Federal Trade Commission Proposes Nationwide Ban on Non-Compete Agreements

On July 9, 2021, Present Biden issued an executive order insisting upon aggressive enforcement of antitrust laws.  In the order, the White House specifically targeted non-compete agreements and urged both the Federal Trade Commission (“FTC”) and Department of Justice to ban or at least limit their use.  In recent years, roughly half of states have limited the enforceability of non-competes, with a few (including California) banning them entirely.  Federal legislation or administrative regulations curbing the use of non-competes has been in the ether in Washington as well for years now, but all efforts to date have stalled

That said, non-competes remain a serious problem for employees in the U.S.  Millions of workers—per at least one report, nearly half of the American workforce—are subject to non-compete agreements restricting their ability to find new employment.  As such, workers’ rights advocates have long urged the U.S. government to address this issue at the federal level, with many pinning their hopes on former public interest attorney, prominent Amazon critic, and current FTC Chairperson Lina Khan (“Khan”) to lead the charge.

Recently, Khan’s FTC has answered President Biden’s and others’ calls for action by announcing a wide-reaching proposed rule that would ban non-compete agreements nationwide.  President Biden has repeatedly expressed the belief that non-competes stifle competition and depress wages, and the FTC estimates that its rule could increase wages by nearly $300 billion annually.  As Khan explained: “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy.  Non-competes 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, FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

Further, the FTC’s proposed rule seemingly provides little, if any, room for employers to creatively work around it.  While it does allow for an exception where a non-compete is “entered into by a person who is selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity’s operating assets,” the exception applies only to individuals with a “substantial” ownership stake.

The FTC also seeks to outlaw employment contract terms that amount to “de facto” non-compete clauses, such as non-disclosure requirements “written so broadly that [they] effectively preclude[] the worker from working in the same field” and obligations for workers to cover training costs if they end their employment too soon, provided the bill is not “reasonably related to the costs the employer incurred for training the worker.”

Moreover, the proposed rule accounts for the use of unenforceable non-compete agreements, which employers often include in employment contracts, even in states like California, for their deterrent effect.  Specifically, the proposal would require employers to withdraw existing non-competes and inform workers that they no longer apply, and make it illegal for an employer to enter into a non-compete with a worker or to try to do so, or to suggest that workers are bound by a non-compete when they are not.

Crucially, the proposed rule does not apply only to employees; rather, it covers independent contractors, interns, volunteers, and other workers—thereby closing another obvious potential loophole.

While the proposed rule will be open for public comment for 60 days before being made final, legal challenges are almost certainly on the horizon, with industry groups like the U.S. Chamber of Commerce expressing outrage that that the rule goes well beyond the FTC’s rulemaking authority.  The 14-page dissent prepared by the FTC’s only Republican appointee—which argues that the agency does not have the rulemaking authority it claims over unfair methods of competition and that non-competes must be assessed on a case-by-case basis, rather than be subject to a blanket prohibition, because they could be supported by legitimate business justifications—may provide a roadmap for employers in the fight against the proposed rule. 

Additionally, legal challenges to the proposed rule will likely focus on the major questions doctrine, which requires that Congress speak clearly when empowering agencies to regulate issues of vast significance.  In recent memory, the doctrine was famously invoked by the U.S. Supreme Court to block the Occupational Safety & Health Administration’s COVID-19 vaccine-or-test rule and to invalidate the Environmental Protection Agency’s Clean Power Plan.

Khan, on the other hand, has stated emphatically that the proposed rule is well within the confines of the FTC’s authority, per the Federal Trade Commission Act, which vests the FTC with the power to prohibit unfair methods of competition.  Khan also invoked National Petroleum Refiners Association v. FTC, 482 F.3d 672 (D.C. Cir. 1972), where the D.C. Circuit Court of Appeals affirmed the statutory authority cited by Khan in striking down a challenge to an FTC regulation requiring that gas stations post octane rating numbers on pumps.  However, some have suggested that the U.S. Supreme Court would have a very different take on this issue, should it choose to address one of the inevitable legal challenges down the line.

In sum, while the success of the FTC’s proposed rule remains to be seen—and an eventual U.S. Supreme Court challenge looms large—Khan has lived up to the hype she garnered upon her appointment as Chairperson, and the proposed rule provides U.S. workers with plenty of cause for optimism that restrictions on their ability to find new employment within their chosen industry may soon be a thing of the past.

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Faruqi & Faruqi, LLP focuses on complex civil litigation, including securities, antitrust, wage and hour and consumer class actions as well as shareholder derivative and merger and transactional litigation. The firm is headquartered in New York, and maintains offices in California, Georgia and Pennsylvania.

Since its founding in 1995, Faruqi & Faruqi, LLP has served as lead or co-lead counsel in numerous high-profile cases which ultimately provided significant recoveries to investors, direct purchasers, consumers and employees.

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About Alex Hartzband

Alex Hartzband's practice is focused on employment litigation. Alex is a Partner in the firm's New York office.

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