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Companies That Use Noncompetes Face Increased Risk of Government Action Following FTC’s Unilateral Expansion of its Enforcement Powers

Perhaps we were wrong. Or perhaps we were just not thinking creatively enough. After President Biden issued his “Executive Order on Promoting Competition in the American Economy,” in which he “encourage[d]” the Federal Trade Commission (FTC) to “consider” exercising its statutory rulemaking authority “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility,” we assumed that Lina Khan, the 33-year-old Biden-appointed Chair of the FTC (and a vocal opponent of noncompetes), would take the torch and propose a Rule prohibiting, or at the very least severely limiting, the use of noncompetes. And she may still do so.

But for the time being at least, it appears the FTC is taking a different, far less transparent, approach. On November 10, 2022, the eve of a long Veterans Day weekend, the FTC issued a “Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act,” in which it announced a unilateral expansion of its enforcement powers beyond just the antitrust laws. “The move—broadening its interpretation of the 1914 law that created the FTC—opens the door to more legal challenges against businesses engaging in alleged coercive or deceptive conduct that undermines competition, Chairwoman Lina Khan said in a briefing with reporters” according to the Wall Street Journal. The new policy was approved on a 3-1 party-line vote, with the sole Republican Commissioner Christine Wilson dissenting (Commissioner Noah Phillips, an opponent to Chairwoman Khan’s efforts to curtail noncompetes, resigned earlier this year).

This new policy could have direct, material, and deleterious effects on employers that utilize noncompetes and other post-employment restrictive covenants to protect their legitimate business interests such as trade secrets and customer goodwill. As we have previously reported, FTC Chairwoman Khan has repeatedly opined that noncompetes are anticompetitive and should be banned. Thus, it would come as no surprise if the FTC were to begin bringing enforcement actions against employers who utilize noncompetes—even those whose agreements have been held to be reasonable by state and federal courts. Indeed, according to the FTC, “Congress passed the FTC Act to push back against the judiciary’s adoptions and use of the open-ended rule of reason,” which is effectively what courts apply to their analyses of noncompetes, albeit without using the nomenclature of antitrust law.[i] Ironically, the FTC goes on to say that this was intended to avoid “inconsistent and unpredictable results,” which is exactly what this new policy, itself, is likely to do.[ii] With no limiting principles, employers cannot reasonably be expected to know whether they are in compliance with the FTC’s position du jure concerning noncompetes, meaning that more risk-averse companies may just cease using them. That is no doubt the point.

According to the Wall Street Journal, FTC Chairwoman Khan said in a statement to reporters that “[t]he hope is by doing this we will be able to restore the FTC to its original mission and mandate as Congress laid out.” What she is referring to is Section 5 of the FTC Act, which vaguely prohibits “unfair methods of competition in or affecting commerce.”  Whether Congress had the power to delegate that much authority to the FTC, much less clearly did so in Section 5 of the FTC Act, is far from being settled. Indeed, the Supreme Court’s recent decision in West Virginia v. EPA cast serious doubt on whether any such purported delegation would violate the Major Questions Doctrine, which provides that regulatory agencies must have “clear congressional authorization” to make rules pertaining to “major questions” that are of “great political significance” and would affect “a significant portion of the American economy.” As we have previously reported, any attempts by the FTC to regulate noncompetes under the auspices of Section 5 of the FTC Act would likely not pass Constitutional muster under the Major Questions Doctrine (if not the Non-Delegation Doctrine, which the Supreme Court did not address in West Virginia v. EPA). Maybe that is why the FTC is taking this new approach, and why its announcement came on the eve of a long weekend.

We could be wrong about the FTC’s intention to use this newfound power to go after companies that utilize noncompetes. The Policy Statement does not actually mention noncompetes, but it would not be a surprise to see the FTC bring enforcement actions in 2023 against companies that use noncompetes—no matter how reasonable in scope they may be—given FTC Chairwoman Khan’s previous statements on the subject and the FTC’s aggressive posture under the Biden Administration. We will continue to monitor the situation and provide updates.

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[i] Earlier in the Biden Administration, the FTC rescinded its 2015 Statement of Enforcement Principles Regarding “Unfair Methods of Competition” under Section 5 of the FTC Act, which declared that the FTC would apply Section 5 using the rule of reason test, “that is, an act or practice challenged by the Commission must cause, or be likely to cause, harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications.”

[ii] Doubly ironic is that, according to the Wall Street Journal, “[t]he Chamber of Progress, an industry-backed group that advocates for progressive public policies, said in a comment at the time that by revoking the 2015 policy, ‘technology companies will have less overall guidance from the commission on how to operate fairly and responsibly.’” According to its website, the “Chamber of Progress is a new tech industry coalition devoted to a progressive society, economy, workforce, and consumer climate. We back public policies that will build a fairer, more inclusive country in which all people benefit from technological leaps.”