The Fight Over Non-Competes Is Heating Up. The FTC Must Stand Strong

A non-compete clause (often NCC), or covenant not to compete (CNC), is a term used in contract law under which one party (usually an employee) agrees not to enter into or start a similar profession or trade in competition against another party (usually the employer). Credit - Getty Images/iStockphoto

On January 5, the Federal Trade Commission announced a policy initiative that could be a major boon for labor. It proposed to ban non-compete clauses for all workers—no exceptions. These contracts bind tens of millions of workers today across nearly all occupations. The FTC estimated its proposed prohibition could increase workers’ collective earnings by as much as $300 billion per year.

The FTC’s proposal did not come easily or quickly. In March 2019, a broad public interest and labor coalition, led by the Open Markets Institute (where I work) and included the AFL-CIO, Public Citizen, and SEIU, petitioned for this rule—a petition lauded by two of the Democrats on the four-member Commission in their statement supporting the FTC’s proposal. Since the submission of our petition, we repeatedly urged the FTC to initiate action. President Joe Biden gave the effort a big boost when he encouraged the FTC to regulate non-compete clauses in a July 2021 executive order.

But the real fight is just beginning. The proposed rule opened a public comment period that ends on Monday, March 20 in which we can all submit comments (including anonymously). After the close of this window, the FTC will review all the comments and publish a final rule, incorporating and responding to the input it receives. Employers and their trade associations have already attacked the proposal and will lobby to weaken the FTC’s final rule. And they will certainly challenge the rule in court. The FTC, however, must hold the line and do everything it can to deliver a win for all workers in the United States.

Non-compete clauses have no place in labor markets. These contracts prevent workers from leaving for greener employment pastures and starting their own businesses.

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In its thoroughly researched proposal, the FTC described the negative effects of non-compete contracts in rich detail. They depress labor market mobility and reduce wages and wage growth (regardless of whether employers can or do enforce them in court) and contribute to racial and gender wage gaps. This negative effect extends even to the very top of the income scale. Economic analysis found that non-competes depress compensation for chief executive officers. If CEOs, who typically hire lawyers to negotiate their employment contracts and enjoy significant bargaining power, cannot protect themselves from the adverse effects of non-competes, what hope do the rest of us have? Further, non-compete clauses shore up the power of dominant corporations by closing off paths to entrepreneurship and restricting workers’ ability to move from big businesses to small firms.

The common justification for non-competes does not withstand scrutiny. Employers insist they need these contracts to protect, among other things, their investment in training workers and trade secrets. As legal scholar Viva Moffat wrote, however, non-competes are “the wrong tool for the job.” Employers have superior means of retaining workers and safeguarding business information. As we have seen of late, employers can and should attract and keep workers by paying good wages, offering better benefits, and improving working conditions—not by locking them up through contractual restraints.

To protect trade secrets and other proprietary information, employers have several legal tools, such as trade secret law and tailored non-solicitation agreements. Further, while some legal protection of information encourages the production of creative works and inventions, which is why Congress enacted the copyright and patent laws, too much protection, through non-competes or other means, can impede the important sharing and synthesis of knowledge and knowhow that drive technological advancement.

Because it deprives them of an important tool to control workers, corporate interests will fight an FTC rule. Many employers would much rather use non-compete clauses than pay higher wages to retain staff.

Industry trade associations wasted no time expressing their opposition to the FTC’s proposal. On the day the FTC announced its proposed ban, the U.S. Chamber of Commerce called the FTC’s action “blatantly unlawful” and asserted “noncompete agreements are an important tool in fostering innovation and preserving competition.”

Voices less hostile or even sympathetic to FTC action against non-competes will cite legal risk as a reason to weaken the final rule. A diluted, alternative rule might protect only a segment of the workforce, such as low-wage workers, or permit employers to offer justifications for using non-competes. To be sure, the courts today are generally against progressive administrative action. The Supreme Court has manufactured new legal doctrines that give itself and judges on the lower courts broad authority to strike down regulations and other administrative actions they do not like. An FTC rule is far from certain to survive a judicial challenge.

Opponents of the rule will have no shortage of possible legal arguments. In her dissenting statement against the proposal, Christine Wilson, the one Republican commissioner at the FTC, served up a menu of theories to those who want to challenge an eventual rule in court.

Yet, given the abundant evidence supporting the FTC’s proposal, the threat of judicial invalidation is not enough to justify a watered-down final rule. Indeed, the factual record presented by the FTC makes anything short of a complete ban hard for the agency to defend. Finessing the rule in an attempt to win over judges ideologically opposed to FTC action on non-competes is unlikely to succeed and more likely to produce disappointment and disenchantment among supporters of the FTC in Congress and the broader public.

Instead the FTC (and other regulators contemplating big moves) should do the right thing, forcing judges’ hand and making them do things that are bad for the public and unpopular, if they so choose. This would make the practical consequences of judicial supremacy even more clear for everyone. Reining in the awesome power of the courts calls for direct confrontation, not defensiveness and timidity.

The fight over the future of non-compete clauses in the U.S. has begun in earnest. During the ongoing public comment period on its proposed rule, the FTC will hear from supporters and opponents. People from all walks of life will share their experiences with non-compete clauses, including forsaking opportunities for raises and career advancement, not pursuing entrepreneurial dreams, finding a new line of work, and being forced to stay in abusive and discriminatory work environments. Their stories will likely only further strengthen the FTC’s case for a complete ban on these coercive contracts. Despite the intense pressure it will face from some of the most powerful interests in the country, the FTC, following the comment period, should quickly make clear it is on the side of working people and enact a complete ban on non-compete clauses.