Minnesota Attorney General Keith Ellison is leading the fight with 18 States’ Attorney Generals (AGs) to ask the federal government to ban employers from utilizing non-competition provisions with most employees. According to Ellison and the other AGs, such provisions constitute an “abusive practice,” especially with respect to “low wage” employees. In their opinion, such provisions take advantage of workers, hurt the economy by holding back innovation, and hinder fair competition with other businesses. The AGs’ request was made through a November 15 letter to the Federal Trade Commission (FTC) Commissioner.
The feds have agreed to get in the act. The FTC just announced that it will hold a workshop to begin examining and evaluating the consumer protection and antitrust effects of non-competes on the market, job mobility, wage growth and innovation.
In spite of the sensationalist language and approach taken by the AGs in their letter, it seems to be a stretch for the FTC to put prohibitions on non-competes nationally. The interest on the federal level is a recent development. The FTC Act does empower the Commission “to prevent unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce.” Currently and historically, however, state laws have controlled the enforceability of non-compete agreements, some with statutory restrictions and some with case law. Such agreements are legal in most states and about 20% of Americans are bound by them. California, for example, has almost completely prohibited the use and enforcement of employee non-compete agreements and, in fact, prohibits employers from even attempting to negotiate or impose them on employees. Oregon law voids non-competes for lower wage employees. Colorado prohibits non-competes for certain health care workers, and Hawaii prohibits them for tech workers. In Minnesota there is no statutory limitation, but courts construe agreements strictly and only enforce those that have reasonable restrictions in scope, duration, and geographical reach.
Attorney General Ellison and the other States’ AGs have applied pressure on the FTC because its rulemaking authority may offer the quickest, most comprehensive regulatory path to protecting workers from what they refer to as “exploitative contracts.” Their letter quotes a September 18, 2019 letter from the FTC Commissioner, in which he stated that:
[A] rulemaking proceeding that defines when a non-compete is unlawful is far superior than case by case adjudication. The proceeding would allow a broad array of stakeholders, not just a plaintiff and a defendant, to contribute to the development of the law.
The proposed, but yet unscheduled, upcoming workshop the FTC just announced is the first step toward a potential ban on non-competes through the rulemaking process.
Make no mistake: non-competes are an incredibly useful, and often vital tool for employers. Such agreements can be instrumental in protecting their businesses. A rule restricting, limiting or prohibiting non-competes for some or all employees, on a national basis, would be a disaster and an attack on business interests. Accordingly, this situation should be carefully watched, and business leaders should actively participate in the process through trade associations, chambers of commerce or other groups which may educate and exert pressure to counter the efforts of the States’ AGs and the unions that have joined forces with them.
It seems unlikely in this political climate, especially with the Trump administration in place, that the FTC would adopt the Ellison letter’s recommendations. Despite the zealous advocacy of the AGs, the positions they espoused are generally contrary to the way courts have analyzed and enforced non-competes in the past. Nevertheless, it bears watching.
Not to be left out, even Congress is considering taking action. In October the Senate introduced the 2019 Workforce Mobility Act, a bill banning all non-compete agreements across the country, with exceptions only for the sale of a business or the dissolution of a partnership. The proposed Act is an extreme approach to non-compete reform but it is gaining some traction in the Senate. Last week the Senate Committee on Small Business and Entrepreneurship held a hearing with testimony from academia, business, and an individual testifying about the negative consequences to him of a non-compete agreement. The Committee did not invite any testimony from any non-compete proponents.
The federalization of this issue coupled with the AG efforts and the FTC rulemaking initiative shows that a partial or total ban on non-compete agreements is a distinct possibility and could have unimaginable far reaching repercussions for business in America. We will continue to update readers on all developments.