FTC floats rule to ban imposed non-compete agreements in US

Miscreants would face the wrath of Khan

The US Federal Trade Commission (FTC) on Thursday proposed a rule to ban non-compete agreements in employment contracts, a prohibition already in place in some US states.

The Notice of Proposed Rulemaking (NPRM) follows a White House Executive Order last year directing the agency to limit the use of unfair non-compete agreements, which the Biden Administration contends harm workers and hinder market competition.

The FTC is currently seeking public comment on its proposal, which the agency claims has the potential to increase US workers' wages by between $250 billion and $296 billion annually and to expand job opportunities for 30 million Americans who are currently bound by non-compete contracts.

"The freedom to change jobs is core to economic liberty and to a competitive, thriving economy," said FTC Chair Lina Khan in a statement.

"Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC's proposed rule would promote greater dynamism, innovation, and healthy competition."

The agency cites as an example the case of a Michigan-based Prudential Security and Prudential command, recently sued by the FTC [PDF] and now subject to an FTC order disallowing post-employment restrictions.

The firms allegedly enforced non-compete agreements against its guards, who were making not much more than minimum wage, banning them from working within 100 miles of their former employer if they left. Its employment contract allowed the company to seek up to $100,000 in damages from workers violating the terms. Prudential is said to have sued former employees who went to competitors for higher wages and to have pressured at least one competitor to fire a new hire who had worked previously for the jealous firm.

The FTC argues that evidence for the benefits of a non-compete ban can be seen from the states or districts that have already outlawed post-employment covenants. California, the District of Columbia, North Dakota, and Oklahoma forbid non-compete clauses, while other states, including Maine, Maryland, New Hampshire, Rhode Island, and Washington, have banned them for low-wage workers.

The proposed rule would make it illegal to offer, agree to, or maintain a non-compete contract with a worker, or to claim that a worker is subject to a non-compete contract. It would apply to employees, independent contractors, or anyone doing work for an employer, paid or not paid. The rule would not apply to other contracts, like non-disclosure agreements, unless the contract was worded so broadly that it functioned as a non-compete agreement.

An FTC spokesperson told The Register that the proposed rule covers non-compete clauses between companies and workers, and would not affect government-imposed employment restrictions faced by foreign workers under visas like H-1B. The rule also doesn't cover non-compete agreements used by franchisors to restrict franchisees, though that's one of the issues the trade watchdog hopes to hear about from the public during the 60-day comment period.

FTC Commissioner Christine Wilson, the only Republican commissioner presently, filed a dissenting statement [PDF] to the agency proposal, claiming that it isn't sufficiently justified by evidence and lacks a legal basis.

"Based on the current record, non-compete clauses constitute an inappropriate subject for rulemaking," said Wilson. "The competitive effects of a non-compete agreement depend heavily on the context of the agreement, including the business justification that prompted its adoption."

Wilson's objections are dismissed in a joint statement [PDF] by Khan, and two other FTC commissioners, Rebecca Kelly Slaughter and Alvaro Bedoya, that insists the proposed rule is consistent with the powers granted by the FTC Act and with judicial precedent.

In 2010, the US Justice Department settled an antitrust claim against six technology companies – Adobe, Apple, Google, Intel, Intuit and Pixar – for a related form of non-compete agreement in which the firms had secretly promised not to try to hire each other's employees. ®