Federal Trade Commission Moves to Ban All Employer to Employee Non-Compete Agreements Nationwide
by Tyler Freiberger, Senior Associate
Employment, Employment Law, Legal Alerts
In his 2021 Executive Order, President Biden “encouraged” the Chair of the Federal Trade Commission (“FTC”) to “exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
This “encouragement” was not surprising. Hostility toward non-compete agreements is not new. The use of these agreements stretches back to the 14th century as a way to protect artisans’ legitimate investment of time and knowledge to an apprentice. This need has not changed, with many employers pointing to the need to protect their trade secrets and skill development investments in their employees, especially with high valued executives. Still, by the 16th century the agreements were not enforced in English courts for the negative impact on the mobilization of workers. The debate on the enforceability of the agreements has continued. More recent than the Middle Ages, in 2020 the District of Columbia passed an effective ban on all non-competes. Facing significant backlash from D.C. employers, this ban was modified to only apply to those making less than $150,000, along with other exceptions.
Virtually every state already has some restriction on the enforceability of these agreements. State courts in general refuse to enforce non-competes that do not rationally limit the geographic scope, term of the restriction, and industries covered. In short, if an agreement attempts a blanket “you cannot work unless for us,” the agreements will be ruled as a naked restraint on trade. Of course, there are countless examples of these agreements still effectively holding employees in a job with non-competitive wages because the employee rationally fears they are limited from looking at other related work.
Given this steady pace toward limiting use of the agreements and the Biden administration’s explicate instruction to target them, the FTC was expected to release some rule to limit them nationally. A well-defined limitation to these agreements, which are indisputably abused at times, was welcomed by many in the employment/labor law industry. However, the proposed rule the FTC did release is, stated bluntly, an overreach. If implemented, the rule prohibits any “contractual term between an employer and a worker that prevents 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.” The proposed rule further requires employers to explicitly tell workers previously restricted that they may now compete with the employer.
The proposed rule will face a tough, if not impossible, challenge if finalized as written. The FTC recently received strong push back from the Supreme Court for stretching its authority from Congress in AMG Capital Management v. FTC, 141 S. Ct. 1341 (2021). In context of AMG Capital, it’s questionable the Commission actually believes they have the authority to make such a sweeping change to employment law under nearly century old limited congressional authority. The FTC is aware that employment and labor issues are already in tension with anti-competitive ideas. For example, a fundamental principle of unions is to join “collectively” to exert market power in industries to raise wages and therefore the end price of a service or product.
Within this context, it’s likely the FTC is using a “shoot for the stars and land on the moon if you miss” approach that will result in some federal limitation to non-competes, but not nearly as drastic as proposed now. Employers that currently utilize non-compete agreements are still advised to review the proposed rule in detail and to participate in the open notice and comment period.