March 23, 2023

Volume XIII, Number 82


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Legal Challenges the FTC Faces in Light of Proposed Ban on Non-Compete Agreements

On January 5, 2023, the Federal Trade Commission (FTC) issued a Notice of Proposed Rulemaking essentially banning non-compete clauses and categorizing them as unfair methods of competition. Non-compete clauses serve to protect a business’s trade secrets and other confidential information, which makes the adoption of such a rule concerning for all US businesses. Our previous article addressed how the FTC’s proposed ban on non-compete agreements could affect your business. This article summarizes some of the legal challenges the proposed rule will likely face.

The FTC voted 3-1 in favor of this proposed rule, with Commissioner Christine Wilson the lone dissenter, who noted that the commission’s rulemaking authority for non-compete clauses is vulnerable to several legal challenges. The commission majority argued that non-compete clauses are exploitative and coercive, thus making the clauses unfair.

Some of the legal challenges Wilson addressed include the following: (1) the commission lacks authority to engage in “unfair methods of competition” rulemaking; (2) the major questions doctrine applies, and the commission lacks clear congressional authorization to undertake this initiative; and (3) assuming the agency does possess the authority to engage in this rulemaking, it is an impermissible delegation of legislative authority under the non-delegation doctrine.

Authority to Engage in Unfair Methods of Competition Rulemaking

Under Section 6(g) of the FTC Act, the commission is authorized to “make rules and regulations for the purpose of carrying out the provisions of the subchapter.” The FTC has consumer protection rulemaking authority under the Magnuson-Moss Act; however, there is a lack of clarity as to whether it can engage in substantive competition rulemaking since the act expressly excluded rulemaking for unfair methods of competition. This lack of clarity will be a source of challenges to the proposed rule.

Major Questions Doctrine

The major questions doctrine has been applied when questioning the authority given to an agency as well as whether Congress meant to confer the power the agency has asserted. The FTC’s action will trigger the application of the doctrine if the agency claims to (1) resolve a matter of political significance, (2) regulate a significant portion of the American economy, or (3) intrude in an area that is the particular domain of state law. Wilson argues that the proposed rule banning non-compete provisions implicates all these claims: Congress has already rejected bills proposing to ban non-compete clauses; approximately 30 million workers are bound by non-compete clauses; and regulation of non-compete clauses has historically been in the domain of state law, with 47 states permitting non-compete clauses in some capacity.

If a court determines that the non-compete clause rule is a major question, the FTC would have to show clear congressional authorization to impose a regulation banning non-compete clauses (which, as addressed previously, is not clearly authorized).

Non-Delegation Doctrine

The non-delegation doctrine proposes that Congress cannot delegate its legislative power to another branch of government, including agencies. While the Supreme Court has approved congressional authorization for the FTC to prohibit unfair methods of competition, it was under the guise of the commission acting as a quasi-judicial body rather than the commission using legislative power to promote fair competition.

It is not clear that prohibiting non-compete agreements will benefit labor markets or have a positive impact on competition. There are additional legal hurdles that the FTC may face as it attempts to regulate competition, all of which cannot be addressed in this article. The public is encouraged to voice their concerns during the comment period of this proposed rule, which ends March 10.

© 2023 Jones Walker LLPNational Law Review, Volume XIII, Number 27

About this Author

Joseph F. Lavigne, Jones Walker, unfair trade practices lawyer, noncompete violations attorney

Joe Lavigne is a partner in Jones Walker's Labor & Employment Practice Group and a lead trial attorney for the firm's Trade Secret Non-Compete Team. His practice focuses on prosecuting and defending claims of employee misconduct including trade secret violations, unfair trade practices, noncompete violations, invasion of privacy, Computer Fraud and Abuse Act, and theft. He also advises clients on employment policies and practices and negotiates employment agreements for employers. 

Thomas P. Hubert, Jones Walker, Defamation Lawsuits Lawyer, Unfair Trade Practices Attorney

Thomas Hubert is a partner in Jones Walker's Labor & Employment Practice Group and a lead trial attorney for the firm's Trade Secret Non-Compete Team. Since 1989, Mr. Hubert has practiced primarily in the area of labor and employment law, as well as in areas that fall under more traditional commercial claims. Specifically, Mr. Hubert has focused on business and commercial litigation, as well as labor and employment (including commercial contracts, Unfair Trade Practices Act, Trade Secret Act, covenant not to compete agreements, defamation, errors and omissions for...

P.J. Kee, Jones Walker, trade secret theft attorney, computer fraud lawyer

P.J. Kee is an associate in the firm's Labor & Employment Practice Group and a member of the Trade Secret Non-Compete Team. His practice focuses on protecting clients from—as well as defending clients against alleged—trade secret theft, computer fraud and abuse, unfair competition, conspiracies, and non-compete violations. He regularly litigates cases involving these disputes in both state and federal courts, and has been on trial teams that have not only successfully obtained and fended off injunctions, but also prevailed on the merits at trial. Recently, he was...