FTC Bans Noncompete Agreements
A massive change to the business environment — if it survives judicial scrutiny.
Photo by rawpixel.com from PxHere
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 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, eliminating the need to litigate them, rather than throwing out an entire class of contractual agreements.
On the other hand, an argument can be made that new employees bring their own intellectual capital to a job and an non compete agreement essentially confiscates it.
This is where conservatives rejoice about the Free Market!!
Right??
@Scott: @Tony W: So, first, a non-compete is a two-way contract. Employees presumably demand higher compensation (either in the form of pay, education benefits, or something) in order to sign one.
Contracts are part of markets and, indeed, a necessary part. As noted in the OP, I think most noncompetes should be invalid. But there are reasons for some of them, and I support them in theory so long as the nature of the noncompete is limited.
@James Joyner: Every non-compete I’ve been coerced into signing was a “two-way contract” only in the sense that I’m fired if I don’t sign it.
The free market means I can go sell my labor wherever I wish, and my employer better pay me enough to make it worth my while to stay put.
Of course businesses don’t like it when their own tactics are used against them.
Sure, just like Major League Baseball owners paid their players more back when they required them to sign a reserve clause… Oh wait. Hmm.
Hint: collusion by employers generally does not result in higher salaries. And universal requirement of non-competes is certainly collusion; it is a deliberate collective action intended to push the costs of enforcing the fair competition laws onto the employees.
@James Joyner: “So, first, a non-compete is a two-way contract. Employees presumably demand higher compensation (either in the form of pay, education benefits, or something) in order to sign one.”
You are such a smart man, but there are times when it feels like you let your political belief system overwhelm any experience with the actual world and real people.
No one under the C-suite level is getting extra benefits to sign a non-compete. They are being told that if they don’t sign, they’re not getting the job.
Pretty much agree with your piece. Some states, like California, already ban them and CA has a lot of companies with trade secrets. Here in Colorado they are tightly restricted.
I think for cases like education and training that can be handled by recovering the cost if the employee leaves early.
But yes, this should be a law, not yet another administrative state action that will get bogged down in the courts.
@Tony W: The problem here is that, by the very fact of having the job and knowing all manner of the employer’s proprietary information, the employee becomes much more valuable to other firms than he would otherwise be.
@wr: Again, I don’t think there should be noncompetes for low-level jobs other than repayment of training and the like. (It would be insane for, say, a plumber to train an apprentice and not have some reasonable period in which he continues to work for his firm after said training.) But lots of professional (lawyers, accountants) and mid-management types gain privileged information from working at jobs that employers ought be able to protect from direct competitors.
@James Joyner: yeah, the Jimmy John’s sandwich makers that are forces to sign them are famously known to be well compensated.
@Andy:
It’s already law, according to the FTC. From the WSJ article:
So no, this is not administrative regulatory overreach — it’s exactly what regulations are supposed to do, which is enforce existing law in a coherent way.
@James Joyner:
I get the argument, but California has banned them forever except for very rare exceptions and has a lot of firms with super valuable proprietary information (the tech and other sectors) and it doesn’t seem to have been a big problem there.
This seems to be a case where we have evidence of effects we can compare between states and although I’ve only looked at this at a surface level, the surface-level look doesn’t show much compelling need to allow these contracts.
Ummmm, James? You just explained perfectly why non compete clauses should be burned to the ground. If “the employee becomes much more valuable” maybe the current employer should pay him more.
Funny how free market practices are thrown out the window as soon as employees demand the freedom to work wherever they want for whomever will pay them the most in a decent work environment.
Thank dawg I was a union carpenter.
@DrDaveT:
So is it your view that the FTC has unlimited authority to determine what is and isn’t unfair competition and also unlimited authority to implement rules to regulate the same?
It seems to me there must be a limiting principle somewhere.
@James Joyner: But wouldn’t all that proprietary information also make the employee more valuable to their current employer?
The phrase “gored by one’s own ox” comes to mind. Privatizing the profits and socializing the expenses has long been business-101. Why shouldn’t employees play by the same rules?
This still feels like a libertarian/conservative dream situation.
@Andy:
I am assuming that the law does not simply say “Unfair competition is illegal” but also actually defines, to some extent, what counts as unfair competition. So no, not unlimited authority — just the usual authority to interpret and implement what the law calls for.
If I’m wrong about that, then it’s an awful law — and the correct regulatory action is to take a position about its intent, implement that, and let Congress correct the situation with less ambiguous legislation if they disagree. “Don’t enforce the law unless it is unambiguous” is never the right option.
@DrDaveT:
This is the provision of the law the FTC is basing the ruling on. It is extremely broad, which I find highly problematic.
When I worked at a very large global PR firm, I signed an NDA that would cover this, but I was not asked to sign a noncompete. There were some clauses in there about jumping from the agency to working for a client’s in-house PR, but those situations were typically handled between the two companies’ counsel, if the person was high enough up the food chain.
Noncompetes have a place, but they should be very, very limited. Businesses wrecked this for themselves by overusing noncompetes and I have absolutely no sympathy for them. Yet another example of how businesses love the free market right up until it affects them in even the slightest negative fashion.
@Andy:
So when you say “they should have passed a law”, what you really mean is “they should have passed a law I agree with, because those are the only legitimate laws”
There’s already a way to protect IP, which is an NDA, and this order doesn’t forbid. A noncompete (in theory) prevents someone from working in their chosen profession at all, which is insane. There are some places like investment banks where they have gardening leave, where there’s a period of time after you leave a firm that the firm can choose to pay you to prevent you from working elsewhere; if companies want to prevent someone from working elsewhere, they should have to continue paying a salary.
And yes, a less broad policy might have been better, but given that the FTC is sure to be challenged in court anyway, why not swing for the fences?
I refer you to Kathy’s First law: there are downsides to everything.
And its rarely invoked corollary: there can sometimes be upsides to some downsides.
Are there any broad societal benefits in the current permissive non-compete usage? Conceivably. Will these benefits diminish or vanish if the FTC rule gets adopted? Conceivably. Will the new FTC rule have downsides? Certainly (see above). Will these downsides be too burdensome to society at large? It’s possible. Will these downsides be too burdensome to some large businesses? It’s very likely. Is this a reason to scrap the new rule altogether? I don’t think it is. Is it a reason not to try to change the current non-compete climate? Hell, no.
For some reason I keep forgetting that NDA’s are not the same Non Compete agreements. I believe that with California banning non compete agreements what landed some of the monster firms in Silicon Valley (Apple, Google, those type of firms) in hot water several years back was that it became public knowledge that due to CA’s rules, these firms had a shadow agreement amongst each other to prevent certain employees from being able to jump ship from Apple to Amazon before a certain rather lengthy period of time had passed, and that actually pissed folks off as all of that was uncovered.
I am more understanding of someone having to sign a NDA to get the job, but preventing them from being embraced by a competing firm if they are laid off, fired, quit for up to two years has always struck me as something that is patently wrong and unbecoming and indeed it does take away freedoms for those of us who are told we live in the land of the free and the home of the brave.
@Andy:
And therefore that gives the FTC a lot of leeway.
This is largely how federal statutes work. I can understand a preference for specific laws and an active legislature willing to tweak the law on a regular basis. But we do not live in such a system.
@Andy:
Yes, but it has a long regulatory history with some interesting recent developments. See for example this FTC announcement from 18 months ago. That was the real change — from an interpretation that the FTC act was completely redundant to the Sherman Antitrust Act in its treatment of unfair competition, to a broader interpretation.
Interestingly, the dissenting opinion makes the converse assertion, saying that the new system replaces a well-defined standard with “I’ll know it when I see it.” The dissent is interesting and persuasive reading, though a bit of the underlying philosophy shows through in places. Putting the term “workers” in scare quotes does not contribute to an appearance of impartial reason.
@Stormy Dragon:
Stop fucking telling me what I mean. You are not a mind reader. You are such a tiresome asshole and this method of engagement is really getting old. Read my comments here you blithering idiot. I support the policy. I think non compete agreements are bad. I just think this level of change should be done via legislation rather than Executive branch fiat for a whole host of reasons not least of which is democratic accountability. How often have I gotten on my soapbox here and said process matters over the last two decades?
The fact is this will be challenged in court and who knows when, if, or in what form it will ever be actually enforced. Which is a pretty strong argument for legislation rather than administrative fiat in my view.
@Andy:
Counter-argument: congress passed a broad law, delegating a lot of authority, on purpose. They retain the right to step in and pass a new law that alters regulations, if they wish.
(The fact that congress basically barely works and would be incapable of doing so at present is either a bug or a feature of the system, depending on your preferred outcomes. Similar to how people want things handled by the states or the federal government based on what will get them their favored policy)
And democratic accountability rests both with the legislature and the executive branch. This is not a rule change that is likely to come out of a Republican administration.
Oh, god, all the time. I don’t know if you even recognize that forests exist as a concept, but you are enamored with trees. Did you know that trees aren’t a single biological grouping, but rather a whole flurry of different branches on the “tree of life” that have evolved similar solutions to a host of different environmental pressures? Of course you did.
@Thomm: Hey now, in Cali, they’re being paid $20/hr now, at least the ones who didn’t get laid off (and can’t go work for Subway, Potbelly, Denny’s, etc. because of the NCA they had to sign).
@Kevin: there’s also a lot of really one-sided NDAs, where a company wants to work with a university staff member and tries to claim rights over not just whatever technology the joint project is working on but anything the staff member thinks about for the following five years.
Hell no. If you want that sort of control, buy your own electron microscope and train your own employee to run it.
“Employees presumably demand higher compensation (either in the form of pay, education benefits, or something) in order to sign one.”
Almost all docs in my area are asked to sign noncompetes. Employers dont need to pay more because everyone does it. If anything, it lowers pay and worsens work conditions because you cant easily leave. You cant leave for better pay without moving, or driving hours a day to work out of range and sleeping overnight at the job pretty often. The whole point is to control the employee.
As others have pointed out you can have an NDA, though that wont apply to many jobs. Fast food is not a secret and most everything docs do is in the literature. If employers want to recoup training costs they can have an agreement to work a set period of time before leaving and have penalties. We do that with nurses.
On a personal note, I was CEO of my doc group for many years. We were the only one in our area (I think the whole state) to not have a non-compete as I thought it was immoral. After I retired the corporation added a non-compete. I talked with my successor and while I was disappointed, it’s really hard to be the only one that doesnt do it. They were having to raise salaries a lot due to a lack of the non-compete.
Also, I think Andy is correct that it would be better if passed as a law but first, Congress cant pass anything and second, it’s moot because SCOTUS will rule against it.
Steve
@Andy: The best way for any of this is to have a debate in Congress and then pass legislation or definitively vote it down, in which case the Federal Agency charged with the matter would have clear guidance. If that agency overstepped their authority Congress would rein them in via clarifying legislation. But since Republicans no longer legislate and seek to prevent others from doing so, we are left with the Executive acting on their own in both Democratic and Republican administrations and adjudication via the courts. This is bad, but it is effectively the way we govern now.
A) It does seem like Congress did pass a law giving the FTC the right to do this.
B) The Supremes will almost certainly overturn this using the gibberish as they dive into the idea of what is unfair. Can’t wait to hear Sammy’s views. Enlightened as always.
C) The entire attack on regulatory government plays so deep into the fundamentalist/literalist American mindset that it creates these loops of demented decision-making, like a trolley problem where it’s a decision between the tracks or the baby and the person who says save the tracks over the baby is 100% pro-life.
@Grumpy realist:
When I was actively searching for new technologies for a very large multi-national firm, I came to dread working with certain academics, who had absolutely no idea what their IP was worth. First off, if you don’t have a patent, I don’t want to talk to you. Please, please, please don’t even tell me what it’s about because the odds are that dozens of other people have had the same idea and we may be actually working on it already, so I don’t want to be put in a position that when we come out with it you accuse us of stealing your ideas. Oh, and by the way, there are lots of good ideas. Even with a patent, a good idea isn’t worth much. We are going to have to invest thousands upon thousands of man-hours and millions of dollars into bringing it to market, if it makes it at all. If you think your frickin’ idea is worth 5% of the sale price then I’m glad to know that up front, so I don’t waste our time pursuing it.
My own limited experience, joining a new company three years ago but having done similar work for a long time (it’s my specialty). So when my lawyer and I came across some language in the proposed contract that would have prevented me from working in my field for six months after employment there, I simply asked them to strike it. Done without any fuss. Now obviously it depends somewhat on who wants what more, but anything is negotiable. Only a stupid company would turn down a good employee over this, regardless of what they might say.
Its a complicated issue, far more complicated than most of the simple minded comments I browsed. But I think James drives to one of the two main points:
“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.”
You don’t even need to go to the extremes, like hair dressers. Your run of the mill engineer ought to be able to go get a job. But there will be unintended consequences. For example, we often hear bleating about how corporations won’t invest in employees. Well, if you do, and they can leave at the drop of a hat, guess what happens? At lest NDA’s are still allowed, flimsy as they are.
I saw one of the FTC’s rationalizations was that in the absence of NC’s the nomad employee would run off and start a business. They even quantified it. Ludicrous. Laughable.
What is not addressed in any commentary I have seen is the NC in the case of a business owner who sells. If someone plunks down 10’s of millions of dollars to purchase someone’s business, one has the right to expect the former owner doesn’t set up shop across the street. That would bring a significant aspect of capital formation and entrepreneurship to a grinding halt.
“Well, if you do, and they can leave at the drop of a hat, guess what happens?’
This has already been figured out. If you put some training effort into that engineer then require that they work set period of time in pay back with penalties if they leave earlier. A noncompete means that you control the employee in perpetuity for what may have been a short period of training. Does it really make sense that you couldn’t accept a job paying 30% more for fast food cooking because you had 2 weeks of training 5 years in the past?
Often missed in this is that noncompetes apply even if you are laid off.
In the case of a business owner it’s not a non-compete with an employee. In this case you would have 2 equals negotiating an agreement. I have not seen any objections to that and from my readings the current proposal would not affect that kind of agreement.
Steve
@Jack:
Wait. I’m puzzled. Up until yesterday, non-competes were allowed and very, very common for engineers, and yet companies weren’t investing in training their employees. So now that they aren’t allowed how will that change the status quo?
Also, FWIW, for things that cost the company money and that may have only a longer term benefit such as helping with the cost of a night school advanced degree, the norm is to predicate the reimbursement on the employee remaining some amount of time (at Xerox years ago it was 3 years), or else they must repay the assistance.
You may want to read the commentary up above.
@Jack:
I’m not sure why you immediately decided to insult people, but the comments appear to be from many who have either worked under NDAs, non-competes, or both. So maybe back off.
This is why you must have a competitive pay structure, and a good corporate culture, in addition to the training. So you don’t become a paid-for-by training ground.
Hire better lawyers. The NDA I signed back in circa 2000 was pretty airtight. A well-crafted NDA along with a non-solicitation clause is all most companies need. They do not need to prevent a person from getting a job in their field, which is what non-competes do.
Non-competes should be reserved for very, very specific circumstances. I have no problem with on-air talent (like morning news broadcasters, particularly for national shows) having limited non-competes, along with very senior level finance/wealth management types. But your mid-level business exec or lower? No, absolutely not.
@Jack:
Are those banned? The lede said “nearly all” NCs. The anticompetitive practice is NCs for employees, not NCs for owners.
That said, I’m not seeing the issue, even for owners. What kind of competent new owner couldn’t easily outcompete a carbon-copy startup next door? If you have any infrastructure, any intellectual property, any brand recognition at all you should be in a position to laugh at the former owner when he tries it. Did you have a specific scenario in mind?
@MarkedMan: I think it’s called “grasping at straws.”
@MarkedMan:
Yes. And legislators could still do this. Federal and state electeds are not without power here. Congress has decided to delegate authority to agencies it has created. This seems a smarter way to govern a massive national federation with 50+ republics and territories than passing new laws for every discrete issue.
Congress created and empowered the FTC by statute, for a reason and with Senate-confirmed commissioners nominated by Presidents. If legislators or jurists want to revisit or reign-in FTC authority, they should do so. But the FTC doing its job in the meantime is not some outrageous power grab. The FTC acts under existing law, advised by in-house FTC counsel.
Some may think existing law guiding FTC action is overbroad; they should lobby their elected representatives. The Chamber of Commerce is doing so, and also taking its objections to the judicial branch. This is republican, representative democracy at work. I don’t see the controversy.
@Jen:
Everywhere I have worked at, the company was eager to honor the NDA of the previous employer. There were a few people who couldn’t work on a specific task or project, but a lot less legal exposure, and an expectation that their own NDA would be taken as seriously at the next company.
These were all big companies though. I don’t know what scummy things tiny companies try to do.
If the noncompete comes with a salary to sit on your ass and do nothing, I’d be ok with it.
@Jen:
Why these? It seems to me they are an almost perfect example of those who SHOULDN”T be bound by non-competes
@James Joyner: “The problem here is that, by the very fact of having the job and knowing all manner of the employer’s proprietary information, the employee becomes much more valuable to other firms than he would otherwise be.”
So wouldn’t the free market answer be to pay the employee more and treat him better so he’s not tempted to leave, rather than use the power of the legal system to coerce him to stay?
@Jack: “Its a complicated issue, far more complicated than most of the simple minded comments I browsed. ”
Thanks, Jack! Helluva way to enter a conversation — “You’re all a bunch of morons, but I’m going to grace you with my wisdom anyway.” Been taking Lounsbury lessons”
“For example, we often hear bleating about how corporations won’t invest in employees. Well, if you do, and they can leave at the drop of a hat, guess what happens? ”
Hmm. If only there were some way a corporation might try to get an employee to stick around without using coercive methods? It’s amazing how it never occurs to our business-minded friends that possibly the employer could simply offer better pay and treatment to their workers, instead of using the court system to enslave them.
Or is that communism?
@MarkedMan: This is likely a remnant from my first exposure to noncompete agreements. The argument was that a television personality who built a following was identified with a specific show, and by leaving and jumping directly to a competing morning program, they could essentially cause brand confusion, along with any news stories that were being worked on (in particular any investigative or “scoop” reporting). I saw no real issue in a wait of 3-6 months–with salary–to sit out a noncompete under those circumstances. Basically, a temporary hold.
That said, this isn’t a hill I’m willing to die on.
@MarkedMan: the most amusing “inventor goes off the rails” I experienced was when an inventor wanted to come in to our law firm to discuss applying for a patent, and, when discovering that I was a theoretical physicist, freaked out so much that he tried to have me banned from the office for any time that he was visiting. (Inventor’s invention supposedly dealt with superconductivity which I had several years experimental experience in)
…inventors always want to think that their inventions are much more important than they actually are.
I haven’t seen anyone mention another reason for non-competes: Clients and customers who follow the employee. My wife is a veterinarian in a small but competitive specialty. She had an NC at her last job, and had to hire a lawyer because her boss/owner tried to enforce it when she moved to a better spot (actually less pay, but better benefits and no more shitheel owner). She had no trade secrets, only HER work and how well she did it. She definitely took some clients with her when she switched hospitals, but the previous business was hardly entitled to her sunny disposition and mastery of her profession, let alone the money of customers.
She may have been lucky. Having spent a fair bit of time on this issue and talking with a number of lawyers the consensus seems to be that, at least in PA and NJ, every case is a total crap shoot and determined more by the judge than the merits of the case.
Steve