With the FTC's looming non-compete ban agencies should rethink key personnel requirements

On April 23, the Federal Trade Commission voted, and issued a rule, to ban non-compete agreements. The FTC took this massive step to promote competition and to "protect the fundamental freedom of workers to change jobs, increase innovation, and foster new business formation."

While the FTC's final rule will take effect 120 days after publication in the Federal Register, the non-compete ban may be put on hold as the U.S. Chamber of Commerce, and others, have already launched a lawsuit challenging the rule. Even with a stay in the rule's effectiveness, government and industry should begin planning on how an outright ban on non-competes could play out in practice.

Indeed, given that non-competes – and other means by which contractors secure key personnel for procurement opportunities – are commonplace, the impact of this rule could potentially and profoundly alter the government contracting landscape. This is particularly true because, as shown below, the FTC’s definition of non-compete is far-reaching.

Briefly, the FTC's rule will, on a go-forward basis, ban virtually all non-competes – from low level workers to senior executives. The rule states, that companies are prohibited not only from entering or attempting to enter a non-compete but also from enforcing or attempting to enforce a non-compete. The rule also includes an expansive definition for non-compete.

Under the rule, a non-compete is a "term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from . . . seeking or accepting” work with another company (or starting a company) after conclusion of employment. 

While a plain reading shows that an outright prohibition is perhaps easy to spot, the rule will still invite considerable debate and confusion regarding its applicability. Specifically, because the definition of non-compete includes nebulous "penalizes a worker for" and "functions to prevent" language, a letter of commitment and other types of worker-restricting terms could be captured by the rule, meaning the current system surrounding key personnel requirements should change.

Consider the following scenario. Suppose a contractor submits with its proposal a required letter of commitment for a named key person to serve as the program manager. Despite signing a commitment letter, the key person resigns from his role with the contractor to take a higher-paying job. All of this occurs after proposal submission and prior to award, but the company does not tell the agency.

Under Government Accountability Office protest decisions, this would likely upend the contractor’s bid (as it has many times in the past) because the key person will likely be deemed unavailable, thereby triggering GAO’s notice requirement. [1]

With the FTC’s prohibition on broadly defined non-compete clauses, however, the key person’s letter of commitment could be viewed by both the contractor and agency officials as either contrary to the FTC’s rule or simply an illusory commitment from the outset, or both. [2]

Specifically, because the FTC’s ban is wide-ranging and captures any term that “functions to prevent” a worker from “seeking or accepting” a new work, a letter of commitment (and potentially naming key persons or resumes) could fall under the definition of a prohibited non-compete.

So, despite submitting the letter, the key person’s commitment, in practice, could be viewed as illusory because the contractor is prohibited from crafting terms that prohibit or “functions to prevent” key personnel from seeking or accepting new work.

Because a letter of commitment could be considered impermissible and illusory, neither the contractor nor agency officials should be able to reasonably interpret the letter as providing a reasonable assurance as to the key person’s availability for the awarded contract.

Because, under the FTC’s rule, a letter of commitment ostensibly fails to serve the purpose for which it is intended, agencies should rethink the way key personnel requirements are used in government contracting.

In light of the foregoing, procuring agencies should abandon the current key personnel system and adopt a new strategy. Specifically, agencies could stop crafting solicitation terms that require bidders to propose named key personnel or to furnish letters of commitment or resumes.

Because workers will be free to come and go as they please (untethered by broadly defined non-competes), it would be unreasonable for agency officials and contractors to believe that a letter of commitment (or resume) means that the key person is definitively willing and available to perform under an awarded contract.

Indeed, even where some information is desirable, agency officials could simply request general details regarding the type of candidate that will fill a key position (e.g., educational background, general work experience, agency experience, certifications, etc.). This scenario would provide flexibility on the contractor’s part and provide agency officials with some confidence that the proposed key personnel have the necessary skills for successful performance.

On the other hand, where agency officials insist on requiring identifiable key personnel because they believe names and resumes will be critical to the success of a procurement, agency officials should consider solicitation language that permits flexibility. This could be accomplished, for example, by including language that clearly states that the agency will not consider a proposal unawardable where there is a change to key personnel after bid submission but prior to award.

After all, because the FTC’s stated rationale is to “protect the fundamental freedom of workers to change jobs,” it would be somewhat of a stretch to conclude that a proposed key person is definitively available, at the time proposals are submitted, to work on the awarded contract when the award may occur several months or years later.

Notably, by adopting a new approach, agency officials also will likely avoid the almost certain problems and protests that will surface where a contractor believes that a letter of commitment is an unreasonable solicitation term.

First, a contractor may object to such an approach on the theory that using a letter of commitment would require the company to violate their obligation not to enter or enforce a non-compete clause.

Second, the contractor may object to the term on the theory that a letter of commitment serves no legitimate need because if such letters fall within the rule’s grasp, they necessarily fail to provide agency officials (and contractors) with any reasonable assurances as to whether the key personnel will definitively be available and willing to perform on an awarded contract.

Interestingly, by adopting a new approach, agencies also will avoid the unintended consequences associated with key person unavailability and, in so doing, could end the split between how GAO and the Court of Federal Claims ("COFC") treat key personnel unavailability. [3]

This lack of harmony – and GAO’s requirement that contractors notify agencies where it knows a key person has become unavailable after bid but prior to award – has plagued many contractors. Indeed, because this issue can sink a contractor’s bid (to the detriment of both contractors and procuring agencies), the current landscape also is unfair.

That is, while COFC arguably has favorable case law, some protests still must go to GAO for jurisdictional reasons. To that end, because a duty to notify can result in bid being rejected (through no fault of the contractor), a system without naming key personnel or requiring letters of commitment would be a welcome sight.

Takeaway

As the foregoing demonstrates, where a key person signs a letter of commitment or otherwise feels compelled to remain employed by the offeror and perform on the awarded contract or refrain from seeking or accepting potentially lucrative work during the pendency of a bid, such restricting terms or letters of commitment may fall within the grasp of FTC’s rule.

If letters of commitment reasonably can be construed as falling under the broad definition of non-compete, agencies will need to adopt a different approach as those commitments are not only illusory but also impermissible. Given this potential new reality, agencies should rethink their approach to key personnel requirements in solicitations.

Josh Duvall is a shareholder in the Washington, D.C. office of Maynard Nexsen and is a member of the firm's Cybersecurity & Privacy Practice Group and Government Solutions Practice Group.

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[1] See, e.g., Ashlin Management Group, B-419472.3, B-419472.4, November 4, 2021, 2021 CPD ¶ 357 (sustaining a protest that the awardee's proposal was unacceptable due to failure to notify the agency when the awardee had actual knowledge of the key person’s unavailability prior to award); M.C. Dean, Inc., B-418553, B-418553.2, June 15, 2020, 2020 CPD ¶ 206 at 4 (“[w]hen the agency is notified of the withdrawal of a key person, it has two options: either evaluate the proposal as submitted without considering the resume of the unavailable employee (where the proposal will likely be rejected as technically unacceptable for failing to meet a material requirement); or open discussions to permit the offeror to amend its proposal.”).

[2] Assuming, for the sake of argument, that neither the contractor nor any other offeror files a bid protest challenging the solicitation terms as unreasonable and/or contrary to the FTC’s rule. Interestingly, a contractor that seeks to provide additional but conditional compensation to a key person, regardless of whether a letter of commitment is in play, also could trigger the rule. For example, if a contractor offers a bonus that either will not be paid until after award or must be repaid by the key person if they take another position prior to the award, then the rule may be in play as the compensation terms could be deemed to “penalize a worker” from “seeking or accepting” a position with another firm.

[3] See, e.g., Golden IT, LLC v. United States, 157 Fed. Cl. 680 (2022) (rejecting GAO’s position and finding that offerors do not have a duty to notify agency officials when a proposed key person becomes unavailable after bid submission but prior to award); IAP Worldwide Services, Inc. v. United States, 159 Fed. Cl. 265 (2022) (same).