Randy Picker Writes About the FTC’s Proposed Rule on Non-Compete Agreements
The FTC’s Non-Compete Ban Will Force Questions Over the Scope of its Authority
On January 5, 2023, the Federal Trade Commission proposed a new rule that would ban most non-compete agreements. Non-compete agreements are contracts that limit the ability of an individual to compete with another firm under specified circumstances. A retiring doctor selling her practice to a recent medical school graduate might agree to a non-compete to boost the sale price for her business, as the purchaser might fear that the doctor’s patients would continue to see the original doctor if she continued to work. A tech firm might insist on a non-compete agreement as a tool for helping it keep safe its trade secrets. And, a little bit more surprisingly, a sandwich chain—call it Jimmy John’s—might use a non-compete to insist that new employees agree that they will not leave to take their sandwich-making skills elsewhere.
State laws limit the enforceability of noncompete agreements, though different states run at this differently. Dealing with an issue at the state level allows for that type of choice and, thus, competition between states. In her great 1994 book Regional Advantage, AnnaLee Saxenian argued that Silicon Valley prospered with a strong shared culture and rapid employee movement between firms, something made possible, in part, as Ron Gilson argued in 1999, by the fact that California didn’t enforce covenants not to compete. And once the Jimmy John’s noncompete clause received public attention, the company dropped them in response to actions by state attorneys general. As that suggests, state law has long played role in regulating the exact extent of non-competes. Even the proposed FTC rule would allow some non-competes in the connection with the sale of a business.
The natural question, of course, is exactly where does the FTC fit in to these state laws? The proposed rule represents a dramatic effort by the FTC to regulate contracts that it believes currently affect 20% of the United States workforce. The rule, if implemented, is likely to set off an extended fight over the scope of the FTC’s authority that will eventually reach the Supreme Court. The FTC is acting under the authority that it believes that it has under Sections 5 and 6(g) of the relevant statute. The latter gives the FTC some authority to make rules though the full range of that power is part of what will likely be contested here.
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