Insight into the FTC’s Proposed Final Rule Potentially Banning Non-Competes: Live Blogging Event | Seyfarth Shaw LLP
Welcome, readers. We are at a pivotal juncture in the realm of non-compete law. Today, we will be providing real-time coverage of a consequential Federal Trade Commission (FTC) meeting. This is not just an ordinary meeting; it’s a crucial dialogue on non-compete agreements, with an anticipated announcement of a final rule that could potentially ban most non-competes with workers.
This is a significant topic that has ignited considerable debate, and the outcome could have substantial implications for businesses and workers. Whether you’re a legal professional, a business leader, or simply someone interested in the intersection of law and business, our live blog will offer you timely updates and comprehensive analysis. Bookmark this page, refresh for updates, and join us as we delve into the intricate world of non-competes. Your engagement and insights are valuable as we navigate this complex issue.
Let’s get rolling.
Your live commentators today are myself, Robert Milligan, editor of the blog and co-chair of our Trade Secrets, Computer Fraud, and Non-Compete practice, and Dawn Mertineit, co-editor of the blog and Trade Secrets/Non-Compete partner.
With this live blog, we’ll hit the big developments and discuss what they mean.
Robert: We are eagerly anticipating today’s FTC video conference!
Dawn: It will be interesting to see what, if anything, has changed from the FTC’s initial proposed rule from last January.
Robert: According to the FTC’s press release, we can expect at the start of the meeting, the Commission will vote on whether to authorize public disclosure of the proposed final rule that is under consideration. Then, Chair Khan will offer brief remarks. Next, if the Commission votes to authorize public disclosure of the final rule under consideration, the Office of Policy Planning will give a staff presentation on the final noncompete rule under consideration. Finally, the Commission will vote on whether to issue the final rule.
Dawn: Here we go!
Robert: Interested to see how the two new FTC commissioners react and what dissent, if any, they supply.
Dawn: The meeting is being held as an open session because of its impact on businesses and employees.
Robert: The vote to publicly disclose the proposed final rule passed. Now they are addressing the proposed final rule.
Dawn: An attorney in the FTC, Ben Kady, will provide an overview. Attorney Kady says that the body of evidence showing that non-competes suppress wages. Needless to say, many have raised concerns with the validity of this “evidence.”
Robert: The FTC claims over 25k of 26k public comments about proposed ban were in favor of the ban.
Dawn: The final rule would provide that new noncompetes for all workers would be banned. But they may remain in effect for certain senior execs.
Robert: FTC claims non-competes with workers suppress wages and stifles innovation.
Dawn: Kady says that non-competes inhibit efficient management. Again, these statements are not accepted by all.
Robert: Proposed final rule includes ban on non-competes with workers after rule’s effective date. Preexisting non-competes would also be rescinded except for senior executives. This is a change from the initial proposed rule which a complete retro active ban. Rule would become effective within 120 days after publication in federal register.
Dawn: What are the odds we hear about California, Robert?
Dawn: Non-competes are “exploitative” according to Kady.
Dawn: But not for non-competes binding senior executives. However, the final rule finds that they are still unfair methods of competition. Not sure I follow that logic…
Robert: FTC claims in its findings that ban with workers (non-senior executives) will increase wages, lead to new business formation, and increase patents.
Dawn: Bottom line is that existing non-competes for senior executives will not be affected, but no new non-competes even for senior execs going forward. This will get challenged, no doubt.
Dawn: Ha, I knew it! Kady uses California as an example of why non-competes aren’t necessary.
Dawn: Never mind that California has a TON of extremely expensive trade secret litigation.
Robert: FTC claims in its findings that non-competes with senior executives inhibit new business formation.
Robert: FTC rejects that non-competes are legitimate business justification to protect trade secrets, points to North Dakota and California.
Dawn: Really surprising that they didn’t address the sale of a business exception, which (in the initial proposal at least) only permits non-competes for sellers having at least 25% interest in the business being sold.
Robert: Thus far the only modification to the initial proposed ban from January 2023 is allowing existing non-competes with senior executives.
Dawn: One of the commissioners (Slaughter) currently saying that they have not expanded the rule to cover franchisees, but it sounds like she’s pushing for that in the future. She also points out that they don’t cover non-profit employees, but doesn’t believe there’s a good policy reason to exclude them.
Dawn: Commissioner Bedoya is also supportive of the rule. “Banning people from working is coercive. It is exploitative.” He says that the FTC has the authority to do this, although he admits he had doubts at first.
Robert: Commissioner Bedoya says FTC has authority to issue this ban, although he was a skeptic at first.
Dawn: Interesting he says that there’s authority in the “second highest court in the land” but doesn’t say what the case is.
Dawn: Holyoak up next. She is fired up – says that the executive branch is trying to bypass the legislative process. “Lawmaking is an extraordinary power.” She does not believe the FTC has the authority to issue this rule.
Robert: New Republican appointed FTC Commissioner Holyoak indicates agency rule making challenges separation of powers. Says that FTC does not have rule making authority for this non-compete ban.
Dawn: She makes it clear that she does not support all non-competes. Like many reasonable practitioners in this space, she recognizes that there are abuses that should be curbed. She does not believe this final rule will survive challenge and argues that it’s a waste of the FTC’s resources given the dubious enforceability. She believes the FTC’s resources would be better used tackling those abuses rather than a broad ban.
Robert: Commissioner Holyoak indicates Section 6g allows the FTC to issue procedural rules, rather than substantive rules, which she characterized as legislative rules. Commissioner Holyoak indicates that the broad non-compete rule exceeds Congressional authorization.
Dawn: Commissioner Ferguson is now up and he agrees with Holyoak. “The administrative state cannot legislate because Congress declines to do so.”
Dawn: He does not believe the FTC has the authority to undo tens of millions of existing contracts and the laws of 46 states.
Robert: New Republican appointed FTC Commissioner Andrew N. Ferguson says the administrative state cannot legislate just because Congress has not.
Dawn: He raises the major questions doctrine, unsurprisingly.
Robert: Commissioner Andrew N. Ferguson says agency must point to delegation of power by Congress on this “major issue” and there has not been a delegation.
Dawn: Commissioner Ferguson will be issuing a written dissent soon and raises constitutional concerns, as well as concerns that the rule is “arbitrary and capricious” (although he acknowledges that there are sound arguments in favor of legislation regulating non-competes – but that the FTC doesn’t have the authority to do so).
Robert: Commissioner Ferguson concludes that FTC lacks authority and the final rule is unlawful.
Dawn: Chair Khan now highlighting some comments from the public.
Dawn: “Robbing people of their economic liberty also robs them of all sorts of other freedoms” including religious practice, right to organize, etc.
Robert: Commissioner Khan says non-competes stifle innovation too.
Robert: She also says FTC does have authority to issue the rule and ignores the plain reading of Section 6g.
Dawn: She insists they have authority. I’m sure we’ll find out soon enough.
Robert: FTC has issued a fact sheet laying out a key change from their initial proposed rule from January 2023. Highlights the senior executive exception to ban for preexisting non-competes:
Dawn: Interesting – she points to changes at the state legislatures as spurring this movement.
Robert: FTC’s proposed final rule is now available on the FTC’s website,
Dawn: Final vote. Khan, Bedoya, and Slaughter vote yes; Holyoak and Ferguson vote no. The rule passes 3-2.
Robert: US Chamber of Commerce has reported that it will file suit tomorrow and seek to enjoin the new rule. Buckle up.
Dawn: The rule will be effective 120 days after it is published in the federal register. But as previously noted, this is going to be challenged immediately.
Dawn: Some other odds and ends we missed while we were furiously typing: formal rescission of existing agreements will not be required (as initially suggested in the proposed rule last year), although employers will still need to notify workers (other than senior executives) that their agreements are no longer enforceable. “Senior executives” are workers who were in “a policy-making position” and who received total annual compensation of at least $151,164 in the preceding year (or annualized if the worker was employed for less than a year).
Dawn: Also, the 25% threshold for business owners has been removed. The final rule requires that for a non-compete to meet the “sale of a business” exception, it must be a “bona fide sale”.
