After proposing in 2023 to ban nearly all employee noncompete agreements nationwide, the Federal Trade Commission (FTC) has remained largely silent on whether it will pare back some of the proposal’s more controversial provisions. These include the lack of an income cap and its comprehensive notice provision. In the meantime, the fate of a similar New York proposal offers some clues about the fraught political landscape for regulating noncompetes.
New York’s proposed noncompete bill (S3100) would have largely banned, without exception, all noncompete agreements, an outlier by comparison with most other state noncompete laws. It was, in many ways, similar to the FTC’s proposed rule. S3100 even referenced the FTC’s proposal: “Recently, the federal government has announced an interest in banning such agreements nationwide via an FTC regulation. This bill would codify such a ban in state law.” And in November 2023, the FTC’s Office of Policy Planning sent a letter to New York Governor Kathy Hochul with research on noncompetes the FTC believed could be useful in supporting S3100’s passage. Given these similarities, S3100 could be viewed as a canary in the coal mine of sorts, a prognostication of the political appetite for a nationwide blanket noncompete ban like the one proposed by the FTC.
On December 22, 2023, Governor Hochul vetoed S3100. In a statement, she noted she has “long supported limits on noncompete agreements for middle-class and low-wage workers, protecting them from unfair practices that would limit their ability to earn a living.” But S3100, she explained, amounted to an inflexible “one-size-fits-all approach.” The bone of contention appears to have been (i) S3100’s lack of an income cap beyond which its noncompete provisions would not apply and (ii) its lack of an exception for the sale of a business. Among states that have enacted noncompete laws, the vast majority have income caps or other exceptions intended to strike a balance between employees’ economic freedom and employers’ financial and intellectual property interests. Even the FTC’s proposed noncompete rule, as currently drafted, would create an exception for the sale of a business in which a person subject to a noncompete has an ownership interest of 25% or more.
In short, the fate of New York’s noncompete ambitions marks an inauspicious start to the FTC’s 2024 plans to rein in noncompetes. And there are mounting headwinds. The FTC’s proposal faces the prospect of judicial review by a Supreme Court that is increasingly hostile toward the so-called administrative state, as we have previously written about.[*] As of publication, the Court is presiding over a case that has the potential to eviscerate Chevron deference, which marks its 40th birthday this year, significantly curtailing agencies’ clout in interpreting ambiguities in laws passed by Congress. These developments have huge implications for the FTC’s proposed noncompete rule. Stay tuned.
[*] West Virginia v. EPA and ‘Major Questions’ Facing the Competition Agencies; FTC Seeks to Ban Non-Compete Restrictions in Employment Contracts; Q&A About FTC Proposed Rule to Ban Non-Compete Restrictions.
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