FTC approves ban on noncompete agreements, sets up potential court battle

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The Federal Trade Commission (FTC) voted to ban the vast majority of noncompete agreements in employment contracts during a special open commission meeting this afternoon. It was the first meeting since September 15, 2022, where the agency was at full strength with five commissioners. The FTC voted along party lines, with recently sworn-in Republican Commissioners Andrew Ferguson and Melissa Holyoak as the only dissenters. Both Commissioners Ferguson and Holyoak pointed to the FTC's lack of authority to promulgate the rule in their dissenting statements.

The final rule bans noncompetes for senior executives prospectively, but not retrospectively. That means existing agreements with senior executives will remain enforceable but cannot be entered into after the rule's effective date. For all other workers, the final rule bans noncompete agreements both prospectively and retrospectively.

While there may be room for policy disagreement regarding the value of employee noncompete clauses, it's clear that this rule is an illegal power grab by the FTC.

CEI submitted comments to the proposed rulemaking in April of last year arguing that the FTC lacked the authority to promulgate substantive rules defining unfair methods of competition, as did experts from TechFreedom and the International Center for Law & Economics.

The Commission relies on a relatively brief provision of the FTC Act, Section 6(g), for its asserted rulemaking authority which states that the agency has the power to "[f]rom time to time classify corporations and . . . to make rules and regulations for the purpose of carrying out the provisions of this subchapter."

Many argue that this language grants rulemaking authority that is procedural in nature, where the FTC can create certain housekeeping rules. Instead, three out of five commissioners view Section 6(g) expansively, with the power to create substantive rule with the force of law.

With today's vote, the FTC has proclaimed itself as a second national legislature.

The FTC published the notice of proposed rulemaking in January of last year, which garnered over twenty thousand comments during the 90-day comment period. Because of this high volume of comments submitted, the Commission announced that it would "not be taking further comments from the public during the April 23 Open Commission Meeting."

This seems contrary to the "robust participatory process" FTC Chair Lina Khan claimed to promote when she joined the Commission and opened monthly meetings to the public. During the last 25 open commission meetings, members of the public were given one to two minutes to address the Commission.

Shortly after the FTC announced its plan to prohibit employee noncompetes as the start of 2023, the US Chamber of Commerce made clear its intention to challenge the rulemaking in court. And they are right to do so. Regardless of what revisions the FTC may have attempted since last year, this rule goes beyond the agency's authority.

Here's more on the FTC's noncompete rule:

Commentary:

Svetlana Gans and Eugene Scalia, "The FTC Heads for Legal Trouble," Wall Street Journal, August 8, 2022, https://www.wsj.com/articles/ftc-may-test-the-courts-limits-meta-lina-khan-roberts-nondelegation-major-questions-enforcement-authority-humphreys-executor-administrative-law-noncompete-11659979935

Alden Abbott, "The FTC's NPRM on Noncompete Clauses: Flirting with Institutional Crisis," Truth on the Market, January 10, 2023, https://truthonthemarket.com/2023/01/10/the-ftcs-nprm-on-noncompete-clauses-flirting-with-institutional-crisis/

Eugene Scalia, "The FTC's Breathtaking Power Grab Over Noncompete Agreements," Wall Street Journal, January 12, 2023, https://www.wsj.com/articles/the-ftcs-breathtaking-power-grab-noncompete-agreements-rule-capital-investment-wage-gap-job-growth-compliance-11673546029

Erik W. Weibust, Peter Steinmeyer, and Stuart Gerson, "After 200+ Years Under State Law, FTC Proposes to Ban Noncompetes in Unauthorized Power Grab," Washington Legal Foundation, Legal Backgrounder, Vol. 38, No. 1 (January 12, 2023), https://www.wlf.org/wp-content/uploads/2023/01/011223Noncompetes_LB.pdf

David McGarry, "The FTC Wants to Outlaw Noncompete Clauses, but Does It Have the Authority," Reason, January 12, 2023, https://reason.com/2023/01/12/the-ftc-wants-to-outlaw-noncompete-clauses-but-does-it-have-the-authority/

Asheesh Agarwal, "Biden's Proposed Ban on Noncompete Agreements Ignores the Constitution," Washington Examiner, February 14, 2023, https://www.washingtonexaminer.com/news/business/2783802/bidens-proposed-ban-on-noncompete-agreements-ignores-the-constitution/

Corbin K. Barthold, "No, Chevron Deference Will Not Save the FTC's Noncompete Ban," Truth on the Market, February 14, 2023, https://truthonthemarket.com/2023/02/14/no-chevron-deference-will-not-save-the-ftcs-noncompete-ban/

Annie Villanueva Jeffers and Joseph M. Rancour, "The FTC's Plan to Limit Noncompetes Could Pose an Array of Practical Problems," Skadden Publication, Spring 2023, https://www.skadden.com/insights/publications/2023/05/the-informed-board/the-ftcs-plan-to-limit-noncompetes

Alden Abbott and Liya Palagashvili, "Policy Spotlight: The Problem with a Federal Ban on Noncompete Agreements," Mercatus Center, George Mason University, May 23, 2023, https://www.mercatus.org/research/policy-briefs/policy-spotlight-problem-federal-ban-noncompete-agreements

Kirti Gupta, Andrei Iancu, and Christ Borges, "Noncompete Agreements, Innovation, and National Security," Center for Strategic & International Studies, June 7, 2023, https://www.csis.org/analysis/noncompete-agreements-innovation-and-national-security

Richard Pierce, "The FTC Doesn't Have the Power to Issue Substantive Rules," Bloomberg Law, August 9, 2023, https://news.bloomberglaw.com/us-law-week/the-ftc-doesnt-have-the-power-to-issue-substantive-rules

Gregory J. Werden, "The FTC Lacks Authority for Competition Rulemaking," Truth on the Market, September 12, 2023, https://truthonthemarket.com/2023/09/12/the-ftc-lacks-authority-for-competition-rulemaking/

Thomas W. Merrill, "Antitrust Rulemaking: The FTC's Delegation Deficit," Administrative Law Review, Vol. 75, No. 2 (Spring 2023), https://scholarship.law.columbia.edu/cgi/viewcontent.cgi?article=5148&context=faculty_scholarship

Regulatory Comments:

Comments of the Buckeye Institute, April 12, 2023, https://www.buckeyeinstitute.org/library/docLib/2023-04-12-Public-Comments-to-the-FTC-on-Proposed-Noncompete-Clause-Rule.pdf

Comments of the U.S. Chamber of Commerce, April 17, 2023, https://www.uschamber.com/assets/documents/FTC-Noncompete-Comment-Letter_FINAL_04.17.23.pdf

Comments of the Competitive Enterprise Institute, April 18, 2023, https://cei.org/wp-content/uploads/2023/04/CEI-Comments-FTC-Non-Compete-Clause-Rule-FTC-2023-0007-0001-4.18.2023-PDF.pdf

Comments of TechFreedom (Berin Szóka & Corbin Barthold), April 19, 2023, https://techfreedom.org/wp-content/uploads/2023/04/FTC-Non-Competes-TechFreedom-I-Szoka-and-Barthold.pdf

Comments of TechFreedom (James E. Dunstan), April 19, 2023, https://techfreedom.org/wp-content/uploads/2023/04/FTC-Non-Competes-TechFreedom-II-Dunstan.pdf

Comments of TechFreedom (Bilal Sayyed), April 19, 2023, https://techfreedom.org/wp-content/uploads/2023/04/FTC-Non-Competes-TechFreedom-III-Sayyed.pdf

Comments of Scholars of Law & Economics and the International Center for Law & Economics, April 19, 2023, https://laweconcenter.org/wp-content/uploads/2023/04/ICLE-Noncompete-NPRM-Comments-final.pdf

Comments of the Pacific Legal Foundation, April 19, 2023, https://www.regulations.gov/comment/FTC-2023-0007-21026

Events:

The Federalist Society, "The Implications of the FTC's Proposed Ban on Noncompete Agreements," Regulatory Transparency Project, March 1, 2023, https://fedsoc.org/events/the-implications-of-the-ftc-s-proposed-ban-on-noncompete-agreements