FTC faces criticism of Non-Compete Clause Rule, prepares for legal challenges

It is not surprising that the FTC's Notice of Proposed Rulemaking for a Non-Compete Clause Rule, a sweeping ban on nearly all U.S. employer-worker non-compete agreements, has faced criticism since its issuance on January 5. The proposed Rule would immediately invalidate any contractual term between an employer and a worker that prevents the worker from seeking new employment or operating a business after the term of employment, and require employers to refrain from entering into new non-compete agreements and rescind existing ones by providing written notice to workers subject to such agreements. It also would supersede any less restrictive state law.

The FTC voted 3-1 in favor of the proposed Rule, with Commissioner Christine Wilson, the lone Republican commissioner who is stepping down on March 31, noting in her dissent that the Rule would be vulnerable to legal challenges. Perhaps in anticipation of those challenges, the FTC's Notice solicited feedback on several aspects of the Rule, including its broad application to all "workers" without distinction on the basis of seniority, skill or compensation. But it remains unclear whether or how the FTC will revise the Non-Compete Clause Rule before promulgating it.

Despite an ongoing public comment period that was recently extended until April 19, the FTC has held strong to its position that the Non-Compete Clause Rule is both defensible and enforceable in its current form. At a public forum hosted by the FTC on February 16, Commissioner Alvaro Bedoya confronted what he called the "misconception" that the proposed Rule portrays senior executives as weak and in need of protection. Commissioner Bedoya highlighted the proposed Rule's potential to create jobs through new business startups and improve exploitative conditions for workers at all seniority levels.

So far, business organizations appear to disagree. The U.S. Chamber of Commerce - which is already suing the FTC over its withholding of information about Commission voting and operations - issued a public statement and sent a letter to Congress setting out its objections to the Non-Compete Clause Rule, which it says will eradicate benefits of non-compete clauses, such as investment in employees, innovation and protection of intellectual property. The American Hospital Association also published a lengthy comment criticizing the proposed Rule's "one-size-fits-all" approach across industries, but especially in light of hospitals' and health systems' acute post-pandemic need to retain physicians. Substantial additional comments from business organizations and industry associations are expected before the close of the comment period next month.

These and other criticisms make clear that, if promulgated in its current form, the Non-Compete Clause Rule is certain to draw legal challenges. A threshold question likely to be presented by any such challenge is whether the FTC can make rules to regulate business practices it deems to be "unfair methods of competition." For its part, the FTC relies on two provisions of the FTC Act, from which it derives its authority: Section 5, which prohibits "unfair methods of competition" and allows the FTC to investigate and adjudicate violations of that prohibition, and Section 6(g), which gives the FTC the power to make rules and regulations for the purpose of carrying out the other provisions of the FTC Act. Challengers will point out that neither provision permits the FTC to make a rule prohibiting a particular unfair method of competition, which arguably suggests that Congress did not expressly authorize the FTC to do so.

The Non-Compete Clause Rule also may be challenged on the basis that it violates the major questions doctrine, a rule of statutory construction most recently articulated by Chief Justice Roberts in West Virginia v. EPA, 597 U.S. __ (2022). That doctrine requires that an agency have "clear Congressional authorization" for actions that represent a new or expansive use of the agency's power and would have a significant economic or political impact. Given the FTC's preliminary estimate that the Non-Compete Clause Rule would immediately invalidate 30 million non-compete agreements and increase wages by almost $300 billion annually, a court may well find that the major questions doctrine applies.

Even assuming the FTC has competition rulemaking authority, the Non-Compete Clause Rule may be challenged as an impermissible delegation of legislative authority under the non-delegation doctrine. Notably, Congress has considered multiple times, but never enacted, statutes that would have banned or restricted non-compete clauses in certain circumstances. A coalition of U.S. Senators and Representatives recently reintroduced one such bill. This legislative history may be used to argue that regulating non-compete agreements is the province of Congress, not the FTC.

Regardless of the bases for any legal challenge, the FTC is likely gearing up for battle. FTC Commissioner Rebecca Kelly Slaughter recently said that she expects to face lawsuits challenging the Non-Compete Clause Rule and the FTC "will be well prepared to argue why we think we are doing the right thing under the law and with the jurisprudence that we have."