Another FTC rule is in trouble, at least industry hopes so

Tom Temin: That rule was again today on noncompete. So what are you thinking about? What are you watching here?

Stephanie Kostro: Tom, thanks for having me, and I appreciate that you’re talking both about the Chevron deference decision from the Supreme Court in conjunction with this FTC rule. As you mentioned, this final rule came out months ago and it was supposed to take effect today, Sept. 4. But there are several cases out there in the courts that contractors are watching very, very closely. One of them was there in the Northern District of Texas where the judge had originally issued a preliminary injunction, which just impacted the plaintiffs in the case. And then, more recently, here on Aug. 20, the judge applied that injunction nationwide, which means this FTC rule on noncompetes does not go into effect today. And in these cases, whether it’s in Texas or Pennsylvania or elsewhere, the judges have been looking at this Chevron deference overturned by the Supreme Court. And what that means is back in 1984, the Supreme Court said, “If the law or statute is ambiguous, then you can use the agency’s reasonable interpretation.’ They had some flexibility to interpret, how to apply, what kind of authority that they had. What the Supreme Court most recently decided here in June is that, ‘No, don’t defer to the agencies. You just have to go by the letter of the law.’ And that’s going to throw a lot of sand and a lot of works. The FTC seems to be just the first one out of the gate.

Tom Temin: And this rule against noncompetes doesn’t seem to be rooted in any statute, but rather, just because the FTC chair doesn’t like it.

Stephanie Kostro: That’s exactly right. What the plaintiffs have alleged and it sounds like the judges have agreed in some cases is that there is no specific authority for the FTC to issue this kind of rule to say that you’re banning noncompete clauses, except for the most senior executives in the company. From a contractor perspective, this is problematic, and PSC submitted comments back when this was a proposed rule. And one of the comments that we submitted, and that we take very, very seriously, is that when a contractor puts together a proposal for a federal agency, they have to identify key personnel and those key personnel shouldn’t change from the time you submit a proposal to the time you do the work. If you don’t have a noncompete clause that keeps them, those employees somewhat attached to the company, you could really, really throw sand in the company’s works, right? And they could get in trouble for not having those key personnel anymore. So that’s the kind of issue the contractors are watching. I would say many of them heaved a very big sigh of relief that the Texas court issued an injunction here, and then we’ll see how it develops. We’ll see how the FTC responds.

Tom Temin: Right. And you point to something important for contractors and that is the crucial person may not be a senior executive of the company. They could be the person who is the best programmer of communication protocols or something and they could be very valuable, even though they’re not senior.

Stephanie Kostro: Exactly. The officials who are exempt originally from this FTC final rule are people like the company president or CEO. It’s not the program manager who you have actually doing the work on a government contract. And so we saw this have an outsized potential impact on small businesses where they only have a few employees, right? And so if you don’t have a noncompete clause that somehow ties them to the company as a government contractor, you could get in a lot of hot water.

Tom Temin: We’re speaking with Stephanie Kostro. She’s executive vice president for policy at the Professional Services Council and on another rule which the State Department has issued as interim final, which I never quite understand that reasoning. But nevertheless, it is interim final, and this has to do with enabling trade cooperation among Australia, the UK, the United States. This AUKUS kind of idea to bolster our presence, I guess below China, if you will. This rule is something you’re looking at. Also, give us the particulars of what it does and how it affects contractors?

Stephanie Kostro: Thanks Tom. This interim final rule is near and dear to my heart as someone who’s tracked export controls, and specifically, more recently, the AUKUS Trilateral Security Partnership very closely. And so what the interim final rule does is it creates an exemption for Australia, UK, and in some cases, Canada, which has long had an exemption from ITAR, certain defense articles and defense service exports with Canada. It creates also a Excluded Technologies List, or they call it ETL, where those are ones that we do have to have additional scrutiny. And they’re not just pushing the easy button to have Australia and the UK have access to this, but there are authorized users. There’s a process for creating the opportunity for re-exports and retransfers, etc. Long story short Tom, this AUKUS Trilateral Security Partnership is a fantastic idea by the three countries, not only to be able to codevelop, co-sustain, operate together, be interoperable, etc. But it also is sending a message to potential adversaries like China that we are serious, and we are a coalition of the willing, if you will, but also really in lockstep with each other. And I think what we need to do here is look at this interim final rule, submit comments by mid-November, which is where the comments are due, and then really have some near term successes. And that’s where PSC and our contractors, who are members, want to see some near-term successes. To really hammer that message home to China.

Tom Temin: And by the way, what do we know about the Australian defense industry? I mean, people sometimes are surprised to realize that not just France and Germany and to some extent, Great Britain, but Norway, Sweden, Finland, a lot of these nations you wouldn’t think have really strong development capabilities for weapons platforms. You can see them at the army show. They have exhibits every year. What about Australia? Do they have what we would want to buy or do we just want to sell to them do you think?

Stephanie Kostro: It’s a combination, to be honest, Tom and what we’re looking really in the U.S.-Australia relationship is what can we do together because they do have some comparative advantages in certain areas of emerging technology, etc. And so as we look at what we can do together, co-development, co-sustainment, coproduction, etc., and really helping them to figure out how they can sustain those submarines that we’ll be helping them get in as part of this AUKUS partnership. That’s what we’re looking at. And to be honest, we’ve had government support from the Australians, UK and U.S. government officials to create what is called an Advanced Capabilities Industry Forum. PSC is one of four U.S.-based trade associations alongside our Australian trade associations and UK trade associations. We all get together regularly, and we talk about exactly this: How can we leverage each other? What are we going to buy from each other? So I think it’s a great question Tom. It’s still nascent at this stage.

Tom Temin: And you hinted at something really important and that is the sustainment capabilities. It’s great to give a nuclear submarine to a country or sell it to them, but really the challenge for those things is as much sustainment and safe operation over long term as building in the first place. And not too many nations have that capability.

Stephanie Kostro: That’s exactly right. And what you don’t want to do is have a submarine in Australia and have to bring it back all the way to the United States for maintenance, right? So you can’t really do that, and so creating that capability within Australia is really going to be critical.