Understanding the FTC’s Vote on Prohibiting Noncompete Clauses

The Federal Trade Commission will hold the most important meeting of this administration at 2 PM EDT Tuesday April 23, 2024. Commissioners will decide whether to issue a rule that declares most noncompete clauses in employment contracts unfair methods of competition. Kelley Drye published my backgrounder on the proposal here. The deliberation and decision will be streamed live from www​.FTC​.gov. We will be watching and posting updates on LinkedIn and (Twitter)X.

It has been fifty years since the FTC issued a competition rule, and then only as an adjunct to a conventional consumer-protection measure. The lone rule required octane disclosures on gas pumps. Since then, FTC officials disclaimed competition rulemaking authority and the agency aligned its competition policy with the larger body of antitrust law.

The current FTC reversed course on both fronts. It announced its intention to distance its competition policy from the rule of reason commonly applied in antitrust. And it criticized case-by-case enforcement as inadequate to deter competitive harms. A noncompete rule would be a climactic culmination of these ambitions.

Will the FTC succeed, and what would it mean? Clues will come in the course of the meeting. Here are some of the questions the Commission will have to answer persuasively if expects a rule to survive in the courts:

Does the Commission have the authority to promulgate competition rules?

The Supreme Court could consider this a Major Question, subject to the analysis of West Virginia v. EPA. For a preview of how that analysis might apply, see my article, Regulating Beyond the Rule of Reason, and our post, The FTC’s Proposal to Ban Noncompetes is on Shaky Legal Ground.

Did the Commission apply a proper definition of anticompetitive practices?

In the analysis supporting the proposal, the FTC noted that the weight of antitrust authority on noncompetes found them to be reasonable restraints. The analysis did not mention the cases from the FTC’s early years, when it held that soliciting or hiring employees from competitors was an unfair method of competition (cited at note 215 here).

Did the Commission adduce adequate evidence of competitive harm?

Academic studies (some collected here) generally find the aggregate evidence inconclusive, including one of the studies on which the Commission relied.

Would the rule adequately protect proprietary information?

A principal purpose of noncompete clauses is to prevent companies from poaching intellectual property and proprietary information from competitors. Some of the consequences of banning the clauses are outlined in Proposed FTC Noncompete Ban Throws Out Good With Bad.

Did the Commission reasonably exempt valuable and harmless noncompete clauses?

Some clauses would be exempt, for example those facilitating business sales and between franchisors and franchisees, which the analysis supporting the proposal considered worthwhile. Kelley Drye’s Corporate Group summarized them in The FTC Proposes Ban on Non-Competes: The Implications for M&A Transactions, and our Employment and Labor Group looked at a future without noncompetes in FTC Proposed Ban of Noncompetes: Practical Guidance For Employers.

This proceeding has the potential to transform employer-employee relations throughout the United States. But its reverberations will be more profound. As noted in my first piece on the proposal, this is the first of a host of competition rules the FTC contemplates. Others in various stages include surveillance, the right to repair, pay-for-delay pharmaceutical agreements, unfair competition in online marketplaces, occupational licensing, real-estate listing and brokerage, and unspecified industry-specific practices. The fate of the noncompete rule will either launch a new era of industrial regulation or realign the FTC with antitrust norms.