Non-compete rulemaking faces legal hurdles but could help Biden politically

30 January 2023 00:00 by Claude Marx

Federal Trade Commission

The Federal Trade Commission’s rulemaking on non-compete agreements faces legal obstacles but could reap political and public policy benefits even if it’s struck down in court.

Though the final rule hasn’t been released, critics are already arguing the agency can’t do it in light of last year’s Supreme Court decision limiting the powers of independent agencies and the narrow scope of the FTC’s rulemaking authority on competition.

The agency is seeking comments on its proposed rule to ban non-compete clauses, which restrict workers from moving to competing employers — outright, using its authority to tackle “unfair methods of competition” under Section 5 of the FTC Act. Comments are due March 20.

A key issue is whether the agency can go after what it sees as anticompetitive practices by rulemaking, rather than by litigation.

Former FTC Chairman William Kovacic said there is precedent for the agency’s move, and it “isn’t asserting authority out of thin air.” He pointed to a 1973 decision by the US Court of Appeals for the District of Columbia Circuit in National Petroleum Refiners Association v. FTC.

In that case, the court ruled: “We believe that, while the legislative history of Section 5 and Section 6(g) is ambiguous, it certainly does not compel the conclusion that the Commission was not meant to exercise the power to make substantive rules with binding effect in Section 5(a) adjudications.”

But given the jurisprudence since then and the strong conservative presence on the Supreme Court and many lower courts, the agency faces long odds.

“It’s not hopeless, it’s simply doubtful,” Kovacic told FTCWatch. The FTC’s powers could be threatened by the Supreme Court’s 6-3 decision last year in West Virginia v. EPA that there must be a “clear congressional authorization” before a federal agency determines any major question of policy. This is part of what courts and others have referred to as the major questions doctrine.

Critics of the proposed rule are using that as part of the basis of their argument, in addition to raising concerns about its merits.

“In its more than 100-year history, the FTC has never enforced a rule to regulate competition, and Congress never intended the agency to have that power,” US Chamber of Commerce President Suzanne Clark said at a Jan. 12 news conference.

Marissa Mastroianni, an employment lawyer at the New Jersey firm Cole Schotz, said eliminating non-compete agreements goes too far because they’re often justified to protect trade secrets and intellectual property.

“There’s a place for non-competes if they are limited and in accordance with state law,” she shared with FTCWatch. “They are appropriate when the company has spent a lot of time training people, or they have a special niche.”

She added they’re generally not enforceable when an employee is laid off or fired without cause.

The FTC’s rulemaking was previewed in 2021 when President Joe Biden issued a wide-ranging executive order on ways to increase competition. He asked the FTC to act on banning non-compete agreements. Because the FTC is an independent agency, he can’t order it to take action like other executive bodies.

Biden justified his request by citing data that at least one in three businesses requires some workers to sign a non-compete agreement. Biden also cited a study that one in five workers without a college education is subject to non-compete agreements.

If the FTC loses its all-but-inevitable court challenge, the effort could still help Biden politically, especially as he prepares for what could be a difficult reelection campaign next year.

It will help keep the loyalty of labor unions. While the number of unionized workers has declined and Democrats have struggled with rank-and-file working-class voters, labor unions continue to provide support for the party in key states.

The National Employment Law Project, a labor union-supported advocacy organization, said in a statement: “Banning non-competes for all workers will reduce labor monopsony, increase worker power, and bring the United States further in step with international rules and norms for employment contracts.”

Besides, the FTC’s rulemaking could lay the groundwork for future congressional action if the Democrats again assume control of both chambers. And it could prompt some state legislatures with Democratic majorities to change their laws.

Kovacic noted in 1964 the FTC began rulemaking on placing warnings on cigarette packages advising of the health risks. It issued a final rule requiring that cigarette makers disclose “clearly and prominently” that “cigarette smoking is dangerous to one’s health and may cause death from cancer and other diseases.”

However, at the request of lawmakers, the agency delayed the implementation date and the next year Congress passed the Cigarette Labeling and Advertising Act of 1965. The law weakened some of the language in the FTC rule and mandated that the packages state “Caution: Cigarette Smoking May Be Hazardous to Your Health.”

“The rule failed but the rulemaking initiative was a catalyst for a major change in public health policy,” Kovacic said.

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