US Chamber of Commerce to sue FTC for banning noncompetes in most jobs

Senior execs making $150K+ will still have to abide by them, but they fall away for everyone else

The US Chamber of Commerce is saying it will sue the Federal Trade Commission (FTC) for officially banning noncompete clauses in employment contracts across America.

A noncompete agreement typically blocks the employee who signed it from going to work for a rival or starting up a competing business of their own.

The Chamber of Commerce labeled the FTC's publication of its final rule yesterday as an "unlawful power grab." The feds claim the move will help usher in 8,500 extra new businesses and 17,000-29,000 more patents each year.

It all kicked off last year when America's federal employment regulator said it was worried about the unequal bargaining power between employers and workers, claiming that noncompete clauses were limiting employees' ability to practice their trade. It asked for Americans' opinions – and received more than 25,000 comments out of 26,000 that were in support of the ban.

In the final rule [PDF] the FTC determined that noncompetes and their enforcement were "an unfair method of competition," making them a violation of Section 5 of the FTC Act. Section 5 [PDF] prohibits "unfair or deceptive acts or practices in or affecting commerce."

The move to abolish the clauses has its critics, unsurprisingly among the nation's employers. Claiming the matter should be confined to state law, the Chamber of Commerce's president and CEO, Suzanne P Clark, said in a statement that "three unelected commissioners have unilaterally decided they have the authority to declare what's a legitimate business decision and what's not by moving to ban noncompete agreements in all sectors of the economy."

Not everyone is affected by the ban under the rule, so while no new noncompetes may be drawn up, some still apply. The rule specifies that "senior executives," defined as those earning in excess of $151,164 annually in "policy-making positions," will still be bound by existing noncompete clauses (they can't be asked to sign any new agreements). The FTC said "this subset of workers is less likely to be subject to the kind of acute, ongoing harms currently being suffered by other workers subject to existing noncompetes."

bad contract

Prepare to be shocked: Employees hate this One Weird Clause


There have been interesting debates around noncompetes since the proposal was floated last year and yesterday's publication of the final rule. For example, noncompete agreements are typically deemed illegal under the California Business and Professions Code. But allegations as far back as 2013 reveal there is more to restraint of trade than a mere contractual clause.

For example, a court filing in an antitrust lawsuit that year revealed Apple CEO Steve Jobs once threatened the CEO of Palm with a patent lawsuit if he didn't stop hiring Apple employees. District Judge Lucy Koh allowed Edward Colligan's phone and email conversations with Jobs to go on the public record after Colligan claimed Jobs called him in 2007 suggesting they came to an arrangement about high-tech employees, agreeing not to hire them away from each other.

Noncompetes also became a topic du jour in Silicon Valley last year during Apple's trade secrets enforcement case against Rivos, a dispute it settled earlier this year. Apple had originally accused the tech startup of hiring away dozens of Apple engineers and using confidential info to develop rival SoCs.

In counterfilings [PDF], Rivos then accused Apple of using the Defend Trade Secrets Act to circumvent noncompete regulations in California. It alleged that Apple was "improperly obstructing employee mobility," claiming it "forces its employees to sign contracts with provisions that run afoul of California law as a condition of their employment. These contracts purport to prohibit employees from retaining anything from their time at Apple – even general know-how that is not trade secret."

Rivos and the ex-Apple employees who went to work for the startup claimed in a filing late last year that "even when Apple knows its employees are leaving to work somewhere that Apple (rightly or wrongly) perceives as a competitive threat, it does not consistently conduct exit interviews or give employees any meaningful instruction about what they should do with supposedly 'confidential' Apple material upon leaving. Whether by neglect or as part of a planned effort to generate a pretextual basis to sue the employees and their new employer for 'stealing' Apple material, Apple lets these employees walk out the door with material they may have inadvertently 'retained' simply by using Apple systems (such as iCloud or iMessage) that Apple effectively mandates they use as part of their work."

Rivos, Apple, and the former employees signed a settlement agreement [PDF] in March.

Back when the FTC was first floating the idea of abolishing noncompetes, Reg readers voted overwhelmingly that their chief concern when it came to employers' contractual clauses were those necessitating they hand over their intellectual property rights or a variation on that theme, à la Evan Brown. Poor old Brown lost his case against Alcatel back in 2002, with a judge ruling the company owned rights to a software idea that existed entirely in the thoughts of its former employee.

Brown's "solution" was a process for "converting machine-executable binary code into high-level source code" – essentially adapting old software to new hardware through the use of a decompiler. Alcatel alleged Brown breached an invention disclosure contract that contained no exceptions, and the judge agreed, handing down a judgment holding the contract enforceable. But as the Journal of Computer and Information Law pointed out, even after the court ordered Brown to disclose his "Solution," as counsel for the company admitted, the Solution was "woefully incomplete and inadequate by steps," making it ineligible for patent protection.

The company claimed at the time this was due to Brown's "willful noncompliance" when he had to travel to its offices to write down the code after the court's temporary injunction, but "Brown testified by affidavit that it would take an individual of 'extraordinary skill' to reduce the Solution to a working computer program and that a programmer of ordinary skill would have 'virtually no chance' of successfully producing a workable program based without extensive experimentation."

The FTC vote on abolishing noncompetes was passed 3:2, with Democrats supporting the ban and Republicans opposing.

"Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned," FTC chair Lina Khan said. "The FTC's final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market." ®

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