The battle over non-competition clauses is coming to a head. The FTC must remain strong
Agreement not to compete
A non-competition clause (often NCC) or covenant to compete (CNC) is a term used in contract law under which one party (usually an employee) undertakes not to practice or take up a similar occupation or act in competition with another party (usually the Employer). Photo credit – Getty Images/iStockphoto
On January 5, the Federal Trade Commission announced a policy initiative that could be a big boon for the workforce. She proposed to ban non-compete clauses for all workers – without exception. Today, these contracts bind millions of employees in almost all professions. The FTC estimated that the proposed ban could increase the collective income of workers by up to $300 billion annually.
The FTC’s proposal did not come easily or quickly. In March 2019, a broad coalition of public interest and labor, led by the Open Markets Institute (where I work) and including AFL-CIO, Public Citizen and SEIU, petitioned for that rule — a petition praised by two by the four Commission Democrats in its statement supporting the FTC’s proposal. Since filing our petition, we have repeatedly called on the FTC to take action. President Joe Biden gave the effort a major boost when he urged 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 Monday, March 20, where anyone can comment (including anonymously). After this window closes, the FTC will review all comments and will publish a final rule that incorporates and responds to the input received. Employers and their professional organizations have already attacked the proposal and will lobby to weaken the FTC’s final rule. And they will certainly challenge the rule in court. However, the FTC must hold the line and do whatever it takes to ensure a win for all workers in the United States.
Non-competition clauses have no place in labor markets. These contracts prevent workers from leaving greener employment areas and starting their own businesses.
In its carefully researched proposal, the FTC described in detail the negative effects of non-compete clauses. They impede 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 inequality . This negative effect extends up the income scale. The economic analysis showed that non-competition clauses reduce the remuneration of CEOs. If CEOs, who typically hire lawyers to negotiate their employment contracts and have significant bargaining power, cannot protect themselves from the adverse effects of non-compete clauses, what hope do we have? rest? Furthermore, non-competition clauses strengthen the power of dominant companies by blocking the path to entrepreneurship and limiting the ability of workers to move from large companies to small firms.
The usual justification for non-competition clauses does not refer to scrutiny. Employers insist they need these contracts to protect, among other things, their investment in employee training and trade secrets. However, as legal scholar Viva Moffat has written, non-competition clauses are “the wrong tool for the job”. Employers have superior ways to retain employees and protect business information. As we’ve seen recently, employers can and should attract and retain workers by paying good wages, offering better benefits, and improving working conditions—not by locking them in through contractual restrictions.
To protect trade secrets and other proprietary information, employers have several legal tools, such as: trade secret Draft Law and Non-Solicitations. While some legal protection of information encourages the production of creative works and inventions, which is why Congress enacted copyright and patent laws, too much protection from non- competition or other means can impede the important exchange and synthesis of knowledge and knowledge. which drives technological progress.
Because it deprives them of an important tool to control workers, corporate interests will fight an FTC rule. Many employers would rather use non-compete clauses than pay higher wages to retain employees.
Industry and trade groups wasted no time in voicing their opposition to the FTC’s proposal. On the day the FTC announced its proposed ban, the US Chamber of Commerce called the FTC’s action “manifestly illegal” and argued that “non-competition clauses are an important tool for promoting -innovation and maintaining competition.”
Voices less hostile to, or even sympathetic to, the FTC’s anti-competitive measures will cite legal risks as a reason to relax the final rule. A weakened alternative regime may protect only a subset of the workforce, such as low-wage workers, or allow employers to offer justifications for the use of non-competition clauses. Certainly, the courts today are generally against the advancement of administrative action. The Supreme Court has developed new jurisprudence that gives itself and lower court judges broad powers to stop regulations and other administrative actions they don’t like. It is far from certain that an FTC rule will survive a court challenge.
Opponents of the rule will not be short of possible legal arguments. In her statement of dissent against the proposal, Christine Wilson, the only Republican commissioner of the FTC, served a list of theories for those who wish to challenge the eventual rule in court.
However, given the abundance of evidence supporting the FTC’s proposal, the threat of court invalidation is insufficient to justify a reduced final rule. Indeed, the factual records presented by the FTC make it difficult for the agency to defend anything but an outright ban. Refine the rule to win over the judges ideological Action by the FTC on non-compete clauses is unlikely to succeed and is more likely to result in frustration and disappointment among the FTC’s supporters in Congress and the general public.
Instead, the FTC (and other regulators contemplating big moves) should be doing the right thing by forcing judges to act and forcing them to do things that are bad for the public and unpopular if they choose. This makes the practical consequences of judicial supremacy even clearer for everyone. The use of the immense power of the courts requires direct confrontation, not defensiveness and timidity.
The fight over the future of the non-compete clause in the United States has begun in earnest. During the ongoing public comment period on its proposed rule, the FTC will hear from proponents and opponents. People from all walks of life will share their experiences of lack of competition, including not receiving raises and advancement opportunities, not pursuing entrepreneurial dreams, seeking a new career direction, and the need to remain in abusive and discriminatory work environments. Their stories will likely further strengthen the FTC’s case for a total ban on these mandatory contracts. Despite the intense pressure it will face from some of the country’s most powerful interests, the FTC should quickly make it clear after the comment period that it stands with working people and enact a total ban on clauses of ‘ non-competition.