Date: January 23, 2023Attorney: Gary S. Young

There is a well-known saying: “If it’s not broken, don’t fix it.”  On January 5th, the Federal Trade Commission (FTC) published a controversial, Proposed Rule banning employment agreement non-competes in an apparent abuse of power. It is alleged that the FTC’s action was taken to satisfy Big Labor’s request for assistance by bolstering its appeal to non-union workers. Although the National Labor Relations Act guarantees the right to choose or reject union representation without interference from any third party, Big Labor’s losing score in election after election illustrates why unions think help is needed.

To the dismay of many, the FTC has acted to provide such help through promulgation of the Proposed Rule: “The proposed [Non-Compete Clause Rule] would provide that it is an unfair method of competition -and therefore a violation of Section 5 –  for an employer to enter into or attempt to enter in a non-compete clause with a worker….”  [Quoted from the Dissent of FTC Commissioner Christine S. Wilson].

The FTC’s action has stirred controversy, as widely reported in newspapers and the internet, underscoring the pitched battle presently raging among the Branches of the federal government. Each is accorded respective powers in the U.S. Constitution with the express intention that they balance each other. It is the view of this writer that the U.S. Constitution and the rule of law are dying a death by a 1,000 cuts as governmental forces openly battle for political supremacy at the expense of the rule of law.

In recent years, Congress has become increasingly paralyzed by extreme partisanship thwarting collegiality and common sense.  Going back to the 1950s, Congress found that it could escape political responsibility by relying upon activist courts, including the U.S. Supreme Court, to confront politically charged issues. The principles of abortion and the woman’s right to choose were accorded by the Roe v. Wade decision rather than by legislative action.  The 2022 Dobbs decision has now reversed Roe. Rather than taking affirmative action in response, Congress has not acted other than to actively encourage angry, antisocial activism.

The Federal Government’s dysfunction extends to the proliferation of Executive Orders which has been criticized as the abuse of Constitutional powers. This outcry also extends to the perceived abuse of powers granted under the Administrative Procedures Act (APA) Pub. L. 79–404, 60 Stat. 237. The concern is that, with Congress in political impasse, the Executive Branch is relying more heavily upon its agencies to execute the political agenda through issuance of unintelligible, over-reaching regulations.

To understand the real intention of the Proposed Rule, the context in which this action has been taken must be considered.  First, the issues of the legality of non-compete restrictions have been addressed extensively in state legislatures and courts.  The FTC’s proposed rule is almost identical to the current law in California, but California’s expressed public policy falls to the far left on the spectrum and is the minority view. While most state courts express dislike for non-competes, they accept them as permitted, limited restraints of trade when balancing the legitimate needs of employers who make substantial investments in people and the creation of intellectual property. 

Here is the legal principle applicable to non-competes as followed by most state courts:

A non-compete is only allowed and enforceable to the extent it (1) is necessary to protect the employer’s legitimate interests, (2) does not impose an undue hardship on the employee, (3) does not harm the public, and (4) is reasonable in time period and geographic scope.

State courts regularly weigh these principles in real cases. Any attempt to apply a non-compete to a low-level employee will be soundly rejected as an overreach which does not promote a legitimate employer interest.

In the Dissenting Opinion of FTC Commissioner Christine S, Wilson, as published with the Proposed Rule, the Proposed Rule is criticized as

“…represent[ing] a radical departure from hundreds of years of legal precedent … despite what appears at this time to be a lack of clear evidence to support the proposed rule. What little enforcement experience the agency has with employee non-compete provisions …[it] fails to demonstrate harm to consumers and competition.”        

Commissioner Wilson’s criticism goes to the essence of the Administrative Procedures Act (APA)  passed by Congress in 1946 to establish due process parameters for the actions of administrative agencies that had proliferated during the Roosevelt years. The APA governs the process in which administrative agencies may propose and establish regulations, and it grants U.S. federal courts oversight over all administrative agency actions.  Such agencies may only issue regulations after engaging in sufficient fact-finding to guide compliance with laws enforced by such agencies. Agencies may not, however, legislate as that is the power granted to Congress. As there was little or no fact-finding before the publication of the Proposed Rule, Ms. Wilson predicts that it will not survive expected court challenges.

Criticism of the Proposed Rule includes that it does not attempt to solve a problem (if there is one) that falls within its purview.  Many critics regard the FTC’s action as an intrusion into the rights of the states in violation of the 10th Amendment which preserves  the powers of the states to the extent not expressly granted to the federal government: “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

One of the most powerful rights reserved to the states is the Police Power. This has been defined as being “[t]he capacity of the states to regulate behavior and enforce order within their territory for the betterment of the health, safety, morals, and general welfare of their inhabitants.” Even today, most employment laws are state laws that structure the relationship of employer and employee.  Being a legitimate exercise of the police power, state employment laws are respected as expressions of strong public policy.

If state law on non-competes is not broken, why then is the FTC attempting to “fix” non-competes while arguably usurping state police powers in violation of the APA and the 10th Amendment?  The answer is provided by The Wall Street Journal in its January 7, 2023 Editorial entitled: “The FTC Does Big Labor a Solid.”  The Editorial Board explains: “The ’FTC’s proposed rule is an air kiss to Big Labor, which demanded that the agency ban non-competes in 2019…[because] Unions want opposition to non-competes as a tool in their organizing kits….” 

In addition to blatantly pandering to unions and possibly violating the APA and the Section 7 rights granted to employees under the National Labor Relations Act, this questionable Proposed Rule flies in the face of the FTC’s 2015 bi-partisan pronouncement that Section 5’s power against unfair competition should only be used in the case of clear consumer harm. 

Sadly, bipartisan, common-sense action in any branch of our government seems to be lost to more base, political impulses as illustrated by this transparent overreach by the FTC. It is hoped that Commissioner Wilson’s prediction of rejection by the courts will be prescient.