A Viewer’s Guide To FTC’s Vote On Banning Noncompete Clauses – Antitrust, EU Competition

The Federal Trade Commission will hold the most important
meeting of this administration at 2 PM EDT Tuesday April 23, 2024.
Commissioners will decide whether to issue a rule that declares
most noncompete clauses in employment contracts unfair methods of
competition. Kelley Drye published my backgrounder on the proposal
here. The deliberation and decision will be
streamed live from www.FTC.gov. We will be watching and posting
updates on LinkedIn and (Twitter)X.

It has been fifty years since the FTC issued a competition rule,
and then only as an adjunct to a conventional consumer-protection
measure. The lone rule required octane disclosures on gas pumps.
Since then, FTC officials disclaimed competition rulemaking
authority and the agency aligned its competition policy with the
larger body of antitrust law.

The current FTC reversed course on both fronts. It announced its
intention to distance its competition policy from the rule of
reason commonly applied in antitrust. And it criticized
case-by-case enforcement as inadequate to deter competitive harms.
A noncompete rule would be a climactic culmination of these
ambitions.

Will the FTC succeed, and what would it mean? Clues will come in
the course of the meeting. Here are some of the questions the
Commission will have to answer persuasively if expects a rule to
survive in the courts:

1. Does the Commission have the authority to promulgate
   competition rules?
   

   1. The Supreme Court could consider this a Major Question, subject
      to the analysis of West Virginia v. EPA. For a preview of how that
      analysis might apply, see my article, Regulating Beyond the Rule of Reason, and our
      post, The FTC’s Proposal to Ban Noncompetes is on
      Shaky Legal Ground.




2. Did the Commission apply a proper definition of
   anticompetitive practices?
   

   1. In the analysis supporting the proposal, the FTC noted that the
      weight of antitrust authority on noncompetes found them to be
      reasonable restraints. The analysis did not mention the cases from
      the FTC’s early years, when it held that soliciting or hiring
      employees from competitors was an unfair method of competition
      (cited at note 215here).




3. Did the Commission adduce adequate evidence of
   competitive harm?
   

   1. Academic studies (some collected here) generally find the aggregate evidence
      inconclusive, including one of the studies on which the Commission
      relied.




4. Would the rule adequately protect proprietary
   information?
   

   1. A principal purpose of noncompete clauses is to prevent
      companies from poaching intellectual property and proprietary
      information from competitors. Some of the consequences of banning
      the clauses are outlined in Proposed FTC Noncompete Ban Throws Out Good With
      Bad.




5. Did the Commission reasonably exempt valuable and
   harmless noncompete clauses?
   

   1. Some clauses would be exempt, for example those facilitating
      business sales and between franchisors and franchisees, which the
      analysis supporting the proposal considered worthwhile. Kelley
      Drye’s Corporate Group summarized them inThe FTC Proposes Ban on Non-Competes: The
      Implications for M&A Transactions, and our Employment and
      Labor Group looked at a future without noncompetes in FTC Proposed Ban of Noncompetes: Practical
      Guidance For Employers.

This proceeding has the potential to transform employer-employee
relations throughout the United States. But its reverberations will
be more profound. As noted in my first piece on the proposal, this
is the first of a host of competition rules the FTC contemplates.
Others in various stages include surveillance,
the right to repair, pay-for-delay pharmaceutical agreements,
unfair competition in online marketplaces, occupational licensing,
real-estate listing and brokerage, and unspecified
industry-specific practices. The fate of the noncompete rule will
either launch a new era of industrial regulation or realign the FTC
with antitrust norms.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.