Consumer Law

FTC cites unfair competition law to justify proposed ban on noncompete agreements; will it hold up in court?

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The Federal Trade Commission has proposed a rule that would ban employers from imposing noncompete agreements on workers and independent contractors.

In a Jan. 5 announcement, the FTC said it has authority to act under the ban on unfair methods of competition in Section 5 of the Federal Trade Commission Act.

“Noncompetes harm competition in U.S. labor markets by blocking workers from pursuing better opportunities and by preventing employers from hiring the best available talent,” the FTC said in the announcement.

A fact sheet from the FTC says noncompete agreements bind an estimated one in five U.S. workers. The agreements prevent people from working for a competing employer after their employment ends.

The proposed rule would ban new noncompete agreements and require rescission of existing noncompete contracts. Generally, the rule would not ban other types of employment restrictions, unless they are so broad that they function as a noncompete agreement. The rule would also include an exemption for noncompete clauses between the seller and buyer of a business.

The FTC is seeking comment on the proposed rule, including on these topics:

    • Whether franchisees should be subject to the rule

    • Whether noncompetes for senior executives should be exempted from the rule or subject to a rebuttable presumption of unlawfulness

    • Whether low- and high-wage workers should be treated differently

The FTC’s power to adopt the law will likely be challenged in court, according to Bloomberg Law. During a press briefing, Lina Khan, chair of the FTC, cited a 1975 decision by the U.S. Court of Appeals for the District of Columbia Circuit, National Petroleum Refiners Association v. FTC, which held that the commission may issue rules related to unfair competition.

Richard Pierce, a professor at the George Washington University Law School, told Bloomberg Law that the decision is a weak justification.

“It’s highly unlikely that it would be upheld by the Supreme Court today,” Pierce said. “I continue to be extremely skeptical that FTC has power to use notice and comment rulemaking to define an unfair method of competition.”

Bloomberg Law also cited a statement by Sean Heather, a senior vice president at the U.S. Chamber of Commerce. Heather said the rule would not survive because “Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule.”

One obstacle is the “major questions” doctrine, which holds that courts should not defer to agency statutory interpretations on questions of “vast economic or political significance.”

“We could see a major-questions doctrine challenge arguing that whether noncompetes are good competition policy is something to be decided by Congress, not an agency,” said Catherine Fisk, a professor at the University of California at Berkeley School of Law, in an interview with Bloomberg Law.

Clifford Atlas, a principal at the law firm Jackson Lewis, told that the FTC was “swinging for the fences,” and there would “absolutely” be legal challenge to the rule. noted that legislatures “in a handful of states” have banned noncompete agreements, while 21 others have imposed limits on them.

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