The FTC Wants To Outlaw Noncompete Clauses, but Does It Have the Authority?

[Kamaji]

The FTC Wants To Outlaw Noncompete Clauses, but Does It Have the Authority?

The Commission's lone dissenter says Congress has not charged it with regulating noncompete clauses.

DAVID MCGARRY
1.12.2023

The Federal Trade Commission (FTC) last week proposed a near-total ban on noncompete clauses for employees and contractors, calling them an "unfair method of competition." The rule would prohibit employers from enforcing existing noncompete clauses and making them a condition of future employment. If it can survive legal challenges, the FTC's ban on noncompetes would have a massive impact on the rights of employers and workers.

The noncompete clause usually sets a time or geographical limit within which an employee is barred from working for her employer's competitors or starting her own competing business. While there is broad agreement that noncompetes have been abused by employers, they also serve to protect proprietary data and incentivize companies to train their workers. In many contexts, noncompetes foster a mutually beneficial exchange between firms and workers. For instance, a worker who contractually agrees not to leave for a competitor in the same region may in turn receive skills training at his company he couldn't otherwise obtain.

"If noncompetes are banned outright…the effect will be less information-sharing within the company," George Mason University economist Tyler Cowen wrote Tuesday in Bloomberg. "New workers in particular, who have not demonstrated their long-term loyalty, will have a hard time getting access to information and getting ahead."

The FTC, however, portrays noncompetes as anti-competitive measures with no redeeming traits. Eschewing incremental reform, the agency has sprung straight to considering an outright ban that would go so far as to nullify existing noncompete agreements (with an exception for certain individuals attempting to sell a business).

While reasonable people can and do disagree about the merits of noncompete contracts, the FTC's announcement makes no mention of the fact that most states already regulate noncompete clauses and employees can generally sue to escape unreasonable ones. Indeed, there are colorable arguments for regulating some noncompetes, particularly those for entry-level positions. In 2016, for instance, multiple state attorneys general forced sandwich chain Jimmy John's to settle over clauses imposed on low-wage employees, despite there being no risk of spilling proprietary secrets. More deviously, one report from Cornell University's Matt Marx found that nearly 70 percent of engineers surveyed were not informed by their employer that they must sign a noncompete until after receiving a job offer, and about a quarter of respondents were informed on their first day.

The FTC proposal would further ban contractual terms that are "de facto non-compete clauses," which in effect prohibit "the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker's employment with the employer." This language is broad and nonspecific, which means the FTC is essentially giving itself a regulatory blank check. FTC Chair Lina Khan, an unapologetically aggressive enforcer, may well exploit the text to its legal breaking point.

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Source:  https://reason.com/2023/01/12/the-ftc-wants-to-outlaw-noncompete-clauses-but-does-it-have-the-authority/

[Kamaji]

Another really bad idea.

Certainly it wouldn't be a bad thing if an agency with national authority did a comprehensive review of the current state of the art on non-competes, and did a careful, sophisticated, analysis of both the good and the bad, with the goal of ultimately providing some common framework and a baseline set of rules for non-completes.

But simply outlawing them altogether is not going to magically increase employees' wages, as the FTC claims.  Furthermore, non-competes do provide benefits, including making the basic policing of an employer's valuable interests in protecting its confidential information and its trade secrets more efficient - for both employers and employees.

[catfish1957]

 i.e.....  simply stated?  A woke end game intended for strategic circumvention.

[DefiantMassRINO]

More needs to be done to re-introduce competition into American capitalism, but noncompetes help protect proprietary information and practices.  They shouldn't be completely eliminated.

What about collusion amongst employers to not "poach" workers, as happened in Silicon Valley in the 2000s?

[catfish1957]

More needs to be done to re-introduce competition into American capitalism, but noncompetes help protect proprietary information and practices.  They shouldn't be completely eliminated.

What about collusion amongst employers to not "poach" workers, as happened in Silicon Valley in the 2000s?

I dealt with one of he worst alphabet agencies my entire work like (EPA).  Always infer their intent to be sinister, focus on political self interest, and consolidation of power.

I applaud you interest in common sense approaches and philosophies in regulatory configuration, and intent.  But 99.9% expect otherwise from the Swamp Creatures. I guarantee it.

[Kamaji]

More needs to be done to re-introduce competition into American capitalism, but noncompetes help protect proprietary information and practices.  They shouldn't be completely eliminated.

What about collusion amongst employers to not "poach" workers, as happened in Silicon Valley in the 2000s?

Agreed.  Unless the FTC is going to claim the authority to waive all employers' interests in confidential or proprietary information (e.g., customer lists, pricing lists, discounting practices, special practices and procedures, and etc), and their rights to protect and enforce those interests under state and federal common and statutory law - which they definitely do not have - getting rid of non-competes will simply incentivize employers who believe their rights and property are being stolen - whether they are or not - to engage in very intrusive investigations and snooping on ex-employees, and to engage in a lot more litigation against their ex-employees and those ex-employees' new employers in order to vindicate their legitimate interests.  Litigation like that will be extremely intrusive to the ex-employees and, more importantly, extremely expensive for them to defend against.

Non-competes in principle play a role in making that process a lot more efficient economically by creating a set of reasonable bright-line rules and expectations amongst employers and ex-employees that avoids most of the costly litigation that would otherwise take place.

Getting rid of non-competes won't make the problem go away, won't make things easier for employees, and rather than having the associated economic costs allocated more or less uniformly across all employees in the form of slightly lower wages (as identified by the FTC, assuming arguendo they did their research correctly), those expenses will hit individual employees in lump-sum format in the form of massive litigation expenses, and judgments for damages, which will drive many of those ex-employees into bankruptcy, where their financial futures will be substantially more crippled than they are under the current system.

To be sure, there are abusive practices in the non-compete area right now, including demanding non-competes from low-level employees like fast-food employees, or other forms of overreaching by certain employers, but the remedy for that is the imposition of a uniform set of best practices for non-competes that have been developed after a careful review and analysis of the entire field, nationwide, not by simply making all non-competes illegal.