GeoLegal Weekly #16 - When the Rules of the Game Change
GeoLegal Weekly #16 - When the Rules of the Game Change
Last week, the FTC banned non-competes and SCOTUS contemplated giving the US president full immunity. How do we deal with a world of not just policy volatility but institutional volatility?
A big thesis underpinning this geolegal risk project is that the role of the law and institutions that write it, interpret or safeguard it is entering a new phase of volatility. This is a big shift. Businesses know how to gain influence when they know WHO to influence. As the locus of power shifts between institutions, businesses face strategic surprises at every turn.
How should business leaders and legal leaders deal with increasing policy uncertainty and the role the courts play in resolving it? First, we need to recognize it is happening. Second, we need to understand why it’s happening. Third, we need to understand how it manifests. And finally, we can get to the bottom of how to navigate through it. I’ll use recent events in the US to discuss this point which no doubt holds across many countries undergoing similar political stresses.
Institutional Volatility
Nearly every day we’re waking up to headlines in the US that the executive branch or the courts are taking settled law, policy or custom and reconsidering it. Last week served up a double dose with the US Federal Trade Commission throwing nearly every business’ contract repository into turmoil by invalidating non-competes across the country at the same time the US Supreme Court contemplated whether to expand presidential powers into full immunity. Earlier this month the Biden administration released plans to relieve massive amounts of student debt and this week it is floating a federal reclassification of marijuana. SCOTUS is soon due to rule on “Chevron deference”, a longstanding precedent related to how executive branch agencies make policy. The Court has already upended decades-old precedents on affirmative action and abortion.
As exciting as Congress banning TikTok may be to influencers and the national security community, for that to be the only substantive legislating in recent memory says something. Going around Congress when it is deadlocked isn’t new. But I’d argue that there have been guardrails to protect the degree to which other branches of government have felt comfortable making big shifts in the absence of legislative mandate. No longer. Go it alone is now the default.
An institutional rebalancing to the other branches of government has some big implications. First, Congress responds to business incentives like donations and lobbying. The courts do not (usually) and executive branch agencies tend to do so only in indirect ways. Congress is also extremely leaky - meaning businesses are able to gauge what will and won’t become law from a distance. Executive agencies are harder to predict as they can often control their own timing and can act outside their traditional guardrails when they feel like it, daring lawsuits to pull them back some day.
Which brings us to last week where it was the process more than the substance that caught my eye.
A Tale of Two Executive Privileges - FTC
Last week, the Federal Trade Commission dramatically expanded its own power and set in motion a process that would render non-competes (existing and future) unenforceable. In doing so, it effectively expanded its institutional focus on preventing anti-competitive practices that harm consumers to also include focusing on workers via second-order effects of competition (its theory being that forcing workers to take non-competes is an unfair way to compete as a business…but the harm is to workers, not consumers with whom the FTC is traditionally concerned.) The key point to note here is that this is controversial: The FTC took a very expansive interpretation of its rule-writing powers to draft this rule.
The action by the FTC wasn’t a surprise per se - both because it comes after proposed regulations were opened for comment last year and also because US President Joe Biden has been promising to wipe away non-competes for years. As Wiley Rein outline in an alert:
“The final rule is the culmination of years of rumblings concerning the enforceability of non-compete agreements nationwide. In 2016, then-Vice President Joe Biden urged the elimination of non-competes and then-presidential candidate Biden renewed his focus on non-compete agreements in a 2019 Time magazine article titled “Non-Compete Clauses Are Suffocating American Workers,” accompanied by the following caption: “We should get rid of non-compete clauses and no-poaching agreements that do nothing but suppress wages.” Biden explicitly called for federal action in the area on multiple occasions, and the FTC has targeted the area for a similarly lengthy period, including holding a public hearing on January 9, 2020, to examine whether there is a legal basis for creating a rule to restrict the use of non-compete agreements.”
Biden laid the ground work for the FTC to execute this in a 2021 executive order :
“To address agreements that may unduly limit workers’ ability to change jobs, the Chair of the FTC is encouraged to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
The Chair did just this and in a partisan 3-2 decision finalized its rule.
How about timing? Well, the US election is just months away and Biden needs to mobilize organized labor as well as individual workers who don’t believe the economy works for them and might otherwise skew toward Trump. And, to be fair, an economy where it’s ok to prohibit sandwich makers from practicing their craft for years after leaving their job is an economy that doesn’t really work for all workers. So, this policy will be a popular talking point on the campaign trail. It’s also a shrewd move because it’s the type of thing Biden can use to beat up on business in general - red meat to the Democratic base he needs to mobilize - without alienating specific businesses themselves.
The new FTC rule itself basically says that all past non-competes in the country become unenforceable after the rule goes into effect 120 days after publication, except for carve-outs for high paid employees in management roles. No new non-competes can be put into effect, even for high paid workers. Employers need to notify their employees of these facts by a date certain. Pretty much every law firm issued a brief on the specifics, so you can find good detailed explanations of the rule itself elsewhere.
But the bigger question is: These are the new rules of the game, but will they remain so? And what should you do as a business in the interim?
For companies that believe this is likely to be settled law, or who are risk averse, they can work to tighten up trade secrets, client solicitations and non-disclosure agreements to stop knowledge leakage from their organization in the absence of non-competes- creating a boon for law firms who can work with their clients to do this.
The legal tech sector is as good as any to think through implications. Isha Marathe has an interesting roundup of voices in Law.com about the impact on legal tech, which basically highlights the fact that so long as non-solicitation and trade secrets rules are in play, a lot of labor is stuck. I’d add that this is especially true when it comes to employees on sponsored visas who would need another sponsor anyway. But it does open the door to increased labor mobility which should have some positive effects on innovation and economic growth.
The problem is that much legal analysis around the FTC taking this action skews toward thinking it overstepped (one informal survey of 17 legal experts for the Yale Journal on Regulation found “almost everyone thought the rule will be struck down, either by SCOTUS or a lower court.”) That means that when the rules are challenged in courts by the US Chamber of Commerce and others, they will likely be invalidated or modified - and the FTC (and other agencies) could even be neutered in the process. Further challenges in the Court to “Chevron deference” also open a path to gutting the rule, as Covington lawyers point out in Bloomberg Law. When you add the chance the court undoes the rule to the chance that Biden loses the next election (let’s just call it 50% today) the balance of probabilities is that the rules are thrown out relatively soon.
And its not just the non-compete rule that’s at stake. The Chamber is filing law suits against numerous regulatory agencies “in overdrive.” It cites:
The SEC is wading into climate regulation by micromanaging environmental impact disclosures. The Occupational Safety and Health Administration has proposed a rule to enable union organizers, activists, and others to enter workplaces under the guise of “assisting” OSHA inspectors. An FTC rule targeting “unfair and deceptive fees” would threaten entire business models that incorporate variable or dynamic pricing.
Every rule is couched in the typical boilerplate about consumer and worker protection, but it’s a thin disguise for the real purpose: establishing sweeping new powers that can be weaponized whenever and against whomever these agencies choose. The thesis behind the power grab is that government knows better than markets, which is a costly idea for every American—consumers and workers included.
My point is not whether the administration or the Chamber is right. The point is that as a business the rules of the game are now quite unclear. So, you could just hold tight or slow-walk implementation, thinking it’s an aberration. In fact, you could actually scramble to lock in all your senior executives into non-competes immediately before the rule goes into effect, doubling-down.
Of course, existing and future employees will have seen the FTC action and likely believe non-competes are illegal and will remain so. Thus, they will view employers who insist on them as being aggressive and will negotiate hard to get them out of contracts, regardless of whether they revert to being legal in the future. Much human resources press is echoing the same point that culture matters even more now that you can’t lock employees in with non-competes which is fair enough. Moreover, states like California have already implemented their own version of this type of law through the legislature and I suspect the FTC action was designed to give air cover to other states for doing so.
Digesting all of that, basically what’s happened is that the Biden administration has pushed really hard on its perception of authority to create a rule that would force most businesses in America to take action but those businesses can’t be sure if they should treat it as the real rules. This is a much different dynamic than losing in Congress and swallowing an unhelpful policy. This is kind of a complete and utter mess of potential action and reaction multiplied across your entire employee base.
A Tale of Two Executive Privileges - Trump’s immunity
I won’t go into great detail about former President Trump’s immunity case in front of the Supreme Court even though some of the argumentation is better than a TV courtroom drama. The reason I raise it here is because it is emblematic of just how expansive the debate is on the rules of the game.
In short, Trump’s attorneys basically claim that the president is immune from prosecution if he does anything and is not impeached and convicted. The Justices threw some really interesting scenarios back at Trump’s team to test this - what if the president orders an assassination of a rival? What if the president is blatantly corrupt?
I’m not equipped to predict the Court outcome, but what I think is most interesting is the shift in societal acceptance that perhaps the president is actually above the law. After all, Trump did attempt to question electoral integrity in 2020 and a group of individuals - many acting in his name - criminally stormed and occupied the US Congress with at least indirect encouragement in 2021. He’s still the Republican de facto nominee.
After 9/11, the role of the US president and the executive branch expanded dramatically. As Congress often deadlocked after recent election cycles, various presidents of both parties have pushed ahead through regulation, as in the Biden adminsitration examples above. But what’s really striking is the sense that there might not actually be a limit to presidential power. For instance, the idea that Trump (who recently was threatened with jail time for contempt of court) could run for president from jail is an actual discussion in US politics at the moment. The fact that his supporter base probably support his unlimited immunity argument means as much as half the country are comfortable with this dramatic expansion of executive power.
All of which is to say that executive branch expansionism like the FTC’s move might generate business outrage but will not register with voters who are increasingly comfortable with the idea that the president is above the law and also probably like when the president does away with restrictions on their work life (25,000 out of the 26,000 comments submitted to the proposed non-compete rule supported removing it). While Trump is a unique figure this socialization of presidential power does provide cover for expansion way beyond the traditional executive branch playbook. That implies to me that we are in for much more pushing of the boundaries of settled law in coming years than we’ve seen outside of crisis response in recent memory.
Implications
To summarize, the US is a hot mess of unpredictability meted out by the executive branch and the courts that interpret what the administrative state does. For businesses, this implies the need to plan for both low probability outcomes as well as the chance the low probability outcomes ultimately get reversed.
This reversal may come in the Courts. But it also will come increasingly from turnover of these regulatory agencies that have a one vote majority in practice or built in because the agencies will flip frequently. And when the agencies are doing things that matters more this is a bigger problem: one academic study found that regulators are writing fewer rules in general but more rules with greater economic impact. When the courts rule on those agencies’ behavior, they could issue sweeping rulings - for instance, if the courts invalidates the FTC approach on non-competes, it could potentially shift the way all agencies write rules. That is a lot of potential volatility in the regulatory environment.
This is the reason that I increasingly think a typical risk prioritization approach is the not the right way to deal with geolegal issues. Non-competes may not be a top risk for your company, but not knowing the powers of your regulators could increasingly become a material challenge. The non-compete issue helps surface a broader trend that would otherwise be missed through a more narrow lens.
Tracking these types of risks - those that intersect between political power and legal basis - is not something companies are structured for. It will require increasing collaboration of lawyers (in house and external) with government affairs teams and political advisors to really figure out what the range of potential (not just likely) scenarios are. From there, the game is about building optionality and resilience.
All of which is easier said than done but subsequent posts will focus on how to do this.
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Special shout out to Karthik Sankaran, who joins the Hence Geolegal team as a strategist and whose insights are drawn upon in no small part above. Karthik has had a substantial career across many roles in the financial and research industries and it’s a pleasure to work with him for the third time! He also writes his own Substack on geoeconomics here.
-SW