THE FTC WANTS TO NUKE NONCOMPETES
Back in July 2021, President Biden issued an Executive Order calling on the Federal Trade Commission (FTC) to “curtail the unfair use of noncompete clauses.” It took some time, but the FTC has finally obliged. And now we know how the FTC interprets the word “curtail” (SPOILER: it’s not narrowly).
On Jan. 5, the agency proposed a new rule that would ban almost all noncompete clauses. The new rule would make it “an unfair method of competition” for an employer to enter into, attempt to enter into, or maintain a noncompete clause with a worker. So new noncompete clauses would be prohibited, and old clauses would be stripped of enforceability. But the proposed rule does more than impact the efficacy of noncompete clauses—it also governs how employers discuss them. The rule prohibits employers from representing to workers that they are subject to noncompete clauses when there’s no good faith basis to believe an enforceable noncompete clause exists. It also requires employers to notify workers (through “individualized communications”) that they are no longer subject to noncompete clauses. This notice requirement applies to current and former employees. Although the new rule does have a carve-out for noncompete clauses executed by people selling businesses, it’s safe to say it would curtail noncompetes.
Three of the four FTC commissioners voted in favor of the proposed rule. According to FTC Chair Lina M. Khan, “[t]he freedom to change jobs is core to economic liberty and to a competitive, thriving economy” and the proposed rule would “promote greater dynamism, innovation, and healthy competition.” Elizabeth Wilkins, Director of the Office of Policy Planning, said employers’ use of noncompete clauses “significantly suppresses workers’ wages,” and the rule would ensure that employers can’t “exploit their outsized bargaining power to limit workers’ opportunities and stifle competition.” The lone no-vote came from Commissioner Christine Wilson, who called the proposed rule a “radical departure from hundreds of years of legal precedent” that calls for a fact-specific inquiry into the enforceability of noncompete clauses. Wilson predicts that the proposed rule will lead to a “raft of unintended consequences” as well as “protracted litigation.”
EXPECT LEGAL CHALLENGES TO THE FTC’S PROPOSED NONCOMPETE BAN
Commissioner Wilson’s forecast for a fight will probably prove to be prescient. One entity that will likely enter the litigation fray is the US Chamber of Commerce. Sean Heather, the Chamber’s senior vice president, said that the proposed rule “is blatantly unlawful,” and he’s confident that the rule “will not stand.” Assuming the proposed rule becomes a final rule (see a bit more on that below), its fate will almost certainly be decided by the U.S. Supreme Court. The Court’s conservative majority has said that broad legislative language isn’t enough to authorize regulations on significant national issues because such language doesn’t exhibit clear Congressional consent. The legislative language in question here is Section 5 of the FTC Act, which prohibits ‘‘unfair or deceptive acts or practices in or affecting commerce.’’ The Court could conclude that noncompete clauses constitute a significant national issue, and that Section 5 isn’t sufficiently specific to show that Congress empowered the FTC to issue a rule as comprehensive and impactful as the new proposed rule.
HAVE YOUR VOICE HEARD ON THE NONCOMPETE BAN
But let’s not get ahead of ourselves. For now, the proposed rule is just that: a proposed rule. The FTC will not issue a final rule until after the public has had an opportunity to comment. The FTC is particularly interested in comments on these points:
· Whether franchisees should be covered by the rule
· Whether senior executives should be exempted from the rule or subject to a rebuttable presumption rather than a ban
· Whether low- and high-wage workers should be treated differently under the rule
The deadline to submit comments is March 10, 2023. You can read the proposed rule here. You can read the FTC’s press release (and find links to the FTC commissioners’ statements) here. And you can find instructions on how to submit a comment on the FTC’s website here: www.ftc.gov/policy/public-comments.