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Federal Trade Commission’s Proposal Sets Noncompete World on Fire: Justified Fears?

A recent FTC proposed rule that would bar noncompete agreements could have major impacts against the working class.

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DC

David J. Carr

February 23, 2023 10:00 AM

Pop Quiz: For decades, U.S. employers used noncompete/non-solicitation/no-pirating agreements to: (a) oppress the working class; (b) legitimately protect their intangible business property; (c) (a) and (b); (d) none of the above. Plainly, perspectives differ on the fairness and efficacy of such provisions. Now the Federal Trade Commission jumps into the fray with both feet, and they choose Answer (a).

This January, the FTC proposed a rule barring noncompete agreements, citing its ability to move against unfair methods of competition under Section 5 of the FTC Act. Wow! Aggressive only begins to describe this act by a federal agency. Noncompete agreements cover up to one in five American workers, the FTC said, limiting workers’ ability to move between employers who might compete for their labor with higher wages.

Expect a major legal battle over the threshold question of whether the FTC possesses the legal authority under the U.S. Constitution for this type of action. Note that, last year, the U.S. Supreme Court, in its rulings on OSHA workplace vaccine/testing mandates and EPA Clean Power Plan regulations, invoked the “major questions” doctrine as a limit on Executive Branch rule-making efforts in the absence of an explicit statutory mandate from Congress. Anticipating this argument, FTC Chair Lina Khan asserted, “In addition to the text of the statute, the structure and purpose of the statute, and legislative history all support the authority that we’ll be exercising.”

Commentators have already begged to differ. Indeed, FTC Commissioner Christine Wilson, the sole Republican appointee, dissented from the proposal, saying the agency is “vulnerable to meritorious challenges” on several fronts, including the major questions doctrine.

The FTC’s notice asserts that elimination of noncompetes will increase worker wages by $300 billion. However, it offers no citation for that claim. The FTC’s position will be that noncompetes violate Section 5 of the Federal Trade Commission Act. “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said Chair Lina M. Khan. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation and healthy competition.”

The FTC’s proposed rule offers a breath-taking scope. Specifically, the FTC’s new rule would make it illegal for an employer to:

  • enter into or attempt to enter into a noncompete with a worker;
  • maintain a noncompete with a worker; or
  • represent to a worker, under certain circumstances, that the worker is subject to a noncompete.

The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also require employers to rescind existing noncompetes and actively inform workers that they are no longer in effect.

The proposed rule would generally not apply to other types of employment restrictions, like non-disclosure agreements. However, other types of employment restrictions could be subject to the rule if they are so broad in scope that they function as noncompetes. This means even customer and employee non-solicitation provisions may be at risk.

The U.S. Chamber of Commerce has already declared itself ready to do battle over this proposal. “Today’s actions by the Federal Trade Commission to outright ban noncompete clauses in all employer contracts is blatantly unlawful,” Sean Heather, a senior vice president at the Chamber, said in a statement. “Since the agency’s creation over 100 years ago, Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule.”

The FTC invites the public to submit comments on the proposed rule. The FTC will review the comments and may make changes in a final rule, based on the comments and on the FTC’s further analysis of this issue. The comment period is open through March 10, 2023. Stay tuned for what appears to be major battle over the future landscape for American businesses.

If you have questions, please contact David J. Carr or another member of the Workplace Solutions Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.

Headline Image: iStock/gremlin

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