The Federal Trade Commission (FTC) is considering a rulemaking to address the use of non-compete provisions in employment contracts. On January 9, 2020, the FTC held a day-long workshop to start a public conversation on whether it should use its rulemaking power to take on this issue. The two Democratic Commissioners have expressed strong support for an FTC rulemaking, while the Republican Commissioners appear less open to a rulemaking effort.
If the FTC were to regulate non-competes, this would be a significant development in an area traditionally governed by state law. It remains unclear whether the FTC will move forward with a rulemaking and what a potential FTC rule would look like. However, the FTC workshop highlights growing concern about non-competes and their impacts on workers and labor markets.
During the January 9 FTC workshop, Commissioner Slaughter delivered a prepared statement expressing strong support for an FTC rulemaking on non-competes in the workplace. She began by saying that while antitrust enforcement is not a “panacea” for the struggles facing American workers, it plays a key role in improving “economic justice” for workers. She noted that antitrust law is concerned not just with markets for consumer goods and services, but also with markets for labor. She then went on to review evidence of the real-world impact of non-competes on workers. She cited recent surveys indicating that non-competes cover an estimated 16–18% of US workers. Employers often impose these provisions on all of their employees, including low-level workers, she noted, without regard to whether there is a legitimate justification or a less-restrictive means of protecting the employer’s investments in employee training and trade secrets.
She also argued that non-competes are rarely the product of meaningful negotiation between employers and employees, and instead are imposed unilaterally by employers on employees. She said the widespread imposition of non-competes by employers has led to lower wages and lower job mobility. Non-competes also harm consumers, she argued, for example by preventing healthcare workers from taking their patients to new competing practices. She concluded by calling on the FTC to undertake a rulemaking addressing non-competes. She noted that while some states, such as Illinois, have taken action to address non-competes through legislation and enforcement, this has been a “patchwork” solution to a nationwide problem. The FTC, in her view, need not wait for federal legislation and should tackle this problem directly through rulemaking.
Commissioner Chopra, the other Democratic Commissioner, has also expressed support for an FTC rulemaking addressing non-competes. More generally, he has argued that the FTC should make greater use of its authority to define “unfair methods of competition” under Section 5 of the FTC Act through rulemaking. Chopra believes FTC rulemaking would improve antitrust law by enhancing predictability and reducing the burden of case-by-case enforcement. Although Commissioners Chopra and Slaughter have argued in favor of a rulemaking on non-competes, they have not specifically stated how broad they believe a rule on non-competes should be.
Commissioner Phillips, one of the Republican Commissioners, expressed a different viewpoint during the FTC workshop. He acknowledged that the United States has a “labor mobility problem” and said he believes non-competes have contributed to this problem. He noted that recent research suggests non-competes are more prevalent than previously thought and often appear in contexts where the justifications are not strong. However, he also argued that non-competes can serve good purposes—in particular, incentivizing investment in workers and protecting trade secrets—in some contexts. He said he hoped the FTC workshop would inform federal and state legislatures as they grapple with this policy issue. However, he expressed concern about the legal basis for a FTC rulemaking on non-competes. He pointed out that the FTC has only made a competition rule under Section 5 of the FTC Act one time in its history and never enforced that rule. He also argued that FTC rulemaking under Section 5 raises separation of powers concerns.
An FTC rule addressing non-competes would be a significant development. Currently, non-competes are primarily a matter of state common law or state statute. Plaintiffs have been largely unsuccessful in challenging non-competes on federal antitrust grounds. If the FTC were to make a rule on non-competes, it would bring this issue to the federal level, using an approach that it has neglected for most of its history.
It remains unclear whether the FTC will proceed with a rulemaking effort or ultimately enact a rule addressing non-competes. Also unclear is what a potential FTC rule on non-competes would look like. While the FTC is unlikely to enact a blanket ban on non-competes in all circumstances, the agency might consider banning them in certain contexts (e.g., for low-skill workers) or making a presumption that non-competes are illegal absent certain specified factors.
Despite this uncertainty, the FTC workshop shows that non-competes in employment contracts are coming under greater scrutiny. Several Commissioners have called for action on this issue, and if there is a change of administration in the fall, the Democratic Commissioners’ view may continue to gain traction. In this current environment, companies may want to consider whether non-competes are necessary to protect investments in employee training and trade secrets, particularly for low-level employees, before implementing them.