The Federal Trade Commission's proposed rule banning noncompete clauses has resulted in more than 5,000 public comments and the resignation of an FTC commissioner.
The FTC proposed the noncompete rule last month, arguing that such a rule could increase employee wages by nearly $300 billion annually and expand career opportunities for nearly 30 million Americans. The noncompete rule would make it illegal for employers to enter into noncompete agreements or maintain existing noncompete agreements. The FTC's actions stem from an executive order issued by President Joe Biden in 2021 asking the commission to take action banning or limiting noncompete agreements.
The commission voted 3-1 to publish the notice of proposed rulemaking, with Commissioner Christine Wilson voting against. Wilson, the only Republican on the commission, announced plans to resign in an op-ed published Tuesday in The Wall Street Journal, naming the commission's advancement of the proposed noncompete rulemaking as one example of FTC Chair Lina Khan's "disregard for the rule of law and due process."
"This proposed rule defies the Supreme Court's decision in West Virginia v. EPA, which held that an agency can't claim 'to discover in a long-extant statute an unheralded power representing a transformative expansion in its regulatory authority.'"
Thousands of comments on the proposed rule both praise and caution against it. The FTC will hold a public hearing Thursday to hear from stakeholders as well as feature speakers who have been subject to noncompete clauses. Comments on the proposed rule are due by March 20.
Comments vary on noncompete rule
In the public comments available on the proposed rule, Mary Henkel wrote that she strongly supports the rule.
"In 40-odd years of law practice, I was retained to both enforce and defend against alleged violations of noncompete clauses," Henkel wrote. "I rejoiced when it was my job to defend the employee. … Employers routinely used the burden of litigation to intimidate employees, or seek revenge for the employee's perceived personal disloyalty, rather than to protect any legitimate employer interest."
Isabel Haynes, another commenter, said she supports the rule because it's "unconscionable and unethical" for companies to require noncompete agreements from low-paid workers.
"I work in the tech industry in fairly ordinary development positions, and if I had been subject to noncompete clauses I would not have been able to switch jobs when I did, and my career would have stalled, hostage to my employer," Haynes wrote.
On the other hand, some commenters believe banning noncompete agreements would create additional risk, especially for small businesses.
In a comment on the proposed rule, Jacob Bynum said reasonable rules restricting the use of noncompete clauses might be prudent but should be left to the court systems within individual states to determine, rather than the FTC.
"Noncompete agreements provide small businesses protection from larger competitors and dubious speculators," Jacob Bynum wrote. "They provide important protection for businesses, like mine, whose equipment requires millions of dollars to purchase enormous amounts of risk, including personal guarantees, and a constant influx of capital to maintain and train."
Proposed rule will likely trigger lawsuits
The U.S. Chamber of Commerce has already indicated that should the proposed rule be finalized, it will challenge it, calling it "blatantly unlawful." Currently, 47 states permit noncompete agreements.
"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, noncompete agreements are an important tool in fostering innovation and preserving competition," said Sean Heather, senior vice president for international regulatory affairs and antitrust at the U.S. Chamber of Commerce, in a statement.
Indeed, "everyone is going to sue everyone," said Nicole Saharsky, co-head of law firm Mayer Brown's Supreme Court and Appellate Practice, during a Mayer Brown webinar on the proposed noncompete rule.
Nicole SaharskyCo-head, Supreme Court and Appellate Practice, Mayer Brown
"That's going to happen, assuming that a rule gets finalized. And it sure seems like the agency is heading in that direction," Saharsky said.
Should the rule be finalized, she said some of the potential legal arguments organizations like the Chamber of Commerce might lean on include the FTC going beyond its statutory authority granted by Congress.
The FTC is relying on Section 6G of the FTC Act for its authority to make new rules and regulations. But Saharsky said there is "history that questions whether Section 6G can be used for a substantive rulemaking on competition."
She added that legal arguments could also focus on the proposed rule being a potential constitutional problem. The Supreme Court, especially the more conservative justices, have been harsh in their views on federal agencies wielding too much power, she said. The rule could also be challenged as arbitrary, capricious and not reasonable.
"It seems like one way or another, this is going to be a pretty tricky situation for the FTC to be navigating in court," she said.
Makenzie Holland is a news writer covering big tech and federal regulation. Prior to joining TechTarget, she was a general reporter for the Wilmington StarNews and a crime and education reporter at the Wabash Plain Dealer.