The Federal Trade Commission recently ended the public comment period on its proposed rule that would ban the use of noncompete agreements nationwide, with 26,814 individuals and organizations weighing in on the proposal.
After the close of comments on April 19, Texas-based Labor and employment lawyers shared their insights with The Lawbook on the possible rule change, how it could alter the litigation landscape in the state and the legal challenges that are likely to follow should the rule go into effect as written.
In announcing the proposed rule, the FTC said the “widespread and often exploitative practice” of imposing noncompete agreements “suppresses wages, hampers innovation, and blocks entrepreneurs from stating new businesses.”
“By stopping this practice, the agency estimates that the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans,” the FTC said.
Most of the comments received fell into two camps, said Chris Hanslik, chairman of Boyar Miller.
“It’s unions, consumer advocates and congressional Democrats in favor and urging the FTC to move forward; and then you have the Chamber of Commerce and other entities on the pro-business side arguing the FTC should not move forward,” he said. “It’s not surprising that’s where these arguments are falling, and I think if the FTC does move forward, you can anticipate litigation over that.”
Houston attorney Zach Wolfe, a solo practitioner, estimates that 90 percent of his law practice involves noncompete and trade secret matters. But he doesn’t think he’ll have trouble staying busy should the ban go into effect.
“I think any time the law changes it creates the potential for more litigation, not less, because everyone is trying to figure out how much did it change,” he said. “I can guarantee there will be challenges, and if I had to guess I would say the 6-3 conservative majority on the Supreme Court is not going to like this at all — it’s a sweeping nationwide rule by the Biden administration that preempts the laws of 50 states on, basically, a contract law issue.”
“I’m not an expert in constitutional law, but I don’t expect it will hold up,” he said.
Wolfe also pushed back on what he characterized as the popular narrative that broad enforcement of noncompete agreements is “a pro-business position as opposed to a pro-employee position.”
“I handle these all the time, and a typical noncompete dispute isn’t really employer versus employee, it’s employer No. 1 versus employer No. 2,” he said. “So, it’s business versus business … it has gotten to the point where almost any time a company hires somebody who previously worked for a competitor, there’s likely to be at least some kind of demand letter and possible a lawsuit. And that, to me, does not seem like a pro-business approach.”
One of the comments opposed to the plan came from Littler Mendelson’s Workplace Policy Institute, which “facilitates the employer community’s engagement in legislative and regulatory developments that affect their workplaces and business strategies,” according to the firm.
Littler Mendelson is the largest labor and employment law firm in the world.
“Put bluntly, in a single document, the commission proposes to scrap literally hundreds of years of settled case law, and invalidate millions of contracts employers have entered into with their employees,” the WPI told the FTC. “As set forth below, the FTC did so based on faulty reasoning and without legal support, foremost its lack of statutory authority to issue rules relating to methods of unfair competition.”
The WPI comment also notes that less than 24 hours before announcing the proposed rule, the FTC announced on Jan. 4 that it had reached consent agreements with three employers who were alleged to have noncompete agreements with their employees that ran afoul of the FTC Act, “the first such cases in the agency’s 100-plus year history.”
“The proposed rule is fatally flawed as a matter of fact, law, and policy. The commission should abandon an ill-conceived effort to upset centuries of precedent under federal and state law, and it should withdraw the proposed rule,” WPI pleaded.
Yelp, the website that hosts crowd-sourced business and restaurant reviews, filed a comment in support of the proposed ban. The California-based company noted that the Golden State has banned noncompete clauses for more than 150 years “and economically flourished during that time.”
“Yelp was recently stymied in its attempt to hire an employee, subject to another company’s form noncompete clause, under the current inconsistent patchwork of states’ laws,” Yelp wrote. “Yelp believes its experience is emblematic of a larger problem, especially given the recent rise of remote work in the United States since the start of the Covid-19 pandemic: Different rules in different states for different employees create harmful uncertainty and inconsistency.”
On the other side of the debate, agriculture equipment company Kinze Manufacturing argued that doing away with noncompetes would be tantamount to declaring “open season on small- to medium-sized businesses.”
“Noncompete agreements ensure the survival of small- to medium-sized companies competing with large national and international companies — especially in tight labor markets like the one we are currently experiencing,” Kinze wrote. “Large companies will gladly ‘purchase’ entire engineering/IT/marketing departments (or other key employees) of smaller companies in order to effectively destroy competition and gain market share.”
The U.S. Chamber of Commerce submitted a comment telling the FTC it was “strongly opposed” to the proposed rule.
“As perhaps acknowledged by the commission’s request for comments on narrower alternatives, the commission’s categorical ban would sweep in millions of noncompete agreements that pose no harm to competition, and in fact benefit the U.S. business community, economy, workers, and consumers,” the Chamber wrote.
That sampling of comments received don’t show the full scope of opposition to the rule, said Houston labor and employment attorney Michael Twomey of Kane Russell Coleman Logan.
“I paid attention to the Texas-based groups [submitting comments] such as the Texas Hospital Association and the Independent Bankers Association of Texas,” he said. “They all, as you would think, think this rule needs to be withdrawn. It’s business as usual as far as where the line has been drawn — no real surprises.”
Twomey said he’s followed the proposal and comments closely but doesn’t believe the rule, as written, will go into effect “in any meaningful way” because of the likely-to-come legal challenges to the FTC’s authority to enact such a rule.
The three consent decrees the FTC publicized the day before announcing the proposed ban can provide some insight into why the regulatory agency is concerned with the use of noncompetes and how they may look to enact reforms, he said.
“Really what they were focusing on [in those cases] were lower-level employees, paid hourly,” who were subject to restrictive noncompete agreements that applied to a large geographic region, he said. “It was viewed to be anticompetitive because then you can lock these people into lower wages. It’s not like an engineer who can move easily and find a job in another part of the state.”
“I do think that’s evidence of where they’re headed,” he said. “The FTC kind of floated alternatives to the broad ban. Maybe we only ban these for hourly employees, or those making less than $15 an hour.”