Hawaii Real Estate
Hawaii Real Estate
Noncompete Agreements
Is your Hawaii noncompete agreement enforceable? Will it be after the Federal Trade Commission's proposed employee-noncompete ban finalizes? Listen for insight.
NONCOMPETE AGREEMENTS
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Introduction
E komo mai. Welcome to Hawaiʻi Real Estate, a podcast by the Hawaiʻi Association of REALTORS®. Our podcast airs the first Wednesday of each month. Each episode includes a Real Data Report, which describes, Hawaiʻi pricing, inventory, and market conditions, as well as a special focus piece, which comments on a current legal issue in the buying, selling, renting, leasing, or managing of property in Hawaiʻi.
Today is Wednesday, September 6, 2023, our focus piece for this episode looks at the Federal Trade Commission’s proposed rule banning noncompete agreements and updates you on a recent landmark decision by the Hawaiʻi Supreme Court governing Hawaiʻi noncompete agreements.
Before we get started, though, please join me in a short moment of silence to honor and mourn all those we lost in the devastating West Maui Wildfires.
Mahalo, and please consider joining me in supporting our charitable foundation at HawaiiRealtors.com/charitable. Lahaina will rise, again.
Real Data Report
Interest Rates
Federal Reserve Chair Jerome Powell took the stage in Jackson Hole, Wyoming two weeks ago to give his annual economic symposium speech. During his speech, he seemed to argue that the Federal Reserve’s Open Market Committee would not raise interest rates when it meets this month.
“Given how far we have come, at upcoming meetings we are in a position to proceed carefully . . . .”
The markets welcomed Chair Powell’s comments that the Federal Reserve could proceed carefully on further rate hikes.
“The major indexes ended the day with gains after Powell’s speech.”
And professional economic forecasters, like Bloomberg News, confirmed earlier projections that a September rate hike was unlikely.
Market pricing about September is unchanged only 20 percent chance of a rate hike.
A halt in interest rate hikes would, indeed, be welcomed news.
Mortgage Rates, Housing Prices & Inventory
Listeners of this podcast know that heightened interest rates have pummeled the housing sector. Chair Powell is not blind to the suffering:
“In the highly interest sensitive housing sector, the effects of monetary policy became apparent soon after liftoff. Mortgage rates doubled over the course of 2022, causing housing starts and sales to fall and house price growth to plummet.”
Plummeting sales and prices are owed at least in part, Chair Powell argues, to “higher interest rates” and inflation-fueled “softening in real household income growth . . . .”
In Hawaiʻi, however, median listing prices have increased since the Federal Reserve began raising interest rates in March 2022. Since that time median listing prices in Hawaiʻi rose to a high in August 2022 of $886,500, falling moderately until February 2023 when median listing prices in Hawaiʻi stood at $827,000. The current median listing price for a home in Hawaiʻi, at least as itʻs reported for July 2023, is $850,000, up $25,000 since the Fed’s first announced rate hike.
Where Hawaiʻi matches the national picture is home sales. Although I do not have figures on the number of homes sold in Hawaiʻi since the Fed first announced a rate hike in March 2022, I can infer with reasonable certainty from the data that is available that home sales in Hawaiʻi significantly slowed.
New listings dropped precipitously while active listings improved significantly, indicating that homes placed on the market during this period were not selling. That conclusion is confirmed by data on the median number of days a home would stay on the market, which increased during this period by 26 days from a low in 2022 of 40 days to a high reported this past July of 66 days.
Focus Piece: Noncompete Agreements
Introduction
And now for our Focus Piece. We focus this month on noncompete agreements—whether a proposed rule by the Federal Trade Commission will ban all noncomplete agreements in Hawaiʻi, and if not, what effect Hawaiʻi’s recent landmark Supreme Court decision has on the enforceability of Hawaiʻi broker noncompete agreements.
Jimmy John’s
Have you ever eaten at a Jimmy John’s?
“Ah, hello? Jimmy John’s?”
Yeah, Jimmy John’s, the sandwich shop. They’re popular on the mainland. Maybe you’ve seen their Super Bowl ad:
“Aloha . . . . I’m Jimmy’s John’s, and I have high quality, reasonably priced sandwiches, customizable for your business modern life.”
When you walk into a Jimmy John’s, you find a counter for placing orders and picking up sandwiches, along with a display of menu items. Seating arrangements usually include a combination of high tables, low tables, and bar-style seating. The color scheme tends to be a mix of red, black, and white (the company’s signature colors). The overall atmosphere is casual and geared towards quick service.
It’s a pretty standard setup for a sandwich shop. But if you entered a Jimmy John’s in the middle of the last decade, one thing was far from standard: the sandwich worker behind the counter was most likely subject to a noncompete agreement. The person who would ask:
· “What type of bread would you like?”
· “Would you like it toasted?”
· “Lettuce, onions, tomatoes . . . oil?”
· “Is this for dine in or take out?”
· And, “What kind of cheese would you like?”
that person, that person would likely be subject to a noncompete agreement.
Jimmy John’s franchises in the mid-2010s regularly required their sandwich-making employees to, as a condition of their employment, sign away their rights to work for competitors. During a sandwich maker’s employment and for two-years after they quit or were fired, they could not work for any business that “[derived] more than 10% of its revenue from selling submarine, hero-type, deli-style, pita, and or wrapped or rolled sandwiches, if [that] business [was] located within three miles of any Jimmy John’s.”
That’s an expansive noncompete. Think of all the business that probably derive more than 10% of their revenue from selling sandwiches or wraps. There’s the obvious Jimmy John’s competitors—Subway, Jersey Mike’s, Quiznos—but there’s also the less-than obvious restaurants like McDonald’s, Burger King, Panara Bread, Potbelly, Au Bon Pain and probably most restaurants that don’t require reservations or evening attire.
A Jimmy John’s sandwich maker who was subject to the Jimmy John’s standard noncompete agreement could not work at any of those businesses if they were within three miles of any Jimmy John’s—not just the Jimmy John’s where the employee worked, any Jimmy John’s.
Why such an expansive prohibition? What trade secret or confidential business information was Jimmy John’s concerned that their sandwich making employees would reveal? Was Jimmy John’s some secret sandwich innovator that sustained its competitive advantage in the sandwich-making marketplace by every two years developing some sophisticated recipe or processes that, although a closely guard trade secret or confidential business practice, it taught to its frontline sandwich maker?
No. Jimmy John’s probably wasn’t concerned that one of their sandwich workers would accept a job at McDonald’s or some other restaurant that sells sandwiches or wraps and then take down the Jimmy John’s empire by divulging Jimmy John’s tactics for layering a sandwich.
Instead, Jimmy John’s likely insisted that their sandwich making employees sign an expansive noncompete agreement to keep wages low. Preventing workers from accepting alternative employment denied their employees their principal bargaining advantage: threatening to walk unless they’re paid more.
That’s at least what states attorneys general argued when they brough lawsuits against Jimmy John’s seeking to invalidate the sandwich worker noncompete agreements on the ground that they were an unfair method of competition.
“A lawsuit against Jimmy John’s revealed that the sandwich shop forces all employees, including low-wage sandwich makers and delivery truck drivers to sign an employment agreement with a non-competition clause that bars them from working for any competitor for two years after they leave.”
In short order, Jimmy John’s settled with the New York Attorney General and Illinois Attorney General, agreeing to rescind all sandwich maker noncompete agreements, promising not to enter into any new noncompete agreement with any sandwich maker, and committing to inform each sandwich maker worker who was already subject to a noncompete agreement that their noncompete agreement was unenforceable.
End of story, right? Wrong.
The actions by the states attorneys general put low-wage-/low-skilled-worker noncompete agreements in the national spotlight. Soon, the Federal Trade Commission would, under the leadership of Chair Lina Kahn, begin asking:
· “How pervasive are noncompete agreements?”
· And, “Are they really necessary for protecting trade secrets, confidential business information, or a business’s good will, or are they simply an unreasonable restraint of trade meant to reduce worker wages or mobility?”
The Federal Trade Commission put their economists to work on those questions. What they found seemed to undermine the basis for most noncompete agreements. Here’s Chair Lina Kahn on their findings:
“So noncompete clauses today govern around one in five U.S. workers. These clauses may have started in the boardroom, but today what we see is that they’ve proliferated across sectors and across income levels. So we’re talking about nurses, we’re talking about fast foot workers, janitors, but also physicians and engineers. And we’ve now seen that in the aggregate, these clauses can really restrict competition—both in labor markets, but also in product markets. And so our economists calculated that collectively American workers are earning around $300 billion less because of these noncompetes and that, on the whole, innovation and entrepreneurship are suffering.”
The federal agency charge with preventing unfair methods of competition used this data to support a proposed rulemaking banning nearly all noncompete agreements in the United States.
“The Federal Trade Commission today issued a proposal banning noncompete clauses that prevent workers from switching employers or starting a new business.”
Her agency’s proposed rule received the full support of the president, who declared during the State of the Union he gave just a month later,
“For too long, workers have been getting stiffed. But not anymore. We’re banning those agreements where companies have to compete for workers and pay them what they’re worth. [Clapping]”
and later during a speech recorded by the Wall Street Journal,
“Workers should be free to take a better job if someone offers it.”
The FTC’s proposed rule banning noncompete agreements is unlikely to become final until April of next year. If it does become final, existing employee noncompete agreements will become null and void, and employees once bound by them will, in the words of President Biden, “be able to walk across town and take the same job at another business and make a few more bucks.”
But there are real questions of whether the FTC has authority to regulate competition. Everyone seems to agree that the agency has authority to adjudicate whether a particular noncompete provision is illegal. They can identify a noncompete agreement that they think is an unreasonable restraint of trade, and they can sue to void it, just like the state attorneys general sued to void the Jimmy John’s sandwich worker noncompete agreement. Whether the FTC has authority to issue a nation-wide rule prohibiting noncompete agreements, however, remains an open question.
In this focus piece, we examine whether the FTC has authority to prohibit employee noncompetition agreements, and if it does, what likely effect that prohibition will have on broker noncompete agreements here in Hawaiʻi.
Does the FTC have authority to ban noncompete agreements?
Wonk Warning
This is going to get a little wonky. To accurately predict how a judge will construe a statute, we must understand how a judge reads a statute.
There are two major camps of judicial construction: textualism, represented by U.S. Supreme Court Justice Elena Kagan and former U.S. Supreme Court Antonin Scalia, and purposivism, represented by former U.S. Supreme Court Stephen Breyer. These are waring camps, but one side is winning. It’s best to understand who’s on which side, and which side is winning, if you want to accurately predict whether courts will allow the FTC to ban noncompetes.
Also, of course, to understand how a judge will construe a statute, you must delve into the statute itself. So we are going to take a close look at the Federal Trade Commisssion Act, the act that created the Federal Trade Commission and that empowers it to act.
Wonky does not mean boring. Stay with me. By the end of this you’re going to understand how to think like a judge, and you’re going to have a pretty solid idea of whether the FTC’s proposed noncompete ban will be upheld.
Two potential sources of competitive rulemaking power (introducing sections 5 and 6).
There are two potential sources for the FTC’s purported authority to issue a substantive rule banning employee noncompete agreements: section 5 and section 6(g) of the FTC Act. In the following chapters, we look at each potential source of authority, and analyze whether a court would likely uphold under that authority an a substantive rule issued by the FTC banning employee noncompete agreements.
First to section 5, which directs the FTC to “prevent” unfair methods of competition.
FTC Act’s § 5’s “prevent” does not empower FTC to create substantive rules.
Does section 5’s directive to “prevent . . . unfair methods of competition” authorize the FTC to issue substantive rules, including a proposed rule banning noncompete agreements? The FTC argues that it does.
At first glance, the FTC’s argument is solid. “Words are to be understood in their ordinary, everyday meanings,” U.S. Supreme Cout Justice Antonin Scalia argued in his commanding text on statutory construction, and prevent is a prospective term meaning to stop something from happening. So one can see how a statute empowering an agency to prevent unfair competition could be interpreted to grant that agency power to issue substantive rules prohibiting unfair methods of competition.
But that argument might lose sight of the forest from the trees. Perhaps no fault is more common in construing a statute than defining a word or phrase without reference to that word or phrase’s context. As U.S. Supreme Court Justice Elena Kagan explains,
“Even when the question is about what a single word means or what a single phrase means . . . .”
--like whether a statute empowering an agency to “prevent . . . unfair methods of competition” grants that agency authority to issues substantive rules prohibiting unfair methods of competition--
“the way to figure out that question is not just to stare at that single word or phrase. You don’t put blinders on.”
So someone construing a statute shouldn’t allow themselves to become myopic. They must broaden your focus beyond the single word or phrase they’re attempting to define or apply. They can’t just mindlessly pull a dictionary from the shelf and plug-and-play a word’s definition into a text. They must look to the word’s context. They must, in the words of Justice Kagan,
“[L]ook at the design and structure of the statute as a whole and see what the statute is trying to do, and how this particular phrase fits with what the statute is, uh, is doing.”
So, if we’re to understand if section 5’s directive to the FTC to prevent unfair methods of competition, we must look to how that provision relates to the whole.
Section 5’s broader context could help us understand what Congress meant when it directed the FTC to prevent unfair methods of competition.
Much of the rest of the section of the statute speaks about the commission’s authority to conduct adjudicative proceedings whenever it has reason to believe that a person or business has employed an unfair method of competition. Adjudicative powers and rulemaking powers are very different. Rulemaking is, as we noted above, prospective. You make a rule to warn people what kind of conduct is prohibited. Adjudicative powers, by contrast, are retrospective. The power to adjudicate a claim is the power to determine if someone violated a rule—you’re looking backward in time to see if an already established rule has been violated. It’s the difference between the power to define a crime murder and the power to conduct a trial to determine if someone committed murder.
Although the term prevent implies a prospective power to issue substantive rules, its resting place in a section 5, a section governing retrospectively-minded adjudications, suggests that its power is limited to conducting adjudications and issuing procedural rules governing adjudications. Most modern judges, who by and large favor the textualist method for constructing a statute (“look to context and structure, and that’s a critically important part”), would likely agree, and hold that section 5 does not grant the FTC the authority to issue a substantive rule banning noncompete agreements.
At the start of this focus piece we mentioned that there are two potential sources of authority for the FTC’s proposed rule banning employee noncompete agreements: section 5 and section 6(g) of the FTC Act. We’ve just shown that a modern court is unlikely to find substantive rulemaking power in section 5. The notion that a modern court would uphold the FTC’s proposed rule banning noncompete agreements on the basis of the commission’s authority under section 5 has been largely debunked.
But there’s still section 6(g), which empowers the FTC “to make rules and regulations for the purpose of carrying out the provisions of the [FTC Act]. Does that empower the commission to issue substantive rules governing competition in the marketplace and, thus, empower it to ban employee noncompete agreements?
It is to that question that we now turn . . . .
FTC § 6(g)’s “to make rules and regulations for the purpose of carrying out the provisions of [the FTC Act] does not empower the FTC to make substantive rules.
Purpose or Values
If section 6(g) empowers the FTC to issue substantive rules, it requires the help of section 5. Section 6(g) authorizes the FTC “to make rules and regulations for the purpose of carrying out the provisions of [the FTC Act].” Section 5 declares unfair methods of competition unlawful. So can section 6(g) bootstrap section 5 and authorize the FTC “to make rules and regulations” to prohibit unfair methods of competition?
That would seem sensible. But how would a judge see it?
Justice Breyer, a purposivist, not a textualist like Justice Kagan or Justice Scalia, recommends six tools for construing a statute.
“Text, history, tradition, precedent, purpose or values, and consequences are relevant to every judge, and if you’re going to say no, I’ll find cases for you.”
No, no. We’re not here to argue. We understand there’s a debate between judges who follow your method of construing a statute, purposivist, and judges who follow Justice Scalia’s and Justice Kagan’s method for construing a statute, textualist.
We just would like to know, Justice Breyer, how judges in your camp would construe the FTC Act.
“Text, history, tradition, precedent, purpose or values, and precedent.”
Right, sure, but the four first tools you list would be employed by a textualist. As a purposivist you go further and also consider—
“Purpose or values and consequences.”
Right. Can you explain those?
“Look at the purpose. And that’s where we’re talking about purpose or values. And finally, look at the consequences of deciding one way or the other, not any old consequence in the world, but consequences that have to do with the purpose. If it’s a speech case, it’s speech consequences that matter. A privacy case, unreasonable search, it’s the privacy, unreasonable search consequences—alright?”
Yeah, alright—so Congress, in passing the FTC Act, wanted to prohibit unfair methods of competition—that was the statute’s purpose—but Congress knew that there wasn’t enough paper or ink in Washington to draft a statute describing all existing methods of unfair competition. And even if there were, some ingenious captain of industry would quickly invent another before Congress could prohibit it. So Congress wrote a statute that broadly prohibited “unfair methods of competition,” and tasked the Federal Trade Commission with identifying or defining the various “unfair methods of competition.”
It would make sense, therefore, that Congress intended to empower the FTC to make rules prohibiting unfair methods of competition. If the FTC Act’s purpose is to prevent unfair methods of competition, it would make sense to interpret section 6(g)’s provision empowering the FTC “to make rules and regulations” as a broad authority to promulgate rules that prevent unfair methods of competition, like a rule prohibiting noncompete agreements.
Some argue that the authority “to make rules and regulations” under section 6(g) is limited to making procedural rules, like prescribing the means and methods of serving a complaint or notice of a hearing. They argue that section 6(g) gives the commission the authority to set the rules for determining whether someone engaged in an unfair method of competition, not to define whether methods of competition are fair or unfair. In short, they argue that they should not give full effect to the general power to “make rules and regulations.”
But that argument flies in the face of the purpose of values inherent to the statute. As we’ve shown, Congress passed the Trade Commission Act because they wanted to prevent unfair methods of competition—and they knew they need an expert agency, the Federal Trade Commission, to define what is an unfair method of competition.
Construing the power “to make rules and regulations” as limited to the power to making procedural rules and regulations would also fly in the face of a widely accept canon of statutory construction. I can’t pronounce the Latin, but it loosely translates to: “general terms are to be given their general meaning.” Without some contextual or other indication to the contrary, general terms must be given the full, fair scope. A court cannot insert its views and constrict a general authority granted by Congress.
The most popular argument against this otherwise widely accepted rule of construction is that a general word or phrase, like “make rules and regulations”, should be limited to what the Congress intended when it enacted the statute. That view has, however, has been widely and very publicly and embarrassing rebuked in high profile cases before the United States Supreme Court, including, most notably, the so-called Slaughter-House Cases.
Litigants in the Slaughter-House Cases argued that the rights found in the post-Civil War amendments to the United States Constitution should be limited to black Americans because they were written and ratified to protect newly freed black Americans. Under their reasoning, for instance, the 13th Amendment’s ban on slavery only banned slavery of black Americans, thus leaving the door open to enslaving other races of Americans.
The court roundly and rightly rejected that argument. Although it found that “negro slavery alone was in the mind of the Congress which proposed the [13th Amendment’s proscription against slavery, the amendment], forbids any kind of slavery.” The court reasoned that the amendment’s language that “slavery . . . shall [not] . . . exist in the United States” was to be given its fair and just weight . . . .” In other words, without some contextual or other indication to the contrary, general terms must be given their full meaning.
Section 6(g) of the Federal Trade Commission Act empowers the Federal Trade Commission “to make rules and regulations.” Why shouldn’t that general power be given its full meaning? From a purely semantic perspective, why shouldn’t the commission’s power “to make rules and regulations” be construed to empower the commission to make substantive rules?
Plus, of course, as we’ve seen, the purpose of the Trade Commission Act was to create an expert agency to identify or define unfair methods of competition. So, even if you grant a litigant their backward Slaughter-House-Cases-style-courts-should-have-the-power-to-limit-general-powers-granted-by-Congress-according-to-what-they-think-Congress-had-in-mind-when-it-passed-legislation argument, the power “to make rules and regulations” to prevent unfair methods of competition was certainly in the minds of Congress that passed the legislation. So, on a purpose or values analysis (“purpose or values and consequences”), the Trade Commission Act’s grant of authority to the FTC “to make rules or regulations” to prevent unfair methods of competition, includes the power to make substantive rules prohibiting particular kinds of unfair competition.
This conclusion is backed up by an opinion of the D.C. Circuit Court of Appeals, a highly influential federal appellate court, which other courts often follow, especially on deisions involving federal agencies. Back in the 1970s, gas pumps did not display octane ratings. Consumers were being swindled because they had no reasonable way to determine what octane gas they were purchasing, so the Federal Trade Commission promulgated a rule requiring gasoline pumps at service stations to display octane ratings, a substantive rule.
Two trade associations and 34 gasoline refining companies challenged the rule, arguing that the Federal Trade Commission lacked the authority to issue substantive rules banning particular methods of business as anti-competitive. The court rejected the challenge and affirmed the commission’s authority to issue rules banning unfair methods of competition, holding that the Federal Trade Commission Act conferred on the Federal Trade Commission the authority to promulgate trade regulation rules having the effect of substantive law—in short the commission had the authority to issue substantive rules banning certain kinds of anti-competitive behavior. The court supported its holding in part by reasoning that the FTC Act’s grant to the commission of the authority “to make rules and regulations for the purposes of carrying out the provisions of [the act] . . . plainly authoriz[ed] rule-making and nothing in the statute or in its legislative history preclude[ed] its use for [that] purpose . . . .” or, to put it another way, “the Federal Trade Commission is authorized to promulgate rules defining the meaning of the statutory standards of the illegality the Commission is empowered to precent.”
This case, National Petroleum Refiners Association v. FTC, this is the case that the FTC cites when it argues that it has substantive rulemaking powers. It has never been overruled, but for reasons we’re about to see, the decision rests on shaky footing.
Consequences
Justice Breyer, remind us, again, of the six tools that are available to judges who are construing a statute.
“Text, history, tradition, precedent, purpose or values, and consequences . . . .”
Right, thank you. Can you expound on the sixth tool? In constructing a statute’s meaning, how do purposivist judges like yourself account the consequences of a particular statutory construction?
“[Not] any old consequence in the world, but consequences that have to do with the purpose. If it’s a speech case, it’s speech consequences that matter. A privacy case, unreasonable search, it’s the privacy, unreasonable search consequences—alright?”
Alright, sure, yeah that makes sense. If Congress passes legislation to accomplish an objective, it would be unreasonable to construe that legislation in manner contrary to that objective. So, if Congress passes a statute directing and empowering a federal agency to prevent unfair methods of competition in the marketplace, as they did when they passed the Federal Trade Commission Act, then we should construe that statute in a manner to would reduce or eliminate unfair methods of competition, not in a manner that would countermand the statute by helping unfair methods of competition multiple or thrive.
With that in mind, let’s look, again, at the FTC’s authority under section 6(g) “to make rules and regulations.” If we construe that rulemaking power as limited to making procedural rules, what consequence what that have on the FTC’s mission to prevent unfair methods of competition in the marketplace?
Well, let’s see.
The FTC would not be able to promulgate substantive rules banning particular kinds of unfair competition. Its authority to issue rules preventing unfair competition would be limited to issuing procedural rules for adjudicating an unfair competition claim.
That’s the position it was in before 1962: the only rules the FTC issued before 1962 were procedural rules governing FTC adjudications. There were no substantive rules defining what acts or practices were unfair methods of competition. Instead, the FTC would determine whether a particular act or practice was an unfair method of competition by hauling an accused party in to defend itself before an FTC adjudication.
Limiting the FTC’s efforts to define unfair methods of competition through adjudication, Judge Wright argued in his majority opinion in National Petroleum Refiners Association v. FTC, produced statutorily undesirable consequences. Congress had directed the FTC to define unfair methods of competition, “but like the federal courts it was designed to supplement, [the FTC had] remained hobbled in its task by the delay inherent in repetitious, lengthy litigation of cases involving complex factual questions under a broad legal standard” and the “case-by-case purely adjudicatory method of elaborating ‘the [standard of what constitutes an “unfair method[] of competition’ and applying it to discrete business practices [had] produced considerable uncertainty . . . .”
National Petroleum Refiners Association v. FTC stands for the rule that the FTC has authority to define unfair methods of competition by issuing substantive rules defining certain acts or practices as unfair methods of competition. A service station gas pump that does not display its octane rating, for example, is an unfair method of competition. And, if the FTC has its way, an employee noncompete agreement is an unfair method of competition. The FTC should not be required, Judge Wright argues in his majority opinion in National Petroleum Refiners Association, to define unfair methods of competition through an onerous and unpredictable national whack-a-mole contest—the FTC Act’s sought to avoid that consequence.
But few courts reason like that anymore. Justice Breyer has retired and his advice to judges that they consider the consequences of their rulings have faded. The consequences of construing a statute in a particular way, most judges argue today, should be divorced from the actual construction of the statute.
Judges are much less likely today to consider whether deciding a case a particular way will support or counterman a statute’s purpose or values. Instead they will look first to a statute’s text. If that is vague or ambiguous, they might look to its history or tradition, but they are much less likely now than they were when National Petroleum Refiners Association was decided to look to a statute’s purpose or the consequences of their decisions for that purpose.
In the words of Justice Kagan, “We’re all textualists now.”
Don’t look to legislative history.
National Petroleum suffers another infirmity. It relies on legislative history, which in recent years has fallen into disfavor. Committee reports, floor statements, and the like are, in the accumulated wisdom of the modern judiciary, unreliable. Congress is a collection of individual minds voting on legislation with varied understandings and with varied purposes. Because National Petroleum relied so heavily on legislative history, a statutory construction method that has atrophied, modern courts are less likely to find it convincing.
And remember, National Petroleum’s power is its power to convince. It was issued by the U.S. Court of Appeals for the District of Columbia, a highly influentially court, but a court that can only bind the federal district court in District of Columbia. We don’t live in the District of Columbia. So, our courts can reject National Petroleum, if they find it unconvincing.
And there is a reason for a modern court to find it unconvincing.
“Congress doesn’t hide elephants in mouseholes.”
A new modern maxim for statutory construction was announced by the textualist loadstar, Justice Anton Scalia, in a famous Supreme Court opinion he authored in 2001 on whether the federal Clean Air Act allows the Environmental Protection Agency to consider the costs of implementing air quality standards: “Congress doesn’t hide elephants in mouseholes,” he wrote, and by that he meant that judges should be skeptical of anyone arguing that a heretofore unrecognized broad power is inconspicuously folded into a large statute. Congress doesn’t hide elephants in mouseholes.
The power to issue a substantive rule regulating competition in the market would, Justice Scalia would likely argue, be prominently declared in some glaringly obvious section of the statute, like a section with a big bold heading reading “The Federal Trade Commission’s Power to Legislative Rules of Competition.”
So where do we find the Federal Trade Commission’s alleged authority to issue substantive rules governing competition? It’s in section 6(g) of the FTC Act, which grants the FTC the power “to make rules and regulations for the purpose of carrying out the provisions of [the FTC Act].” That’s a sixteen-word clause buried in a section containing 2,231 words. It doesn’t appear under an heading announcing the agency’s power to issue substantive rules but rather under a subsection heading reading “Classification of corporations”. If Congress doesn’t hide elephants in mouseholes, courts are likely to be skeptical that section 6(g) authorizes the FTC to issue substantive rules governing competition.
For courts that think they might see an elephant in that mousehole, a new doctrine announced by the Supreme Court last year might blow them back.
Major Questions Doctrine
The modern Supreme Court just generally views agency action with more skepticism. It announced a new doctrine in West Virginia v. Environmental Protection Agency last year: the major questions doctrine, which requires explicit Congressional authorization for any federal regulation on a matter of major national, economic, or political significance.
Congress did not explicitly authorize the Federal Trade Commission to promulgate a substantive rule banning employee noncompete agreements. So now the question is: is a federal ban on employee noncompete agreements a matter of major national, economic, or political significance?
On that point, the Federal Trade Commission has done our homework. Think back to the nationwide study their economists conducted after the Jimmy John’s episode and remember the conclusions thew drew economists drew on how noncompete agreements impact our economy and the markets:
“So noncompete clauses today govern around one in five U.S. workers. These clauses may have started in the boardroom, but today what we see is that they’ve proliferated across sectors and across income levels. So we’re talking about nurses, we’re talking about fast foot workers, janitors, but also physicians and engineers. And we’ve now seen that in the aggregate, these clauses can really restrict competition—both in labor markets, but also in product markets. And so our economists calculated that collectively American workers are earning around $300 billion less because of these noncompetes and that, on the whole, innovation and entrepreneurship are suffering.”
With facts like that, it’s all but certain that a court would conclude that a federal ban on employee noncompete agreements is a major question. Because the ban was not explicitly authorized by Congress, the major questions doctrine would seem to require its invalidation.
I say “seem to require its invalidation” because the doctrine is new. The high court has only applied in twice—first in West Virginia v. EPA last year to invalidate an EPA clean air regulation and then this year in Biden v. Nebraska to invalidate the Department of Education’s student-loan forgiveness regulation. Lower courts are tinkering with the doctrine, but its breadth, contours and exceptions are not yet well understood. So, although it appears to require courts to invalidate the FTC’s proposed rule banning noncompetes, we cannot yet be sure.
Likely Court Challenge to FTC’s Proposed Rulemaking
The FTC’s proposed rule banning noncompete agreements will likely be finalized next April. Soon thereafter, it will likely be challenged in court, on the basis that the FTC does not have the power to issue substantive rules governing competition.
Those challenges may succeed. Although the only court decision on the agency’s authority to promulgate substantive rules comes from the highly influential U.S. Court of Appeals for the D.C. Circuit, which held that the relevant federal statute authorized the FTC to promulgate substantive rules, that holding is not binding on any court outside of the District of Columbia, and the reasoning that court employed to reach its decision is less likely to be viewed as antique than persuasive.
State and Federal Legislation Banning Noncompetes
Even if those challenges succeed in invaliding the commission’s proposed rule, though, a national wave of legislative activity aimed at prohibiting noncompete agreements has formed and might be unstoppable.
“A new labor law regarding employment noncompete agreements in Massachusetts went into effect today.”
“We want to help employees and employers navigate Colorado’s new employment laws.”
“One of those laws was regarding noncompete clauses. Now the legislature has changed that law. They’ve severely restricted these agreements.”
“So Representative, Mr. Elkins, welcome to the committee. Umm, please present your bill.”
“Thank you, Mr., Mr. Chair, yeah, House Bill 295 is a bill that would , ah, ah, um, outlaw most cases of noncompete agreements.”
“State lawmakers have passed a bill that would ban all noncompete agreements.”
“[T]ake a look at a piece of legislation that we’re introducing today, the Workforce Mobility Act. It’s a pretty simple piece of legislation. It would ban the use of noncompete agreements for both high income and low income workers.
All told, noncompete agreements are completely banned by state constitution or statute in California, North Dakota, Minnesota, and Oklahoma. New York may soon join that list, as its legislature engrossed a bill this year that would ban noncompete agreements. That bill now sits on Governor Hochul’s desk, and most professional observers expect her to sign it into law, making New York the fifth state to enact an outright noncompete agreement ban.
Other state legislatures are inching towards a ban, and the U.S. Congress is contemplating a federal statute that would ban noncompete agreements nationwide. A legislative wave is coming, and it might sweep away all noncompete agreements.
Noncompete agreements face legislative and regulatory assault. The courts, too, are ready to attack.
Judicial Invalidation
Lorna Gagnon, a real estate broker from New Hampshire, moved to Hawaiʻi in 2008 and was hired by Prudential Locations, LLC as a “sales coach.” When she was hired, she signed a noncompete agreement, promising not to establish her own brokerage firm in Hawaiʻi within one after leaving Locations.
About five years after she signed the noncompete agreement, she left Locations, and just two months after that she opened a new RE/MAX franchise in Hawaiʻi called Prestige Realty Group, LLC. Locations sued Gagnon for violating her noncompete agreement by opening a competing brokerage company in Hawaiʻi less than a year after leaving Locations. The case made it all the way to the Hawaiʻi Supreme Court, which decided it last year in a landmark decision for Hawaiʻi noncompete agreements.
Gagnon argued that her noncompete agreement was invalid. Hawaiʻi courts only uphold noncompete agreements, she rightly argued, that are reasonable and that are made to protect trade secrets, confidential business information, special customer relationships, or some other legitimate purpose.
To be reasonable, the noncompete agreement’s restrictions on where the former employee can compete, when the former employee can compete, and how the former employee can compete must not be greater than necessary to protect the employer, must not impose undue hardships on the former employee, must not provide less benefit to the employer than harm it does the general public and their right to a competitive marketplace.
Locations argued that it had a legitimate interest in protecting its confidential business information. The noncompete agreement was useful, it argued, in preventing Gagnon from divulging its confidential business information to a competing brokerage.
The court noted, however, that other Locations employees who had access to the same confidential business information as Gagnon were not required to agree to a similar noncompete agreement. And the noncompete agreement that Gagnon signed with Locations did not prohibit her from working for existing brokerage, it only prohibited it from establishing a new competing brokerage. Because Locations did not take reasonable or complimentary measures to protect its confidential business information, the court reasoned that Locations’s confidential business information was not the reason Locations had Gagnon enter into the noncompete agreement.
Locations acknowledged the court’s reasoning but argued that Gagnon’s noncompete agreement was supported by Location’s legitimate interest in preventing “its managerial personnel from taking actions harmful to its businesses, such as forming a competing real estate brokerage firm . . . .” Section 480-4 of the Hawaiʻi Revised Statues prohibits, however, “every contract . . . in restraint of trade or commerce” (in other words, every monopolistic contract). The question before the court was whether Location’s desire to prevent Gagnon from forming her own real estate brokerage was a restraint of trade that must be invalidated.
The court invalidated the noncompete agreement, holding that that the desire to prevent a real estate broker from forming a competing firm was not a legitimate ancillary purpose to support a noncompete agreement. The court reasoned that a plain reading of section 480-4 prohibited contracts entered into for the purpose of preventing competition, which was the purpose for Gagnon’s noncompete agreement—not some desire to protect trade secrets, confidential business information, or special customer relationship, or so reasoned the court.
Locations v. Gagnon was a landmark decision. It established the principle that preventing competition itself is not a legitimate purpose for a noncompete agreement. A noncompete agreement could be upheld if it was made in support of an employer’s efforts to protect its trade secrets, confidential business information, or special customer relationships—and, if an employer doesn’t want to see a court invalidate their noncompete agreement, they would be wise to take reasonable precautions to protect whatever trade secret, confidential business information, or special customer relationships they are protecting by, among other things, ensuring that all employees with access to that information or involved in those relationships sign similar noncompete agreements.
Conclusion
And that’s our episode. Noncompete agreements in Hawaiʻi are under siege from regulators, legislators, and judges.
The Federal Trade Commission has proposed a nationwide rule that would ban noncompete agreements. That rule seems unlikely to survive modern judicial scrutiny, but while it is challenged in the courts, expect the U.S. Congress to continue its separate effort to statutorily ban noncompete agreements.
In Hawaiʻi, noncompete agreements remain legal, but to survive judicial scrutiny, they must be reasonable and made for an ancillary legitimate purpose, like protecting an employer’s trade secrets, confidential business information, or special customer relationships. Preventing an employee from establishing a competing firm is not a legitimate purpose for a noncompete agreement in Hawaii.
We will continue to monitor legislative, regulatory, and judicial developments that could affect the validity of Hawaiʻi noncompete agreements.
Thank you for listening. And please consider supporting our charitable foundation at HawaiiRealtors.com/charitable to support those in need, including those suffering from the recent devastating fires in Lahaina.
Mahalo.
