FTC Bans Noncompetes
FTC (tweet, Hacker News):
Today, the Federal Trade Commission issued a final rule to promote competition by banning noncompetes nationwide, protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.
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The FTC estimates that the final rule banning noncompetes will lead to new business formation growing by 2.7% per year, resulting in more than 8,500 additional new businesses created each year. The final rule is expected to result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year, and it is expected to lower health care costs by up to $194 billion over the next decade. In addition, the final rule is expected to help drive innovation, leading to an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years under the final rule.
As with network neutrality, this is probably something the courts or Congress should have handled, but it seems like a good protection for those of us living outside Silicon Valley.
As I wrote a year ago, I used to think that noncompete agreements (“agreements”?) were mainly a thing in the tech industry. But their use became so rampant that even sandwich shop chains were requiring them.
Noncompetes are now banned: not just in California (like before), but nationwide. Very, very relevant for anyone at Amazon (which is the Big Tech that has enforced noncompetes even for low-level engineering positions).
Some people might know that Amazon sued me after I had left AWS and later went to Google Cloud. I cannot be happier to see the FTC ruling to ban non-competes in the US. “Noncompete clauses violate a 110-year-old law that prohibits unfair methods of competition, the FTC says.”
The FTC has come out with a very good and important policy ruling, but I’m not sure it has the authority to do so. The legal challenge (that was filed basically seconds after the rule came out) could do way more damage not just to some fundamental parts of the administrative state, but to the very underlying policy that the FTC is trying to enact: protecting the rights of workers to switch jobs and not be effectively tied to an employer in modern-day indentured servitude with no realistic ability to leave.
All the way back in 2007, I wrote about how non-competes were the DRM of human capital. They were an artificial manner of restricting a basic freedom, and one that served no real purpose other than to make everything worse. As I discussed in that post, multiple studies done over the previous couple of decades had more or less shown that non-competes are a tremendous drag on innovation, to the point that some argue (strongly, with data) that Silicon Valley would not be Silicon Valley if not for the fact that California has deemed non-competes unenforceable.
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The rule is 570 pages long, with much of it trying to make the argument for why the FTC actually has this authority. And all those arguments are going to be put to the test. Very shortly after the new rule dropped (long before anyone could have possibly read the 570 pages), a Texas-based tax services company, Ryan LLC, filed a lawsuit.
Previously:
- FCC Reinstates Network Neutrality
- Apple to Decentralize From Silicon Valley
- AWS Non-Compete Agreement Lawsuit
- When Rules Don’t Apply
- Apple/Google Hiring Lawsuit Finally Settled
- Et Tu, Tim?
- Organ Banked
- Apple/Google Hiring Lawsuit, Settled
- Apple/Google Hiring Lawsuit
- The No-Hire Paper Trail
Update (2024-06-19): Matt Bruenig (via Hacker News):
As part of litigating this case, the General Counsel (GC) of the National Labor Relations Board (NLRB) also alleged that the employer’s non-compete clause and coworker non-solicitation clause were illegal work rules under the Stericycle standard. The GC has been pursuing this particular legal theory since early last year, but this is the first time the theory has been put in front of an ALJ and also the first time an ALJ has ruled that these kinds of clauses are unfair labor practices that violate the National Labor Relations Act (NLRA).
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Despite all the discussion about the FTC banning non-competes, there still seems to be little recognition that non-competes for non-supervisory workers are effectively impossible to enforce at the moment due to the policies of the NLRB GC.
Update (2024-08-09): Matt Stoller:
To comply with this new rule, firms can’t sign such agreements, and must tell employees their non-competes are void. The new regulation is set to go into effect on September 4th. This move accelerated the momentum of the campaign, and enraged corporate America, especially the private equity firms who rely on locking in professionals such as doctors and vets into these arrangements.
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In early July, Judge Ada Brown in Texas, who is in the Fifth Circuit, issued a ruling in a case of an accounting company challenging the ban, ruling that the FTC did not have the authority bar non-competes, and that the FTC rule was “arbitrary and capricious.”
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What does this legal wrangling mean? Well, when two Federal courts in different parts of the country issue different rulings, it’s called a “circuit split,” and it creates legal uncertainty. The Fifth Circuit can do anything they want to do, including blocking the rule from going into effect, but a circuit split makes it tacky to just issue nationwide injunctions, since they would then have to fight with other judges over the matter. We’re in somewhat uncharted territory here.
Update (2024-08-21): Taylor Nicole Rogers and Brooke Masters (via Hacker News):
FTC spokesperson Victoria Graham said in a statement that the agency was “disappointed” by the decision but vowed to “keep fighting to stop non-competes”.
“We are seriously considering a potential appeal, and today’s decision does not prevent the FTC from addressing non-competes through case-by-case enforcement actions,” Graham said.
Update (2024-09-13): Steven Vaughan-Nichols (via Hacker News):
Before the ban could even take effect on Sept. 4 (two days after Labor Day in the US), District Court Judge Ada Brown in Dallas stopped the FTC from enforcing it, saying the move “exceeded its statutory authority,” was “arbitrary and capricious” and would have caused businesses “irreparable harm.”
