FTC Sets Meeting to Vote on Final Noncompete Rule

“[T]here is a simple economic rationale for the contract: noncompetes encourage both parties to invest in the employee-employer relationship, just like marriage contracts encourage spouses to invest in each other.” – Brian Albrecht, ICLE

FTCFederal Trade Commission (FTC)  Chair Lina Khan announced yesterday that there will be a Special Open Commission Meeting held on April 23 to vote on whether to issue a final version of the January 2023 proposed rule that would ban employers from using noncompete clauses for their employees.

“The proposed final rule being considered would generally prevent most employers from using noncompete clauses,” said the Open Commission Meeting’s event description. “As the Notice of Proposed Rulemaking explained, noncompetes are a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses,” it added.

The proposed rule change was open for public comment between January 2023 and April 19, 2023. As of April 17, 2024, the Regulations.gov website indicated that 26,813 comments had been received and 20,697 posted. The FTC said in further justifying the proposed rule that banning noncompetes could increase wages by $300 billion a year, as firms would be encouraged to do more to keep their workers.

But there has been opposition to the draft proposal among the business community, including the U.S. Chamber of Commerce, which said in April 2023 that “such a proposal fails to recognize that noncompete agreements can serve vital procompetitive business and individual interests—such as protecting investments in research and development, promoting workforce training, and reducing free-riding—that cannot be adequately protected through other mechanisms such as trade-secret suits or nondisclosure agreements.”

Brian Albrecht, Chief Economist of the International Center for Law & Economics (ICLE), said in an article for Truth on the Market that, while he recognizes the potential for abusive practices associated with noncompetes, he does not support a complete ban. “[T]here is a simple economic rationale for the contract: noncompetes encourage both parties to invest in the employee-employer relationship, just like marriage contracts encourage spouses to invest in each other,” Albrecht wrote. And in official comments submitted on the proposal, ICLE said the need for a complete ban is not supported by the evidence or the Commission’s experience.

In its announcement yesterday, the FTC said that if the Commission votes to authorize public disclosure of the final rule, the Office of Policy Planning will then give a staff presentation on the details of the final rule, after which a vote on whether to issue the final rule will be taken.

In an article authored for IPWatchdog on the proposed rule in February 2023, John Schroeder of Stinson LLP said that the FTC has downplayed the importance of noncompetes for trade secret protection due to alternatives available under trade secret law. But Schroeder said that those protections “are not without limitations.”

“Whereas non-compete clauses can preclude a former employee’s opportunity to disseminate confidential or proprietary information, trade secret enforcement through civil litigation often only provides after-the-fact consequences once harm has already been done,” Schroeder wrote.

Renowned trade secret expert James Pooley said in another article on the proposed rule that the Commission’s justification for the proposal is based on California’s experience, which already bars almost all noncompetes, relies on unproven theories and also fails to acknowledge some of the downsides. “The FTC justifies much of its logic and confidence on California’s experience; but the causal connection between that state’s restriction of noncompetes and the success of Silicon Valley has never been proven,” Pooley wrote.

“One thing we are sure of: California leads the nation in trade secret litigation. That should come as no surprise, since its businesses have no other tool to protect their confidential information. It’s fair to question whether a surge in lawsuits in the rest of the country would be acceptable, or whether that outcome was even considered at the FTC.”

The proposal also goes even further than California, Pooley added. Whereas California “permits noncompetes for someone who sells their interest in a business,” the FTC proposal “would only allow this ‘goodwill’ exception for a ‘substantial’ owner, which it defines as holding at least 25% of the company.”

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Author: gustavofrazao
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Join the Discussion

7 comments so far. Add my comment.

  • [Avatar for BD]
    April 22, 2024 12:21 pm

    The way I read it. FTC, Section 5(a) of the FTC Act, empowers the agency to investigate and prevent unfair methods of competition, and unfair or deceptive acts or practices affecting commerce. Furthermore, under the Clayton Act The Commission is charged under Sections 3, 7 and 8 of this Act with preventing and eliminating unlawful tying contracts, corporate mergers and acquisitions, and interlocking directorates. So the FTC does have the right to enforce new rules under both of these directives. Now I am sure there will be some push back from the business community. As of now, the noncompetes put the employer at a decisive financial advantage over their employees. My son has been a victim of this practice because he doesn’t have the $100k + needed to fight the litigating law firms representing the deep locks of the employer. In a sense, the employer is bullying my son due to financial constraints. BTW, my son did not leave voluntarily, he was terminated and still held to the non compete contract terms. The noncompete in itself is an unfair practice and an unnecessary burdensome on employees.

  • [Avatar for Nope]
    April 20, 2024 03:39 pm

    This is obscene. As someone who has had to sign non-competes for most of my career, I promise you it has never helped me and has harmed my family immensely. Imagine spending a decade learning an industry and your employer absolutely refuses to increase your pay, despite the numerous roles you’ve undertaken and a competitor offers to treat you like a human and you have to decline? Should I be able to sell someone else’s secret sauce? No. Should I be allowed to work in a field I am proficient in, and feed my kids? Yes. Our country disgusts me sometimes.

  • [Avatar for Ace Edwards]
    Ace Edwards
    April 20, 2024 02:39 pm

    I am actively in a situation where my employer is not providing quality support to my customers but I have a non-compete and I would likely be litigated against if I leave and pursue those clients which deserve proper support and level of service that they use to get from my company. Non-competes need to go.

  • [Avatar for Jackie]
    April 18, 2024 05:02 pm

    Non competes are bad for employees and for the economy. It restricts the choices people can make for themselves, their families and damage careers.
    Banning non competes is good for the economy because each person is free to move to the job where they can contribute and learn most.

  • [Avatar for Anon]
    April 18, 2024 09:50 am

    The view that non-competes “encourage both parties to invest in the employee-employer relationship” is ludicrous on its face, ignoring the very real non-balance of power in the relationship.

    The economist is so wrong that I will not repeat his name.

  • [Avatar for Tammy Belknap]
    Tammy Belknap
    April 17, 2024 11:39 pm

    Get rid of the no compete!
    Absolutely agree it really hinders the person that has moved on from making a living on what they had been Making a living on.

  • [Avatar for Pro Say]
    Pro Say
    April 17, 2024 07:42 pm

    Regardless of how one feels about it, this rule exceeds the FTC’s constitutional authority to issue and enforce it.

    Only Congress has such authority. (But hey — that would require actual work trying to convince enough congress folks to pass such legislation.)

    The only question is which, if any, corps and/or industry group/s are willing to fight it.

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