FTC issues
A notice of rulemaking
To ban non-competes

On January 5, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking (NPRM) that seeks to severely limit the scope of employee non-competes.

This would bring federal law into alignment with the laws of states like California, where the near absence of non-competes has been credited for contributing to the state’s culture of entrepreneurship and labor mobility.

FTC Chair Lina Khan issued a statement in connection with the NPRM, saying

By design, noncompetes often close off a worker’s most natural alternative employment options: jobs in the same geographic area and professional field. These restrictions can undermine core economic liberties, burdening Americans’ ability to freely switch jobs.

She cited the 1944 US Supreme Court case of Pollock v. Williams, in which the court described the “right to change employers” as a critical “defense against oppressive hours, pay, working conditions, or treatment”

According to Khan’s statement,

noncompete clauses reduce competition in labor markets, suppressing earnings and opportunity even for workers who are not directly subject to a non-compete. When workers subject to noncompete clauses are blocked from switching to jobs in which they would be better paid and more productive, unconstrained workers in that market are simultaneously denied the opportunity to replace them. This collective decline in job mobility means fewer job offers and an overall drop in wages, as firms have less incentive to compete for workers by offering higher pay, better benefits, greater say over-scheduling, or more favorable conditions. The FTC estimates that the proposed ban on noncompetes would increase workers’ total earnings by close to $300 billion per year.

She also published an op-ed in the New York Times, noting that:

experts estimate that one out of every five American workers, or about 30 million people, is bound by a non-compete. Studies and media reports have found noncompetes routinely invoked against fast-food workers, arborists, and manual laborers, to name a few examples. Just this week, the Federal Trade Commission, where I am chair, settled allegations against a company in Michigan that prohibited its workers — security guards earning at or near the minimum wage — from going to work for a competitor within a 100-mile radius of their job location for two years. Each worker who violated the noncompete would have been liable for $100,000.

According to a report by Michigan Law which she cited,

Only 10 percent of employees negotiate over their noncompetes, and about one-third of employees are presented with noncompetes after having already accepted job offers.

Many employees may sign employment agreements without reading them, not even being aware that they’re bound by non-competes until an employer seeks to enforce them.

The statement raises several questions about the scope of the proposed new FTC rules:

• Should different rules apply to senior executives or other highly paid workers?
• Should the rule cover non-competes between franchisors and franchisees?
• What other tools (such as trade secrets law and confidentiality agreements) might employers use to protect valuable investments, and how sufficient are these alternatives?

Non-disclosure agreements (NDAs) and non-solicitation agreements (prohibiting employees from soliciting clients and/or fellow employees/contractors) would not be affected by the new rules unless such documents were so broad in scope as to function as non-competes.

Interested parties have sixty days to submit comments for the FTC’s consideration before the rule is finalized. Comments can be filed online or on paper.

Write “Non-Compete Clause Rulemaking, Matter No. P201200” on your comment, and file your comment online at https://www.regulations.gov, by following the instructions on the web-based form. If you prefer to file your comment on paper, mail your comment to the following address: Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Avenue NW, Suite 1 CC-5610 (Annex C), Washington, DC 20580.

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