FTC ban may be test of bipartisan opposition to noncompete clauses
Senators from both parties proposed to limit use of the clauses
A proposal from the Federal Trade Commission to ban noncompete agreements aims to correct what some say is a harmful power imbalance between companies and employees, an issue prominent enough to have won over some members of the typically pro-business Republican Party.
The move, however, sets the stage for a fight — likely in the courts and potentially in Congress, if the pushback is strong — over whether the agency can legally intervene in what are essentially contracts between workers and their employers.
The FTC’s proposed rule would bar employers, whether small businesses or Fortune 500 companies, from requiring noncompete or similar contracts, a practice that restricts workers’ ability to leave for job opportunities at rival firms or start their own competing ones. It would nullify existing agreements with current and former employees within 180 days of the final rule's publication.
Noncompete agreements are “exploitative” measures that affect about 30 million Americans, the agency said last week. Getting rid of them would improve wages by nearly $300 billion per year, it said.
“Noncompetes 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,” FTC Chairwoman Lina Khan said in a statement. “By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”
The FTC asked for public comment on whether any employees should be exceptions to the rule.
The agency's proposal drew a swift rebuke from the U.S. Chamber of Commerce, the nation's largest lobbying body, representing more than 3 million businesses and organizations. It slammed the proposal as “blatantly unlawful” and out of line with the agency’s authority.
On the other side, Kristin Hull, founder of Nia Impact Capital, said companies' treatment of employees — what she called their most valuable assets — is a top concern for investors, including firms specializing in environmental, social and governance investments as well as the largest asset managers.
“This is something that companies cannot take lightly and they don’t take lightly,” Hull said in an interview. “We're in a place where innovation is really, really important, and we need each of our companies to be able to recruit, hire and retain top talent. This will be something that we're particularly concerned about.”
Issues of employee rights and working conditions, which are part of businesses' human capital management, have garnered more attention in recent years from shareholders and the public.
Proposals seeking more information about fair pay and working conditions made up 12 percent of ESG-related resolutions in the 2022 proxy season, according to the annual Proxy Preview report from the organizations As You Sow, the Sustainable Investments Institute and Proxy Impact. Meanwhile, workers across several industries, such as retail and media, have taken matters into their own hands by forming unions.
Hull said the FTC’s rule, if finalized, would pressure companies to increase benefits and become more transparent because employers would need to work harder to keep their top talent.
“We're going to be seeing this change in the landscape of how we treat employees,” she said. “I think this type of intervention from the government will cause a sea change in how we think about organizing our companies and our employee talent, so I'm excited to see it.”
The push to end noncompete agreements has some bipartisan support in Congress. Sens. Todd Young, R-Ind., and Christopher S. Murphy, D-Conn., introduced legislation during the last session of Congress to limit their use, with backing from Sens. Kevin Cramer, R-N.D., and Tim Kaine, D-Va.
In a joint statement, the four senators praised the FTC’s proposal as a much-needed effort to curb employers’ abuse of noncompetes. But the lawmakers also see such contracts as hurting the economy and innovation overall, a potential effect that could tip support in favor of banning them.
“In recent years, we've seen an explosion of noncompete agreements across industries and income brackets that have depressed wages and stifled innovation,” Murphy said in a statement last week. “Senator Young and I applaud the FTC for taking this step, and I look forward to continuing our work in Congress to support American workers and entrepreneurs.”
Legal experts are warning that the proposed rule will likely face challenges. In a note to clients, law firm Ropes & Gray LLP said it expects business groups to file lawsuits challenging the FTC's authority to issue its proposed rule.
Sean Heather, senior vice president of international regulatory affairs and antitrust at the chamber, said the group is confident the rule will fall in court.
“Attempting to ban noncompete clauses in all employment circumstances overturns well-established state laws which have long governed their use and ignores the fact that, when appropriately used, noncompete agreements are an important tool in fostering innovation and preserving competition,” he said in a statement.
Legal experts say the rule also will face challenges under the “major questions doctrine,” a legal theory that featured prominently in the Supreme Court’s 2022 ruling in West Virginia v. Environmental Protection Agency. The ruling curbed federal agencies’ statutory authority on rulemaking with broad-based economic and political consequences.
“Whether the Proposed Rule ultimately goes into effect or not, it stands as a clear FTC policy statement on noncompete clauses generally,” attorneys from law firm Latham & Watkins LLP said in a client note issued this week.
Just before the FTC announced its proposed rule, it took action against companies and their owners over such agreements, Latham & Watkins partners Nineveh Alkhas and Ian R. Conner said in the client note. The agency alleged that a Michigan-based security company required employees to sign agreements that would prevent workers from joining another such company within 100 miles for two years after they left, or face a penalty of $100,000.
The FTC said these types of restrictions infringe on fair competition and violate the FTC Act.
The agency proposed consent decrees requiring the company and owners, who have since sold the business, to drop all the restrictions.
“Even if the proposed rule does not take effect, given the current FTC’s general disdain for certain restrictive covenants and its recent enforcement actions, companies may wish to begin evaluating with counsel the business justification, necessity, and scope of their noncompete clauses and similar covenants,” the lawyers said.