The FTC Wants To Outlaw Noncompete Clauses, but Does It Have the Authority?
The Federal Trade Commission (FTC) last week proposed a near-total ban on noncompete clauses for employees and contractors, calling them an “unfair method of competition.” The rule would prohibit employers from enforcing existing noncompete clauses and making them a condition of future employment. If it can survive legal challenges, the FTC’s ban on noncompetes would have a massive impact on the rights of employers and workers.
The noncompete clause usually sets a time or geographical limit within which an employee is barred from working for her employer’s competitors or starting her own competing business. While there is broad agreement that noncompetes have been abused by employers, they also serve to protect proprietary data and incentivize companies to train their workers. In many contexts, noncompetes foster a mutually beneficial exchange between firms and workers. For instance, a worker who contractually agrees not to leave for a competitor in the same region may in turn receive skills training at his company he couldn’t otherwise obtain.
“If noncompetes are banned outright…the effect will be less information-sharing within the company,” George Mason University economist Tyler Cowen wrote Tuesday in Bloomberg. “New workers in particular, who have not demonstrated their long-term loyalty, will have a hard time getting access to information and getting ahead.”
The FTC, however, portrays noncompetes as anti-competitive measures with no redeeming traits. Eschewing incremental reform, the agency has sprung straight to considering an outright ban that would go so far as to nullify existing noncompete agreements (with an exception for certain individuals attempting to sell a business).
While reasonable people can and do disagree about the merits of noncompete contracts, the FTC’s announcement makes no mention of the fact that most states already regulate noncompete clauses and employees can generally sue to escape unreasonable ones. Indeed, there are colorable arguments for regulating some noncompetes, particularly those for entry-level positions. In 2016, for instance, multiple state attorneys general forced sandwich chain Jimmy John’s to settle over clauses imposed on low-wage employees, despite there being no risk of spilling proprietary secrets. More deviously, one report fr
Article from Reason.com