The Hidden Intention Behind the FTC’s Non-Compete Ban

Every year, millions of Americans discover that a single signature on their employment contract can restrict them from being hired by certain employers for years or even their entire careers. One in five American workers forced to sign a non-compete face this reality [1]. Typically, a non-compete clause forbids or penalizes a worker from accepting employment with a competing firm from the same industry for a designated length of time following the worker's separation from the current employer. In some cases, non-competes even bar people from starting their own businesses.

First drafted in the 15th century, non-competes clauses began as a way for companies to feel more comfortable investing in training or giving employees access to proprietary information [2]. For instance, companies in sectors like pharmaceuticals that rely on research or those where talent retention is a crucial objective tend to require non-competes to protect their intellectual property. They prevent workers from immediately transferring their valuable knowledge to a competitor and give companies the confidence that their invested workforce cannot be used against them.

Modern non-competes, however, have far stretched beyond that original intent. Common in jobs with little to no training (e.g., minimum wage jobs), including one in six U.S. food preparation and service workers, non-competes serve an alternate purpose: wage suppression [3]. If a service worker finds out that a competitor offers higher pay, for instance, they might not be able to switch jobs until a year after they quit their original job due to being restricted from non-competes. An infamous example of this is Prudential Security’s non-compete clauses that restricted security guards paid slightly above minimum wage from accepting employment with a competitor within a 100-mile radius for two years after employment [4]. While a Michigan state court found these agreements unenforceable, the decision was tied to state legislation, meaning similar non-competes could still be enforceable in states with less stringent regulations. In 2023, the FTC filed a case against the company on this very issue, alleging the uncompetitive nature of its non-competes. However, the case is mainly symbolic, as the company no longer employs security guards.

A 2016 U.S. Treasury Department study demonstrates that non-competes decrease wages by 5 to 10 percent across most industries [5]. These agreements blunt labor market competition, yielding benefits to corporations at the expense of workers. In response to this growing issue, the Federal Trade Commission (FTC) introduced a sweeping rule that would render most non-competes illegal,3nullify any existing agreement, and supersede state laws that permitted certain types of non-competes [6]. The rule excluded non-competes for “senior executives,” defined as policy-making employees making over $150,000 annually.

While the ban effectively addressed widespread concerns about non-competes, it overstepped the limits of the FTC’s legal authority. The Federal Trade Commission Act of 1914 grants the FTC the power to prevent "unfair methods of competition,”4but the Commission has never been explicitly given rulemaking authority to impose regulations of this magnitude [7]. The FTC based its justification on Section 6(g) of the Act, which allows it to issue rules "for carrying out the provisions" of the law.

However, this provision has historically been used to carry out administrative, not substantive, regulatory activity. Legal history underlies this nuanced distinction. In the 1970s and 1980s, Congress passed numerous amendments to the FTC Act; some explicitly granted the agency rulemaking authority over unfair and deceptive practices – an authority completely distinct from anti-competitive practice under which a non-compete ban falls. Since Congress did not pass amendments granting similar power to regulate anti-competitive behavior as they did for deceptive practices, their purposeful omission reveals Congress's intent to restrict the FTC’s powers in this area. As Judge Brown noted in her ruling for Ryan LLC v. Federal Trade Commission, which indefinitely delayed the rule's implementation, the FTC had overstepped its statutory authority.

Furthermore, the FTC's rule was deemed "arbitrary and capricious" under the 1964 Administrative Procedure Act, which generally means that the regulation considers factors not intended by Congress, fails to address critical aspects of the issue, offers an explanation that contradicts the evidence or is so unreasonable that it cannot be attributed to differing views or agency expertise [8]. A blanket ban that affects all workers except a limited class of senior executives does not account for the legitimate business interests that certain non-competes protect. There are numerous roles where companies must share proprietary information with employees, but these employees may not meet the narrow classification of a "senior executive.” The FTC’s failure to create a more nuanced rule with data-driven exceptions and empirical backing contributed to its legal vulnerability, as Judge Brown highlighted in her ruling.

It is clear the FTC did not attempt to draft a ban that would withstand legal scrutiny. The section they cited to justify their statutory authority had not been used since 1978, and amendments to the FTC Act have clarified the agency's scope. Given these circumstances, the FTC likely anticipated their ban would be struck down in court. This situation raises an important question: why would the FTC implement a rule knowing its legality was unlikely to hold up?

The answer lies in the FTC's strategic use of the ban as a tool to achieve its broader goals. By triggering widespread media coverage of the ban’s announcement and subsequent decisions to strike down the ban, the FTC generated large-scale press attention to non-compete agreements in media outlets across the partisan spectrum, including the New York Times, CNN, and Fox News, potentially spurring legislative action [9].

While the FTC has not officially announced an intention to impose a ban, its pursuit of ceremonial prosecutions, such as the case against Prudential Security, reveals its aim to bring more attention to the issue. Similarly, its decision to release a description of the ban in January 2023, more than a year before its eventual implementation, further cements this intention [10].

Federal legislation remains the only meaningful path to comprehensively address non-competes, given the FTC's limited authority to regulate them. Given this, if the FTC truly seeks to limit the negative footprint of non-competes, legislative action is needed now.

No polls have tracked directly the impact of the FTC’s actions on public attitudes regarding non-competes, but some relevant data can be found in time-based polls. One Ipsos poll in January 2023 reported that two-thirds of people aware of the FTC’s proposed ban favored bans on noncompetes [11]. A poll in April 2024, after the ban was officially announced, found 59 percent of respondents supported the actions of the FTC [12]. Unfortunately, no polling data exists following the court's decision to strike down the rule. While this data does not prove causality, it does show a positive correlation between public awareness of the ban and support for action against anti-competitive non-compete agreements.

Critics argue that the FTC should have crafted a more legally defensible rule that could have survived in court. However, these critiques often overlook the FTC's minimal authority regarding substantive rulemaking on anti-competitive practices. Given the agency's lack of statutory authority in this domain, any meaningful ban that applied to the 30 million Americans subject to non-compete agreements would have likely faced the same legal fate as the FTC’s rule.

Alternatively, the FTC could have addressed non-competes case-by-case, targeting individual companies. However, this approach would be highly impractical. Many large corporations have hundreds of non-competes in place, and determining which agreements are uncompetitive and which are reasonable would require substantial resources that the FTC simply does not possess. Moreover, taking on such cases would involve a drawn-out legal battle against corporations with far greater resources than the agency. This approach would be slow, costly, and ultimately ineffective. Thus, broad federal legislation remains the most feasible way to limit non-competes' use.

Although it was eventually struck down, the FTC’s non-compete ban was crucial to raising awareness and provoking conversation about a severe and pressing issue. Although not fully within the scope of its power, the ban was a tactical maneuver to draw attention to the harm non-compete agreements cause and drive legislative appetite. Meaningful reform will depend on federal lawmakers stepping up to fight the overreach of non-compete agreements.

Bibliography

[1] “Ryan LLC v. Federal Trade Commission, No. 3:2024cv00986 - Document 211 (N.D. Tex. 2024),” Justia Law, October 8, 2024, https://law.justia.com/cases/federal/district-courts/texas/txndce/3:2024cv00986/389064/211/.

[2] Russell Beck, “A Brief History of Noncompete Regulation,” Fair Competition Law (blog), October 11, 2021, https://faircompetitionlaw.com/2021/10/11/a-brief-history-of-noncompete-regulation/.

[3] Natarajan Balasubramanian, Evan Starr, and Shotaro Yamaguchi, “Employment Restrictions on Resource Transferability and Value Appropriation from Employees,” SSRN Scholarly Paper (Rochester, NY: Social Science Research Network, May 16, 2024), https://doi.org/10.2139/ssrn.3814403.

[4] “Prudential Security, et al., In the Matter Of,” Federal Trade Commission, December 30, 2022, https://www.ftc.gov/legal-library/browse/cases-proceedings/2210026-prudential-security-et-al-matter.

[5] “Non_Compete_Contracts_Econimic_Effects_and_Policy_Implications_MAR2016.Pdf,” accessed October 7, 2024, https://home.treasury.gov/system/files/226/Non_Compete_Contracts_Econimic_Effects_and_Policy_Implications_MAR2016.pdf.

[6] “FTC Announces Rule Banning Noncompetes,” Federal Trade Commission, April 23, 2024, https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes.

[7] “Ryan LLC v. Federal Trade Commission, No. 3.”

[8] “Capricious,” LII / Legal Information Institute, accessed October 15, 2024, https://www.law.cornell.edu/wex/capricious.

[9] “FTC Bans Worker Noncompete Clauses - The New York Times,” accessed October 15, 2024, https://www.nytimes.com/2024/04/23/business/noncompete-clause-ban.html; Jeanne Sahadi, “FTC Finalizes Rule Banning Most Employers from Using Noncompete Clauses. But Legal Challenge Is Expected | CNN Business,” CNN, April 23, 2024, https://www.cnn.com/2024/04/23/success/ftc-bans-non-compete-clauses/index.html; “How US Workers Could Be Affected by Changes to ‘noncompete’ Agreements and Overtime Pay,” Text.Article, Associated Press (Fox News, April 24, 2024), https://www.foxnews.com/us/how-us-workers-affected-changes-noncompete-agreements-overtime-pay.

[10] “FTC Announces Rule Banning Noncompetes.”

[11] “Most Americans Support Banning Noncompete Agreements for Workers | Ipsos,” January 6, 2023, https://www.ipsos.com/en-us/news-polls/most-americans-support-banning-noncompete-agreements.

[12] “Majority of Americans Support FTC Ruling That Would Ban Non-Compete Agreements | Ipsos,” May 1, 2024, https://www.ipsos.com/en-us/majority-americans-support-ftc-ruling-would-ban-non-compete-agreements.