The FTC’s Prodigious Step to Liberate Workers from Non-Competes and Create a Fairer Marketplace for All
Yesterday was a truly historic day for antimonopoly advocates, scholars, workers, union members, and the general public. The Federal Trade Commission (FTC) is proposing a rule under its unfair methods of competition (UMC) authority to ban effectively all non-competes in the United States.1 This rule, and the use of the Commission’s UMC rulemaking powers more generally, has been a repeated request from many scholars and advocates - including my employer, the Open Markets Institute.2 The proposed rule also answers President Biden’s call to ban non-competes, which he explicitly requested in his landmark Executive Order on Promoting Competition in the American Economy in July 2021.
Non-competes are a scourge on workers. These coercive agreements forcibly tie workers to their employer. For example, should the worker ever decide to leave, a non-compete prevents the worker from becoming employed at another firm that is considered a rival to their current employer. Typically, this restriction lasts for some specified duration and within a certain geographic scope. In other words, non-competes not only deprive a worker of becoming employed at another firm that leverages their earned skill set, but they also prevent the worker from becoming employed at a firm that is located within the geographic zone where they live. Should workers be legally prohibited from using their duly acquired skills, or be forced to learn a new trade or be unemployed, or be required to move to obtain employment at a similar company and earn an income? I don’t think so.
The data is crystal clear that non-competes suppress competition, economic opportunities for workers, and worker wages. Worse, they are almost never negotiated by the workers - as employers often present non-competes to workers in a take-it-or-leave-it manner. For workers, it’s relinquish their right to some future economic opportunity or be unemployed. Unfortunately, the chosen path is understandable.
Traditionally, absent some state law or other regulation, non-competes are litigated on a case-by-case basis - subjecting workers to significant ambiguity about whether the agreement is legal at all, never mind potentially incurring exorbitant legal costs should litigation be initiated. In the grand scheme of things, non-competes are one of many restrictive contracts that further tip the already heavily imbalanced scales of power that employers have over their workers.
Supporters of non-competes routinely point to how these coercive contracts can protect intellectual property and allow firms to obtain the benefits of the training they provide to their workers. These agreements are not only unduly broad and the “wrong tool” to accomplish these goals, but there are also alternative, more socially beneficial, means to achieve these perceptually reasonable objectives that do not restrict a worker's freedom to select an employer. For example, if firms genuinely do not want employees to leave, pay them more, enhance their working conditions, and treat them better. If firms want to protect their intellectual property, they can use trade secret law or patent and copyright infringement lawsuits to do so. Nothing in the FTC’s proposed rule inhibits employers from taking these actions. Perhaps the ardent opponents of the FTC’s proposed rule need to be reminded that the economy is supposed to be designed for the welfare of the people, not corporations.
In its nearly 220-page proposed rule, the FTC painstakingly reviews all the available evidence and harms of non-competes. Having read a surfeit of scholarly articles, I can confidently assert that the FTC’s proposed rule is not only exceptionally well written, but it is also perhaps the greatest compilation of existing scholarship on non-competes that I have ever read. The agency also provides many examples of how non-competes have been nefariously used to restrict workers’ freedoms. The agency truly left no stone unturned as it relates to why non-competes should be completely prohibited throughout the entire U.S. economy. While challenges and courtroom battles are inevitable, the breadth and detail of the proposed rule clearly indicate the FTC is ready for a fight and is prepared to win despite the odds, given the current composition of the judiciary. Rather than read the entire proposed rule, the FTC has conveniently provided the public with a significantly shorter 4-page fact sheet that details the justifications for the rule. The FTC is rightly putting out it best case to the public that its decision is just, necessary, and beneficial.
Critically, before the rule is enacted, there will be a 60-day comment period.3 Since there are between 30 and 60 million people subject to non-competes, there will certainly be no shortage of heartbreaking and revealing stories about workers that have felt compelled to stay with their current employer for fear of retaliation and, under threat of litigation, forced to stay with an employer that mistreats them, underpays them, or subjects them to unduly harsh working conditions.
While providing little to support the legal arguments as to whether the FTC under its controlling statute can promulgate such a rule or not - which will be the primary crux of the litigation to come - comments serve a more important purpose. Yes, empirical evidence, legal scholarship, and case law matter, which the FTC cites a copious amount of in its proposed rule. But personal experience from the public matters a great deal too. Comments provide the moral force that the agency needs to justify a rule in the first place. These stories also create added public pressure on the judiciary to support and ultimately uphold a rule - and should the rule be overturned by the judiciary, used to justify legislative measures directly from Congress as well as show Congress just how favorable such a new law would be. I encourage all Law & Power readers to submit their personal stories to the FTC as they relate to their experience with non-competes. The Federal Registrar has not published the FTC proposed rule, but as soon as it does, the comment period will open.
Thanks for reading.
Image Credit: Romain Dancre via Unsplash.
There is a limited exception allotted for the sale of a business.
For additional reading on the FTC’s UMC rulemaking powers, see Sandeep Vaheesan, Resurrecting “A Comprehensive Charter of Economic Liberty”: The Latent Power of the Federal Trade Commission, 19 U. Pa. J. Bus. L. 645 (2017).
Open Markets Inst. et al., Petition for Rulemaking to Prohibit Worker Non-Compete Clauses (March 20, 2019), https://static1.squarespace.com/static/5e449c8c3ef68d752f3e70dc/t/5eaa04862ff52116d1dd04c1/1588200595775/Petition-for-Rulemaking-to-Prohibit-Worker-Non-Compete-Clauses.pdf; see also Daniel A. Hanley, Ending Corporate America’s Coercive Contracts, Democracy J. (Dec. 21, 2021), https://democracyjournal.org/arguments/ending-corporate-americas-coercive-contracts/.
The comment period will more than likely be extended to 90 days. Also, note that the rule will not be enacted immediately after the comment period. The FTC will make some modifications to its proposed rule after reviewing the comments.