National Association of Professional Insurance Agents Issues Public Comment to FTC

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WASHINGTON, March 23 -- The National Association of Professional Insurance Agents has issued a public comment to the Federal Trade Commission. The comment was written and posted on March 20, 2023.

The comment, on Docket No. FTC-2023-0007-0001, was sent to Shannon Lane, attorney in the Office of Policy Planning.

Here are excerpts:

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On behalf of the National Association of Professional Insurance Agents (PIA)/1, thank you for the opportunity to comment on the Federal Trade Commission's (FTC) Notice of Proposed Rulemaking (NPRM) concerning the use of non-compete clauses and agreements by employers and workers./2

I. Background and Introduction

In January, the FTC issued a Notice of Proposed Rulemaking (NPRM) that would ban employers from entering into non-compete agreements with their workers. A non-compete agreement or clause is a contract or contract term, typically between an employer and an employee, that prevents the employee from working for a competitor or starting a competing business, usually within a certain geographic area and for a specified length of time that begins when the worker's employment relationship with the current employer ends. While non-competes typically apply to a time after the employer-worker relationship has concluded, under current federal law, employers and workers can enter into them at any time--before, during, or at the conclusion of the relationship.

The proposal claims that non-compete agreements and clauses constitute "unfair methods of competition." On the contrary, particularly for independent insurance agencies like PIA's member agencies, non-compete clauses and agreements are used to protect employers from workers who would steal their ideas, business practices, and/or intellectual property for use in...

1 PIA is a national trade association founded in 1931 whose members are insurance agents and agency owners in all 50 states, Puerto Rico, Guam, and the District of Columbia. PIA members are small business owners and insurance professionals serving insurance consumers in communities across America.

2 https://www.regulations.gov/document/FTC-2023-0007-3959.

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...their own competing businesses or to share with a competitor of their employer, likely to enhance their own opportunities for professional advancement.

The value of an independent insurance agency cannot be measured, but it is marked by the depth, breadth, and loyalty of its book of business. The clientele of independent agencies exists because agency owners cultivate and invest in professional relationships, often over the course of decades. Independent insurance agencies launch and develop their businesses in communities of all sizes, and those businesses often grow by word-of-mouth and civic goodwill, both of which are strengthened by agency owners' ongoing economic and social investments in their local communities. Independent agencies use non-compete clauses and agreements to protect against the theft of their business assets in part because, for many of them, it would be prohibitively expensive for them to rebuild their businesses after such a theft./3

3 Indeed, when asked how the proposed ban might affect their businesses, many PIA members expressed fear that their businesses could be destroyed if they could no longer use non-competes to protect them. Specifically, here are a few examples of agency owners' concerns, in their own words:

This [ban] would destroy our business and our ability to grow it.

As a Kansas family agency we have relied on non-compete ... agreements to protect our business for over 60 years.

While we understand the desire to allow people to work in their trained field, our concern as an insurance agency is the theft of proprietary and private personal information that can occur as well as the transfer of revenue that was only obtained as a result of their training and association with the employer.

I built my agency from the ground up. The use of noncompete [sic] is critical to maintaining the integrity of my business ...

Our non-compete and non-solicitation agreements ... are essential to our business.

The non-compete agreement is critical to the long-term viability of an insurance agency. There are years of work and dollars invested into developing an agency that provides a high level of service to customers.

A ban on noncompete agreements could be devastating to my business.

I remain thankful that I had [a non-compete] agreement in place. Competing for business is difficult, yet a natural part of what we do. The elimination of these agreements would create an environment in which ... my intellectual property could be legally stolen.

As a small business owner, without a non-compete agreement, I risk losing my business.

Withdrawal of even limited non-compete agreements between me and my employees would be extremely detrimental to my business and would immediate [sic] wipe away untold dollars of value in insurance agencies.

This [proposal] could probably destroy my business and my career.... I have both sold insurance agency business and purchased other agencies. Without the safety of the non-compete it would be total chaos in the insurance industry.... It would also destroy my opportunity to sell the business and eventually retire with some sort of dignity and reward for building my business over 40 plus years.

As a small business owner ..., the best way to protect my business, my employees and my customers is the ability to use a non-compete.... I am not restricting anyone from the ability to stay within their field and earn a living, I am protecting the rest of my employees so they continue to have a place to work. This proposed rulemaking not only puts my business in jeopardy, it puts my 16 employees in jeopardy as well. That is 16 families that are at risk

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If finalized as proposed, the ban would invalidate millions of private contracts and have a substantial but unpredictable effect on employer/worker relationships in nearly every industry across the United States. Plus, considerable litigation is likely to arise over both the legality of the ban itself and the FTC's power to issue it.

II. FTC Does Not Have Administrative Authority to Ban Non-Competes

The FTC's power to issue a ban on non-compete clauses and agreements is dubious, and its promulgation would infringe on states' rights to regulate contracts, impair the parties' abilities to discharge obligations set forth in legally executed contracts (which will, in turn, lead to costly contract disputes and increased litigation arising out of such disputes), and infringe on the rights of employers and workers to freely enter into such agreements. Additionally, the FTC has little precedent on which to base its sudden attempt to restrict commercial agreements between consenting parties. At best, the agency's authority to engage in rulemaking concerning unfair methods of competition is ambiguous and is expected to generate expensive and complex litigation./4

The agency may see its authority challenged on the grounds of what is known as the "major questions doctrine," which states that broad legislative language is insufficient to allow a federal agency to regulate on topics of national significance without clear Congressional authorization. The use of non-competes is a topic of national significance, and, furthermore, the proper use of non-competes has historically been addressed by state law. Congress has never provided the FTC with the level of power it would need to lawfully promulgate a nationwide ban on non-competes. These legal issues will likely take years to resolve, and the protracted litigation and resulting uncertainty could permanently damage the already fragile labor market. While the FTC litigates...

My agency has a non-compete with our 1099 employees. This agreement is the bedrock of [our agency]. Without this in place, our business would be in peril.

Removing our ability to protect our accounts [using non-competes] will threaten the long-term financial health of our agency.

I am a small woman owned insurance agency in NJ. I have been in the industry for over 35 years.... I could not run my business without non-competes.

This bill would be extremely detrimental to my business. Over many years and at great expense, we have developed proprietary processes and procedures that have helped us to gain clients and be successful against competitors in the insurance sales space. All of our licensed producers currently have non-competes and always have for many years. It is common and expected in our industry. These agreements stop employees from leaving and ... opening their own office.... Of course these agreements are limited to reasonable geographic distance from our location. If you allow these agreements to be nullified, it would be extremely detrimental to our business.

Banning non-compete provisions would be extremally [sic] detrimental to my insurance agency.... [A ban on non- competes] would be financially devastating to us.... This would destroy the value of my business and most likely put me in bankruptcy.

4 The FTC's authority to engage at all in rulemaking concerning unfair methods of competition is not conclusively settled; rather, it depends on one's interpretation of the 1975 Magnuson-Moss Warranty-Federal Trade Commission Improvements Act. For text of the Act, see the Magnuson-Moss Warranty-Federal Trade Commission Improvements Act (last visited on March 14, 2023).

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...the issue, employers will spend money on legal advice to aid them in properly navigating their obligations in the context of any existing non-competes; understanding whether they may enter into new non-competes while the future of the ban remains unknown, depending on the outcome of pending litigation; and addressing issues related to existing non-competes among current and former workers in an ambiguous regulatory environment.

For these reasons and those that follow, we urge the FTC to withdraw this NPRM.

III. Proposed Ban is Overly Broad

The FTC claims that its NPRM is drafted to address the perceived challenge posed by employers that "overuse" non-compete clauses and agreements. However, the FTC has not tailored its proposal to target the problem it claims to be solving; rather, it bans non-compete clauses and agreements for all employers, regardless of the facts surrounding any employer's historical or current use of such tools. This NPRM is extremely broad; it defines "workers" as employees, externs, volunteers, apprentices, interns, or independent contractors, without regard to whether one was paid or unpaid. If adopted as proposed, the rule would prohibit the future use of non- compete agreements and clauses between employers and "workers," would require employers to rescind any non-compete agreements and clauses currently in use, and would even require employers to proactively inform both current and former workers that any non-compete agreements they had previously signed are no longer effective.

Many of PIA's insurance agency members have, over the course of years, specifically adapted to the use of alternatives to non-compete clauses and agreements, like non-disclosure and non- solicitation agreements, for instance, because of the degree to which the use of non-compete clauses and agreements is already limited.5 Such agencies justifiably view this NPRM with great trepidation because of its references to "de facto non-compete clauses," which, while not actually non-compete clauses, may have what the FTC deems to be a similar effect on a worker subject to it.

The NPRM does not sufficiently elaborate on what would distinguish a legal non-solicitation clause or agreement from a de facto non-compete clause or agreement. It indicates that a restrictive covenant that has the effect of preventing a worker from looking for or accepting work with a competitor after the worker has ended their employment relationship with the employer. As described further below, however, even this standard will vary based on state law and the vagaries of the federal circuit court in which disputes arising from it are heard.

5 One PIA agency owner observed, "Many insurance agencies utilize restrictive covenants in hiring employees and contractors. Our agency doesn't include territory/location restrictions.... However, we do include non-solicitation and non-disclosure language in our agreements." The agency owner concluded that, if finalized as drafted, the NPRM would be widely viewed as banning all restrictive employment covenants, not just non-competes, because "most of the population is not aware of the nuance between non-compete and non-solicitation, etc. Moving forward with this rule will create tremendous confusion in the industry," increased litigation arising from common misunderstandings about precisely what a non-compete is, and increased legal costs associated with rewriting existing agreements to ensure compliance.

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The vagueness of this distinction will make it challenging for independent insurance agencies and other employers to know with confidence whether they are complying with the rule, if it is finalized as proposed.

The FTC's definition of "non-compete clause" generally does not include non-disclosure contracts or clauses, for instance. A non-compete clause is defined as a "contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker's employment with the employer." This definition will likely invite expensive and protracted litigation on the subject, particularly because the issue is relatively new, and courts have not yet produced sufficient case law for future disputes to be easily resolved.

A non-disclosure clause or agreement, on the other hand, does not prevent a worker from competing with their former employer altogether, nor does it prevent other employers for competing for that worker's labor. If a worker signs a non-disclosure agreement (NDA) with their employer and then leaves to work for a competitor, the NDA will prevent the worker from sharing sensitive information with the competitor, but it will not prevent the worker from accepting the job with the competitor altogether.

However, in the NPRM, the FTC expresses concern that "some employers may seek to evade the requirements of the Rule" by imposing unreasonable restrictions on workers using contracts that "restrain such an unusually large scope of activity that they are de facto non-compete clauses." The NPRM offers as an example of a de facto non-compete agreement an NDA that is "written so broadly that it effectively precludes the worker from working in the same field."

Much of the NPRM suggests the FTC views employers as inherently bad actors and expects them to consistently engage with their workers in bad faith. The NPRM further indicates that the FTC should anticipate that employers will attempt to bypass any narrowly tailored non-compete ban by calling them by other names and hoping to elude the FTC's attention. The NPRM refers to such provisions or contracts as "functional equivalents," and, according to the NPRM, they would be viewed as non-compete clauses for purposes of enforcing the ban, regardless of whether they were drafted intentionally to evade it.

Moreover, the rescission provision extends the requirement that employers provide notice of rescission to not only current workers but former workers as well. For independent insurance agencies, which regularly collect detailed, nonpublic personal information from both clients and prospective clients out of necessity, this poses a particular challenge. Ideally, a worker who has signed a non-compete agreement will have also signed a non-solicitation agreement (NSA) and/or an NDA as well. However, if the NPRM is finalized as written, and a worker has signed only a non-compete agreement, the rescission of said agreement will leave the agency and its assets largely unprotected from a former worker for whom poaching the agency's entire book of business suddenly would not violate their agreement.

Should the non-compete ban be finalized as written, to minimize the likelihood of this issue arising in the aftermath of its promulgation, we urge the FTC to allow employers to replace rescinded non-compete language with a 12- or 18-month NSA for a limited period (for instance, 2-3 years) following the rule's effective date.

The rescission requirement also demands that the employer notice of rescission be provided in an "individualized communication," even if the notice is going to a former worker rather than a current one. The FTC handles the practical challenge associated with requiring an employer to locate former workers by limiting the notice requirement to former workers whose "contact information [is] readily available" to the employer. No details are offered to assist an employer in determining whether a former worker's contact information is "readily available," though, which will make it difficult or impossible for an employer to know which former workers must be contacted and when they have complied with this aspect of the new requirement. The NPRM provides model language for employers to use and a safe harbor provision deeming employers in full compliance with the notice requirement to have complied with the rescission requirement in full, but the FTC's failure to elaborate on the meaning of "readily available" makes its rescission guidance difficult to follow.

[Text omitted]

XIII. Conclusion

The Federal Trade Commission does not have the authority to promulgate a rule banning non- compete clauses and agreements in the absence of an explicit delegation of such power by Congress. The NPRM is overly broad and would unfairly impede business practices nationwide. It constitutes an improper incursion into areas of law traditionally left to the states and would improperly preempt existing state law. Additionally, non-compete clauses and agreements serve many valuable purposes in the labor market and should be permitted to continue to serve those purposes.

Finally, the FTC has exacerbated existing economic uncertainty by its stated commitment to banning not only non-compete provisions and agreements but also their "functional equivalents." We urge the FTC to withdraw this proposed rule.

As always, we appreciate the opportunity to provide the independent agency perspective. Please contact me at [email protected] or (202) 431-1414 with any questions or concerns. Thank you for your time and consideration.

Sincerely,

Lauren G. Pachman

Counsel and Director of Regulatory Affairs

National Association of Professional Insurance Agents

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Original text here: https://downloads.regulations.gov/FTC-2023-0007-9970/attachment_1.pdf

TARGETED NEWS SERVICE (founded 2004) features non-partisan 'edited journalism' news briefs and information for news organizations, public policy groups and individuals; as well as 'gathered' public policy information, including news releases, reports, speeches. For more information contact MYRON STRUCK, editor, [email protected], Springfield, Virginia; 703/304-1897; https://targetednews.com