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FTC's 'vague' rule to ban non-competes faces legal hurdles

The U.S. Federal Trade Commission’s move to outlaw employment agreements that condition workers’ jobs on their promise to steer clear of work for competing firms is expected to face challenges that could block or narrow the measure.

On Thursday, the agency published a notice in the Federal Register of a proposed rule that, if adopted, would ban all non-compete clauses for all types of workers, including employees, independent contractors, and interns. As written, the federal rule would supersede state laws that currently govern non-competes and would apply retroactively, invalidating existing agreements.

Public sentiment has been trending against non-competes, leading some companies to abandon the practice, especially for rank-and-file workers. However, business and employment litigation attorneys say that a broadly conceived ban, like the one proposed by the FTC, is bound to face political pushback and possibly legal pushback, as well.

“I don't think that rule as proposed is going to stand only because it is so broad, so vague, so general,” Peter Glennon, a business and employment attorney, told Yahoo Finance. “I perceive this proposed initial rule as a framework that they're hoping people will help them shape to be a little more focused.”

Signage is seen at the Federal Trade Commission headquarters in Washington, D.C., U.S., August 29, 2020. REUTERS/Andrew Kelly
Signage is seen at the Federal Trade Commission headquarters in Washington, D.C., U.S., August 29, 2020. REUTERS/Andrew Kelly (Andrew Kelly / reuters)

The proposed rule does carve out exceptions to allow businesses to maintain some non-competes – such as when a business owner stays on as an employee after selling their firm to a new owner or when an employer pays expenses to train a new hire.

Still, Glennon and other employment experts say the proposal may run contrary to Constitutional law.

For one, they say the FTC, part of the executive branch of the U.S. government, may be violating its authority under the separation of powers doctrine, which empowers only Congress to create laws.

Second, they say the rule may infringe on Article I of the Constitution, which protects the rights of individuals to enter into contracts and outlaws Congress and the states from passing ex post facto laws, or those that punish actions retroactively.

“The critical thing here is whether the FTC has the authority to make this rule,” Roger Feicht, an employment litigation attorney, told Yahoo Finance. And a separate question, he said, is whether the FTC has legal authority to invalidate past non-competes and force employers to rescind them going backward.

“These are contracts that have already been negotiated,” Feicht said, noting that high-level managers commonly agree to stick with a company in exchange for benefits like stock options, retention bonuses, and other long-term incentives.

“What happens in that scenario where those benefits have been paid or partially paid, or where those stock options have vested?" Feicht said. "Does the employee have to return them because they’ll no longer be governed by their agreement?”

Federal Trade Commission seal is seen at a news conference to announce that Facebook Inc has agreed to a settlement of allegations it mishandled user privacy at FTC Headquarters in Washington, U.S., July 24, 2019. REUTERS/Yuri Gripas
Federal Trade Commission seal is seen at a news conference to announce that Facebook Inc has agreed to a settlement of allegations it mishandled user privacy at FTC Headquarters in Washington, U.S., July 24, 2019. REUTERS/Yuri Gripas (Yuri Gripas / Reuters)

The proposed rule doesn’t address those questions, though the FTC could address them in its final rule. For now, the public has 30 initial days to submit comments on the proposal. The Commission will then undertake another review and then decide whether it should make the proposed orders final or take other action.

Glennon adds that under the rule proposal, businesses may continue to impose confidentiality and non-solicitation agreements on their workers. Confidentiality agreements have historically overlapped in part with non-compete agreements, helping companies to protect their intellectual property and trade secrets.

“This affects every industry,” Glennon said.

Feicht predicts trade groups and state attorneys general will lead the opposition rather than individual businesses, since businesses may want to avoid the public perception that they’re opposed to more bargaining power for workers.

In a statement responding to the proposal, the U.S. Chamber of Commerce characterized the ban as unlawful.

“Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule,” the organization wrote. “Attempting to ban non-compete clauses in all employment circumstances overturns well-established state laws, which have long governed their use and ignores the fact that, when appropriately used, non-compete agreements are an important tool in fostering innovation and preserving competition.”

The FTC estimates that 30 million U.S. workers are currently subject to non-compete agreements.

In a statement, the agency’s chair Lina Khan said: "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.”

Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.

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