The Federal Trade Commission may have banned most forms of noncompete agreements between employers and employees, but it’s unclear whether the ruling will survive a volley of legal challenges that are sure to come.
The FTC says nearly 1 in 5 Americans are subject to a noncompete clause, which often prevents workers from taking a new job with a competitor or starting a new business in the same line of work as the former employer.
Set to take effect in August, the rule squeaked by on a 3-2 vote in April, exempting nonprofit organizations and existing noncompetes for so-called “senior executives,” defined as those in policymaking positions with annual salaries above $154,161.
The final rule also included a carveout for financial institutions, common transportation carriers, air carriers, and individuals or businesses subject to the Packers and Stockyards Act, which regulates meatpacking, livestock and poultry dealers.
The FTC said 25,000 of the more than 26,000 comments it received during the public comment period supported the ban. Arguing that noncompete agreements “keep wages low, suppress new ideas and rob the American economy of dynamism,” supporters said the change will result in a $300 billion increase in salaries for American workers, lower health care costs, lead to a 2.7% annual bump in new businesses, and between 17,000 and 29,000 more patents filed within a decade.
But some legal observers question whether the FTC had the authority to exercise, citing the “major questions doctrine,” a constitutional interpretation that suggests federal regulatory agencies don’t have the power to make “major economic or political changes.”
When Providence attorney and state Rep. Brian C. Newberry, R-North Smithfield, got wind of the ruling, he said he reacted with one question: “Are you kidding me?
“We have this thing called Congress that is supposed to pass legislation about these types of things,” he said. “And that doesn’t account for the question over whether [the ban] can apply to all agreements. Because it doesn’t affect interstate commerce if you are talking about an employee and employer within a 10-mile radius. So, I don’t think Congress has the authority, either.”
Newberry says there are situations where noncompete agreements make sense.
“If you train someone as a dentist, you don’t want them stealing all of your clients and moving down the street,” he said. “Companies aren’t going to train and hire people if they are afraid [that the person is] going to take their business from them. That’s part of why you have a noncompete. But you can’t issue a blanket rule.”
Matthew H. Parker, a partner at Whelan Corrente & Flanders LLP in Providence, says that while noncompete agreements have been overused, he agrees the FTC decree was an administrative “overreach.”
“They can scare people into remaining in jobs where they’re not really happy or they could be earning more elsewhere,” he said. “But if you are CEO of my Fortune 500 company and I’m going to pay a year of severance if I fire you, I can’t require you to not compete during that year?
“They have been at the board [of directors] table and then go to work for your biggest competitor. It’s [not] going to be hard for them to [take advantage] of that secret information.”
Parker says it’s difficult to predict the outcome of any legal challenges, but politics may play a role if the matter reaches the highest court.
“We have a pretty conservative Supreme Court [that is] not going to look favorably on the administration engaging in what is effectively legislative action through rulemaking,” he said.
Even if the rule is eventually struck down, Rhode Island supporters of a ban may have a backstop in the form of legislation before the General Assembly.
The Senate recently passed a bill filed by Sen. Matthew L. LaMountain, D-Warwick, to ban noncompete clauses statewide. A House companion version is in limbo.
In written testimony to the House Labor Committee, the Rhode Island Business Coalition said a statewide ban would outlaw a practice that can be “mutually beneficial” to employers and employees.
“To ban them completely would be detrimental and could stifle economic development in our state,” the coalition said. “When an employee leaves, taking proprietary information to a competitor, the co-workers left behind suffer if the business loses customers … the co-workers left behind lose salaries or jobs.”
Lisa P. Tomasso, senior vice president of the Hospital Association of Rhode Island, told the committee that noncompetes “are essential tools, particularly at the executive level, for maintaining a competitive edge in today’s health care economy,” and argued it was “premature and potentially disruptive to enact state-level legislation that could conflict with any forthcoming federal regulations or guidelines.”
While FTC projections tout future benefits from the ban, Parker acknowledges that there are already examples where restricting noncompete agreements has been beneficial, citing California’s ban.
“Much of the economic development you have seen in Silicon Valley and the tech sector is due to the free movement of people from company to company without noncompetes getting in the way,” Parker said. “But having a rule act as a blunt instrument may be going too far. So we’ll have to wait and see.”
