The Federal Trade Commission proposed a new rule that would ban employers from imposing noncompetes on their workers, a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses. By stopping this practice, the agency estimates that the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.
The Commission asked for public comments on the proposal, which were due by April 19, 2023.
NAED joined a list of hundreds of trade associations, member groups, and chambers of commerce to craft a letter to the Commission in opposition to the proposal. In addition, NAED’s Senior Vice-President of Government Affairs and Strategic Projects Ed Orlet provided tED magazine with a quote about the FTC non-compete proposal. “First of all, the FTC doesn’t have the legal authority to make this rule,” Orlet said. “Additionally, noncompetes are the best way for employers and key employees to agree on expectations regarding corporate intellectual property, customer information and other critical assets.”
The formal letter says:
The undersigned organizations, who together represent businesses that provide goods and services to virtually every American in every corner of the country, submit these comments regarding the proposed Noncompete Rule. We strongly oppose the proposal because noncompetes serve vital business and employee interests and because the FTC lacks legal authority to issue the proposed rule.
Most importantly, noncompetes serve pro-competitive interests. Courts, scholars, and economists all have found that noncompetes encourage investment in employees and help to protect intellectual property. In every sector of the economy, employers rely on noncompetes to protect investments in their workforce, to protect trade secrets and other confidential information, and to structure their compensation programs. As the FTC’s own economist John McAdams recently explained, noncompetes “allow firms to reduce recruitment and training costs by lowering turnover,” encourage firms to offer higher wages to compensate new employees, and “increase the returns to research and development,” thereby promoting innovation. Unfortunately, the Commission ignored or downplayed this evidence, thereby undermining“confidence in the integrity of the rulemaking process or the ultimate outcome.”
Moreover, noncompetes promote pro-competitive interests far more effectively than alternatives such as trade-secret laws or nondisclosure agreements. By relying on noncompetes over nondisclosure agreements or trade-secret law, “employers avoid the difficulties of proving an actual or threatened misappropriation of trade secrets to secure an injunction,” a costly and time-consuming process. Scholars have found that noncompetes “may represent a more efficient mechanism to prevent proprietary knowledge transfers in certain circumstances, particularly when monitoring and the enforcement of trade secrets law is costly.”
Noncompetes are also often used as part of contractual arrangements between the employer and the employee that result in additional compensation to the employee, in the form of added pay, retention bonuses, stock awards, deferred compensation or as part of a severance package. Noncompetes are also essential to the sale of a business. Businesses often have multiple owners with ownership levels beneath the 25 percent threshold recognized by the proposed rule, yet noncompetes would be banned in these instances as well. Employers often make significant investments in providing upskilling for their employees. These investments often require the employee to agree to stay with the employer for a period of time. The proposed rule fails to appropriately recognize any of these applications, all of which fail to demonstrate a clear harm to competition or harm to the employee.
In addition to the damage the proposal would inflict on businesses and employees, the FTC lacks the statutory authority under the FTC Act to issue the rule. Section 5 of the FTC Act empowers the Commission to pursue individual enforcement actions against “unfair methods of competition,” and Section 6(g) provides narrow authority to develop internal procedural rules. Neither provision, nor any other, authorizes the FTC to adopt generally applicable substantive rules defining unfair methods of competition. In contrast, Congress has repeatedly granted the FTC the authority to promulgate substantive rules on “unfair or deceptive acts and practices” and other discrete topics, but has declined to authorize regulations addressing unfair methods of competition.
Without express authorization from Congress, the FTC also lacks the constitutional authority to promulgate the proposed rule. As the Supreme Court recently explained, the major- questions doctrine requires that Congress speak clearly if it wishes to assign decisions of “vast economic and political significance” to an agency. That doctrine recognizes that “extraordinary grants of regulatory authority are rarely accomplished through modest words, vague terms, or subtle devices,” even when there is a “colorable textual basis” for the agency’s position. Nothing in the FTC Act shows a hint of a decision by Congress to allow the Commission to invalidate contracts affecting tens of millions of workers, particularly given that Congress itself has recently considered legislation that would regulate noncompetes.
Similarly, the proposed rule also runs afoul of the nondelegation doctrine. A statutory delegation is constitutional only so “long as Congress lays down by legislative act an intelligible principle” to cabin the agency’s discretion. If the term “unfair methods of competition” is divorced from history and precedent, and if the Commission can condemn any business practice as unfair based on nothing more than “nefarious-sounding adjectives,” then there is effectively no limit to what the Commission could condemn under Section 5.9
Finally, the proposed rule also violates bedrock principles of federalism. For centuries, noncompetes have been a matter of state law, and today, forty-seven States enforce reasonable noncompete clauses. If Congress “intends to alter the usual constitutional balance between the States and the Federal government,” it must be “unmistakably clear,” particularly when an agency’s regulation would disrupt areas of “traditional state regulation.”
While there are many ways for this proposal to be narrowed, because the FTC lacks the authority to issue any regulation on this issue, it should withdraw its proposed rule, and revert to the authority granted to it by Congress to address questions of unfair methods of competition through its adjudicative function.