During his State of the Union address, President
Joe Biden
touted the benefits of banning noncompete clauses. But he did not ask
Congress
for approval, permission, or even discussion. Instead, he is relying on a small agency to change the law for him.
Last month, the
Federal Trade Commission
proposed a rule that would ban virtually all noncompete agreements across the country. An unprecedented power grab, this rule would harm tens of millions of businesses and employees and serve as a direct affront to Congress, the courts, the states, and the Constitution.
BRIGHT JOBS NUMBERS DON’T TELL THE WHOLE STORY
Noncompete agreements encourage businesses to hire and invest in employees. A typical noncompete might restrict a departing employee from working for a competitor for some period of time, perhaps a few months, and in areas close to the employer, perhaps a few dozen miles. If a company has confidence that an employee will stay a while, the company is more likely to hire and invest in that employee’s skills, knowledge, and training. As one scholar
explained
, “If the firm could not use the noncompete, then competitors could hire that worker away and experience the benefits of the information they provided to him.”
For hundreds of years, courts have examined noncompete clauses on a case-by-case basis. For any particular contract, courts weigh a company’s business rationale against the employee’s desire to work for a competitor. Any given noncompete clause may well fail this balancing test. But as one federal appeals court explained, in general, noncompetes “are legal unless they are unreasonable as to time or geographic scope.”
As a result, the proposed blanket ban would damage the economy. As the FTC itself
acknowledges
, two studies have found that “noncompete clauses increase employee training and other forms of investment.” At a time of robust international competition, we want American businesses to invest more in their employees’ skills and knowledge rather than less. Another study, in the financial services sector, found that the suspension of noncompetes led to higher prices and worse service for consumers. To be sure, a few other studies reach different results, but those studies only highlight the need to continue to evaluate noncompetes on a case-by-case basis: Courts should invalidate unreasonable noncompete clauses, but there is simply no valid basis to treat them all as unlawful.
Moreover, the FTC’s blanket ban offends our very system of self-government. Three FTC commissioners — or as the
dissenting
commissioner put it, “three unelected technocrats” — voted to impose a sweeping rule to invalidate tens of millions of contracts across the country. Under the Constitution, three unelected people (none of whom, incidentally, have deep experience in the private sector) should not have the power to dictate decisions of such vast legal, policy, and economic consequence to the rest of the nation. Ancient Rome was ruled by a triumvirate; we are not.
In our system of government, Congress, the people’s elected representatives, should have a say. The last Congress considered several bills to regulate noncompetes, and the current Congress is considering similar bills. Only Congress can properly evaluate the trade-offs in enacting any sort of national rule.
The states, 47 of which enforce noncompetes, should also have a say. Throughout history, noncompete clauses have been treated as a matter of state contract law. In recent years, many states have restricted noncompete clauses to prevent abuses, to define the circumstances in which they will or will not enforce noncompetes, and to ensure procedural protections. Indeed, Biden’s home state of Delaware generally enforces noncompete clauses.
The courts, which have evaluated noncompetes for centuries, should have a say. The courts have developed the expertise to assess the reasonable of individual noncompete clauses, weighing the interests of businesses and employees, as well as the mandates of state law.
Should the FTC continue its power grab, Congress, the courts, and the states all will have their say. Congress could stop the FTC cold — in the 1970s, in response to another period of FTC excesses, Congress
constrained
the agency’s authority to enact new regulations. Almost certainly, many states will challenge the FTC’s efforts to usurp their traditional authority. And the courts, which have become very skeptical of agency excesses, are unlikely to let this small independent agency impose such sweeping changes on the manner in which employers and employees interact.
If Biden truly wants to ban noncompete clauses, he should propose a bill so that Congress can debate the contours and merits of such a ban. The FTC, however, must operate within, not above, our system of government.
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Asheesh Agarwal served as assistant director of the FTC’s Office of Policy Planning during George W. Bush’s presidential administration.
