which was passed in 1998 and thus superseded the earlier adoption of § 5325.

Northern Arapaho Flag

Chief Justice Roberts walked through the language of § 5325 and the ways in which the Tribes accounted for the healthcare spending under the contracts. He found the Tribes' account of their expenses incurred reasonable, entitling the Tribes to the reimbursement they sought.  Section 5326, it turns out, was passed in response to a 1997 case, Ramah Navajo Chapter v. Lujan, in which the Tenth Circuit allowed tribes to recover not only for costs associated with operations under contracts with the federal government but also under contracts with state governments.  Congress did not intend for costs incurred under separate contracts to be recoverable in that case. But the Majority concluded that § 5326 was not intended to cover the current situation as the federal government contracts with the Tribes specifically covered the Tribal healthcare expenditures at issue.  These were not expenses incurred under separate contracts but ancillary costs associated with the Tribes' contracts authorized under the ISDA.

The next section of the Majority opinion addresses the government's contentions and those of the Justice Kavanaugh's dissent.  According to the Majority, the government's arguments simply find no support in the statutory text.  To the extent that the government worries about the Tribes making expenditures beyond what the statute authorizes, the Majority has a straightforward response: such expenditures would not be covered by the statute, and so the government would not be obligated to reimburse them.  Justice Kavanaugh's complaints seem a variant on the government's arguments.  There are general concerns about controls on the natural of tribal healthcare expenditures. Chief Justice Roberts responds that the limitations on such expenditures are laid out in the statute.  Justice Kavanaugh seems to worry about the expense involved, but if Congress has taken on certain obligations, it is not for the Court to question such expenditures.

In a final section Chief Justice Roberts notes that the IHS's refusal to cover the costs at issue imposes a penalty on the tribes for opting for self-determination.  Such a penalty undermines Congress's purpose in enacting the ISDA. The Majority affirmed the decisions of the Ninth and Tenth Circuits.

Justice Kavanaugh begins his dissent by citing decades of executive branch precedent interpreting the statute to provide that the tribes have to cover the contract support costs.  Departing from that precedent will cost the government between $800 million and $2 billion, and most of that money will go to the well-off tribes that have the resources to enter into self-determination contracts.  Hmmm.  I don't associate either Justice Kavanaugh or the three other Justices who joined with adherence to precedent, especially not to precedents adopted by executive agencies.   When we're talking about billions of dollars of expenditures, that sound like a major question.  If only there were a doctrine that allowed courts, rather than executive agencies to decide Congress's intent when major questions were implicated.

The  next section of Justice Kavanaugh's opinion provides five textual arguments in support of the government's position, two based in § 5235, two based in § 5236, and one based in § 5388.  Finally, Justice Kavanaugh contends that Congress did not intend to fund these administrative costs and that doing so actually imposes limits on the tribes' self-determination, as it would allow the federal statutory scheme to cover all tribal choices as to healthcare expenditures.

I am in no position to judge whether the majority or the dissenters have the stronger textual arguments, and there is some evidence in the dissent that the not all Indian tribes have adopted the legal position that won the day here. Based on the response I have seen, it seems like experts in federal Indian law are applauding the decision.  Neither opinion recognizes the possibility that the statutory framework is ambiguous. If they did, we might see the Justices fighting over the continued viability of the Indian canon. That fight may lay ahead.

Minnesota Moves to Make Its Laws Mirror New FTC Rule on Non-Competes

Sometimes we hear from real lawyers.  Brendan Kenny, a Minnesota attorney, reached out to let us know that his colleague, Mary Ellen Reihsen had written up a short piece on Minnesota's newly-adopted statute, § 181.9881, barring non-solicitation agreements in service agreements with customers.

In 2023, Minnesota adopted a fairly comprehensive ban on non-competes. Then, following the adopting of the new FTC rule, discussed here, they expanded the statute to sync Minnesota law with federal law.  The revision is set to go into effect next month, but Ms. Reihsen reports that business groups are seeking to narrow the rule.

The heart of the new statute reads as follows:

Restrictive employment covenants; void and unenforceable.

(a) No service provider may restrict, restrain, or prohibit in any way a customer from directly or indirectly soliciting or hiring an employee of a service provider.

(b) Any provision of an existing contract that violates paragraph (a) is void and unenforceable.

(c) When a provision in an existing contract violates this section, the service provider must provide notice to their employees of this section and the restrictive covenant in the existing contract that violates this section.

The statute provides for one carve out relating to computer software development services.  I wish I knew the lobblying story behind that bespoke exception.

Ms. Reihsen provides some great examples to illustrate whey this rule is important.  Perhaps you use a service to provide you with home health aids, cleaning services, 0r office temps.  You may like the person you've hired, and they may confide in you that half of what you pay them goes to their employers, not to them.  You decide to cut out the middleman and hire them directly.  They make 25% more; you pay 25% less. Service providers used to be able to prohibit their customers from suggesting such an arrangement, but as of July 1st, they will no longer be able to do so.

Ms. Reihsen's short piece begins by stating that the new law "will create uncertainty among employers." I don't know.  The new law seems pretty clear.  The law has allowed certain anti-competitive practices for decades.  Now it doesn't.

Uncertainty may still arise in the form of law suits. As we noted, the FTC rule is already subject to multi-pronged challenges. If the business interests affected by the new law are not successful in amending the law to narrow its scope, we may see litigation on the state level as well, but I'm not sure what legal theories are available.  The federal litigation is about the separation of powers: major questions doctrine, non-delegation doctrine, Article II's vesting clause.  But here the action is by a state legislature.  The new law is intended to have retroactive effect, but still a Contracts Clause claim would be a stretch.

For Every New FTC Rule, There Is a Reaction in the Form of Regressive Legislation in Oklahoma

Oklahoma in the "progressive" camp on non-competes, along with California, Minnesota, and . . . North Dakota.  Well, it was in the motley crew of states that, for one reason or another, ban non-competes.

Image © Caleb Long, CC BY-SA 2.5 
via Wikimedia Commons

But Oklahoma's non-compete law, 15 O.S. § 219A, allows for competition, "as long as the former employee does not directly solicit the sale of goods, services or a combination of goods and services from the established customers of the former employer."  So the statute brought protection from non-competes, with a pretty narrow carve-out.  Apparently, there was some dissatisfaction with the terms "directly" and "established."

This year, with SB 1543, our legislature attempted to address that dissatisfaction, by making the carve out so broad as to pretty much swallow the rule.  According to the bill's sponsors, at least as represented here, the revisions enable entities to "protect[] their legitimate businesses interests" and resist "unfair competition."  How?  Well, here's the new version of the law, with additions highlighted and deletions in bold cross-out.

A person who makes an agreement with an employer, whether in writing or verbally, not to compete with the employer after the employment relationship has been terminated, shall be permitted to engage in the same business as that conducted by the former employer or in a similar business as that conducted by the former employer as long as the former employee does not directly solicit, directly or indirectly, actively or inactively, the sale of goods, services or a combination of goods and services from the established customers or independent contractors of the former employer.

This change is purportedly necessary because the language of the original statute was "vague" and caused "confusion." 

But Oklahoma courts had not so found.  Part B of the statute provides  "Any provision in a contract between an employer and an employee in conflict with the provisions of this section shall be void and unenforceable."  In Howard v. Nitro-Lift Techs., L.L.C., Oklahoma's Supreme Court read the statute to empower a court to strike down in its entirety any non-compete or non-solicitation provision that exceeded the limits permitted under the statute.  In Autry v. Acosta, the Oklahoma Court of Appeals similarly set aside an injunction in favor of an employer.  The employer could not succeed on the merits, as its non-solicitation provision, which purported to prohibit an employee from indirect solicitation of her employer's former clients, both current and previous, exceeded what was permissible under § 219A. A and was therefore unenforceable under § 219A. B.

Courts did not find the language of § 219A vague or confusing.  Perhaps the problem with the statutory provision lies elsewhere. Perhaps the law was too effective in prohibiting restraints on trade and employee mobility.

I am at a loss to understand what would remain of the ban on non-competes if the legislation became law.  I suppose that it still might offer some protections for people who just work for a competitor but are in no way involved in the solicitation of business.  However, "directly or indirectly, actively or inactively" could mean and likely is intended to mean that if your name even appears on your new
employer's website, you are engaged in a prohibited act of solicitation.  And because the word "established" has been eliminated, any solicitation of customers within the industry could be treated as a solicitation of the former employer's "customers," past, current, future, or potential.

In shocking news, although the reform bill sailed through the Oklahoma legislature, Oklahoma's Governor Stitt (left) vetoed the bill.  Here is his veto message:

Senate Bill 1543 would significantly expand employers' power to impede employees' ability to compete with their employer, post-employment, and worse, it would allow employers to restrict individuals' ability to earn a living, especially while using a learned trade or skillset. For these reasons, I have vetoed Enrolled Senate Bill 1543.

By the Governor of the State of Oklahoma
/s/ Kevin Stitt

Thanks, Governor Stitt.  This is something to keep an eye on for the next legislative session, but Governor Stitt will remain in office until 2027, so if he sticks to his guns, Oklahoma's workers are relatively safe from non-competes for a while.

The FTC's Rule Banning Non-Competes and the Response

The Federal Trade Commission (FTC) this week announced a new Final Rule on non-competes.  I was hoping for a short document that clearly and concisely lays out the new rule.  Instead, we got a a 570-page document that, truth be told, I will never read.  Here's the summary, which I did mange to read:

The final rule provides that it is an unfair method of competition—and therefore a violation of section 5—for persons to, among other things, enter into non-compete clauses (“non-competes”) with workers on or after the final rule’s effective date. With respect to existing non-competes—i.e., non-competes entered into before the effective date—the final rule adopts a different approach for senior executives than for other workers. For senior executives, existing non-competes can remain in force, while existing non-competes with other workers are not enforceable after the effective date.

According to the FTC's website, the new rule will "will generate over 8,500 new businesses each year, raise worker wages, lower health care costs, and boost innovation."  

Well, that sounds great.  Surely, nobody would oppose all that.

Well, nobody except Ryan, LLC, which was the first to file a federal lawsuit challenging the new rule in Ryan, LLC v. FTC.  The main argument relies on a favored weapon in the anti-regulatory arsenal, the newly minted "major questions doctrine."  The FTC lacks the authority, Ryan argues, under congressional statutes, to issue so sweeping a regulation.  In fact, Ryan argues, the FTC lacks power to regulate unfair competition.  It did not do so until 1962, and it never sought to regulate non-competes until 2022.

As to substance, Ryan argues, "Workers, firms, and the economy all benefit from reasonable non-compete agreements."  The key term here is "reasonable."  Ryan contends that courts have long assessed the reasonableness of non-compete agreements.  Regulation here is unnecessary, as the courts have already struck the right balance among competing interests. 

The causes of action are predictable.  Count I, citing the major questions doctrine, alleges that the FTC lacks authority to adopt the new rule.  Count II, citing the non-delegation doctrine, Schechter Poultry (that old chestnut!), and Justice Gorsuch's dissent in Gundy, alleges that allowing the FTC to regulate in this area would be an unconstitutional delegation of legislative powers to the executive branch.  Count III, citing the Vesting Clause thesis and the unitary executive, alleges that the FTC Act violates Article II, because its commissioners can only be terminated by the President for cause.  Count IV seeks a declaration: vacating the new rule; finding that the FTC has no authority to regulate unfair competition; that the FTC claim of authority to issue the rule violates the non-delegation doctrine; and that the structure of the FTC violates Article II.  

Sounds crazy right?  Not to these folks.

I mean, should the courts strike down an entire agency because they don't like one rule, for which the agency provided a 570-page explanation?  Needless to say, if an agency got out over its skis, Congress could yank it back by issuing its own clarifying instructions.  But in our world, apparently, the power to do so is vested not through Article I, and not through Article II, but through Article III.  We the people, in order to form a perfect juristocracy . . . 

SCOTUS Takes Another FAA Case

Image by DALL-E

A couple of years ago, we wrote about the Arbitration for All approach to the Federal Arbitration Act (FAA), which was given extreme expression in a recent Judge Easterbrook opinion.  That opinion builds on a series of SCOTUS cases from a decade ago (we barely took notice of Stolt-Nielsen; here's a guest post on Rent-A-Center; here's our post on Concepcion, and here's our post on Italian Colors).  Now, arbitration is in retreat on a number of fronts.

First, the Consumer Finance Protection Bureau attempted to prohibit class-action waivers in consumer lending agreements.  That regulation was nixed by the Republican-controlled Congress soon after Donald Trump took office.  Second, mass arbitration has lead some companies to remove compulsory arbitration from the their terms and conditions, a development that we most recently covered here.  Finally, SCOTUS recently issued two unanimous opinions limiting business entities' ability to compel arbitration on employees once the litigation has progressed for a while or if the employees are transportation workers.

The Supreme Court will now take another crack at the latter issue, having granted cert. in Bissonnette v. LePage Bakeries.  That case is a putative class action by people who deliver baked goods.  They are suing the company that makes those goods.  Defendant LePage Bakeries moved to dismiss the suit and compel arbitration.  Like the plaintiffs in Saxon, which SCOTUS decided in 2022, plaintiffs claimed that they are exempt from the FAA, because Section 1 of the FAA exempts workers involved in interstate commerce.  The district court granted the motion to compel.  A panel of the Second Circuit first decided the case in 2022 and affirmed over a dissent from the late Judge Rosemary Pooler (right).  

The majority opinion kept things simple.  Following the Supreme Court precedent of Circuit City Stores v. Adams, the Court noted that only "transportation workers" come within the Section 1 exemption from the FAA.  The Second Circuit agreed with the district court that delivery workers are not "transportation workers."  Then, after SCOTUS decided Saxon, the panel reconsidered its opinion but arrived at the same conclusion.   

The Second Circuit first elected not to take the off-ramp available through arbitration under state law because the availability of arbitration under Connecticut law in this instance is unsettled.  Turning to the FAA, the majority noted that not everybody who works in the transportation industry is a transportation worker, but more to the point, just because you drive a truck to deliver baked goods does not mean that you are in the transportation industry.  Judge Pooler, citing courts from other jurisdictions, drew a different conclusion, "“[A] trucker is a  transportation worker regardless of whether he transports his employer’s goods or the goods of a third party.”  She sprinkled citations from Saxon liberally throughout her opinion, and she makes a compelling case that, if people who merely load baggage onto planes are "transportation workers," clearly a truck driver is a "transportation worker."  

In February, 2023, the Second Circuit denied rehearing en banc over the dissents of three judges.  Judge Jacobs, who wrote for the majority in the panel decision, and Judge Pooler take the gloves off in their statements regarding the denial of rehearing.  SCOTUS granted cert. back in September 2023.  The issue is "Whether, to be exempt from the Federal Arbitration Act, a class of workers that is actively engaged in interstate transportation must also be employed by a company in the transportation industry."

According to Ronald Mann, writing on SCOTUSblog, Justice Kavanaugh (left) took the lead in oral argument, making the case for a narrow reading of Section 1.  Somehow, Justice Kavanaugh believes that the Congress that passed the FAA didn't want anybody to be outside of arbitration.  Workers in the transportation industry were exempt because there was a separate arbitration scheme for them.   But look, if Congress intended for employees to be exempt from the FAA for any reason, including another arbitration scheme, then it intended them to be exempt from the FAA.  If Congress changed its mind about that, it is for Congress to amend the FAA to make it applicable to employees.  It is not for the courts to revise legislation.  SCOTUS should not update the non-delegation doctrine in the guise of the "major questions doctrine" while arrogating to itself the power to decide major questions of statutory interpretation through reference to non-textual sources. 

Moreover, I'm not sure what arbitration scheme he is referring to.  Counsel for the employees, Jennifer Bennett, ably showed that Justice Kavanaugh was just wrong about why seamen and transportation workers were exempted from Section 1. The arbitration schemes that he references were nothing like the FAA.  They provided only an option for arbitration as an alternative to litigation after a dispute arises.  She then goes on to argue that the FAA has no requirement that "transportation workers" be employed in the "transportation industry."

I have a different take.  On my reading of the legislative history of the FAA, the drafters expected it to apply exclusively among business people.  They never wanted it to apply to employment agreements and they never expected arbitration agreements to come in the form of contracts of adhesion.  As the drafters explained the purposes of the FAA to the Senate, “It is purely an act to give the merchants the right or the privilege of sitting down and agreeing with each other as to what their damages are, if they want to do it.  Now, that is all there is in this.”

Justice Kavanaugh is right that the drafters of the FAA assumed that there would be an alternative arbitration scheme for employment agreements.  It was state arbitration statutes such as Connecticut's.  Congress had no power in the 1920s to legislate on the subject of employment agreements that did not implicate interstate commerce as that phrase was understood at the time.  At the time, it was quite narrow.  So the exemption in Section 1 was not meant to protect employees in the transportation industry from arbitration in unique ways.  It addresses the only category of workers whose employment agreements might be subject to arbitration and provides that they are exempt.  Nobody thought in 1925 that the FAA would apply to other employment agreements.  That was a matter for state arbitration statutes.

However, if, as may be the case here, the employer has not properly provided for arbitration consistent with the state statute, well then, litigation it is!  Even if arbitration under state law is appropriate, not all states permit employers to ban class representation through arbitration clause bootstrapping, so a return to the original public meaning of the FAA (see what I did there!) could effect a substantive change in the arbitration law landscape.

Justice Kavanaugh worries that protecting employees from mandatory arbitration would be a major shift.  Indeed.  However, as SCOTUS recently recognized, sometimes a court has to revise its decisions when those decisions were "egregiously wrong from the start."  From that perspective, it should be very telling that the earliest cases that the employer's counsel can cite in support of their narrow understanding of the Section 1 exemption date from the 1970s.  To make matters worse, Chief Justice Roberts (right) asks where the test applied in those 1970s test came from.  He expresses his intuition, which seems spot on, that "they just kind of made [it] up."

Will Katie Perry Be Known for Music or the PERRY Act?

Today's post was another gift from Miriam Cherry, that Holmesian gatherer of rare gem-like contracts stories.  She is as indefatigable as Sherlock and as legally savvy as Oliver Wendell. 

Katy Perry, as far as I can recall, is famous for having been creative enough to coin a singular for "fireworks" but not creative enough to find a word that actually rhymed with "firework."  "Worth"?  Nope.  "Burst"?  Nope.  Here's one that might be coming to your minds now:  "Jerk."  She is also known for her "left shark" dancer below.  

But she also is very into real estate.  We reported before about her attempt to buy a convent. She won that case, and only one nun died in the process (that we know about).

More recently, according to TheRealDeal, she and her husband, Orlando Bloom, attempted to purchase the Montecito estate of Carl Westcott, of 1-800-FLOWERS fame.  The sale price was $15 million, but Mr. Westcott, who is now 84 years old and suffers from Huntington's Disease, claims that he was not of sound mind when he agreed to the sale, not necessarily because of age or disease, but because he had just undergone a six-hour back surgery, and he was on pain medication.  Three years later, the parties are still embroiled in litigation.  

In order to avoid such problems in the future, some have proposed the Protecting Elder Realty for Retirement Years Act, or Katy PERRY Act.  According to its website, 

The Katy PERRY Act addresses the risks of elder financial abuse, especially as it relates to property and real estate sales and transfers. The Act establishes a 72 hour cool-down period during which either party involved in a contract for conveyance of a personal residence, in which one party is over the age of 75, can rescind the agreement without penalty.

If that Act had existed a few years ago, it might have prevented a firework.

Tamar Meshel on the Revisions to the FAA

We are delighted to welcome Tamar Meshel (right) back as a guest blogger!

Dr. Tamar Meshel is an Associate Professor at the University of Alberta Faculty of Law. She researches, teaches, and consults primarily in the areas of domestic and international arbitration and her work has been cited by the Supreme Court of Canada, the Supreme Court of Israel, and the Delaware Court of Chancery, as well as by numerous scholars.

The New Chapter in the Life of the FAA

The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (aka EFASASHA, EFASA, or EFAA)—codified at 9 U.S.C. §§ 401–02 (Chapter 4 of the FAA)—came into effect on March 3, 2022. It is the first substantive limit placed by Congress on the scope of the FAA since the statute was enacted nearly 100 years ago. The Act provides that “at the election of the person alleging conduct constituting a sexual harassment dispute or sexual assault dispute . . . no predispute arbitration agreement . . . shall be valid or enforceable with respect to a case which is filed under Federal, Tribal, or State law and relates to the sexual assault dispute or the sexual harassment dispute” (§ 402(a)).

The Act also renders three arbitration principles inapplicable in sexual assault and sexual harassment disputes. First, it permits the unilateral revocation of a “joint, class, or collective action” waiver (§ 402(a)), which would otherwise be enforceable pursuant to AT&T Mobility LLC v. Concepcion. Second, it requires courts to decide the validity and enforceability of an arbitration agreement even where a party challenges the underlying contract rather than the arbitration clause (§ 402(b)), a challenge that would otherwise be decided by the arbitrator pursuant to the severability principle and Prima Paint Corp. v. Flood & Conklin Mfg. Co. Third, it requires courts to decide the validity and enforceability of an arbitration agreement even where the parties intended to delegate this determination to the arbitrator (§ 402(b)), a delegation that would otherwise be enforced pursuant to Rent-A-Center, West, Inc. v. Jackson.

At the same time, the Act gives rise to many questions that courts must now grapple with:

1. Chapter 4’s application to non-employment disputes

The most obvious context to which Chapter 4 applies is employment. Indeed, out of about two dozen cases that have considered Chapter 4 (that I’ve examined), all but two were in the employment context. In the two non-employment cases the plaintiffs were a patient in a care facility (Ferrell v. Imperial Care Center LLC) and a college student. In the former the court explicitly held that Chapter 4 applies to sexual assault/harassment claims that are not work-related or that do not arise from employment contracts. In the latter the court did not consider this question, because it found Chapter 4 temporally inapplicable (see below).

While the congressional record suggests a focus on employment disputes, nothing in the language of Chapter 4 restricts it to that context. So it is likely to be applicable in any case involving a sexual assault and/or sexual harassment dispute.

2. Chapter 4’s temporal application

Section 3 of the Act provides that it “shall apply with respect to any dispute or claim that arises or accrues on or after the date of enactment of this Act,” which is March 3, 2022. The courts have unanimously interpreted this provision to mean that Chapter 4 does not apply retroactively. Creative attempts to establish an “accrual” date post-March 3, 2022—for instance, when the defendant filed its motion to compel arbitration or when the Equal Employment Opportunity Commission issued a notice of right to sue—have failed. Courts have also rejected the following arguments: 1) that Chapter 4 eliminates the FAA’s pre-emption of state law that prohibits arbitration of sexual assault/harassment claims even if these “accrued” prior to March 3, 2022; 2) that Chapter 4 evidences a public policy that disfavours arbitration of sexual harassment/assault claims accruing before this date; 3) that Chapter 4 renders agreements to arbitrate such claims per se unconscionable; and 4) that individual claims accruing before March 3, 2022 may be saved by asserting class-wide claims on behalf of potential plaintiffs who may have been harmed after that date.

However, there is disagreement over when would be latest “accrual” date possible for the purpose of applying Chapter 4. Some courts have found the latest possible date to be when the plaintiff filed the lawsuit, while others have found that date to be when the alleged conduct occurred. In one case, Chapter 4 was found applicable to an alleged continuing violation (hostile work environment and retaliatory conduct) that spanned both before and after March 3, 2022. The U.S. District Court of the Eastern District of New York held that pursuant to the “continuing violation” doctrine, the plaintiff’s claims “accrue on the day of the last act in furtherance of the violation,” which in the context of the hostile work environment and retaliatory conduct claims continued after March 3, 2022.   

It also remains unclear what, if any, is the difference between a “dispute” and a “claim” and between “arises” and “accrues” in § 3. For instance, the U.S. District Court for the Southern District of New York found no meaningful difference and suggested that the Act refers to both “claims” and “disputes” simply “in order encompass various kinds of proceedings.” The U.S. District Court for the Southern District of Florida (in Hodgin v. Intensive Care Consortium Inc.) disagreed and separately considered whether the plaintiff’s “claim” had “accrued” (meaning she had a “complete and present cause of action”) before March 3, 2022 and whether her “dispute” had “arisen” (meaning there was a “disagreement, not just the existence of an injury) before that date.

While the “accrual” date has been hotly contested in the courts, as time passes this issue will become less relevant to the application of Chapter 4.

3. Standard for pleading a sexual assault/harassment dispute

In three cases, the U.S. District Court for the Southern District of New York has considered the standard that a plaintiff must meet in order for § 402(a) to invalidate an arbitration agreement. The court in some of these cases also considered whether meeting this standard should prohibit arbitration of the entire “case” or only of the sexual assault/harassment claims.  

Johnson v. Everyrealm and Yost v. Everyrealm involved claims brought by two former employees against the same employer for sexual harassment under the New York State Human Rights Law and the New York City Human Rights Law (which the court found to qualify as “state law” under § 402(a)), as well as for whistleblower retaliation and intentional infliction of emotional distress. Mera v. SA Hospitality Group involved claims for sexual harassment under the same New York laws as well as wage and hour claims brought under the Fair Labor Standards Act and the New York Labor Law on behalf of a group of employees.   

In all three cases, the district court held that the plaintiffs were required to meet the FRCP Rule 12(b)(6) standard of plausibility with respect to their sexual harassment claims, and that once that standard was met, all “related” claims in the action would also be non-arbitrable.

In Johnson, Judge Engelmayer held that the plaintiff had plausibly pled a claim of sexual harassment under the New York City Human Rights Law and therefore Chapter 4 applied. Judge Engelmayer acknowledged that the FAA permits the splitting of arbitrable from non-arbitrable claims. Yet he also found a “contrary congressional command” in § 402(a), which makes a pre-dispute arbitration agreement invalid and unenforceable “with respect to a case which is filed under Federal, Tribal, or State law and relates to the ... sexual harassment dispute.” Therefore, Judge Engelmayer concluded that a well-pled sexual harassment claim makes an arbitration clause unenforceable “as to the other claims in the case.” He noted, however, that because the plaintiff’s claims all arose from his employment, he was not considering whether “claim(s) far afield might be found to have been improperly joined with a claim within the EFAA so as to enable them to elude a binding arbitration agreement.”   

Applying these principles in Yost, Judge Engelmayer found that the plaintiff’s factual allegations in support of a claim of sexual harassment were “threadbare” and failed to allege a “plausible claim” of sexual harassment under the New York City Human Rights Law. Judge Engelmayer therefore dismissed the plaintiff’s sexual harassment claims. He then held that, as a result, Chapter 4 could not prevent the arbitration of the remaining claims.  

Finally, in Mera, Judge Aaron found that the plaintiff had plausibly pled a claim of sexual harassment under the New York State Human Rights Law, and therefore that claim could not be arbitrated. However, he found that § 402(a) rendered arbitration agreements unenforceable “only with respect to the claims in the case that relate to the sexual harassment dispute.” Unlike in Johnson, the plaintiff’s wage and hour claims in Mera did not “relate in any way to the sexual harassment dispute.” Therefore, the plaintiff was compelled to arbitrate those claims. The action was stayed with respect to the wage and hour claims pending arbitration, while the sexual harassment claims proceeded in court.

The fate of claims joined with a sexual assault/harassment dispute may thus turn on how “related” they are to that dispute. This means that claims that are not directly sexual assault/harassment claims but are related to the underlying conduct may become non-arbitrable as long as the sexual assault/harassment claims are plausibly plead in the same “case”. In contrast, plaintiffs may not be able to easily bootstrap claims that are entirely unrelated to the underlying conduct or to the plaintiff’s sexual assault/harassment dispute in order to render them non-arbitrable.

These are still early days for FAA Chapter 4, and some of the cases discussed above are currently pending appeal. It is also important to note that neither the Act nor Chapter 4 of the FAA address other mechanisms that are used to avoid the litigation and/or the publication of conduct underlying sexual assault/harassment disputes, such as settlement agreements, confidentiality agreements, and NDAs.

SCOTUS Decided a Case That Purported to Be About Contracts!

The issue in the case was whether nursing home residents could vindicate their rights under the Federal Nursing Home Reform Act (FNHRA) in court.  At issue in the case were the rights to be free from unnecessary physical or chemical restraints and to be discharged or transferred only when certain preconditions are satisfied.  Ms. Talevski believed that 42 U.S.C. § 1983 provided the jurisdictional hook to get her to court because it provides for a cause of action for any person deprived of rights secured by the Constitution and laws "under the the color of state law;" that is, through state action.  Of note to contracts junkies, the petitioners in the case, Valparaiso Care and Rehabilitation's nursing home (VCR), claimed that laws that derive from Congress's Spending Power are not "laws" for the purposes of § 1983.  Rather, they are "contracts," and people like Ms. Talevski are third-party beneficiaries of those contracts.  Hence, the argument goes, § 1983 does not provide a basis for individual enforcement of the FNHRA.

In Health and Hospital Corporation of Marion County v. Talevski, the U.S. Supreme Court, per Justice Jackson (right) rejected VCR's arguments in a 7-2 ruling.  Ms. Talevski brought her action, alleging mistreatment of her husband, whose dementia progressed with shocking rapidity once he became one of VCR's residents in 2016.  According to the allegations of the complaint, VCR medicated Mr. Talevski into heightened dementia.  When Ms. Talevlski discovered the problem and had his medication tapered until his mental condition was restored, VCR accused him of harassing female staff and eventually used this as grounds to have him transferred to a separate facility 90 minutes removed from his family and kept him there, in violation of a court order.  

When Ms. Talevski brought her case on behalf of her husband in 2019 against VCR and related entities, known collectively in the litigation as HHC.  The District Court granted HHC's motion to dismiss, holding that no party could enforce the FNHRA through a § 1983 action.  The Seventh Circuit reversed.  

The case comes down to a dispute over the continued force of the Court's statement in Maine v. Thiboutot, 448 U. S. 1 (1980) that "laws" in § 1983 means "laws."  Building on dictum in Pennhurst State School and Hospital v. Halderman, 451 U. S. 1, 17 (1981), HHC and the dissenters argue that laws passed pursuant Congress's spending powers are not laws.  In Halderman, the Court noted that such laws are “much in the nature of a contract,” because, “in return for federal funds, the States agree to comply with federally imposed conditions.”  If FNHRA is a contract, then Ms. Talevski is a third-party beneficiary of that contract, and under the common law of third-party beneficiaries at the time that § 1983 was adopted, third-party beneficiaries could not sue to enforce contractual rights.  

Justice Jackson disposes of this syllogism with a one-two punch.  First, relying on an amicus brief from contracts scholars, led by Friend of the Blog, Mel Eisenberg(!), Justice Jackson attacked HHC's factual claim that the common law did not recognize the rights of third-party beneficiaries to sue to enforce contractual rights.  Second, she noted that the claim arises in tort, not in contract, and so the entire notion that contracts law might apply here is "at the very least, perplexing." 

Justice Thomas, writing in dissent, does not find the notion perplexing.  He argues that treating rights arising under laws enacted pursuant to Congress's Spending Clause power creates problems with the anti-commandeering doctrine.  Although Justice Gorsuch concurred in the majority opinion, he wrote separately to note the anti-commandeering issue, which the parties did not raise in this case.  Storm clouds gather on the horizon.

Detroit Institute of Art Settles Dispute over Provenance of a Van Gogh

When I was in practice, one of the partners in my firm was a prominent art lawyer.  His cases were fascinating.  One involved a well-known art dealer who was given a painting to show at various galleries but then sold it and fled the country.  I can't remember whether he was covering gambling debts or paying for a divorce.  It was one of those.  The partner told me, in essence, "These things happen."  Even though the works of art are worth millions, people's livelihoods depend on their reputations, and so transactions are done based on handshakes and relationships.  The players all know each other, so the danger of conversion is thought to be small.  Until it isn't. 

When I teach Sales, I sometimes come across such cases, and they implicate the doctrine of entrustment under UCC § 2-403(2), which provides:  "Any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business."  I suspect there was an entrustment issue involved in the controversy between Brazilian collector Gustavo Soter and the Detroit Institute of Art (DIA) over Vincent Van Gogh's painting, Une liseuse de roman (above).   

Claire Voon reported for The Art Newspaper in January that the painting was on loan to DIA.  Mr. Soter alleged that the painting had been stolen from him.  Mr. Soter claimed that he had bought the painting for $3.7 million and then transferred it to an unnamed third party without relinquishing title to it.  That unnamed third party then allegedly absconded with the painting and its whereabouts were unknown for years. U.S. District Court Judge George Caram Steeh found that the museum was blameless but encouraged the parties to settle their dispute, and ordered DIA not to allow the painting to be moved until the matter was settled. The exhibit of which the painting is a part was set to close at the end of January, and so the court ordered DIA to hold onto the painting until the matter could be resolved

The museum took the position that, under the federal Immunity from Seizure Act, no court could tell it what to do with the painting, as it had exercised due diligence before accepting the painting for exhibition.   It argued that the complaint should be dismissed.  Otherwise, the argument goes, foreign lenders would not send their paintings to be exhibited in the United States.  Courts could issue injunctions, and the paintings could be held in limbo.  

Fortunately, as Ed White reported in Fortune, in March Mr. Soter and Brokerarte Capital Partners LLC, his sole-owned company, reached a deal with the unnamed entity that transferred the painting to DIA.  Now the painting can be released from captivity, but the details of the deal are otherwise unknown.  While Mr. Soter dropped his claim for injunctive relief.  However, as of March, DIA did not consider the matter resolved.  It wanted the District Court vacate its decision granting the injunction so as to deprive it of precedential value.  

. . . And Forty Pages Later, We Know What "From" Means in Texas

As a graduate student, I learned that, because of imperfections in the human mind and in language, we usually fail to express any one true meaning in words.  As litigators trying to win for my client on a motion to dismiss, my colleagues and I often tried to persuade courts that contractual language had only one true meaning.  We often succeeded.  In my work on constitutional law, I reverted to my graduate-student approach to language, with a helping hand from James Madison (right):

Besides the obscurity arising from the complexity of objects, and the imperfection of the human faculties, the medium through which the conceptions of men are conveyed to each other adds a fresh embarrassment. The use of words is to express ideas. Perspicuity, therefore, requires not only that the ideas should be distinctly formed, but that they should be expressed by words distinctly and exclusively appropriate to them. But no language is so copious as to supply words and phrases for every complex idea, or so correct as not to include many equivocally denoting different ideas. Hence it must happen that however accurately objects may be discriminated in themselves, and however accurately the discrimination may be considered, the definition of them may be rendered inaccurate by the inaccuracy of the terms in which it is delivered. And this unavoidable inaccuracy must be greater or less, according to the complexity and novelty of the objects defined. When the Almighty himself condescends to address mankind in their own language, his meaning, luminous as it must be, is rendered dim and doubtful by the cloudy medium through which it is communicated.

I would belatedly attach as Exhibit A to Federalist #37 a recent 40-page opinion.  In Apache Corporation v. Apollo Exploration, LLC, the Supreme Court of Texas ably rendered the word "from" intelligible.  It began by recalling the common law rule that, in a contractual context, if the parties say that that are bound for one year, beginning from June 30th, they are bound until June 30th the following year, not until June 29th.  Because of the complex factual context, however, it does indeed take forty page to establish that, in this context, in this jurisdiction, unless altered by the parties, the common-law meaning of "from" is fixed, or at least, as Madison put it farther up the same paragraph, "liquidated."

Well, maybe it doesn't take quite 40 pages to work out what "from" means.  The facts of the case are pretty complicated.  But there is a part of the opinion that will definitely have you humming "What a difference a day makes."  In this case, because of wildly fluctuating prices and land values, "according to Apache, approximately $180 million of potential damages rides on the answer to whether the North Block portion of the lease expired on New Year’s Eve or New Year’s Day." 

Because the lease's primary term end date was January 1, 2010, after various extensions, under the common law rule, the lease at issue would terminate on January 1, 2016.  The parties could have departed from the common law rule; however, the lease in question manifested no intention to do so.

Thanks to members of the AALS Contracts Listserv, from which I learned that New York addressed this in a statute, NY General Construction Law § 20. 

A number of days specified as a period from a certain day within which or after or before which an act is authorized or required to be done means such number of calendar days exclusive of the calendar day from which the reckoning is made.  If such period is a period of two days, Saturday, Sunday or a public holiday must be excluded from the reckoning if it is an intervening day between the day from which the reckoning is made and the last day of the period.  In computing any specified period of time from a specified event, the day upon which the event happens is deemed the day from which the reckoning is made.  The day from which any specified period of time is reckoned shall be excluded in making the reckoning.

New York's Court of Appeals then made clear that the rule in § 20 applies in contractual as well as statutory contexts.  Messina v. Lufthansa German Airlines, 390 N.E.2d 758 (N.Y. 1979). 

Georgia Court Enforces One-Year Statute of Limitations in a Wrongful Death Case

In BPG Inspection v. Omstead,  BPG agreed to a fee of $380 to conduct an inspection of the home that the Omstead's were considering purchasing.  The key contractual language at issue ran as follows:

YOU MAY NOT FILE A LEGAL ACTION, WHETHER SOUNDING IN TORT (EVEN IF DUE TO OUR NEGLIGENCE OR OTHER FAULT), CONTRACT, ARBITRATION OR OTHERWISE, AGAINST US OR OUR EMPLOYEES MORE THAN ONE YEAR AFTER THE INSPECTION, EVEN IF YOU DO NOT DISCOVER A DEFECT UNTIL AFTER THAT. THIS TIME LIMIT MAY BE SHORTER THAN THE LAW OTHERWISE PROVIDES.

A BPG employee undertook the inspection in February 2020 and provided a report that cautioned that the inspector's role was to identify material defects discovered upon visual examination.  "Latent, inaccessible, or concealed defects are excluded from this inspection."  The report mentioned a seven-foot tall retaining wall but observed that it seemed to be functioning as intended.  The inspector returned one month later in connection with some repairs that the Omstead's had requested of the sellers.  

The Omsteads later discovered that defects in the retaining wall was causing water to leak into their garage.  While they were attempting to address those defects in July 2021, the wall collapsed onto Mr. Omstead, and he died from his injuries. In September 2021, Mrs. Omstead filed suit against BPG and its inspector, alleging negligence, fraud, breach of contract, and breach of warranty.  The trial court denied summary judgment to defendants, finding its exculpatory clauses void as against public policy.  

In January, the Georgia Court of Appeals dismissed this case based on the one-year limitation on claims. Under Georgia law, such a limitation can be enforced, even in the case of a wrongful death suit.   The Court of Appeals stressed the courts' limited ability to find contractual provisions void for violating public policy.  The court canvassed Georgia statutes, including statutes that provide for the invalidity of some categories of contracts on public policy grounds.  It could find no statutory basis for invalidating the limitation at issue in this case, nor did it find any precedent that would permit it to do so consistent with Georgia law.  

Judge Barnes specially concurred.  Although she agreed that the majority had correctly applied existing law, she wrote separately to urge the legislature "to enact legislation prohibiting parties from contractually shortening the statute of limitation for bringing tort claims arising out of personal injury or wrongful death."  She noted that legislatures in Alabama, Mississippi, and South Carolina have already done so.  Hooray for inter-branch dialogue!  

And yet, I'm not sure if Alabama, Mississippi, and South Carolina have this one right.  Given the limited scope of the inspection and the low fee charged for it, limiting exposure to liability makes a lot of sense.  From the facts we have, it does not look like plaintiff would have a strong case, even if there were a way around the one-year limitation on claims.  These were latent defects, not discoverable without specialized expertise.  If the leak was substantial, there might have been evidence of water damage, but perhaps the problem was really that sellers concealed that damage.  So many possibilities.  And given that water slowly erodes at surfaces, I'm not sure how a trier of fact winds back to the clock to determine whether the problems that caused the wall to collapse should have been detectable fifteen months earlier.  

Saving Bitcoin (Yes, Really!): The 2022 Uniform Commercial Code Amendments

A great thing is happening in commercial law as I type these words: Musty corners of the Uniform Commercial Code are in the process of being brought up to date to deal with the realities of twenty-first century commerce. The 2022 UCC Amendments now being considered in state legislatures across the country are replacing the "writing" requirements baked into Article 2 (Sales), Article 3 (Negotiable Instruments) and elsewhere with the more flexible "record" that can be electronic or written and represents commercial reality. The comprehensive system of secured lending contained in Article 9 is being updated as well. These revisions will provide a stable system of rules that address once-unimagined electronic assets like NFTs (non-fungible tokens) and cryptocurrency to enable them be safer and more attractive forms of collateral because of the certainty with which a lender can secure its position.

So yes, that "electronic basketball card" NFT your cousin bought last year could actually end up being pledged as collateral that helps that cousin get a loan. As Yakov Smirnoff used to say, "What a country!"

But I digress. To this professor of payment systems law, the most exciting part of the package of 2022 UCC amendments is new Article 12, entitled "Controllable Electronic Records." Article 12 creates state commercial law rules to govern blockchain assets like bitcoin and other cryptocurrency, as well as any other technology (present or future) where a purely digital record is capable of being under exclusive control.

For those unfamiliar, the paradigm-changing innovation brought about by bitcoin circa 2009 was that, through blockchain programming methodology, it allowed for the creation of a digital token that could not be copied (or in currency terms, counterfeited). A thought experiment with paper currency will demonstrate how useful blockchain programming actually is. While counterfeiting is an occasional problem for paper currency like the U.S. dollar, imagine the disaster for the use of cash as a store of value if any trickster with a photocopier could make unlimited and undetectable copies. Eventually, no one would accept cash as payment. Why would you when you could just as easily print your own? Increased money supply facilitates inflation, which is bad enough, but an infinite increase in the money supply would eventually reduce its value to zero.

The trouble with digital files, then, is that they are susceptible to the infinite creation of perfect copies. Bitcoin changed all that through blockchain programming. Because of verification on a decentralized computer network, only one bitcoin token could demonstrably exist as the verified real thing, even in the face of dozens of ostensible duplicates. In payment system terms, this means that bitcoin solved the "double-payment" problem preventing the creation of a digital and decentralized asset. Yay for bitcoin!

But not quite. The creation of non-counterfeitable digital assets has spawned (and is continuing to spawn) numerous applications, such as "trading card" collectable NFTs, digital shareholder governance, smart contracts, and even the possibility of marketable electronic title for real property. Meanwhile, bitcoin and its crypto-progeny have fallen quite short on the original use case for blockchain: a mainstream payment system. Instead, cryptocurrency has become largely the province of high-risk speculative investment and hobbyists. The recent collapse of the FTX cryptocurrency exchange and some high profile crypto-heavy commercial banks suggests that pure speculation is ultimately not a viable path forward. What bitcoin-and-company are truly lacking is widely accepted use as a payment system.

UCC Article 12 is primed to change that. It creates the legal safeguards and commercial certainty that bitcoin needs break out of its niche. Article 12 does this by establishing a basic legal regime for the ownership and transfer of "controllable electronic records"—a category that includes all decentralized cryptocurrency. Rather than focus on physical concepts of possession, the UCC revisions focus on control, as shown in this excerpt from subsection (a) new section 12-105:

§ 12-105. Control of Controllable Electronic Record.

(a) [General rule: control of controllable electronic record.] A person has control of a controllable electronic record if the electronic record, a record attached to or logically associated with the electronic record, or a system in which the electronic record is recorded:

(1) gives the person:

(A) the power to avail itself of substantially all the benefit from the electronic record; and

(B) exclusive power, subject to subsection (b), to:

(i) prevent others from availing themselves of substantially all the benefit from the electronic record; and

(ii) transfer control of the electronic record to another person or cause another person to obtain control of another controllable electronic record as a result of the transfer of the electronic record; and

(2) enables the person readily to identify itself in any way, including by name, identifying number, cryptographic key, office, or account number, as having the powers specified in paragraph (1).

This provision is technology neutral. It clearly covers blockchain assets like bitcoin while still leaving room for other technological innovation in the realm of decentralized digital assets. The only inquiry in connection with making a transaction occur is the existence of control, and the ability to transfer it to another. Article 12 gives bitcoin the legal certainty that existed for centuries in the world of commercial paper by establishing a clear and comprehensible regime of control to stand in the place of the (literally impossible for bitcoin) regime of physical possession.

And there is much more. What good is digital value as a cash substitute if you can't spend it? New Article 12 takes care of that by adapting the centuries-old regime that made a success of commercial paper: negotiability. While the musty negotiable instruments term of "holder in due course" does not appear in the statutory text of Article 12, the definition of a "qualified purchaser" is clearly inspired by it. Section 2-102(a)(2) provides:

“Qualifying purchaser” means a purchaser of a controllable electronic record or an interest in a controllable electronic record that obtains control of the controllable electronic record for value, in good faith, and without notice of a claim of a property right in the controllable electronic record. 

What then is the result of being a qualified purchaser, of (for instance) taking bitcoin as payment in exchange for vale, in good faith, and without notice of a claim to asset? Article 12 provides that the party taking the bitcoin takes it free-and-clear as against anyone else in the world. Subsection (e) of section 12-104 provide for this important commercial law legal right:

§ 12-104. Rights in Controllable Account, Controllable Electronic Record, and Controllable Payment Intangible.

[* * *]   

(e) [Rights of qualifying purchaser.] A qualifying purchaser acquires its rights in the controllable electronic record free of a claim of a property right in the controllable electronic record.

Now,let's tie this all together. Based on the above statutes, a seller of goods or services now knows—from a legal perspective—exactly what it must do to accept cryptocurrency payments with the assurance that the transaction is not going to be undercut by an unknown party. If Joe's Hardware Store takes the steps necessary to obtain "control" of bitcoin and it does so as a "qualifying purchaser" of the bitcoin in exchanging its valuable goods and services for that bitcoin, then the transaction is complete. Period. No one else can show up on Joe's doorstep and claim a lien or other legal right to the bitcoin. The legal uncertainties that arise from taking this "mysterious" cryptocurrency as payment are now resolved. It works with as much certainty as credit cards, checks, or—dare I say it—cash.

The 2022 amendments to the Uniform Commercial Code are set to play a crucial role in "saving" bitcoin by empowering it and other cryptocurrency to live up to its original potential, not as some quirky, speculative investment, but as an actual payment system.

Texas AG Ken Paxton Seeks to Scuttle Settlement With Whistleblowers

Image by Gage Skidmore

While I was in Texas for KCON, I came across this news article from James Barragán in The Texas Tribune.  In short, Texas Attorney General Ken Paxton (right) agreed to a $3.3 million settlement with eight whistleblowers who worked with him and were terminated or resigned after accusing him of corruption and abuse of office.  They agreed to pause their suit against General Paxton so that a payment of the settlement could be arranged. 

General Paxton now thinks the pause should to continue indefinitely, and plaintiffs have had to return to court to ask the court to allow the case to proceed.  The Texas legislature is refusing to approve the payment, and Paxton is now arguing that the whistleblowers, having agreed to a settlement that cannot be implemented, should walk away with nothing.  If the legislative session that ends on May 29th awards them nothing, they can wait, General Paxton avers in a legal filing, until the next legislative session . . . in 2025 and then 2027, and so on.

It seems an important commentary on our time that the incredibly powerful Attorney General of our second-most populous state should engage in corruption atop corruption and it doesn't even merit national news.  My quick Google search turned up no reporting on the issue in the national press.  General Paxton boasts on his website that he brought suit against the Obama Administration 27 times in two years.  Sixteen months into the Biden Presidency, General Paxton had already brought 25 challenges to that administration's policies.  It is hard to keep straight all of the cases that the U.S. Supreme Court has heard in the past few years that are captioned Texas v. United States.  And yet, news of significant corruption and abuse of legal process by a politician with a national impact merits little more than a shrug and a sigh.  I spoke with some friends from Texas about the story, but they could not disentangle this story about corrupt politicians from all the others and responded with hopeless resignation.

The settlement agreement included a provision for an apology from Paxton to his former subordinates.  There are no reports that General Paxton has issued the apology.  The Texas Legislature apparently has no interest in using taxpayer dollars to pay for a settlement that would resolve General Paxton's legal problems in this case.  People interested in learning about the other legal fixes for which General Paxton has never been held accountable, including two indictments for securities fraud which somehow, after seven years, still have not gone to trial, can read about them in the Texas Monthly.  

The Texas Montly also provides a litany of complaints about the inefficacy of General Paxton's office in fulfilling its primary mission -- addressing crime in Texas.  That's as may well be, but from this blog's perspective, there's just one legal delict that matters: breach of contract.

Sid DeLong on Loan Forgiveness and Injunctions (Preliminary and Nationwide)

NATIONWIDE IS ON OUR SIDE: LESSONS FROM THE STUDENT DEBT INJUNCTION
Sidney W. DeLong

In Nebraska v Biden, several states sued the Biden Administration to enjoin the Secretary of Education from implementation of the impending student debt “forgiveness” program under the under the Higher Education Relief Opportunities for Students Act (HEROES Act). The grounds were that that it was unauthorized by the Act and unconstitutional.

Plaintiffs sought a nation-wide preliminary injunction blocking implementation of the plan in a Texas district court, which denied relief on jurisdictional grounds, finding that the plaintiffs lacked standing to sue. In the linked opinion, the Eighth Circuit Court of Appeals unanimously reversed and granted an “injunction pending appeal.”[1] The opinion has several features of interest relating to so-called “nationwide preliminary injunctions.”  

Last month, the Supreme Court heard oral argument on the standing issue.  The Circuit Court held that the state of Missouri had standing to sue because a Missouri governmental agency, the Missouri Higher Education Loan Authority (“MOHELA”), obtained revenue as a result of “servicing” student debt, i.e. collecting loan payments.

The Supreme Court will probably rule in a way that renders the Eighth Circuit’s holdings on the injunction issues moot. But the reasoning that court used is of interest on the matter of nationwide preliminary injunctions.

Irreparable Injury

“It is alleged MOHELA obtains revenue from the accounts it services, and the total revenue MOHELA recovers will decrease if a substantial portion of its accounts are no longer active under the Secretary’s plan.” The Circuit Court held that such harm to MOHELA would irreparably harm the state of Missouri, either directly if MOHELA is part of the state for these purposes or indirectly because of its potential effect on state revenues.

The concept of injury here seems questionable. Who is injured when the government “forgives” a federally guaranteed student loan? Because of the guarantee, lenders and their assignees will be fully paid by the government (the taxpayers) in accordance with the loan guaranty program. Insofar as MOHELA is an assignee of student loans, it will be paid in full.

What about collection agencies whose income comes from the fees they obtain in servicing student loans? Presumably, if the loans are forgiven and the debts are repaid by the government and not by individual payments, there would be no further need to “service” the loans. As was acknowledged in the Supreme Court argument, this loss of fees would give collection agencies enough of an interest to have standing to sue. But since when does a collection agent have a legally enforceable right to the continuation of a debt it services? It seems unlikely that the contract be the creditor and the collection agent gives the agent such a right. Only if the “collection agent” is actually an assignee of the debt, which is not alleged in this lawsuit, then the assignor’s cancellation of the debt would certainly violate the assignee’s rights. But settlement did not affect the holders of the debt because the federal guarantee assures against any loss.

Even if a collection agent had a legally protectable interest in the servicing fees from a debt, violation of that interest would not cause an irreparable injury, giving the agent a general power to enjoin the settlement. An award of money damages would completely compensate for such financial loss. For the same reason, a damages award would compensate any entities, such as the state of Missouri, who derive benefits from the collection of those fees.

There is nothing irreparable about the threatened loss.

The sliding scale test for a preliminary injunction.

Ever since the decision in Winter v Natural Resources Defense Counsel, Inc., 555 U.S. 7 (2008), the Circuits have split on the correct test to apply in ruling on a preliminary injunction. The Winter majority propounded a four-part test in which each element must be established. Justice Ginsburg in dissent argued that courts could continue to use a “sliding scale” test, in which a strong showing of risk of harm might outweigh a weaker showing of likelihood of success on the merits.  In the years following Winter, circuits have split over which test to use.

The Circuit court applied a version of the sliding scale test, finding that a federal preliminary injunction is warranted: “where the movant has raised a substantial question and the equities are otherwise strongly in his favor, the showing of success on the merits can be less.”

But Nebraska seems to be a case like Winter, in which the party seeking the preliminary injunction has a strong case on the merits (given the Supreme Court’s likely resolution of the loan forgiveness validity question) but a weak case on irreparable harm (speculative losses of servicing fees).

Nationwide Injunctions. In a nationwide injunction, a court orders the U.S. government defendant to abate a national program even though the claim at issue is brought on behalf of only a few plaintiffs. But for a court to issue a nationwide injunction upon a showing of only localized harm violates a fundamental equitable principle of injunctive relief: An injunction order must be narrowly tailored to address only the specific irreparable injuries that the plaintiffs have demonstrated will result to them and the injunction must be justified by the balancing of the particular equities of the parties in the case. See generally, Laycock and Hansen, Modern American Remedies (5^th Ed.) Absent a class action, an individual plaintiff should rarely or never be entitled to enjoin a governmental defendant’s actions relating to other parties.

Despite these criticisms, and rather like the storied bumblebee that scientists proved was incapable of flight, the nationwide injunction is now a fact of life and has become the go-to strategy of both the Team Blue (e.g., in actions to enjoin Trump’s immigration policies) and Team Red (in the actions to enjoin the Affordable Health Care Act).

That is not to say that nationwide injunctions are not problematic from a practical basis. Because any district court can issue a nationwide injunction, forum shopping is an essential litigation strategy. Progressives typically file in New York hoping for an Obama judge; Conservatives typically file in Texas hoping for a Federalist Society judge. And the chance always remains that different district courts will issue conflicting temporary restraining orders or preliminary injunctions against an agency, making it impossible to comply with them all.

Members of the DC Mafia as imagined by Justice Kagan
Image by DALL-E

Although such a suggestion is fraught, perhaps the Court should consider issuing a rule that all actions seeking to enjoin a federal agency must be temporarily transferred to a single forum, e.g., a court sitting in the District of Columbia. They could be retransferred after disposition to the court where filed.

The Circuit Court held that a nationwide injunction was appropriate in Nebraska v Biden because the plaintiff obtained loans from around the nation and because it would have been unfeasible to tailor the order to block forgiveness of the specific loans as to which the plaintiff needed relief. The opinion states that “MOHELA is purportedly one of the largest nonprofit student loan secondary markets in America. It services accounts nationwide and had $168.1 billion in student loan assets serviced as of June 30, 2022.”

Nebraska thus adds another factor to be considered in issuing a nationwide injunctions, which is that they are warranted when the plaintiff’s claims are so numerous and geographically widespread that it is unfeasible to disentangle them from the government’s other activities. This factor certainly seems to distinguish Nebraska v Biden from the immigration cases where the orders could be limited to the plaintiffs.

Of course, as the Legal Realists will point out, the resolution of this case will not turn on the law of injunctions or of nationwide injunctions but upon the Supreme Court’s view of the legality of the debt forgiveness order, a question about which there seems to be little dramatic uncertainty.

[1] While the court appears to have granted the preliminary injunction, the exact effect of the ruling is unclear: (“We GRANT the Emergency Motion for Injunction Pending Appeal. The injunction will remain in effect until further order of this court or the Supreme Court of the United States.”) It is unclear to this author whether this is a stay pending the Circuit Court resolution of the preliminary injunction appeal or an injunction pending resolution of an eventual appeal on the merits of the substantive claim.)

Consumer Finance Protection Bureau Proposes Registry of Non-bank Entities Adhesive Boilerplate Terms

Back in January, the Consumer Finance Protection Board (CFPB) announced that it was creating a Registry of Supervised Nonbanks that Use Form Contracts to Impose Terms and Conditions that Seek to Waive or Limit Consumer Legal Protections.  The proposal and explanation run to 223 pages.

If you want the tl/dr version, CFPB Director Rohit Chopra (below, right) explains the reasons for the registry here.  The gist is that the CFPB does not like one-sided form contracts and terms of service.  One practice that Director Chopra highlights is "gag rules" that prohibit or even threaten to fine users who post negative comments about a product or website.    Another is contractual waivers that prevent consumers from suing companies, even thought those companies reserve their own right to sue their users or customers.  

Congress has already enacted the Consumer Review Fairness Act, which prohibited “gag clauses” in certain form contracts.  In so doing, Congress built on a tradition in U.S. law of ensuring that standard form contracts are free of coercive or onerous terms.  Similar regulation is in place Australia, Japan, the United Kingdom and the European Union.  The American Law Institute's new Restatement of Consumer Contracts Law recognizes the right of consumers to challenge not only unconscionable contracts but also the terms and conditions adopted as a result of a deceptive act or practice.

Director Chopra identifies the proposal as having three main features:

Our proposal has a number of key features:

First, the registry would help regulators and law enforcement more easily detect when companies are offering products and services using prohibited, void, and restricted contract terms described above. This would be especially useful to state and tribal regulators with limited resources to alert or take action against companies violating the law.

Second, the registry would assist the CFPB and the public to understand the types of terms and conditions that are in use in today’s marketplace, and their effect on the adequacy of underlying consumer financial protection laws that are being waived or limited. This would allow the CFPB and others to study the use of these terms, along with their risks and benefits, to inform our research, consumer education, and other functions.

Finally, the registry would inform how the CFPB conducts its supervision of nonbank financial companies. While banks and credit unions are subject to routine examination by regulators, many nonbank companies are not. The CFPB would use data from the registry to identify supervised nonbanks and the risks their terms and conditions pose, prioritize which firms to examine, and plan the scope of those exams.

Let's hope that SCOTUS allows the CFPB to continue its important work in the realm of consumer protection.

LPE Project on the Proposed FTC Ban on Non-Competes

We posted last week on the proposed new FTC rule that would impose severe limits on non-compete provisions in employment contracts.  

The Law and Political Economy Project has posted eight perspectives on the proposed rule.  It's a great collection.  Recommended reading!

 

FTC Puts the Kaibosh on Non-Competes

Lina Khan, FTC Chair

The Federal Trade Commission (FTC) has proposed a new rule limiting what it calls unfair methods of competition.  The rule, after some definitional mumbo-jumbo, is pretty straightforward and incredibly sweeping.  First the proposed rule provides:

(a) Unfair methods of competition. 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; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.

Boom!

But wait, you say.  What about all currently existing non-competes?  The FTC is not done yet:

(b) Existing non-compete clauses.

(1) Rescission requirement. To comply with paragraph (a) of this section, which states that it is an unfair method of competition for an employer to maintain with a worker a non-compete clause, an employer that entered into a non-compete clause with a worker prior to the compliance date must rescind the non-compete clause no later than the compliance date.

Boom!

The rest is notice requirements and narrow exceptions.  Employers would have 180 days from the effective date of the proposed rule to comply with the rescission requirement.

According to the FTC, non-competes suppress wages.  The FTC estimates that its proposed rule would increase workers’ earnings between $250 billion and $296 billion per year.

BOOOM!

Expect legal challenges.  Expect them to invoke the Supreme Court's recent invention, the major questions doctrine.