The Last-Minute Curveball for a Big FTC Ban
6 min read
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In the early days of 2023, the Federal Trade Commission made a big announcement: It was proposing a new rule banning noncompete agreements for almost all American workers. The proposed ban was set to take effect next week, but a federal judge in Texas ruled to block it last week. An FTC spokesperson told me in an email that the agency was “seriously considering” appealing the Texas judge’s ruling. Even if the agency doesn’t salvage its own ban, though, a surprisingly diverse group of lawmakers seem poised to try to take these agreements down.
The idea of a noncompete agreement first emerged in the 1400s, Evan Starr, a professor at the University of Maryland’s business school, told me, when a master craftsman tried to prevent his well-trained apprentice from practicing his trade elsewhere. Today, companies that use noncompetes argue that they are valuable as a way to keep employees from poaching their client lists, to make sure that their investments in training employees don’t wind up benefiting other businesses, and to protect trade secrets. About a third of American companies now include noncompete terms in every employee contract, Starr noted, and an estimated 20 percent of the American workforce is subject to noncompete agreements.
Some are top business executives whose bosses don’t want to see them jump ship to a competitor. But others are lower-wage employees in a variety of roles for which the case for a noncompete isn’t always as compelling: dancers, camp counselors, house cleaners, many of whom are trying to move to higher-paying jobs or start their own business. In an infamous example, Jimmy John’s employees once faced temporary restrictions from working at nearby sandwich-making businesses (the company dropped noncompetes in 2016 after settling a lawsuit on the matter). Noncompetes are not always technically enforceable, but they can still be very expensive to fight in court, and lead some employees to avoid seeking jobs with better wages or conditions for fear of violating a contract.
A wealth of research has established that being free from noncompetes leads to higher wages and better mobility for workers (the FTC estimates that a typical worker would make $524 more a year if noncompetes were banned). But framing noncompetes solely as a labor issue misses the point, Orly Lobel, a law professor at UC San Diego, told me: “Beyond the protection of workers, it’s about harm to the economy and the market.” Employers benefit, she argued, from a less rigid economy, where new entrants have a chance to compete. The explosion of entrepreneurship in Silicon Valley—located in a state in which noncompetes are largely banned—played a big role in getting government officials to look more seriously at banning noncompetes, Lobel said. By the time President Barack Obama took office, he was calling on states to ban the agreements for some workers, arguing that it would boost wages and foster competition. The Biden administration kept pushing on the issue, and Vice President Kamala Harris has called the FTC’s attempted ban “a huge win.”
The FTC “may not have been the right vehicle” for banning noncompetes, Starr said, because its authority to do so was not clear—the Texas judge argued as much when she blocked it. Several business groups have sued the FTC over the ban, and the agency may face pushback in higher courts if it appeals the Texas decision. As William Kovacic, a law professor at George Washington University and a former FTC commissioner told me in an email, the FTC is currently seeking “expansive interpretation of its authority” at the same time that federal courts, including the Supreme Court, are demanding that agencies show they have the backing of Congress before using broad regulatory power.
But the FTC’s move wasn’t the only recent effort to quash the noncompete. Last year, employees at another federal agency, the National Labor Relations Board, received a memo from its general counsel determining that such agreements violate the National Labor Relations Act (the law that protects employees’ right to collective bargaining) in most circumstances. A bipartisan group of lawmakers introduced a bill last February that would narrow the use of noncompetes; Senator Marco Rubio has also advocated for a version of a noncompete ban for low-wage workers. The FTC proposal has helped inspire states to rethink their own restrictions on noncompetes, too, experts told me.
As both a labor and a free-market issue, noncompetes bring unlikely groups of allies together. Senator Elizabeth Warren and Representative Matt Gaetz, for example, both came out as strong supporters of the FTC ban. This range of support suggests that the battle against noncompetes is far from over.
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