Extensive litigation awaits the Commission if rule is finalized
By: David Bland
“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 Chamber is confident that this unlawful action will not stand.” —Sean Heather, SVP for International Regulatory Affairs and Antitrust, U.S. Chamber of Commerce
On Jan. 5 the Federal Trade Commission (FTC) proposed a new rule that would ban all non-compete contracts. The major move by the Commission comes on the heels of President Biden’s July 2021 Executive Order on Promoting Competition in the American Economy, in which Biden directed the FTC to utilize its rulemaking authority to “curtail the unfair use of non-compete clauses…that may unfairly limit worker mobility,” among other requests. The order did not change any existing laws but set into motion the FTC’s move to consider non-compete clauses as “unfair methods of competition” under Section 5 of the FTC Act.
The proposed rule begins a 60-day public comment period that ends on March 20. Nearly 5,000 comments had been submitted at the time of this publishing with most of the comments strongly supporting the FTC’s new rule.
Labor’s Petition Is Answered
The Notice of Proposed Rulemaking (NPRM) to ban non-compete clauses is being lauded by labor groups such as the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), Service Employees International Union (SEIU), Public Citizen, and the Economic Policy Institute (EPI), which, along with over 50 other signatories, petitioned the FTC in March 2019 to ban non-competes contracts nationwide.
The petition states that approximately 30 million workers are currently bound by non-compete clauses, and this figure is also used in the Commission’s NPRM. The signers argue that ”Because most private-sector workers do not belong to a labor union and lack effective voice on the job, the threat of leaving for another job is often the only source of leverage for many workers. By restricting exit, non-competes rob workers of this power.”
The petition also argues that non-compete clauses should be subject to laws against unfair methods of competition. This contention is also taken up in the NPRM.
“In recent decades, important research has shed light on how the use of non-compete clauses by employers affects competition,” stated the Commission. “Changes in state laws governing non-compete clauses have provided several natural experiments that have allowed researchers to study the impact of non-compete clauses on competition.
“This research has shown the use of non-compete clauses by employers has negatively affected competition in labor markets, resulting in reduced wages for workers across the labor force—including workers not bound by non-compete clauses. This research has also shown that, by suppressing labor mobility, non-compete clauses have negatively affected competition in product and service markets in several ways.”
FTC Suggests New Rule Would Increase Earnings
In a fact sheet released on the same day as the NPRM, the FTC provided background information supporting its motivations for moving forward with the new non-compete rule proposal. The Commission listed the following reasons why it believes non-compete clauses should be outlawed.
- Non-compete clauses significantly reduce workers’ wages.
- Non-compete clauses stifle new businesses and new ideas.
- Non-compete clauses can exploit workers and hinder economic liberty.
- Employers have other ways to protect trade secrets and other valuable investments that are significantly less harmful to workers and consumers.
To address these issues, the FTC’s NPRM proposes to ban, without exception, non-compete clauses as an unfair method of competition. Employers would be required to rescind existing non-competes with workers, including independent contractors.
The Commission stated in its fact sheet that it believes enforcement of the proposed rule would increase workers’ earnings by up to $300 billion per year and save $148 billion annually on healthcare costs. The agency also believes that a ban on non-competes will reduce racial and gender wage gaps.
US Chamber Pushes Back on New Rule, Threatens Lawsuit
Representing some 3 million businesses, the U.S. Chamber of Commerce has signaled that it plans to sue the Federal Trade Commission if it continues to pursue the ban on non-competes. The Chamber carries considerable weight when dealing with lawmakers and is reported to have spent almost $60 million lobbying Congress in 2022. According to cnbc.com, the Chamber has vowed to seek limits to FTC authority through the appropriations process.
In a Jan. 5 statement, Sean Heather, U.S. Chamber senior vice president for International Regulatory Affairs and Antitrust, stated the Chamber’s opinion that the FTC’s actions are unlawful.
“Today’s actions by the Federal Trade Commission to outright ban noncompete clauses in all employer contracts is blatantly unlawful,” Heather said. “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 Chamber is confident that this unlawful action will not stand.”
He continued, “Attempting to ban noncompete clauses in all employment circumstances overturns well-established state laws, which have long governed their use and ignores the fact that, when appropriately used, noncompete agreements are an important tool in fostering innovation and preserving competition.”
Modest Bi-Partisan Support for New Rule in Congress
While the FTC may see a significant challenge to a rule outlawing non-competes in the conservative-majority Supreme Court, there is limited bi-partisan support for the ban among congressional centrists. Last year, Republican Senators Todd Young (R-Indiana) and Kevin Cramer (R-N.D.) joined with Democrats Chris Murphy (D-Connecticut) and Tim Kaine (D-Virginia) to introduce a bill that would largely ban non-competes. The legislation has not been moved up at this point, but with the support of a Democratic Senate and President, the issue will likely remain high on the progressive policy wishlist.
Neil Bradley, executive vice president, chief policy officer and head of strategic advocacy for the U.S. Chamber, said that limiting the FTC’s authorities in Congress will be an “uphill challenge.”
“We’re going to work all angles, we’re not putting all of our eggs in the appropriations … basket,” he said. “We’re already in litigation, and we’re going to be in future litigation against the FTC.”
Commissioner Wilson Dissents
Christine Wilson, the only remaining Republican Commissioner at the FTC, released a 14-page dissenting statement. Wilson argued that the Commission has engaged in a radical departure from the long history of legal precedent that is lacking in evidence to support the new rule.
“What little enforcement experience the agency has with employee non-compete provisions is very recent (within the last week) and fails to demonstrate harm to consumers and competition,” Wilson said. “Lacking enforcement experience, the Commission turns to academic literature – but the current record shows that studies in this area are scant, contain mixed results, and provide insufficient support for the scope of the proposed rule.”
Wilson also submitted that the Commission’s engagement in “unfair methods of competition” rulemaking in the NPRM may be challenged in court. She suggested that a starting point for the legal challenges to the new non-compete rule will be to argue that the rulemaking power of the FTC is limited to consumer protection issues as “…Congress has not clearly authorized the FTC to make competition rules that may have significant political or economic consequences.” Wilson also contended that a recently established doctrine, known as the “major questions doctrine,” may be a basis for demonstrating that the FTC has overstepped its authority.
The Major Questions Doctrine
First applied in 2022 during the controversial Supreme Court case, West Virginia v. EPA, the major questions doctrine sets a new precedent for limiting the power of administrative agencies. Under this doctrine, the Court has rejected the authority of federal agencies when 1) the claim of authority is regarding an issue of “vast economic and political significance.” and when 2) Congress has not clearly delegated authority over the issue to the agency.
Public Comments Will Be Critical for Opponents of the New Rule
To conclude her dissenting letter, Commissioner Wilson strongly urged all interested stakeholders to submit comments to the Agency.
“This is likely the only opportunity for public input before the Commission issues a final rule. For this reason, it is important for commenters to address the proposed alternatives to the near-complete ban on non-compete provisions,” Wilson said.
Will a Non-Compete Ban Affect Direct Sellers?
While the NPRM explicitly includes independent contractors in its provisions, the impact of outlawing non-compete clauses in direct selling distributor contracts is not yet clear.
Kevin Thompson, founding partner at Thompson Burton PLLC, said he believes the impact to the channel would be negligible.
“Assuming if the FTC successfully pulls this off and bans non-competes, I do not think it will have much impact on our industry,” Thompson said. “Contrary to popular belief, companies do not typically rely exclusively on the non-compete clause when they go after distributors. The provision with teeth is the non-solicitation clause and it’s the one that’s generally enforceable throughout the entire country. While non-compete clauses might be on their way out, the non-solicitation clause is not going anywhere.”
The public may submit comments about the Non-Compete Clause Rule at www.regulations.gov/document/FTC-2023-0007-0001
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