Jurisprudence

The Ban on Noncompete Clauses Will Face a Fierce Legal Battle. Its Architects Are Prepared.

FTC Chair Lina Khan has revived a powerful tool to protect workers against anti-competitive abuse.

Lina Khan testified before the Senate.
Lina Khan, chair of the Federal Trade Commission. Saul Loeb/Getty Images

The Federal Trade Commission issued a proposed rule on Thursday that lays the groundwork for a nationwide ban on noncompete clauses in employment contracts. The introduction of the rule is a huge development on its own. Employers use noncompete clauses to depress wages and lock in workers for no good reason. It’s estimated that at least 30 million workers in the U.S. are subject to noncompete clauses that restrict their ability to move to a competing employer or start a competing business. Workers are unable to leverage a better job offer into higher wages. The FTC estimates that a ban on noncompetes would increase earnings over $250 billion annually.

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Beyond the rule’s direct beneficial impact on workers, it has crucial implications for the agency’s long fallow rulemaking authority. The legal underpinnings of the noncompete clause rule rely on rulemaking authority granted by Congress but neglected by the FTC until now. The proposal could pave a path for the FTC to issue rules without being hamstrung, or “mossified,” by the procedural gauntlet known as Magnuson-Moss, or “Mag-Moss.”

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The proposed noncompete clause rule is refreshingly direct. Noncompete clauses are contractual terms under which one party agrees not to work against the other. They are built into employment contracts and bar workers from taking a job with a firm deemed in competition with the employer and from starting a competing business. The new rule does not include special carveouts or exceptions common on the state level. It also avoids the problem of employers threatening the use of unenforceable noncompetes on workers who may not know the clauses are illegal in their state. And importantly, the proposed rule affirmatively states that “non-compete clauses increase racial and gender wage gaps by disproportionately reducing the wages of women and non-white workers.” The rule actively requires employers to rescind existing noncompete clauses and provide notice to their workers. In short, the agency put forth a rule that addresses the problem head-on without prevaricating or kowtowing to corporate America.

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With a mountain of evidence in hand, the FTC made the determination that noncompete clauses are an unfair method of competition. That determination is a big deal, and not just for protecting workers. To understand why, it’s important to understand that while Congress passed laws to give the FTC significant rulemaking authority, the agency hasn’t ever really used it in an impactful way. By one estimate, the agency has only issued one substantive antitrust rule in the last 50 years.

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For almost all its history, the FTC has been reticent—or unwilling—to use the broad authority granted to it by Congress in Section 5 of the FTC Act. Section 5 grants the FTC the power to prohibit practices that it determines are an “unfair method of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.” That necessarily wide mandate has never been fully used to protect the public through rulemaking or standalone enforcement.

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Business-friendly agency officials have attempted to wall off the FTC’s rulemaking authority for fear of an active regulator using its power to outlaw unfair practices and ding corporate profits. In 2015, the FTC issued a policy statement preemptively constraining the agency’s use of Section 5. Courts have been skeptical about the use of Section 5 on its own despite a strong line of precedent backing the agency’s use of extensive Section 5 powers.

Following a federal appeals court’s 1973 decision that the FTC had the statutory authorization to issue trade regulation rules, Congress passed a series of bills that imposed new rulemaking requirements on the FTC known as the Mag-Moss procedures. With Section 5 and competition rulemaking on the shelf, the FTC’s only procedural choice for national regulatory standards was Mag-Moss using authority found elsewhere in the FTC Act.

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Mag-Moss makes standard informal rulemaking under the Administrative Procedure Act look like the essence of proficiency and speed. The Government Accountability Office estimated that agencies take about four years on average to finalize a rule under the APA. Prior to Mag-Moss, it took the FTC an average of about three years to issue consumer protection rules. After the procedures went into effect, the average shot up to almost six years for rules that made it to finalization. The FTC ended up abandoning rules related to food advertising, nutritional labels, and hearing aids—some after a decade of staff work.

Mag-Moss is an industry lobbyist’s dream. If you’re looking to slow down a rule that will hurt your client, there’s no better way than endless procedure. In effect, Mag-Moss is red tape. The procedures prevent essential consumer protections from coming to fruition by imposing years of onerous notices, hearings, oral presentations, cross-examinations, and the like. The delays not only add time, but provide a host of opportunities for business interests to water down the rule’s substance. They also give courts ample opportunity to invalidate an FTC rule by claiming that the agency made a mistake at some point in the long and complex process. More procedural requirements mean more chances for a judge to flyspeck some aspect of rulemaking.

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Industry already has an asymmetrical advantage over public interest groups when it comes to shaping regulations. It is difficult to imagine the noncompetes rule surviving a full-scale assault by corporate lobbyists under Mag-Moss.

Thankfully, it’s a new day at the FTC under the current leadership of Chair Lina Khan, a Joe Biden appointee who’s backed up by commissioners Rebecca Slaughter and Alvaro Bedoya. Khan’s FTC acted to rescind the 2015 guidance that clipped Section 5 authority. The new guidance, issued last year, lays out an extremely strong case for the use of Section 5 authority in a wide range of contexts, including competition rulemaking.

The commission also voted in 2021 to update its Mag-Moss rulemaking procedures so that it can act quickly and turn the page on “decades of self-imposed red tape.” The FTC’s moves are building blocks to give the agency a path to responsive regulatory action. The noncompetes rule and associated enforcement actions are significant uses of the agency’s consumer protection power under Section 5. Competition rules, like the ban on noncompetes, only need to undergo standard APA procedures, putting the FTC on par with most other agencies.

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Looming over all the good news is the entrenched hostility of the courts to an aggressive and powerful FTC. The conservative legal movement has made great strides in building antiregulatory thought and doctrine into case law and the wider legal academy. This term, the U.S. Supreme Court will decide a case that may open the door for more constitutional challenges to the agency’s structure.

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The inevitable legal challenges to the rule will also summon the business world’s favorite antiregulatory tool: the major questions doctrine, which the Supreme Court conjured up in 2022’s West Virginia v. EPA to strike down a regulation on the grounds that Congress did not specifically authorize a policy with such major political and economic significance. The U.S. Chamber of Commerce has already said it doesn’t believe the rule is within the FTC’s statutory authority. It’s not hard to see a conservative judge deeming the use of noncompetes so significant across the economy that exact congressional authorization is required, even though Congress has made clear that it is the FTC’s duty to crack down on unfair practices like noncompete clauses. Yet the major questions doctrine itself is novel and leaves a host of unanswered questions. Not all courts will agree to substitute their view so easily for that of Congress based on such an unusual legal theory. But there’s no doubt corporate America will fight tooth and nail to stop, or indefinitely pause, the noncompetes rule and what it sees as the greater threat: a reinvigorated Section 5 authority at the FTC.

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It’s tempting to say that a conservative Supreme Court majority will quickly use the major questions doctrine to block the noncompetes ban. Doing so, however, would require an embarrassing stretch of the already thin premise. The FTC’s statutory authority to police a clearly unfair method of competition is more direct than the EPA’s authority in West Virginia v. EPA, the recent major questions decision. Were the court to take such a bold step, the reaction might finally wake up Congress.

The proposed noncompetes rule has incredible potential. It is competition rulemaking, based on Section 5 authority, that will not be subject to onerous Mag-Moss procedures. Once finalized, it will help millions of Americans stuck in hostile, abusive, or just plain bad work environments. The rule will raise wages and allow for real competition in the labor market. Ultimately, it could open the door for the FTC to meet its mandate to protect consumers and competition, without being dragged down by weaponized procedure.

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