The FTC decrees: No more non-compete agreements

Lina Khan, chair of the Federal Trade Commission (FTC), speaks at the White House on Wednesday, April 3. PHOTO: AL DRAGO/BLOOMBERG NEWS
Lina Khan, chair of the Federal Trade Commission (FTC), speaks at the White House on Wednesday, April 3. PHOTO: AL DRAGO/BLOOMBERG NEWS


Lina Khan’s latest rule instantly invalidates 30 million contracts without Congressional authority.

Is there anything that Federal Trade Commission Chair Lina Khan doesn’t think she can do? Apparently not. On Tuesday she and her fellow Democratic commissioners effectively invalidated tens of millions of employment contracts without authority from Congress.

The FTC’s 570-page rule outlaws so-called non-compete agreements across the economy. Employers use these agreements to restrict workers from joining competitors or starting their own firms for a specified duration after leaving. They protect an employer’s intellectual property and investment in worker development.

The FTC says such agreements “restrict the freedom of American workers and suppress wages" and “stifle new businesses and new ideas." Disregarding reams of evidence to the contrary, the agency bars employers from enforcing existing non-compete agreements for workers who aren’t “senior executives."

Its rule also forbids employers from entering future non-compete agreements with “senior executives" in a “policy-making position" who earn more than $151,164 a year. By the FTC’s estimate, some 30 million workers are currently covered by non-compete agreements, which will now be rendered void.

Non-compete agreements may frustrate some workers, but they are rarely iron-clad. Employers usually are willing to negotiate less restrictive covenants to protect their trade secrets and training investments. They also usually offer more pay and perks in exchange for workers agreeing to a non-compete.

According to a U.S. Chamber of Commerce survey, 78% of responding employers said they provide additional compensation that spans the duration of an agreement or longer. Employers will pay workers less, and invest less in them, if workers can easily take the skills they acquire on the job elsewhere.

The FTC says innovation and businesses haven’t suffered in such states as California, North Dakota and Oklahoma where non-compete agreements are generally unenforceable. “California, for example, is home to four of the world’s ten largest companies by market capitalization," the FTC says. Yes, and this may not be a coincidence.

Without non-compete agreements, Big Tech companies in California can poach talent from startups by offering them higher pay and stock options. Ms. Khan’s rule will help deep-pocketed businesses while harming smaller ones. The FTC says companies can instead use lawsuits to protect trade secrets, but this ignores that it’s hard to safeguard employee know-how.

Consider the brawl between the Orange County, Calif., tech startup Masimo and Apple. Masimo has alleged in federal court and the International Trade Commission that Apple poached its executives who helped the Cupertino company copy its pulse oximeter technology. U.S. courts could soon be flooded with such intellectual property disputes.

Some states are considering legislation to limit non-competes for lower-paid workers. This may increase labor mobility, but it could also make it harder for businesses to retain workers. State and local lawmakers can better balance such tradeoffs for their constituents than can bureaucrats in Washington.

Congress could also restrict non-compete agreements, but it hasn’t. The FTC claims authority to do so under Section 5 of the Federal Trade Commission Act, which authorizes the agency to prevent “unfair methods of competition." Ms. Khan claims the commission can define “unfair" however it wishes.

As the Chamber and Business Roundtable explain in a lawsuit challenging the FTC rule, Section 5 prohibits “only practices that cause actual harm to competition and are not outweighed by procompetitive justifications." They add that “the Commission has not claimed the authority to make rules regarding ‘unfair methods of competition’ for the last half century."

The lawsuit cites the Supreme Court’s major-questions doctrine, which says administrative agencies must have express authorization from Congress for significant rules.

Ms. Khan disagrees. Her rule notes that “where Congress wished to limit the scope of the Commission’s authority over particular entities or activities, it did so expressly, demonstrating its intent to give the Commission broad enforcement authority over activities in or affecting commerce outside the scope of the enumerated exceptions."

So unless Congress tells the FTC it can’t do something, it can do it. Got that, judges?

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.