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Non-Compete Obligation

Popular Media A non-compete obligation is a contractual promise by one party to refrain from conducting business of a similar nature to that of the other party. . . .

A non-compete obligation is a contractual promise by one party to refrain from conducting business of a similar nature to that of the other party. Non-compete obligations are encountered principally in contracts for the sale of a business and contracts of employment. In general (although with localized exceptions, e.g., regarding employment in the State of California), such agreements are enforceable provided they are reasonable and limited in scope, territory, and duration. In addition, employment non-compete obligations typically must be supported by adequate consideration. Non-compete obligations may be anticompetitive if they amount to a naked division of territory or customers among the parties or are collusively deployed among competing firms (i.e., “no poach agreements”).

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Antitrust & Consumer Protection

Expressive Trading, Hypermateriality, and Insider Trading

Scholarship Abstract The phenomenon of social-media-driven trading (SMD trading) entered the public consciousness earlier this year when GameStop’s stock price was driven up two orders of . . .

Abstract

The phenomenon of social-media-driven trading (SMD trading) entered the public consciousness earlier this year when GameStop’s stock price was driven up two orders of magnitude by a “hivemind” of individual investors coordinating their actions via social media. Some believe that GameStop’s price is artificially high and is destined to fall. Yet the stock prices of GameStop and other prominent SMD trading targets like AMC Entertainment continue to remain well above historical levels.

Much recent SMD trading is driven by profit motives. But a meaningful part of the rise has been a result of expressive trading—a subset of SMD trading—in which investors buy or sell for non-profit-seeking reasons like social or political activism, or for aesthetic reasons like a nostalgia play. To date, expressive trading has only benefited issuers by raising their stock prices. There is nothing, however, to prevent these traders from employing similar methods for driving a target’s stock price down (e.g., to influence or extort certain behaviors from issuers).

At least for now, stock prices raised by SMD trading have been sticky and appear at least moderately sustainable. The expressive aspect, which unites the traders under a common banner, is likely a reason that dramatic price increases resulting from profit-seeking SMD trading have persisted. Without a nonfinancial motivation to hold the group together, its members would be expected to defect and take profits.

Given that SMD trading appears to be more than a passing fad, issuers and their compliance departments ought to be prepared to respond when targeted by SMD trading. A question that might arise is whether and when SMD-trading-targeted issuers, and their insiders, may trade in their firms’ shares without running afoul of insider trading laws.

This Article proceeds as follows: Part I summarizes the current state of insider trading law, with special focus on the elements of materiality and publicity. Part II opens with a brief summary of the filing, disclosure, and other (non-insider-trading-related) requirements issuers and their insiders may face when trading in their own company’s shares under any circumstance. The remainder of this Part analyzes the insider trading-related legal implications of three different scenarios in which issuers and their insiders trade in their own company’s shares in response to SMD trading. The analysis reveals that although the issuer’s and insiders’ nonpublic internal information may be material (and therefore preclude their legal trading) prior to and just after the onset of third-party SMD trading in the company’s stock, subsequent SMD price changes (if sufficiently dramatic) may diminish the importance of the company’s nonpublic information, rendering it immaterial. If the issuer’s and insiders’ nonpublic information about the firm is immaterial, then they may trade while in possession of it without violating the anti-fraud provisions of the federal securities laws.

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Financial Regulation & Corporate Governance

DOJ’s Threatened Reign of Error: Proposed Criminal-Monopolization Prosecutions

TOTM The Biden administration’s antitrust reign of error continues apace. The U.S. Justice Department’s (DOJ) Antitrust Division has indicated in recent months that criminal prosecutions may be forthcoming . . .

The Biden administration’s antitrust reign of error continues apace. The U.S. Justice Department’s (DOJ) Antitrust Division has indicated in recent months that criminal prosecutions may be forthcoming under Section 2 of the Sherman Antitrust Act, but refuses to provide any guidance regarding enforcement criteria.

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Antitrust & Consumer Protection

Comments of ICLE In the Matter of Accelerating Wireline Broadband Deployment

Regulatory Comments We wish to highlight two primary concerns: that decisions by pole owners to delay maintenance and shift costs onto attachers are a significant impediment to deployment, and that there is a pressing need for the Commission to create an expedited process to resolve these disputes.

Introduction

Thank you for the opportunity to comment on this Further Notice of Proposed Rulemaking (FNPRM) in the Matter of Accelerating Wireline Broadband Deployment by Removing Barriers to Infrastructure Investment. It is a broad aim of the U.S. government to extend broadband connectivity to all Americans.[1] However, a complicating factor in this regard is that Internet service providers (ISPs) need frequent access to utility poles to attach their equipment, which creates a point of friction that adds cost and slows deployment timetables.

These barriers to deployment can take many forms, some arising in areas over which the Commission does not have jurisdiction.[2] But with respect to those matters over which it does have jurisdiction, the Commission asks:

In this Second Further Notice, we seek comment on ways to eliminate or expedite resolution of pole replacement disputes by establishing clear standards for when and how utilities and attachers must share in the costs of a pole replacement that is precipitated by a new attachment request.[3]

Utility-pole attachments represent a critical component of deployment costs. Current estimates suggest that, in rural areas, as much as 25% of the cost of broadband deployment can be attributed to pole-replacement and upgrade issues.[4]  We wish to highlight two primary concerns: that decisions by pole owners to delay maintenance and shift costs onto attachers are a significant impediment to deployment, and that there is a pressing need for the Commission to create an expedited process to resolve these disputes. We have attached to these brief comments a paper published by the International Center for Law & Economics and that expands on these and related issues in greater depth.

Read the full comments here.

[1] Infrastructure Investment and Jobs Act, H.R. 3684, 117th Cong. (2021).

[2] The FCC lacks jurisdiction over poles owned by electrical cooperatives or municipal governments, and 28 states have not verified that they have regulatory authority over pole attachments. See Michelle Connolly, The Economic Impact of Section 224 Exemption of Municipal and Cooperative Poles (Jul. 12, 2019), available at https://www.ncta.com/sites/default/files/2019-07/NCTA%20Muni%20and%20Coop%20Poles%20Connolly%20Paper%20Ex%20Parte%20Filing%207-22-19.pdf. While not the subject of this proceeding, it should be noted that excessive attachment fees from these sources impede broadband build-out by slowing growth and raising the expense to consumers of broadband access. For example, pass-through literature finds that 56% to 70% of wholesale price increases are passed on to consumers while 5.0% to 6.4% of increased commodity prices are passed on to consumers. See Cost Pass-Through: Theory, Measurement, and Potential Policy Implications: A Report Prepared for the Office of Fair Trading, RBB Economics, (February 2014), at 156-57, available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/320912/Cost_Pass-Through_Report.pdf. We believe the Commission should engage on this issue as an expert adviser to state authorities that may have influence over these deployment barriers.

[3] Accelerating Wireline Broadband Deployment by Removing Barriers to Infrastructure Investment, FCC 22-20 (Mar. 16, 2022).

[4] Petition of NCTA for Expedited Declaratory Ruling, In the Matter of Accelerating Wireline Broadband Deployment by Removing Barriers to Infrastructure Investment, WC Docket No. 17-84 (Jul. 16, 2020), at 5-9, available at https://www.ncta.com/sites/default/files/2020-07/071620_17-84_NCTA_Petition_for_Declaratory_Ruling.pdf.

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Telecommunications & Regulated Utilities

American Data Privacy and Protection Act

TL;DR After years of fragmented privacy law across the 50 states, a recently introduced bipartisan and bicameral bill proposes to create a federal privacy regime.

Background…

After years of fragmented privacy law across the 50 states, a recently introduced bipartisan and bicameral bill proposes to create a federal privacy regime. Sponsors of the American Data Privacy and Protection Act (ADPPA) say it will set a national baseline for privacy protections and user remedies, while allowing firms to continue to innovate.

But…

The bill’s breadth and onerous requirements could have unintended negative consequences for consumers. Worse, the measure would only partially preempt state law, arguably leaving the worst of both worlds.

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Data Security & Privacy

Guiding Principles & Legislative Checklist for Broadband Subsidies

ICLE Issue Brief President Joe Biden in November 2021 signed the Infrastructure Investment and Jobs Act. Among other provisions, the law allocated $42.45 billion toward last-mile broadband development, . . .

President Joe Biden in November 2021 signed the Infrastructure Investment and Jobs Act. Among other provisions, the law allocated $42.45 billion toward last-mile broadband development, with the National Telecommunications and Information Administration (NTIA) directed to administer those funds through the newly created Broadband Equity, Access & Deployment (BEAD) program. The BEAD program will provide broadband grants to states, who may then subgrant the money to public and private telecommunications providers.

Serious analysis of the proper roles for government and the private sector in reaching the unserved is a necessary prerequisite for successful rollout of broadband-infrastructure spending. Public investment in broadband infrastructure should focus on the cost-effective provision of Internet access to those who don’t have it, rather than subsidizing competition in areas that already do.

Read the full checklist here.

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Telecommunications & Regulated Utilities

How the Future of Derivatives Markets Can Benefit Farmers

Popular Media Regulation is justified when it serves the public interest, but it is frequently motivated by the economic self-interest of powerful groups. Economists call this the . . .

Regulation is justified when it serves the public interest, but it is frequently motivated by the economic self-interest of powerful groups. Economists call this the “bootleggers and Baptists” phenomenon—those likely to profit from trade in illicit alcohol push for regulation alongside the moralists hoping to protect the vulnerable.

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Financial Regulation & Corporate Governance

Don’t Abolish Employee Noncompete Agreements

Scholarship Abstract For over three centuries, Anglo-American courts have assessed employee noncompete agreements under a Rule of Reason. Despite longstanding precedent, some now advocate banning all . . .

Abstract

For over three centuries, Anglo-American courts have assessed employee noncompete agreements under a Rule of Reason. Despite longstanding precedent, some now advocate banning all such agreements. These advocates contend that employers use superior bargaining power to impose such “contracts of adhesion,” preventing employees from selling their labor to the highest bidder and reducing wages. Abolitionists also contend that such agreements cannot produce cognizable benefits and that employers could achieve any benefits via less restrictive alternatives, without limiting employee autonomy.

This article critiques the Abolitionist position. Arguments for banning noncompete agreements echo hostile critiques of other nonstandard contracts during Antitrust Law’s “inhospitality era.” These critiques induced courts and agencies to condemn various nonstandard agreements. Employee noncompete agreements escaped such condemnation because they were governed by state contract law.

The article recounts how Transaction Cost Economics (“TCE”), undermined these critiques. TCE demonstrated that nonstandard agreements, such as exclusive territories, could overcome market failures by preventing dealers from free riding on each other’s promotional efforts. TCE also concluded that such agreements were voluntary integration, unrelated to market power. These scientific developments induced courts to abandon their hostility to nonstandard contracts, and nearly all such agreements properly withstand rule of reason scrutiny.

TCE also undermines the case against employee noncompete agreements. Most notably, TCE predicts that most such agreements are voluntary methods of ensuring that employers capture the benefits of investments in employee training and trade secrets, by deterring rival firms from free riding on such investments and bidding away employees. Application of TCE also rebuts claims that less restrictive alternatives will achieve the same objectives as noncompete agreements.

Finally, TCE undermines contentions that such agreements injure employees by preventing them from receiving lucrative bids from competing employers. This account of harm treats hypothesized bids and resulting imagined (higher) wages as an exogenous baseline against which to measure the impact of such agreements. According to TCE, however, such bids are not exogenous, but instead often occur because noncompete agreements incentivize employers to make investments that increase employee productivity. Banning such agreements will thus reduce employee productivity, eliminating the incentive for rivals to bid for employees. In such cases, claims that noncompete agreements reduce wages invoke an illusory baseline of bids that would not occur but for the enforcement of such agreements.

Empirical evidence confirms TCE’s predictions. Many such agreements apparently arise in unconcentrated markets. Most are disclosed in advance, and robust enforcement induces additional employee training. Finally, employees who receive pre-employment notice of such provisions earn higher wages than similarly situated employees not bound by such agreements. Thus, many such agreements appear to be voluntary means of protecting investments in employee training, improving employee productivity, and increasing GDP.

This is not to say that all employee noncompete agreements produce significant benefits. Some employers decline to disclose such contracts until after employees join the firm. Such agreements apparently depress wages without producing benefits. Moreover, some such agreements could raise rivals’ costs and enhance employers’ market power.

Neither potential impact justifies abolition. States or the FTC could encourage or require pre-contractual disclosure, leaving employers and employees free to adopt provisions that increase their joint welfare. Moreover, even the inventors of raising rivals’ costs theory opined that most markets are not susceptible to such a strategy. Abolitionists have made no effort to establish that employee non-compete agreements usually arise in markets where such a strategy is possible. The rare prospect that parties may employ fully disclosed agreements to pursue such a strategy does not justify abolishing all such agreements.

Indeed, banning all such agreements may have a disparate impact on small, labor-intensive firms, by discouraging optimal investments in employee training. This potential impact may help explain labor union support for abolishing such agreements. Unionized firms predictably adopt capital-intensive production processes in response to collective bargaining and resulting noncompetitive wages. Laws that disadvantage non-union, labor-intensive firms will enhance the demand for the output of unionized firms, increasing the demand for unionized labor. Banning noncompete agreements will thus sometimes boost unionized workers at the expense of their nonunion counterparts.

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Antitrust & Consumer Protection

The Overlooked Systemic Impact of the Right to Be Forgotten: Lessons from Adverse Selection, Moral Hazard, and Ban the Box

Scholarship Abstract The right to be forgotten, which began as a part of European law, has found increasing acceptance in state privacy statutes recently enacted in . . .

Abstract

The right to be forgotten, which began as a part of European law, has found increasing acceptance in state privacy statutes recently enacted in the U.S. Commentators have largely analyzed the right to be forgotten as a clash between the privacy interests of data subjects and the free speech rights of those holding the data. Framing the issues as a clash of individual rights largely ignores the important scholarly literatures exploring how giving data subjects the ability to render certain information unobservable can give rise to systemic effects that can harm society as a whole. This Essay fills this gap by exploring what the right to be forgotten can learn from the literatures exploring the implications of adverse selection, moral hazard, and the emerging policy intervention know as ban the box.

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Data Security & Privacy