NPR (“U.S. bans noncompete agreements for nearly all jobs“):
The Federal Trade Commission narrowly voted Tuesday to ban nearly all noncompetes, employment agreements that typically prevent workers from joining competing businesses or launching ones of their own.
The FTC received more than 26,000 public comments in the months leading up to the vote. Chair Lina Khan referenced on Tuesday some of the stories she had heard from workers.
“We heard from employees who, because of noncompetes, were stuck in abusive workplaces,” she said. “One person noted when an employer merged with an organization whose religious principles conflicted with their own, a noncompete kept the worker locked in place and unable to freely switch to a job that didn’t conflict with their religious practices.”
These accounts, she said, “pointed to the basic reality of how robbing people of their economic liberty also robs them of all sorts of other freedoms.”
The FTC estimates about 30 million people, or one in five American workers, from minimum wage earners to CEOs, are bound by noncompetes. It says the policy change could lead to increased wages totaling nearly $300 billion per year by encouraging people to swap jobs freely.
The ban, which will take effect later this year, carves out an exception for existing noncompetes that companies have given their senior executives, on the grounds that these agreements are more likely to have been negotiated. The FTC says employers should not enforce other existing noncompete agreements.
The vote was 3 to 2 along party lines. The dissenting commissioners, Melissa Holyoke and Andrew Ferguson, argued that the FTC was overstepping the boundaries of its power. Holyoke predicted the ban would be challenged in court and eventually struck down.
Shortly after the vote, the U.S. Chamber of Commerce said it would sue the FTC to block the rule, calling it unnecessary, unlawful and a blatant power grab.
WSJ (“FTC Bans Noncompete Agreements That Restrict Job Switching“):
The Federal Trade Commission on Tuesday banned employers from using noncompete contracts to prevent most workers from joining rival firms, achieving a policy goal that is popular with labor but faces an imminent court challenge from business groups.
The measure, approved by the agency’s Democratic majority on a 3-to-2 vote, marks the first time in more than 50 years that FTC officials have issued a regulation to mandate an economywide change in how companies compete. The commission has historically operated like a law enforcement agency, investigating and suing individual companies over practices or deals deemed to violate the law.
The rule prohibits companies from enforcing existing noncompete agreements on anyone other than senior executives. It also bans employers from imposing new noncompete contracts on senior executives in the future.
FTC Chair Lina Khan said the rule restores rights to Americans that corporations have taken by imposing noncompete clauses in the workplace. “Robbing people of their economic liberty also robs them of all sorts of other freedoms,” she said.
[…]
Noncompete clauses violate a 110-year-old law that prohibits unfair methods of competition, the FTC says. The restrictions hamper competition for labor, the agency says, and result in lower pay and benefits for workers.
The practice has grown more prevalent in the U.S. economy and now affects nearly one in five American workers. Even lower-wage workers such as restaurant employees and hair stylists, who lack access to intellectual property or trade secrets, have been subject to them.
Sales staff, engineers, doctors and salon workers are among the most common types of workers affected by companies’ enforcement of noncompete clauses, according to research published by Cornell University professor Matt Marx in 2022.
Businesses that use noncompete agreements say they are an effective way to protect their intellectual property and other investments.
[…]
The FTC says it gets that authority—even if it has hardly ever been used—from an obscure section of a law that created the commission in 1914.
The Chamber of Commerce says the law never granted that power to the FTC, which would become an uber-regulator of American business if it continues to issue similar regulations.
I’m skeptical that the regulation will survive judicial challenge. Beyond that, changes this sweeping really ought to some through Congress, not the whims of presidential appointees. This is effectively a new law—and a major one at that—not a regulatory interpretation of statute.
As a matter of public policy though, it’s hard to make a case that businesses ought to be able to restrict the right of low-level workers to take jobs at other firms. While I hardly claim expertise in those fields, it seems absurd on its face that cosmetologists and hair dressers are in possession of some great trade secrets.
At the same time, this seems to go too far. There are people below the CEO level who are trusted with insider information that companies should have some right to protect. (And the rule applies even to CEO-level employees going forward; they’re simply the only class whose existing noncompetes would be grandfathered.) It’s not at all hard to imagine a company engaged in massive mergers and acquisitions deals making a key player at the other firm an offer they can’t refuse at a crucial juncture. Similarly, a firm engaged in a major lawsuit could do the same with the lead attorney for the other firm.
The FTC press release claims that “Trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information.” But proving that the NDA has been violated is a hell of a lot harder than keeping the worker in-house.
In government circles, even relatively low-ranking employees are prohibited from taking certain jobs for a limited period—a few years—after leaving service. This is true even though they’ve signed NDAs.
Additionally, there ought to be a limited non-compete requirement enforceable in cases where the employer provides education and training benefits. This is, again, a common practice in government circles. If the Army pays for someone to go to law school or the Air Force pays for someone to become a certified pilot, they have a substantial “payback” commitment in which they must serve a specified period of time or pay back a pro-rated portion of the cost.
It strikes me that a narrower regulation would have been preferable. Most noncompetes are already unenforceable, as they’re deemed “unreasonable.” It shouldn’t be terribly difficult to preclude those from being signed at all, precluding the need to litigate them, rather than throwing out an entire class of contractual agreements.
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Author: James Joyner
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