FTC Hears Mixed Views at Public Forum on Proposed Rule to Ban Non-Compete Agreements

On February 16, 2023 the Federal Trade Commission (“FTC”) hosted a virtual public forum on the agency’s proposed rule that would ban virtually all non-compete agreements between employers and employees, previously reported on here. The forum, which included a discussion by a panel of six individuals who have experience with or have been affected by non-compete agreements, as well as an open public comment opportunity, reflected surprisingly mixed views on whether the FTC’s proposed rule should be adopted.

Background

In January, the FTC issued a notice of a proposed rule that would categorically deem virtually all employer non-compete agreements with workers an unfair method of competition that violates Section 5 of the FTC Act. The proposed rule would prohibit companies from using these provisions, require employers to rescind any existing agreements, and mandate that companies provide notice to current and former employees about the ban. The rule adopts a “functional test” to determine if a particular contract term is a “non-compete,” and states that broad non-disclosure agreements and similar covenants could amount to de facto non-compete agreements that would be also banned. 

Notably, the proposed rule covers nearly all types of “workers,” including paid or unpaid independent contractors, externs, interns, volunteers, apprentices, and sole proprietors. But the proposed rule would not apply to franchise agreements or most non-profit entities (i.e., entities that do not operate for their own profit or the profit of their members). The proposed rule also has a narrow exception for certain non-competes that are entered into as part of the sale of a business.

Since the FTC proposed the rule, the agency has received over 5,000 comments, many of which support the proposed rule, as well as a request from a large contingent of business associations to extend the comment period and other organizations that oppose the proposed rule. The comment period is set to expire on March 20, 2023.

The Forum

The FTC forum’s moderated panel consisted of an eclectic group of speakers, including a logistics business owner from Chattanooga; a representative from the HR Policy Association; a cancer specialist doctor from north Florida; the founder of an investment group focused on local capital; the general counsel of a global defense, security, and aerospace company; and a residential caretaker who was subject to a non-compete agreement. The panel speakers represented a wide range of viewpoints, from complete support for the proposed blanket ban, to strong disagreement with the proposed rule.

Interestingly, the panel largely agreed that certain types of non-compete agreement abuses need to be addressed, such as the use of non-competes for fast food workers. However, that is where the consensus ended.

The general counsel of a global defense firm and the representative from the HR Policy Association expressed the need to be able to continue to use reasonable and responsible non-competes for high-level executives and employees with sensitive knowledge. Other participants disagreed and pointed to other alternatives to address company concerns, such as non-disclosure agreements, non-solicitation agreements, trade secret laws, and overall better compensation packages.

Just as with the panel, the public-comment session was filled with conflicting opinions from over 40 workers, business associations, and employers. Generally, individual employees and executives; advocates for doctors, nurses, veterinarians, and teachers; consumer protection groups; and labor and employment lawyers supported the proposed rule as drafted. Several of these commenters even urged the Commission to expand the proposed rule to include other contract terms, such as an outright ban on training repayment agreement provisions, so-called “TRAPs.”

Business advocates, including the US Chamber of Commerce and associations that represent application developers, investment groups, national retailers, propane providers, small businesses, franchisors, wholesalers, electrical contractors, and more, opposed the proposed rule as written. Many of these participants argued that the FTC does not have the legal authority to issue the proposed rule, that the proposed rule is overly broad, and/or that non-compete rulemaking should be left to the states. Most of these participants also asked the FTC to extend the comment period and take more time to consider input before finalizing the rule.

Notably, several franchisee representatives asked for franchisees to be included in the definition of “workers.” Consequently, while they support banning non-competes, they said that they could not support the proposed rule as currently written.

In closing, Commissioner Bedoya provided three important takeaways from the public forum. First, he said there is a misconception that non-competes are just a problem for “blue collar” workers. He stressed that two highly sophisticated doctors explained how non-competes adversely affected their ability to provide care to patients, and harmed their families by restricting physicians from practicing for another employer in the state or region where they live.

Second, Commissioner Bedoya challenged the idea that the proposed rule portrays senior executives as weak market actors. He clarified that the proposed rule does not assert that senior executives are subject to coercion, but rather that non-competes for senior executives harm competitive conditions and impede the creation of new businesses.

Finally, he pushed back on the notion that employees can fight these agreements in court. Commissioner Bedoya said he was struck by comments from individuals who explained how fighting a non-compete in court forced them to get a second job or go bankrupt.

Next Steps

As the Commission continues to consider the public comments and reactions, interested parties should consider whether to submit a public comment by the current March 20, 2023 deadline.

At the end of the public comment period, the Commission will consider whether to promulgate the rule as written, revise the rule, or terminate the proposed rulemaking. It is highly unlikely that the FTC will abandon the proposed rulemaking given remarks by FTC leadership, as well as President Biden’s remarks in his State of the Union address attacking non-compete agreements and supporting a ban.

Assuming a final version of the proposed rule is issued, it will surely be challenged in court. Already, the U.S. Chamber of Commerce has said it will challenge the FTC’s authority to issue the rule, calling the proposal “blatantly unlawful.”

Still, in light of the heighted agency scrutiny and employee awareness of this issue—even without the rule being finalized—companies with non-compete and other restrictive agreements with their employees may benefit from reviewing and reevaluating their employment contracts.

The FTC’s public forum comes on the heels of the bipartisan reintroduction of the “Workforce Mobility Act of 2023” by Senators Christopher Murphy (D) and Todd Young (R), which also seeks to ban non-compete agreements.

Companies that wish to review their existing non-compete agreements or to submit a public comment in response to the FTC’s proposed rule can contact Crowell’s antitrust, labor, or trade secret teams, including the below contacts for this alert.