The Federal Trade Commission published a proposal rule on January 5 to ban nationwide non-compete agreements. It cited that they are in violation of Section 5 Federal Trade Commission Act. We sat down to talk with Martin Schmelkin (an employment law partner at Schulte Roth & Zabel) about the rule’s impact and the time it is open for comments.
Schmelkin states that “I believe we’re still a long way from this rule being applied.” “There will be significant comment that comes to the FTC so that the proposed rule will not be the final, published one.” I believe there will be litigation about this rule.
Schmelkin says that the proposed rule falls outside the mandate of the FTC under the non-delegation doctrine. He states, “This is within the purview” of Congress. “This is not something four commissioners could propose and implement nationally. It was actually three, as it was a vote of 3-1.
FTC Commissioner Christine S. Wilson voted against the rule. She issued a dissenting opinion, in which she criticizes its substance as “a radical departure form hundreds of years worth of legal precedent that employs an fact-specific inquiry into the whether a noncompete clause is unreasonable.” Additionally, she believes that the Commissions competition rulemaking authority will be challenged.
Lina M. Khan, FTC Chair, stated that noncompetes can be illegal in different contexts and for different reasons. For example, noncompetes used by employers to bind low-wage employees may be coercive or unfair, while noncompetes used to bind senior executives are not. The proposal states that employers’ use noncompetes to undermine competition in markets is harmful to workers and should be prohibited.
According the FTC banning noncompetes would “increase wages [by nearly $300 billion per annum] and expand career opportunities to 30 million Americans,” according to Elizabeth Wilkins, Director of the Office of Policy Planning. She stated that “research has shown that employers’ use of “noncompetes” to restrict workers’ mobility significantly suppresses worker’s wages, even when a state law prohibits them from being enforced.
Although it is unlikely that this rule will be published in its entirety and could be subject to court oversight, Schmelkin believes state and local legislators can use the rule to start a dialogue on restrictive covenants and non-compete agreements.
Three states currently ban non-compete agreements: Oklahoma, North Dakota, and California. A dozen other states have also implemented restrictions on non-compete agreements, such as salary thresholds.
Schmelkin states that “Since January 5th, I’ve spent a lot time with clients who were worried when this rule was published.” Does this mean that employers cannot have non-competes anymore with their employees?” This is a preliminary answer that we must continue to monitor. A prudent employer will examine their non-compete clauses and other restrictive covenants to determine if they are reasonable and enforceable.
Schmelkin says that there is still a lot to be done before we can know the final rules. “But, it is clear that this is a major focus of the FTC’s current administration.”
FTC Proposed a Ban on Noncompetes Compels Discussion originally appeared on Attorney At Law Magazine.