“[T]here is a simple economic rationale for the contract: noncompetes encourage both parties to invest in the employee-employer relationship, just like marriage contracts encourage spouses to invest in each other.” – Brian Albrecht, ICLE
Federal Trade Commission (FTC) Chair Lina Khan announced yesterday that there will be a Special Open Commission Meeting held on April 23 to vote on whether to issue a final version of the January 2023 proposed rule that would ban employers from using noncompete clauses for their employees.
“The proposed final rule being considered would generally prevent most employers from using noncompete clauses,” said the Open Commission Meeting’s event description. “As the Notice of Proposed Rulemaking explained, noncompetes are a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses,” it added.
The proposed rule change was open for public comment between January 2023 and April 19, 2023. As of April 17, 2024, the Regulations.gov website indicated that 26,813 comments had been received and 20,697 posted. The FTC said in further justifying the proposed rule that banning noncompetes could increase wages by $300 billion a year, as firms would be encouraged to do more to keep their workers.
But there has been opposition to the draft proposal among the business community, including the U.S. Chamber of Commerce, which said in April 2023 that “such a proposal fails to recognize that noncompete agreements can serve vital procompetitive business and individual interests—such as protecting investments in research and development, promoting workforce training, and reducing free-riding—that cannot be adequately protected through other mechanisms such as trade-secret suits or nondisclosure agreements.”
Brian Albrecht, Chief Economist of the International Center for Law & Economics (ICLE), said in an article for Truth on the Market that, while he recognizes the potential for abusive practices associated with noncompetes, he does not support a complete ban. “[T]here is a simple economic rationale for the contract: noncompetes encourage both parties to invest in the employee-employer relationship, just like marriage contracts encourage spouses to invest in each other,” Albrecht wrote. And in official comments submitted on the proposal, ICLE said the need for a complete ban is not supported by the evidence or the Commission’s experience.
In its announcement yesterday, the FTC said that if the Commission votes to authorize public disclosure of the final rule, the Office of Policy Planning will then give a staff presentation on the details of the final rule, after which a vote on whether to issue the final rule will be taken.
In an article authored for IPWatchdog on the proposed rule in February 2023, John Schroeder of Stinson LLP said that the FTC has downplayed the importance of noncompetes for trade secret protection due to alternatives available under trade secret law. But Schroeder said that those protections “are not without limitations.”
“Whereas non-compete clauses can preclude a former employee’s opportunity to disseminate confidential or proprietary information, trade secret enforcement through civil litigation often only provides after-the-fact consequences once harm has already been done,” Schroeder wrote.
Renowned trade secret expert James Pooley said in another article on the proposed rule that the Commission’s justification for the proposal based on California’s experience, which already bars almost all noncompetes, is based on unproven theories and also fails to acknowledge some of the downsides. “The FTC justifies much of its logic and confidence on California’s experience; but the causal connection between that state’s restriction of noncompetes and the success of Silicon Valley has never been proven,” Pooley wrote.
“One thing we are sure of: California leads the nation in trade secret litigation. That should come as no surprise, since its businesses have no other tool to protect their confidential information. It’s fair to question whether a surge in lawsuits in the rest of the country would be acceptable, or whether that outcome was even considered at the FTC.”
The proposal also goes even further than California, Pooley added. Whereas California “permits noncompetes for someone who sells their interest in a business,” the FTC proposal “would only allow this ‘goodwill’ exception for a ‘substantial’ owner, which it defines as holding at least 25% of the company.”
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