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August 13, 2024
Why is the Federal Trade Commission playing a game of chicken with American companies over the nationwide ban on non-compete agreements? Why create the needless uncertainty and panic? While this ambiguous circumstance may be a boondoggle for my profession, who does it really help? Remember first that the FTC rule crafting a nationwide ban on noncompetes passed at the FTC by the slimmest of margins (3-2). Hardly a mandate with full-throated support from the American public. The rule then was immediately challenged in court. One court (Texas) already has issued a stay, but limited the stay to the parties in that case. Another challenge is pending in Florida. A PA judge declined to issue an injunction to stay enforcement of the rule. This manufactured chaos is not necessary.
Why? No rush exists. Noncompetes have been around since the Dyer’s Case in 1414, when an apprentice breached his promise not to compete in the same town for six months against the person who taught him his trade. Second, the rule affects only one in five American workers. The US has a population of roughly 345 million people. The FTC contends that about 150 million of these Americans are in the workforce, and up to 20 percent of those workers have a noncompete. So, 30 million people affected. But the FTC is merely one agency. It has no jurisdiction over banks, savings & loans, credit unions, air carriers, meat packers, or non-profits. The rule also does not apply to noncompetes associated with the bona fide sale of a business, or to senior executives that signed a noncompete before September 4, 2024. So how many workers are really impacted? Not enough to encourage a thoughtless rollout.
The FTC has existed for 110 years. Five hundred (yes 500) years after the first noncompete case, Congress empowered the FTC to prevent “unfair methods of competition.” The FTC did not outlaw noncompetes then. Almost 90 years ago Congress said, “oh yeah, prevent unfair deceptive acts and practices too.” The FTC did not outlaw noncompetes then. Rather, during these 100+ years, each state handled its own business regarding noncompetes. Everyone knows that noncompetes are disfavored unless they are limited in scope and duration and protect an employer’s legitimate business interest. For decades some states, such as California, have chosen to prohibit noncompetes. Other states have allowed narrowly tailored noncompetes that reasonably protect an employer’s investment (blood, sweat, and tears) in intellectual capital, customers, goodwill, and knowledge and know-how. Maybe some people think it’s a good idea: teach me your trade or business, show me how it’s done, introduce me to your customers, pay me, and I promise that, if I ever quit, for some period of time I will not compete, take your stuff, or steal your customers.
I am not advocating for or against noncompetes. I am just highlighting that for decades state legislatures (the people) and state courts have done what was best for their state, with widely varying approaches. For a federal agency that is created to investigate practices that amount to unfair competition or deceptive acts on a case-by-case basis and perhaps issue a cease and desist order, a sudden “one-size-fits-all” nationwide ban that is sowing chaos seems maddening, particularly when nothing in the Federal Trade Commission Act empowers the FTC to enact a nationwide ban. The rule rollout will be – at best – a mess for American employers. On the other hand, the rule impacts far fewer than 1 in every 5 American workers who signed noncompetes as part of their jobs. Maybe for once we should try not to eat the elephant in one bite.
These comments regarding chickens and elephants are mine alone and not those of my clients.
