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Update: FTC Publishes Proposed Rule Barring Non-Compete Agreements

January 19, 2023

Overview

On January 19, 2023, the Federal Trade Commission (FTC) published its proposed rule barring most non-compete agreements that would apply to employees. We previously summarized the proposed rule here.

The deadline for comments on the proposed rule is March 20, 2023. Comments can be submitted online at Regulations.gov or in writing to Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Avenue NW, Suite CC-5610 (Annex C), Washington, DC 20580. Comments submitted online or in writing should reference “Non-Compete Clause Rulemaking, Matter No. P201200” on the comment.

The substance of the published proposed rule is the same version announced by the FTC on January 5, 2023, and it is very broad. It would apply to both employees and independent contractors, regardless of their job duties, position, or compensation, and to all employers, regardless of size.

It would also apply to almost any agreement that seeks to restrict or limit who an employee can work for post-employment and to agreements or policies that would have the “effect of prohibiting the worker from seeking or accepting work with a person or operating a business after the conclusion of the worker’s employment with the employer.” This would include:

The primary exception to the ban on non-compete agreements would apply to non-compete agreements arising out of the sale of a business.

While the published proposed rule does not change from the version previously announced by the FTC, it does contain new statements by the FTC Commissioners, both in support and in opposition to the proposed rule.

Chair of the FTC Lina M. Khan included a statement in support of the proposed rule, which was joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro M. Bedoya.  Chair Khan’s statement identified two primary reasons for the proposed rule:

  • “First, noncompete clauses reduce competition in labor markets, suppressing earnings and opportunity even for workers who are not directly subject to a noncompete. When workers subject to noncompete clauses are blocked from switching to jobs in which they would be better paid and more productive, unconstrained workers in that market are simultaneously denied the opportunity to replace them. This collective decline in job mobility means fewer job offers and an overall drop in wages, as firms have less incentive to compete for workers by offering higher pay, better benefits, greater say over scheduling, or more favorable conditions.”
  • “Second, the existing evidence indicates that noncompete clauses reduce innovation and competition in product and service markets. Studies show that locking workers in place reduces innovation, likely by decreasing the flow of information and knowledge among firms. By preventing workers from starting their own businesses and limiting the pool of talent available for startups to hire, noncompetes also limit entrepreneurship and new business formation. This in turn reduces product quality while raising prices.”

Chair Khan’s statement also identifies several questions that the Commissioners believe are “especially worthy of close consideration” and on which they solicit comments:

  • “[S]hould the rule apply different standards to noncompetes that cover senior executives or other highly paid workers” and, if so, “how any such category of workers should be defined and what standards should be applied?”
  • “[S]hould the rule cover noncompetes between franchisors and franchisees?”
  • “[W]hat tools other than noncompetes [such as trade secrets laws and confidentiality agreements] might employers use to protect valuable investments, and how sufficient are these alternatives?”

Commissioner Slaughter also included her own statement, which was also joined by Commissioner Bedoya:

“I strongly encourage[s] the public to share their lived experiences and perspectives with the Commission. I have heard personally about how noncompete clauses can strike fear into workers and make them anxious about their livelihoods. These stories come from a variety of different industries and professions, from fast-food workers to family physicians. Public input from individuals who are or who have been bound by noncompetes and from firms that use them is a critically important step in the rulemaking process, and it will help the Commission weigh the proposed broad ban on noncompete clauses as well as the alternative approaches discussed in the NPRM.”

Commissioner Christine S. Wilson included a statement in opposition to the proposed rule. Commissioner Wilson described the proposed rule as “a radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a non-compete clause is unreasonable in duration and scope, given the business justification for the restriction.” Commissioner Wilson also expressed the view that:

  • “the Commission lacks authority to engage in ‘unfair methods of competition’ rulemaking”
  • “the major questions doctrine addressed in West Virginia v.EPA applies, and the Commission lacks clear Congressional authorization to undertake this initiative” and
  • “assuming the agency does possess the authority to engage in this rulemaking, it is an impermissible delegation of legislative authority under the nondelegation doctrine, particularly because the Commission has replaced the consumer welfare standard with one of multiple goals.”

Commissioner Wilson solicited comments on the proposed rule that address the following:

  • “The NPRM references some academic studies regarding non-competes. What other academic literature addresses the issues in the NPRM, including the procompetitive justifications for non-compete provisions?”
  • “The NPRM describes papers that exploit natural experiments to estimate the effects of enforcing non-compete clauses. While this approach ensures that the estimates are internally valid, it reflects the causal effects of non-compete agreements only in the contexts within which they are estimated. What should the Commission consider to understand whether and when these estimates are externally valid? How can the Commission know that the estimates calculated from the contexts of the literature are representative of the contexts outside of the literature?”
  • “The NPRM draws conclusions based on ‘the weight of the literature,’ but the literature on the effects of non-compete agreements is limited, contains mixed results, and is sometimes industry-specific. Which conclusions in the NPRM are supported by the weight of the literature? Which conclusions in the NPRM contradict the weight of the literature? Which conclusions in the NPRM require additional evidence before they can be considered substantiated?”
  • “Where the evidence provided in the NPRM is limited, is the evidence sufficient to support either the proposed ban on non-compete clauses or the proffered alternative approaches to the proposed ban?”
  • “What are the benefits and drawbacks of the currently proposed ban compared to the proposed alternative rule that would find a presumption of unlawfulness, including the role of procompetitive justifications in rebutting a presumption?”

Employers, and employees, might want to submit comments in response to the FTC’s proposed rule. For example, the FTC’s proposed rule specifically requests comments on alternatives to the FTC’s proposed broad ban on non-competes, and identifies the following potential alternatives that the FTC might adopt:

  • A rebuttable presumption instead of a categorical ban. As described by the FTC, “[u]nder this approach, it would be presumptively unlawful for an employer to use a non-compete clause, but the use of a non-compete clause would be permitted if the employer could meet a certain evidentiary burden, based on a standard that would be articulated in the rule.”
  • A rebuttable presumption of unlawfulness to non-compete clauses for some types of employees and no restrictions on non-compete clauses that apply to other types of employees. For example, there could be a rebuttable presumption of unlawfulness to non-compete clauses for employees earning less than $100,000, but no presumption applicable to employees earning more than $100,000.
  • A categorically ban the use of non-compete clauses for some employees and a rebuttable presumption of unlawfulness to noncompete clauses for other types of employees. The FTC provided the following example of this alternative “the rule could ban non-compete clauses generally, but apply a rebuttable presumption to workers who qualify for the FLSA exemptions for executives or learned professionals. Or the rule could ban noncompete clauses but apply a rebuttable presumption to workers who earn more than $100,000 per year.”
  • A categorical ban the use of non-compete clauses for some employees and no restrictions on non-compete clauses that apply to other types of employees. For example, the State of Washington prohibits the use of non-compete clauses for employees earning $100,000 or less per year and independent contractors earning $250,000 or less per year. Employers could impose non-compete clauses on employees earning in excess of those amounts.
  • Application of different standards for different types of employees. These exemptions or different standards could be based on an employee’s job functions, earnings, other factors, or a combination of factors. For example, the rule could bar non-compete clauses for employees who are paid hourly and receive overtime, but permit non-compete clauses for employees who are classified as an executive, administrative, or professional employee under the Fair Labor Standard Act

Lawyers at Schwabe, Williamson & Wyatt, P.C., are advising clients who wish to submit comments in opposition to the rule. If you desire any assistance in submitting comments in opposition, or if a rule that invalidates non-competition agreements would severely negatively affect your company, please reach out for assistance.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for ‎your situation, you should contact an attorney.

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