As our colleagues have previously reported in this blog, on January 5, 2023, the Federal Trade Commission issued a notice of proposed rulemaking (NPRM) concerning its unprecedented effort to ban all non-compete clauses with workers and to preempt state law on the issue. The NPRM followed just one day after the FTC announced that it had reached a consent settlement with three companies for alleged unfair trade practices by imposing overly burdensome non-compete agreements.

Not surprisingly, the NPRM has sparked a surge of commentary in the legal and business communities and immediately courted controversy. The sole Republican member of the FTC, Commissioner Christine S. Wilson, issued a vigorous dissent, arguing:

The proposed Non-Compete Clause Rule represents a radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a non-compete clause is unreasonable in duration and scope, given the business justification for the restriction. The Commission undertakes this radical departure despite what appears at this time to be a lack of clear evidence to support the proposed rule. What little enforcement experience the agency has with employee non-compete provisions is very recent (within the last week) and fails to demonstrate harm to consumers and competition.

Commissioner Wilson also noted that “the Commission’s competition rulemaking authority itself certainly will be challenged” and that the proposed rule is vulnerable to meritorious challenges on constitutional grounds, including both the Non-Delegation Doctrine and the Major Questions Doctrine. Commissioner Wilson also questioned the economic analysis underpinning the NPRM, noting that feedback from prior workshops regarding potential agency action included testimony that “economic literature is still far from reaching a scientific standard for concluding that non-compete agreements are bad for overall welfare” and that trade-offs for restrictive covenants are likely “context-specific.” (Dissenting Statement at 7 (internal punctuation omitted).)

Likewise, within hours of the FTC issuing the NPRM, the US Chamber of Commerce issued a statement decrying the FTC’s overreach. According to Sean Heather, US Chamber Senior Vice President for International Regulatory Affairs and Antitrust, “Today’s actions by the Federal Trade Commission to outright ban noncompete clauses in all employer contracts is blatantly unlawful. Since the agency’s creation over 100 years ago, Congress has never delegated the FTC anything close to the authority it would need to promulgate such a competition rule. The Chamber is confident that this unlawful action will not stand.”

The US Chamber further noted that, “Attempting to ban noncompete clauses in all employment circumstances overturns well-established state laws which have long governed their use and ignores the fact that, when appropriately used, noncompete agreements are an important tool in fostering innovation and preserving competition.”

The NPRM kicks off a notice and comment period through which the FTC solicits comment on the proposed rule before a final rule goes into effect. Given the controversy that the FTC’s proposed rulemaking has already generated, we expect that the NPRM will garner significant comment over the next two months and expect that the final version of the rule will differ significantly from the current version of the proposed rule.

But regardless of the form that the final rule takes, does the FTC even have the authority to promulgate rules on worker non-competes? That is the million dollar question—or, to use the FTC’s own estimate of the economic impact of its proposed rule, the $296 billion question.  As Commissioner Wilson’s dissent suggests, the NPRM will almost certainly face legal challenges in the months ahead, and courts will face the task of answering that precise question.

And while ultimately this question will be settled by the courts, we think there is a significantly strong probability that the answer will be “no.”

The FTC bases its rulemaking authority on Section 5 of the Federal Trade Commission Act, which provides:

The Commission is hereby empowered and directed to prevent persons, partnerships, or corporations . .. from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.

15 U.S.C. § 45(2).

The FTC acknowledges, however, that it has never before used its rulemaking authority to regulate employee non-compete agreements, which it claims will have an economic impact of $296 billion, and its attempt to completely preempt state law on the basis of this statutory authority is surprising.

This would seem to present an issue squarely within the Major Questions Doctrine. Just last year, the Supreme Court invalidated the EPA’s renewable energy clean air regulations and OSHA’s vaccine mandate for private sector workers on the basis of the Major Questions Doctrine, which recognizes that, when delegating rulemaking authority to agencies on questions of vast economic and political significance, “Congress does not usually ‘hide elephants in mouseholes.’”[1]

The same reasoning should apply here. Non-compete agreements have existed for centuries, and, like contracts generally, their enforceability is governed by state law. They were not uncommon in 1914, when Congress passed the FTC Act, and the common law rule on non-compete agreements has existed since before the American Revolution. Indeed, enforcement of non-competes has been a feature of English common law since the early 18th century.

Moreover, non-competes have been a matter of political significance over the past several years, with numerous states enacting new laws restricting use of non-competes with low-wage workers. As we have previously reported, in the past few years, Congress itself has considered, but failed to enact, numerous bills that would have banned or placed limitations on use of non-competes with workers. See VA Hiring Enhancement Act (H.R.3401) (to void non-competes for physicians going to work at VA hospitals); Workforce Mobility Act of 2021 (H.R.1367) (to ban employee non-competes); Workforce Mobility Act of 2021(S.483) (same); Freedom To Compete Act of 2022 (S.2375) (to ban non-competes for workers who are not exempt under the Fair Labor Standards Act); Restoring Workers’ Rights Act of 2022 (H.R. 8755) (same); FTC Whistleblower Act of 2021 (H.R.6093) (to void non-competes for whistleblowers to the FTC); Employment Freedom for All Act (H.R.5851) (to void non-competes for any employee who is fired for not complying with their employer’s COVID-19 vaccine mandate).

If Congress had wanted to invalidate all worker non-compete agreements and completely preempt state law or delegate that authority to the FTC, it would have said so explicitly. Instead, after a century in hibernation, the FTC is just now learning that Congress supposedly intended to displace state law and gave the FTC powers to pronounce on employee contracts that have always been matters for the states for over 200 years and a feature in common law for more than 300 years.

Moreover, even if Congress had delegated to the FTC authority to engage in this rulemaking, such rule-making arguably would be an impermissible delegation of authority under the Non-Delegation Doctrine. Article I of the Constitution provides that “[a]ll legislative Powers herein granted shall be vested in a Congress of the United States.” § 1. Based on that provision, the Supreme Court has long held that Congress may not transfer to another branch “powers which are strictly and exclusively legislative.” Congress may confer substantial discretion on executive agencies to implement and enforce the laws, but the Court must “lay down by legislative act an intelligible principle to which the person or body authorized to [exercise that authority] is directed to conform.”[2] Even if Congress had intended to delegate to the FTC the power to make rules regarding employee non-competes, the vague reference to “unfair methods of competition” in Section 5 of the FTC Act is arguably far too broad to meet this standard.

The proposed rule will be the subject of vigorous opposition and, if enacted, numerous legal challenges. We will continue to monitor developments on this topic and will report on court challenges as they are filed. In the meantime, employers should take a close look at their existing non-compete agreements to ensure that they are compliant with the ever-evolving requirements of state law, which, for the time being, continues to govern worker non-compete agreements. And as both the majority and dissent on the FTC have done, we also encourage all who are potentially impacted by this proposed rule to provide their comments to the FTC.  Please contact a Seyfarth trade secrets lawyer if you are interested in submitting a comment to the FTC.

[1] See West Virginia v. Environmental Protection Agency, 142 S. Ct. 2587, 2622 (2022) (striking down EPA Affordable Clean Energy rules); National Federation of Independent Business v. Department of Labor, Occupational Safety and Health Administration, 142 S. Ct. 661, 669 (U.S. 2022) (striking down OSHA emergency temporary standard mandating COVID-19 vaccine or testing for private sector workers).

[2] See Gundy v. United States, 139 S.Ct. 2116, 2123 (U.S., 2019) (citing Mistretta v. United States, 488 U.S. 361, 372 (1989)).