Jake Parentis
Associate Editor
Loyola University Chicago School of Law, JD 2024
On January 5, 2023, the Federal Trade Commission (FTC) published a proposed rule that would categorically ban noncompete agreements between employers and a broad class of “workers,” including independent contractors, volunteers, apprentices, and even sole proprietors who provide services to clients. By pushing for markedly extensive change, the FTC has played its strongest hand. Consequently, the federal government should anticipate that an abundance of litigation will be initiated by the corporate sector’s major players, who will fight for middle-ground legislation.
The presidential push for a noncompete ban
The FTC’s latest proposal should come as no surprise given the federal government’s long standing contempt for noncompete agreements. Dating back to 2016, the Obama administration released a fact sheet announcing steps the White House was taking to curtail abusive and unfair noncompete agreements. President Obama’s call-to-action declared that noncompete agreements were an institutional factor that curb wages and prevents entrepreneurship. As labor-related issues are often significantly impacted by political fortunes, the Trump administration largely ignored the issue. But on July 9, 2021, President Biden signed an Executive Order on Promoting Competition in the American Economy. The order directed federal agencies to conduct a sweeping array of activities designed to monitor and regulate business practices that the Biden administration asserted to have potential adverse effects on open competition. In particular, President Biden directed the FTC to address noncompete agreements that “unduly limit workers’ ability to change jobs.”
Moreover, on January 4, 2023, the day before announcing its most recent proposed ban, the FTC issued a press release detailing its crackdown on noncompete restrictions and took legal action against three companies, requiring them to “drop noncompete restrictions that they imposed on thousands of workers.” In one complaint, the FTC ordered two of the largest U.S. food, glass, and beverage container manufacturers to stop imposing noncompete restrictions on its workers. According to the FTC, these companies dominated the market share in this sector.
For over a decade, Ardagh Group S.A. (Ardagh), for example, imposed noncompete restrictions on nearly 800 employees, regardless of the extent of their positions, banning them for two years after leaving Ardagh from directly or indirectly performing “the same or substantially similar services” for any business in the U.S., Canada, or Mexico that was “involved with or that supports the sale, design, development, manufacture, or production of glass containers” in competition with Ardagh. In another complaint against Prudential Security, Inc., executives exploited their superior bargaining power against low-wage security guards and threatened to charge a ludicrous $100,000 penalty for alleged violations of their noncompete clause. In both cases, the FTC took issue with the broad-sweeping and restrictive noncompetes.
Potential implications of an enacted noncompete ban
According to NPR, the proposed rule is subject to a public comment period for 60 days and would not become effective until some months thereafter following publication. If the current form of the rule goes into effect, the rule would ban all noncompete agreements in any way related to any American worker, effectively federalizing state contractual agreements across the nation that restrict and limit noncompetes.
Moreover, the proposed rule extends beyond mere employees, even including bans on these clauses as they relate to independent contracting and sole proprietorship. Strikingly, the rule would not even ‘grandfather in’ existing noncompetes. Instead, employers would have to rescind all noncompete provisions and inform workers, in writing, via letter, email, or text message that the agreement is nullified and will not be enforced. Employers who fail to notify workers would face significant federal penalties.
In theory, the FTC’s proposal does not target non-solicitation agreements that prevent employees from poaching their former co-workers or customers after leaving the employer. Accordingly, concerned business executives and owners can perhaps take solace in those protections. However, the FTC’s ban could apply if those provisions were broad enough to prohibit a worker from working in the same field. Essentially, if a non-solicitation functions as a non-compete, but simply carries a different name, those are illegal also.
Anticipated legal and constitutional challenges
Litigation has begun and more is imminent. A number of leading business organizations have and will continue to vigorously challenge this proposed rule. The U.S. Chamber of Commerce plans to initiate a lawsuit against the FTC over the ban. Chamber CEO Suzanne Clark has expressed concern over the FTC potentially overstepping its bounds, commenting that “[i]f the FTC can regulate noncompete agreements without authorization from Congress, there is no aspect of employment or commercial arrangements that it doesn’t have the authority to regulate or ban arbitrarily.” Moreover, in a recent press release, the Chamber described the proposal as “blatantly unlawful” and ignorant of established state laws where “noncompetes are an important tool in fostering innovation and preserving competition.”
On the surface, the FTC’s stated policy drivers make sense. The agency seeks to not only protect lower paid workers who lack leverage to negotiate fair terms, but also prevent highly-paid senior executives from abusing their power. Opponents of the ban may argue that even in the face of unfair bargaining power, employees retain the autonomy to walk away at any moment. However, many employees have no choice but to accept a job, even if they fear the implications of the noncompete they reluctantly ‘agree’ to sign. Yet, despite the FTC’s benevolent intentions, the proposed ban is aggressive and unlikely to be enacted as it stands. Proponents, however, should remain optimistic for a more middle-ground version to eventually take form.
States such as Illinois, for example, have successfully limited, rather than outright banned, the use of non-competes, allowing them only for employees above certain significant income thresholds. The FTC’s proposed ban will more realistically resemble that approach. Ultimately, any change must begin somewhere, and the FTC’s strong proposal has at least got the ball rolling. Mass litigation is inevitable, but there is ample reason for hope.