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The FTC Abolishes Non-Compete Clauses


Jonathan F. Harris (@LawProfJHarris) is Associate Professor of Law at LMU Loyola Law School Los Angeles, a senior fellow of the Student Borrower Protection Center, and a grantee of the University of California Student Loan Law Initiative.

Sandeep Vaheesan (@sandeepvaheesan) is the legal director at the Open Markets Institute, and author of Democracy in Power: A History of Electrification in the United States.

On Tuesday, the Federal Trade Commission enacted one of the most significant regulations of the Biden years: a comprehensive ban on non-compete clauses. The final rule prohibits new non-compete clauses for all workers, regardless of line of work or income, and makes existing non-competes null and void for everyone except senior executives. A neurologist making $1 million a year and a gig worker making less than the federal minimum wage will both be covered when the rule goes into effect later this year.

This outcome is the product of years of reporting, research, and advocacy, including a 2019 rulemaking petition to the FTC by the Open Markets Institute, where one of us works. It is also the result of more than 26,000 public comments. As Chair Lina Khan noted while unveiling the rule, more than 25,000 of these comments supported the ban, and many described how non-compete clauses had kept them stuck in abusive jobs or prevented them from pursuing better opportunities. By freeing workers from these restrictive agreements, the rule is expected to increase worker earnings by an average of $524 per year and lead to the creation of an additional 8,500 new businesses per year.

In this brief post, we comment on two important aspects of the new rule and its fate. First, we explain how the FTC, in the final rule, plugged a gap in its earlier proposed rule by barring a work-around that employers and their counsel have been developing—compelling workers to pay large sums of money if they leave. This critical decision promises to make the rule significantly more effective. Second, we address two theories the FTC will confront in defending the rule against legal challenges: whether it has the power to write competition rules and whether the non-compete ban implicates the so-called major questions doctrine.

Stay-or-Pay Contracts

With conventional non-compete clauses facing greater legal restrictions, employers have increasingly turned to a functionally similar alternative. They use training repayment agreement provisions (TRAPs) to require a worker to compensate them for on-the-job training, whatever its merits, in the event the worker leaves before a stipulated period. TRAPs are one example of a growing list of “stay-or-pay” contracts; employees understandably are reluctant to leave if that means incurring a significant debt or paying their boss thousands of dollars out of pocket.

Stay-or-pay contracts function as non-compete clauses by locking workers in place. Indeed, they can be worse than traditional non-competes because workers must pay to leave, even if they don’t take a job with a “competitor.” In a recent case, one judge compared laboring under these contracts to indentured servitude and added that, fortunately, the Thirteenth Amendment abolished such arrangements. Moreover, research by J.J. Prescott, Stewart Schwab, and Evan Starr documents the rising use of TRAPs, with as many as one in 12 workers in the U.S. bound by this type of coercive contract.

Consider, for example, a California nurse who was compelled to pay thousands of dollars when she left her job at a hospital owned by healthcare giant HCA. After resigning due to mental and physical exhaustion, she was hit with a bill for $4,000, purportedly to compensate the hospital for on-the-job training. She is hardly alone: TRAPs have become a favored tool for hospitals seeking to retain workers, with close to half of surveyed new graduate nurses laboring under such agreements, some of which require nurses to pay as much as $15,000 when they depart. TRAPs are especially prominent among young workers between the ages of 25 and 45, resulting in diminished earnings over the span of their careers. For these reasons, one nursing school dean has called for hospitals to improve working conditions to make workers want to stay, rather than turning to punitive TRAPs.

The FTC, in its final rule, defined non-compete broadly, prohibiting both conventional non-compete clauses and functional non-compete clauses. This is good policy. Employers do not need TRAPs or other functional non-compete clauses to protect themselves. In the case of nurses at HCA hospitals, it is unclear what, if any, value they were receiving from the training. They had already completed their education and obtained the credentials required to be a registered nurse. As Brynne O’Neal of National Nurses United told NBC News, “[E]mployers are passing on to nurses the cost of basic on the job training that’s required for any RN position at any hospital, and then they’re using these contracts to lock nurses into their jobs or risk this devastating financial penalty.”

Further, employers already have assorted tools to safeguard proprietary business information. They can use copyright, patent, and trade secret law, as well as tailored non-solicitation contracts. They do not need non-competes and similar restraints on worker mobility. As law professor Viva Moffat has written, non-competes are “the wrong tool for the job” because they broadly lock workers in place with the ostensible purpose of safeguarding firm knowledge but do not protect against covert disclosures of valuable information.

Fundamentally, employers can retain staff by treating them with respect and rewarding good work and long tenure with raises, bonuses, and promotions. The head of the Center for Human Resources at the Wharton School of Business put the choice starkly: “One view about how you retain people is you be nicer to your people. The other is you try to lock them up.”

The Coming Attacks

The FTC now must defend its rule in court. On Tuesday, Republican commissioners Andrew Ferguson and Melissa Holyoak voted against the rule and offered several reasons for why the FTC should not ban non-compete clauses through regulation. We respond to two of these theories, each of which concerns the underlying authority of the FTC.

First, does the FTC have the authority to write rules prohibiting unfair methods of competition? According to statutory text, which should be paramount in construing the FTC’s regulatory authority, the answer is “yes.” In Section 6(g) of the FTC Act, Congress gave the FTC authority to “to make rules and regulations for the purpose of carrying out the provisions of [the FTC Act].” This language is “clear as it is unlimited,” wrote the D.C. Circuit in its National Petroleum Refiners decision in 1973. While this decision has been assailed by industry-friendly academics, the D.C. Circuit’s approach to statutory interpretation is harmonious with the dominant method today. As Justice Neil Gorsuch, a leading textualist jurist, wrote in the 2020 Bostock decision, “[w]hen the express terms of a statute give us one answer and extratextual considerations suggest another, it’s no contest. Only the written word is the law . . . . ”

Second, does the non-compete clause rule implicate the major questions doctrine? In other words, is the FTC regulating a major question without clear congressional authorization? The topic is unavoidably subjective, but history suggests that the answer is “no.” As Richard Revesz and Max Sarinsky explained recently, similar antecedents can help weaken the force of major questions arguments against agency actions today.

The supportive historical precedents here are three-fold. First, non-compete clauses are unquestionably governed by the federal antitrust laws, though those laws have generally concluded that non-compete clauses should be evaluated under the rule of reason, as opposed to being “presumptive” or “per se” illegal. And the FTC, which is not constrained by judicial constructions of the Sherman Act in interpreting the FTC Act, published reams of evidence, including that provided by the public, and analysis on the harms and benefits of non-compete clauses before concluding that a per se prohibition is the appropriate rule.

Second, the pre-Sherman Act common law prohibited restrictions on practicing one’s occupation. Indeed, such restrictions were the original “restraint of trade.” In a 1949 opinion concerning baseball’s reserve clause, Judge Learned Hand wrote that the antitrust laws “certainly forbid all restraints of trade which were unlawful at common-law, and one of the oldest and best established of these is a contract which unreasonably forbids any one to practice his calling.”

Third, non-compete clauses are a type of vertical restraint: a contract that governs the relationship between two parties in a buyer-seller relationship. The FTC has targeted improper uses of vertical restraints from its earliest days. In its first decade, it challenged resale price maintenance by Beech-Nut and exclusive dealing by Stanley Booking. More recently, last September, it sued Amazon for restricting market sellers from discounting their goods on non-Amazon sites and using non-Amazon logistics services. In the interim—a century-plus period—the FTC was hardly dormant in challenging these contracts. It brought enforcement actions against brewers, pipe fitting makers, movie advertisers, pharmaceutical companies, and shoe manufacturers, among others, for employing vertical restraints in violation of the FTC Act or other antitrust statutes.

The FTC deserves great credit for its strong final rule. It abolishes non-competes and functionally similar contracts. Now the FTC will defend its worthy regulation in court and try to get the rule to stick. Given the composition of the federal judiciary, the FTC cannot be certain, or even very confident, of success. But we believe it has strong rebuttals to at least two of the most likely theories that will be offered for why the rule should be struck down. Whether judges are faithful to their professed principles and past decisions is to be seen.