On January 5th, 2023, the Federal Trade Commission (“FTC”) made a bold first attempt to exercise its relatively unused power to regulate unfair competition to propose a blanket ban on noncompete employment agreements.
The proposed rule delivers on a Democratic campaign promise to use the agency’s statutory power to combat unfair compensation methods under Section 5 of the FTC Act. The proposal is the latest part of an administration-wide effort to push back against what the White House believes to be lax competition enforcement in the past decades.
Supporters of the ban argue that noncompetes result in billions of dollars in losses annually, suppress economic growth, discourage innovation, and create barriers to entry for prospective entrepreneurs. Additionally, supporters argue that companies can use other methods to protect their trade secrets, such as nondisclosure and nonsolicitation agreements. However, the FTC warned that it would target nondisclosure agreements considered to be “de facto” noncompetes.
The proposed ban is bound to receive legal pushback, with the FTC’s sole Republican member already voicing opposition and arguing that the agency lacks the authority to impose such a ban. When litigants challenge the ban, they will likely do so under the “major questions doctrine,” in which the Supreme Court has decided that broad legislative language is not enough to authorize regulations on significant national issues.
Since noncompete legislation has traditionally been left to the states, the ban could be viewed as an attack on state’s rights and thus be deemed an issue of significant national importance. Some states have already imposed wage-based limits on noncompetes, attempting to strike a delicate balance between distinct needs and policy goals. Many argue that the FTC should adopt a similar wage-based approach that would prohibit noncompetes for low-wage workers but allow them for senior employees who could be privy to trade secrets.
Notably, the FTC’s process leaves the possibility of change open as it requests public input on how the ban should apply to executives, franchisees, and other senior employees.
It remains to be seen whether the ban can withstand the inevitable legal challenges and legislative pushback. If it survives through enactment, the ban will serve as a significant precedent for FTC authority which may result in even more sweeping changes in the future.
