FTC’s Proposed Noncompete Ban Timeline Set Back After Thousands Submit Public Comments
As we have previously discussed here and here, published on January 5, 2023, the FTC’s proposed rule expressly would not apply to franchise agreements. Part of the FTC’s proposed rule public commenting period included whether the proposed rule should be broadened to ban post-termination noncompetes in franchise agreements between franchisors and franchisees.
Bloomberg Law has since reported that, partially due to the volume of public comments received, the FTC is not expected to vote on the proposed rule, or a revised version of the proposed rule, until April 2024. This is a longer rule-making process than many initially assumed, given the high-priority and level of resources the FTC has expended on its proposed noncompete ban. If adopted, the proposed rule is likely to face significant legal challenges.
Public Comments in Support of the FTC’s Proposed Noncompete Ban
US Senators Sherrod Brown (D-OH), Elizabeth Warren (D-MA), Richard Blumenthal (D-CT), nine additional Senators, and 52 US House Representatives sent a letter to the FTC in support of the rule noting that “the noncompete rule would impact approximately 30 million Americans, giving them increased freedom to change jobs and create new businesses, and it would increase wages by nearly $300 billion each year.” That comment letter also urged the FTC “to resist calls for additional postponement and act quickly to protect as many workers under this rule as possible” and to “remain skeptical of calls for expansive exemptions that may undermine the benefits of a strong rule.”
The Democracy Forward Foundation also submitted comment letters in support of the FTC’s proposed rule by several different entities, including on behalf of the Restaurant Opportunity Centers United (ROC United). ROC United’s comment focused upon the purported harm to restaurant workers posed by noncompetition covenants and highlighted the scrutiny and actions by states’ Attorneys General faced by sandwich shop Jimmy Johns regarding its use of noncompetition covenants for entry level store employees. Jimmy John’s reportedly stopped using noncompetition covenants for entry level store employees in 2016, but the company’s prior practice continues to be cited as an infamous example of overly broad noncompetition covenants.
Eighteen state Attorneys General also submitted a joint public comment letter in support of the FTC’s proposed ban. The public comment letter argues that a federal rule limiting noncompetes will significantly benefit workers — especially low-and middle-wage workers — and promote fair competition among businesses. The letter also argues that the FTC’s nationwide ban would obviate the inconsistencies currently in place across states thereby creating clarity and allowing interstate and intrastate commerce to fully benefit from the purported economic benefits of a ban on noncompete agreements.
Public Comments In Opposition To the FTC’s Proposed Noncompete Ban
In contrast, numerous business groups and many others have vehemently opposed the ban, arguing that the proposed rule would threaten employers’ ability to protect confidential information, protect their other legitimate business interests, and otherwise hinder business operations. Many commenters noted that if the FTC insists on promulgating a nationwide noncompete ban, the ban should be limited to workers below a certain income threshold or certain classifications of workers. Many commenters also argued that the FTC lacks the authority to promulgate its proposed rule and that, in any event, the proposed rule is arbitrary and capricious under the Administrative Procedure Act. Critics claim that the functional approach to noncompetes taken by the FTC’s proposed rule was ambiguous and overly broad, that the proposed ban’s retroactive application would violate the Takings Clause of the Fifth Amendment, and that the exception for noncompete covenants in connection with the sale of a business was too narrow.
For example, the US Chamber of Commerce’s comment letter argued that the proposed rule fails to recognize that “noncompete agreements can serve vital procompetitive business and individual interests — such as protecting investments in research and development, promoting workforce training, and reducing free-riding — that cannot be adequately protected through other mechanisms such as trade-secret suits or non-disclosure agreements.” The Chamber’s comment letter also notes that the proposed rule does not make exceptions for employees having access to the employer’s trade secrets or other commercially valuable confidential information, which most states recognize as a legitimate business interest justifying noncompetition covenants.
The International Franchise Association (IFA) also submitted a comment letter in opposition to the FTC’s proposed rule. The IFA directly responded to the FTC’s request that commenters address whether the proposed noncompete ban should be extended to prohibit noncompetes in franchise agreements; the IFA’s letter explains that “[t]here is neither a factual nor a legal basis that would support voiding all noncompete clauses under all franchise agreements across hundreds of industries under all circumstances.” The IFA asserted that noncompete clauses serve an important function in that they “protect the equity of franchisees in the businesses that they have established, the confidential and proprietary information of franchisors, and the goodwill, know-how, and integrity of franchise systems.” IFA argues that in allowing these protections, noncompete clauses in certain contexts are actually pro-competitive rather than anti-competitive. The IFA also warned that a complete ban could strip away entrepreneurs’ empowerment and investments.
Next Steps for the FTC’s Proposed Rule
As noted above, the FTC is not expected to vote on its proposed ban, or some version of it, until April 2024. However, the FTC is free to act sooner. Any final rule will take effect 180 days after its publication. In the event that the FTC does adopt the proposed rule or some variation of it, the rule will face significant legal challenges, including whether (1) the FTC has substantive unfair methods of competition rulemaking authority, (2) the FTC’s rule violates the major questions doctrines, (3) the FTC’s rule constitutes an impermissible delegation of legislative authority under the non-delegation doctrine, (4) the retroactive components of the rule constitute an improper taking, and (5) the rule is otherwise arbitrary and capricious under the Administrative Procedure Act.
Implications for Employers
In addition to the FTC, the National Labor Relations Board (NLRB) (e.g., see here.) and numerous states (e.g., see here) have been actively seeking to restrict the use of post-termination noncompetition covenants. Employers should continue to evaluate their use of noncompetition agreements with appropriate caution, adopting a state-by-state and position-by-position or even employee-by-employee analysis. Employers should be prepared to present a strong justification for the use of noncompetition agreements and avoid overly broad agreements which may be interpreted as chilling the legitimate rights of departing employees. Finally, employers should consider additional or alternative means to protect their legitimate business interests, including through other restrictive covenants, other contractual provisions, and ensuring reasonable steps are taken to protect confidential information and trade secrets.
ArentFox Schiff LLP will continue monitoring developments in this area, and we are available to advise how your business can protect itself in the rapidly changing landscape surrounding restrictive covenants.
