FTC Proposed Ban on Noncompetes Compels Discussion

Federal Trade Commission
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On January 5, the Federal Trade Commission announced a proposed rule to ban non-compete agreements nationwide, citing that they violate Section 5 of the Federal Trade Commission Act. As the proposed rule enters the 60-day comment period, we sat down with Martin Schmelkin, an employment law partner with Schulte Roth & Zabel to discuss the rule and its impact.

“I think we’re a long way away from this rule being implemented,” Schmelkin says. “There will be significant comments that come to the FTC, such that the proposed rule in its current form will unlikely  be the final, published rule. Additionally, I think there’s going to be litigation over this rule.”

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According to Schmelkin, under the non-delegation doctrine, this proposed rule is well beyond the scope of the FTC’s mandate. “This is the purview of Congress,” he says. “This is not something that four commissioners – well, really three as it was a 3-1 vote – could put forth and implement nationally.”

FTC Commissioner Christine S. Wilson, who voted against the rule, issued a dissenting statement in which she criticizes the substance of the rule as “a radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a non-compete clause is unreasonable.” Further, she believes that the “Commissions competition rulemaking authority itself certainly will be challenged.”

In her issued statement, FTC Chair Lina M. Khan stated, “[N]oncompetes may be unlawful in different contexts for different reasons; for example, employers’ use of noncompetes to bind low-wage workers may be coercive and unfair in ways that the use of noncompetes to bind senior executives is not. Still, the proposal concludes that, in the aggregate, employers’ use of noncompetes undermines competition across markets in ways that are harmful to workers and consumers and warrant a prohibition.”

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According to the FTC, banning noncompetes could “increase wages by nearly $300 billion per year and expand career opportunities for 30 million Americans.” That statement went on to quote Elizabeth Wilkins, director of the Office of Policy Planning, stating that even in circumstances in which a noncompete is unenforceable under state law, “research shows that employers’ use of noncompetes to restrict workers’ mobility significantly suppresses workers’ wages.”

While it is unlikely that the proposed rule will be published as written and may face the court’s oversight once published, Schmelkin believes that state and local legislators will be able to use this proposed rule to begin a dialogue about non-compete agreements and restrictive covenants in general.

Currently, three states have complete bans on non-compete agreements – California, Oklahoma and North Dakota. Another dozen states have implemented restrictions to non-compete agreements such as salary thresholds.

“Since January 5, I’ve spent a lot of time with clients who were concerned when this proposed rule came out,” Schmelkin says. “Does this mean employers can no longer have non-competes with their employees? The short answer is no, this is still early stages, and we need to monitor developments. However, a prudent employer will now take a look at their current non-compete clauses and their restrictive covenants in general and determine if these are reasonable and enforceable.

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“There is a long way to go before we know what the final rule will look like,” Schmelkin adds. “But, there is no doubt that this is a big focus of the current administration’s FTC.”

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