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The Federal Trade Commission (FTC) will hold an open meeting today to vote on a proposed rule banning noncompete agreements, which restrict employees at a company from taking jobs at rival firms for a set period of time.
It is expected that the rule will be finalized today. Sources have indicated to the Prospect that little in the final rule has changed from what was originally proposed at the beginning of 2023. The agency has held public events hearing from workers affected by noncompetes, and more than 27,000 comments were submitted on the proposed rule, most of them in favor.
But while today’s meeting will almost certainly result in a final rule, that doesn’t make it completely safe from its antagonists. The U.S. Chamber of Commerce indicated at the American Bar Association antitrust law section’s spring meeting earlier this month that it would file suit to overturn the rule. It’s no secret that the Chamber is staunchly opposed to the rule, as they filed a public comment calling it “arbitrary and capricious.”
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A lawsuit could more broadly threaten the rulemaking authority the FTC cited when proposing to ban noncompetes. This authority, under Section 5 of the FTC Act, was dormant for decades until the ascent of Lina Khan to the position of chair. Writing definitive rules protecting against unfair methods of competition across the economy relieves the FTC of having to rely on lawsuits against individual firms. Lawsuits often take years and require costly expert analysis, while rulemaking can set bright lines barring anti-competitive activity.
The FTC asserted the right to use Section 5 rulemaking in a policy statement in 2022. While a noncompete ban robs companies of a key wage suppression tool, the Chamber of Commerce and its allies are perhaps even more afraid of repeated uses of rulemaking to set guardrails for firm behavior. That’s why the fight over noncompetes will be even bigger than the specific rule.
ROUGHLY 30 MILLION AMERICANS ARE BOUND by these restrictive covenants that employers wield to prohibit worker mobility. Fast-food cooks, janitors, and hairdressers have these clauses in their employee contracts, and so do software engineers and corporate vice presidents. Though they started out mainly at the executive level to protect trade secrets, noncompetes have trickled down across the economy to low-wage workers who don’t credibly have access to competitively sensitive information. Instead, the agreements are used to shackle workers to their companies, taking away one of the most important tools that employees at non-unionized shops have to negotiate up wages: to take a higher-paying job elsewhere.
By restricting labor mobility, studies have estimated that these agreements significantly suppress worker earnings across the economy. The FTC, when it proposed the rule, put the cost to workers at a staggering $300 billion per year. Noncompetes also pose obstacles for new startup businesses, which struggle to attract talent that is tied to large employers. In numerous sectors such as health care, noncompetes have credibly worsened job quality so much that they’ve led to work shortages, which hampered the system’s response during the pandemic.
Roughly 30 million Americans are bound by these restrictive covenants that employers wield to prohibit worker mobility.
The proposed rule was widely celebrated by reform advocates for issuing a complete ban on these agreements across income levels, without any carve-outs. The ban also included language about a set of separate but related restrictive labor clauses known as training repayment agreement provisions (TRAPs). In these agreements, workers are forced to pay for their own previous work training after they leave a job to start a new position. The National Labor Relations Board recently unwound a TRAP put together by an Ohio-based aesthetic services company called Juvly, which asked departing workers to pay between $50,000 and $60,000 in training costs.
Some anti-monopoly groups asked for a stronger final rule on TRAPs. The current provision doesn’t ban them, but instead prohibits “unreasonable” repayments by employees, without fully defining what would constitute an unreasonable payment. (See the update below.)
The noncompete ban, even if it incorporates stay-or-pay contracts, cannot fully wipe out these abuses from the workforce. That’s because the FTC Act exempts several industries from its rules on unfair methods of competition, including banks and credit unions, partnerships, nonprofits, agricultural corporations subject to the Packers and Stockyards Act, some types of health care workers, and air carriers. Other agencies, like the Department of Transportation or the Department of Health and Human Services, would have to promulgate their own rules to protect those workers.
AS SOON AS THE FTC ANNOUNCED THE PROPOSED RULE in 2023, the Chamber of Commerce signaled its opposition to the rule. They’ve spent untold sums lobbying against it with a well-armed team of D.C. lobbying shops. And at the ABA antitrust meeting this month, a representative from the Chamber committed publicly on a panel that they would file a legal challenge against the final rule.
Yet despite the Chamber’s hostility to the rule, the ban has received bipartisan support. A bipartisan bill to ban noncompetes was reintroduced last year. Congressional Republicans generally have done the Chamber’s bidding at every turn to try and thwart the administration’s anti-monopoly actions, such as recently passing a resolution condemning a CFPB rule capping overdraft fees. But they’ve backed off on the noncompete rule.
“There haven’t been any appropriation riders or other legislative attacks on this rule because it’s an issue everyone can basically agree on,” said Anna Aurilio, the federal campaign director at the Economic Security Project.
But the Chamber has more on its mind than just noncompetes. Section 5 rulemaking could be used to ban exclusive-dealing arrangements, “pay-for-delay” deals between pharmaceutical companies and generic manufacturers, and even potentially tech platforms that self-preference their own content over third-party sellers.
Former Republican commissioner Christine Wilson asserted in her statement opposing the proposed rule that it was an unlawful violation of the “major questions doctrine,” an invented Supreme Court theory that courts can overrule an agency if it oversteps congressional authorization. The Court has used it on multiple occasions, and Wilson’s citation likely sets the stage for the Chamber to call the noncompete ban, or Section 5 rulemaking in general, a major questions doctrine violation.
Katherine Van Dyck, then a senior legal counsel with the American Economic Liberties Project, told the Prospect last year that “the FTC’s powers have been upheld again and again by past Supreme Courts so there’s clear precedent here.” Van Dyck now works as an attorney adviser to the FTC.
The Supreme Court has been willing to constrain the FTC’s powers in the recent past, however. In 2021, the FTC was stripped of its ability to obtain monetary restitution in cases where companies harmed consumers on a first offense.
A legal opinion on rulemaking authority would at least give the agency clarity on its own powers. And by starting with the noncompete ban, an incredibly popular concept, the FTC makes it difficult for judges to side with businesses trying to suppress workers’ wages.
That’s the fight in the near future; for today, the ability of businesses to lock their workers into their jobs has been blocked, if only temporarily.
UPDATE: The commission finalized the rule today along party lines. The final rule also bans Training Repayment Agreement Provisions (TRAPs) if they “function to prevent a worker from seeking or accepting other work or starting a business after the employment associated with the TRAP.” This is an upgrade from the initial language. Now the fight shifts to the courts.
