On February 16, 2023, the FTC hosted a public forum for the purpose of examining the proposed rule banning non-compete agreements. The agenda included, among other things, opening remarks from Chair Kahn, an overview of the rulemaking process by the FTC’s general counsel, a panel discussion, and comments from the public. A recording of the forum is available here.
In her preliminary remarks, Chair Kahn claimed that the proposed rule would increase workers’ earnings significantly and non-competes are an unfair method of competition. She claimed that the FTC has deep expertise on non-competes based upon enforcement, analysis, and addressing public comments. During the explanatory session, FTC staff explained that the comment period ends March 20th and encouraged the submission of additional comments. Staff also explained the functional test in the proposed rule and indicated that the ban applies to any agreement that functionally operates as a non-compete, which could be an overly broad non-disclosure agreement or training repayment agreement. FTC staff stated that the proposed rule does not apply to “run of the mill non-disclosures.”
The panel discussion included six individuals, four of whom supported the wholesale ban of non-competes and two of which spoke in opposition. The comments in support of the FTC’s proposed ban were made by a president of a logistics business, the CEO of a real estate investment company, a doctor, and a condominium building maintenance engineer. The two voices in opposition included a former CHRO speaking on behalf of the HR Policy Association and in-house counsel at a multi-national corporation in charge of employment matters.
The voices in opposition to the ban pointed out that non-competes are already subject to rules of reasonableness in states where allowed and that the agreements provide an irreplaceable tool to prevent senior managers, executives and employees with access to trade secrets and strategic plans from immediately competing. The opposition suggested that the FTC focus on curbing abuses; not pursuing a wholesale ban. A voice in opposition said that non-competes, when used responsibly, can protect a company’s trade secrets by allowing for a reasonable “cooling off” period. Another said that it is “unrealistic to expect that upper-level employees who would go to work for competitors would quickly forget what they learned from their previous employers.” She also challenged whether the exception for the sale of business was drafted correctly to appropriately define substantial interest holders.
Proponents of the ban cited the alleged oppressiveness of non-competes when used with new, inexperienced employees, low wage workers, the necessity of worker mobility, and – specific to the doctor – the impact to patient care, creation of physician shortages, and higher health care costs. Proponents also claimed non-competes were immoral, rampant, analogous to the “drug cartel” controlling labor, and depress working conditions.
Following the panel and reactions of Commissioner Kelly Slaughter echoing some of the comments of the proponents of the ban and Chair Kahn, the FTC opened up the forum for public comment.
As would be expected, public comment on the proposed rule was all across the board but the business community was well represented and vocal and slightly outnumbered those in favor of a ban.
The business community came out strong against the proposed rule across a diverse industry sector. Several industry associations and other representatives from the business community spoke against the proposed rule, noting, among other concerns, the overbreadth of the ban, which, as one speaker noted, makes no distinction between executives earning millions of dollars a year and the hypothetical “cashier at a burger place” that President Biden spoke about during the State of the Union address.
Representatives of the business community also raised concerns about FTC’s lack of jurisdiction to make rules on non-compete clauses. Given that the proposed rule would overturn decades (if not centuries) of caselaw on non-competes, many speakers urged the FTC to delay implementation of the final rule.
Other representatives of the business community raised other points:
- Several requested that the FTC extend the comment period sixty days from March 20th and not rush the process;
- Non-competes protect intellectual property, trade secrets, and protect investment in skills and training;
- Issues concerning non-competes should be addressed by federal or state legislatures;
- Any rule should not apply retroactively as business transactions have already occurred, been paid for and vested contract rights should not be interfered with;
- The FTC’s “functional test” is vague and unclear and will lead to unintended consequences and the improper challenge of legitimate agreements;
- The proposed 25% interest to qualify as a substantial interest holder for purposes of the sale of business exception to the ban is too high and impractical;
- Trade secret law is not sufficient and only protects after a breach has occurred and doesn’t fully protect a company from the harm;
- State courts and state legislature already protect workers from unfair non-competes;
- The proposed rule would adversely impact long term investment, hurt investment, innovation, and job growth
Other speakers, including representatives of labor unions, public policy and the plaintiff-side labor and employment bar, came out strongly in favor of the proposed ban. A handful of speakers related stories about their individual experiences in being sued by former employers seeking to enforce non-competes. Not surprisingly, such testimony about individual cases generally did not include any details about the temporal, geographic, or scope limitations of the agreements they signed – in other words, the precise factual considerations that courts currently consider when determining whether a non-compete is reasonable. Instead, proponents of the FTC’s proposed rule, like the FTC itself, tended to speak in broad and sweeping terms about the “intimidation” and “unfairness” of non-competes generally, without addressing why non-competes are per se unreasonable in all circumstances.
FTC Commissioner Alvaro Bedoya closed the forum with brief remarks. If Commissioner Bedoya’s remarks are an indication of where the commission is going, the public comments appear not to have moved the needle at all and served largely as a backdrop for the FTC to press ahead with its Notice of Proposed Rulemaking (“NPRM”). He did not acknowledge the numerous business organizations and trade associations that spoke out against the rule or their request for a sixty day extension on the current commentary deadline in the public comment session.
In his closing remarks, Bedoyo appeared to dismiss arguments that the NPRM should be more narrowly tailored to protect vulnerable low-wage workers (like President Biden’s hypothetical fast food worker). Bedoyo noted that non-competes are “not just a problem for blue-collar workers,” pointing to testimony of medical professionals who spoke in favor of the NPRM during the public comment. And in apparent response to seemingly-obvious comments from the business community that senior executives should be treated differently than low-wage workers in regulation of non-competes, Bedoyo doubled down on the FTC’s approach. Bedoyo argued that the NPRM was “very carefully drafted” to ban non-competes for all workers not because the FTC believes that senior executives are subject to coercion and exploitation but because, in the FTC’s view, “non-competes for senior executives harm competition” and impede the creation of jobs. He also challenged the notion that employees can have their day in court if their non-competes are unfair and instead believes that employees capitulate to unfair agreements. There was nothing at the hearing indicating that the FTC is backing away from moving forward with a rule or questioning its authority.
Unless the FTC extends the period for public comment, the comment period will end on March 20, 2023. Public comments can be posted on the FTC’s website through March 20.