2 Ways the FTC’s Proposed Rule Against Non-Competes Could Impact the Government Contracting Sector
By Joshua Duvall, David Yang, and Macy Climo
The Federal Trade Commission (“FTC”) recently issued a proposed rule, which, if enacted as written, would ban essentially all non-compete agreements by private employers. The proposed rule is one of the broadest expansions of agency authority in the FTC’s history, raising a myriad of considerations for all employers.
Briefly, the proposed rule would prohibit employers from entering agreements with employees, regardless of what the agreements are called, if their substantive effect would prohibit or otherwise restrict employees from working for another company or themselves after the conclusion of their employment with the employer. The substance-over-form or de facto nature of the proposed rule represents an industry sea change, especially since it would require employers to rescind any existing agreements.
Further, the proposed rule would prohibit the enforcement of even non-disclosure or non-solicitation agreements if they have the potential to bar or impact an employee’s ability to work. For instance, the rule would ban a non-disclosure agreement if “is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer.” Clearly, the rule’s interpretive leeway poses many, and perhaps significant, challenges regarding its administration and enforcement, but it certainly injects confusion for employers.
While the unprecedented breadth of the FTC’s proposed rule has profound implications for all employers across a multitude of industries and sectors, as we discuss below, it presents certain unique challenges to the government contracting sector.
Key Personnel
A recurring issue facing government contractors pertains to key personnel. Due to the serious nature of key personnel issues, contractors have naturally employed strategies aimed at curbing or reducing their risk of losing key personnel. Contractors in the highly competitive government contracting community that are in steep competition to obtain and maintain talent commonly request that employees sign exclusive letters of commitment to prevent them from leaving for a competitor in the middle of a bidding cycle. At the management level where these discussions occur, employers are concerned about both protecting their investments in key personnel and in protecting the company’s proprietary and confidential business information to which such individuals generally have access. Accordingly, employment risk management tools are based in both necessity and practicality and are widely used to safeguard the availability of key personnel in prospective or ongoing procurements, thus protecting the significant investments in the proposal capture efforts they incur for the procurements they pursue.
In addition, in procurements where key personnel are part of the evaluation, the solicitation often requires that offerors submit résumés and letters of commitment for any key personnel that they propose for the effort. Procuring agencies use these letters to ensure that the proposed resources will be available to perform the contract. As such, offerors frequently find themselves executing exclusive commitment letters for the key personnel they will propose to both satisfy solicitation requirements in addition to their own due diligence obligation to ensure that the people they propose will be able available to perform.
The lack of these letters can have steep consequences for both contractors and the agency. Contractors risk protest allegations that their proposals contain misrepresentations, which can derail their bids. Indeed, even if a proposal was accurate at the time of its submission, offerors may need to advise the agency of any key personnel changes that have occurred during evaluations and before award. An offeror’s failure to advise the agency of any such changes can lead to an improper bait-and-switch protest allegation at GAO, which GAO will sustain if the protester can show that the awardee knew or should reasonably have known that the personnel they proposed for contract performance will not be available to perform, the agency relied upon that misrepresentation, and the misrepresentation had a material impact on any award decision.
For example, in ASRC Federal Data Solutions, LLC, B-421008.2 et al., Dec. 2, 2022, 2022 CPD ¶ 294, GAO sustained a protest because a key person proposed by the awardee had signed an exclusive commitment agreement with the protester to support the protester’s proposal on the procurement and the awardee had knowledge prior to proposal submission that the proposed key person was no longer available to support its bid. On that basis, GAO not only found that that the awardee made a material misrepresentation in its proposal and sustained the protest, but it recommended that the agency terminate the awardee’s contract, altogether exclude the awardee from the competition, and make a new award decision. The agency also faces added risk without letters of commitment. It may find itself having contracted for a particular team or solution and suddenly be without access to that team. Resulting litigation risks delay in the procurement and ultimately performance for the agency, in addition to the cost to both the agency and contractor.
If the FTC’s rule is implemented as proposed, exclusive, and perhaps non-exclusive, letters of commitment (or any related exclusivity agreements) could fall within the rule’s grasp, which will necessarily create unintended consequences in the procurement space. For starters, agencies will need to reevaluate their solicitation requirements to find an alternative method of attaining the same level of confidence that the key resources proposed by offerors in their bids will be the same personnel that will perform the work in the absence of commitment letters.
Likewise, contractors will need to determine how to mitigate the risk of allegations that their proposals contain misrepresentations or that their offers may be eliminated during evaluations if the team they proposed is no longer available to perform – whether by a letter of commitment or by an agreement stating that the person will be exclusive to the company for a particular procurement. This increased risk profile, coupled with the loss of the considerable resources that offerors invest in their proposal efforts, will likely complicate agency award decisions and lead to an uptick in bid protests, which will only further delay performance.
From any standpoint, the impact of the FTC’s proposed rule, while perhaps unintended, will present difficult issues for procuring agencies and contractors alike in meeting the government’s procurement needs, including complicating and delaying procurement timelines and increasing litigation risks.
Contractor Proprietary Information
In addition to the foregoing concerns, the FTC’s proposed rule, given its breadth, could place government contractors in a difficult position in protecting their confidential and proprietary business information. This concern is of course applicable to all companies, but it is particularly sensitive in the government contracting space given the highly competitive nature of the industry where pricing and complex technical know-how are always material and often dispositive factors in award decisions. As noted, while the FTC’s rule is aimed at non-compete agreements, it can also limit or prohibit non-disclosure or non-solicitation agreements if, in substance, the agreements have the potential to restrict employment opportunities.
Accordingly, in situations where an employee, at for example management levels, is being recruited by a competitor, contractors are understandably concerned that the individual could disclose proprietary information, such as confidential pricing and technical information, to the competition. Although the FTC’s proposed rule addresses non-disclosures in the “same field” of business, this limitation has less import in government contracts because the field is generally much more broadly construed than in other industries. In any event, under the FTC’s proposal, the concerns remain valid because a non-disclosure agreement, depending on its terms, may not be enforceable.
Unless the FTC’s rule is narrowed, government contractors may be placed in the perhaps untenable and certainly unenviable position of determining how to protect their sensitive business information from competitors even though the issue may have little to do with any unreasonable or undue restraint of trade. As presently proposed, the proposed rule raises serious considerations for both agencies and contractors in conducting fair and proper procurements and upholding their integrity by minimizing the risks of sensitive information, such as contractor bid or proposal information, from impacting the procurement.
Takeaways
While there undoubtedly will be a robust comment period and subsequent legal challenges, government contractors should consider the foregoing issues in their comments on the agency’s rulemaking because the consequences, whether intended or not, pose substantial challenges for contractors. As services contracts constitute a significant portion of government procurements each year and those efforts seek and rely upon qualified individuals to manage and perform the solicited work, key personnel issues will only increase in importance whether from evaluation, award, or bid protest standpoints. Introducing uncertainties into these areas is undesirable as they can only delay or complicate procurements, which is to no one’s benefit.
Finally, and especially in the highly competitive area of government contracting, the importance and need to protect sensitive company information, such as pricing and technical data, cannot be overstated. The protection of this information is critical considering the intimate circles within which government contractors compete, and there is no need at management or executive levels to prohibit non-compete agreements or introduce ambiguity as to whether non-disclosure or similar instruments will be valid. These concerns are paramount given the fundamental tenet that all government procurements must ensure that all offerors are able to participate on a level playing field. Given the issues described above, contractors should consider addressing FTC’s call for comments “on whether there are other categories of highly paid or highly skilled workers” that should be exempt from the rule’s grasp.
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If you have any questions, please a contact one of the authors or a member of Maynard, Cooper & Gale’s Government Solutions Group for more information.
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