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Response starting to form to Biden ‘competition’ order

Unknowns but general direction clear, bar says

The title of the Biden administration’s recent executive order on “Promoting Competition in the American Economy” is unlikely to set off alarm bells.

After all, “more competition” conjures images of new jobs, better wages and prices for consumers, and more opportunities to launch and establish a business. Who could be opposed to that?

However, beneath that innocuous title are 72 initiatives and directives involving more than a dozen federal agencies. As of now, there are not a lot of specifics, and only time will tell what form the revised regulations and other policy changes the Biden administration is urging will take, attorneys say.

But that does not mean that the direction things are heading cannot be discerned. Given that, lawyers have begun to think about what the forthcoming changes may mean for their clients and are developing plans to respond.

Action on noncompetes likely, but in what form?

One aspect of the executive order that has already gotten the attention of the legal community: two brief mentions of noncompete clauses “and other clauses or agreements that may unfairly limit worker mobility.”

The order specifically encourages the chair of the Federal Trade Commission to consider working with the rest of the commission to exercise the FTC’s statutory rulemaking authority to curtail the “unfair” use of noncompete and other objectionable clauses or agreements.

Even within the short sentences, there are several qualifiers and caveats, according to Boston attorney Russell Beck. FTC action is being “encouraged,” not mandated, and the executive order is seemingly concerned with only “unfair” noncompetes, as distinguished from “all” noncompetes.

Moreover, it is at least debatable whether any action the FTC might take could quickly be unwound in the courts, Beck said.

Generally, the FTC is charged with addressing antitrust — and thus “intra-corporate” — issues, he noted. It may thus be a “bit of a stretch” to presume that the FTC can expand its scope to include “inter-corporate” issues, such as the use of noncompete or no-poach agreements.

If the FTC does head down the road of regulating noncompetes — and that seems likely, given past statements from new Chair Lina M. Khan and an apparent willingness of the Democratic majority on the commission to flex its power — Beck said litigation challenging the agency’s actions is sure to follow.

Such a pattern has already been seen with what courts have ruled to be overreaching by the Department of Labor, including its attempt to drastically increase the minimum salary an employee must earn to qualify for the most common exemptions from the federal overtime laws, Beck noted.

Another possibility is that Congress instead will be the one to act. While some may be skeptical that this Congress can come together to pass much of anything these days, “if there ever was a time when Congress would actually pass noncompete legislation, I think this is the time,” Beck said.

There are two Republican senators who seemingly favor a full ban on noncompetes, while others appear open to a partial ban, with low-wage or blue-collar workers, for example.

At a minimum, there may be some “low-hanging fruit” — such as a prohibition on an employee finding out that he will be required to sign a noncompete agreement on his first day of work — that Congress can pick off with bipartisan support, Beck said.

A lot of the work to rein in the use of noncompetes has already been going on at the state level, and it may be best not to tinker with that approach, he suggested.

Boston attorney Peter C. Lando agrees.

“This seems to me to be best left to the states,” he said.

On patents, new ‘standards’ set

Those outside the patent field may not have been able to appreciate immediately the import of the “rather oblique” Section 5(d) of the executive order, noted Boston attorney Andrew S. Updegrove.

Section 5(d) seeks to “avoid the potential for anticompetitive extension of market power beyond the scope of granted patents, and to protect the standard-setting processes from abuse” by encouraging the attorney general and secretary of commerce to “consider whether to revise their position on the intersection of the intellectual property and antitrust laws.”

The section then specifically mentions a 2019 “Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments,” which the Department of Justice, U.S. Patent and Trademark Office and National Institute on Standards and Technology had jointly issued.

If Biden gets his wish, the attorney general and secretary of commerce will reverse the policies of Makan Delrahim, who headed the Antitrust Division of the DOJ in the Trump administration, Updegrove explained in a recent blog post.

The setting of standards has been outsourced to the private sector for the past quarter-century through the passage of the National Technology Transfer and Advancement Act, Updegrove said.

Having industries write their own laws has turned out “a lot better than you might expect,” he added.

When patent owners participate in the development of standards, they accept certain obligations, including agreeing to license their “standards essential patents” on “reasonable and non-discriminatory,” or RAND, terms.

While standards-setting organizations universally impose such obligations, they do not dictate the pricing and other terms that will satisfy a RAND obligation. That often leads to lawsuits between patent owner and potential licensees, Updegrove noted.

Traditionally, regulatory agencies and courts have focused on protecting licensees implementing the standards against “patent hold-up,” the refusal of holders of standards essential patents to honor their RAND obligations, according to Updegrove.

But Delrahim led the charge to flip that script, taking the official position that the real problem was “patent hold out,” the refusal of the standards implementer to agree to the patent holder’s RAND terms, Updegrove said. Moreover, Delrahim also believed that any disputes should be addressed under contract, rather than antitrust, law.

Delrahim’s positions stem from his belief that inventors need stronger protection to foster innovation, according to Updegrove.

But now, the tables seem to be turning once again. While Delrahim has been replaced by an acting assistant attorney general unlikely to set his department on a new course, Khan is operating without similar strictures as a permanent appointee to the FTC, Updegrove said.

Khan has also long been an advocate of a new way of approaching antitrust enforcement, which focuses less on the impact on consumers and more on the potentially adverse effects of allowing single companies — particularly high-tech companies — to dominate market niches, Updegrove said.

“The takeaway is that, when it comes to standards, if you are a vendor implementing standards, you should feel that you have less to fear from owners of [standards essential patents] claims,” he said. “If, on the other hand, you are the owner of a lot of SEPs and regularly enforce rights in them, it’s like the rules will be less in your favor and more in favor of parties trying to license standards.”

Guidelines on mergers get fresh look

The executive order also encourages the DOJ and FTC to “review the horizontal and vertical merger guidelines and consider whether to revise those guidelines.”

Almost immediately, Khan and the acting head of the DOJ’s antitrust division, Richard A. Powers, announced they would be picking up that gauntlet.

The horizontal merger guidelines were last revised in 2010 during the Obama administration, while the latest vertical merger guidelines, issued in June 2020, are just over a year old.

Despite how new they are, it is unsurprising that a review of the vertical merger guidelines has been ordered, given that they were adopted over the vehement opposition of the FTC’s two Democratic commissioners at the time, Rohit Chopra and Rebecca Slaughter.

“First, [the guidelines] do not directly address the many ways that vertical transactions may suppress new entry or otherwise present barriers to entry,” Chopra wrote. “Second, the guidelines make assumptions based on contested economic theories and ideology rather than historical, real-world facts and empirical data in line with modern market realities.”

Slaughter noted that one of the key points of the guidelines — to disavow the “false assertion” that vertical mergers are almost always pro-competitive — had been undermined.

“I also fear that the Guidelines signal that the Agencies will view vertical mergers as likely to be procompetitive and will use the Guidelines to justify lack of enforcement against vertical mergers,” she wrote.

This is yet another area where there may be noble intentions behind the action being directed, but there are risks of going too far, Lando said.

While the executive order repeatedly refers to companies as “powerful,” there are also many smaller companies out in the world, and many of those smaller companies actually want to be acquired, he said.

“It’s part of their wind-down plan,” Lando said.

But for now, there is little to do beyond of keeping an eye out for the FTC’s and DOJ’s forthcoming guidance, he added.

“The devil is always in the details,” he said.

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