The Federal Trade Commission just voted to impose a nationwide ban on freely negotiated contracts that are legal in 46 states. This new rule will compel companies throughout the country to not enforce valid noncompete agreements. And those that continue to use noncompete agreements, regardless of how reasonable the terms, will face expensive and time-consuming administrative hearings and enormous fines.
But worst of all, the FTC’s new rule effectively gives the agency the power to make laws governing any aspect of American enterprise that it might deem “unfair.”
The Federal Trade Commission is just another alphabet-soup federal agency for most people. Based on its name, one might assume that the FTC enforces laws that Congress has enacted to protect consumers from fraudsters. That is true enough. But with its ban on noncompete agreements, the FTC now claims power to sidestep Congress whenever the commission wishes to outlaw any business arrangement it does not like — even when Congress has considered and rejected similar legislation.
A noncompete agreement is simply a contract between an employer and an employee. In exchange for an offer of employment and benefits, companies in many industries ask employees to agree not to work for a competitor if the employee leaves. The agreements are typically limited by geography and a reasonable time frame. Courts in most states recognize these agreements as legitimate contracts as long as they are reasonably crafted. For example, most courts would say that a noncompete agreement is unreasonable if it prevents ex-employees from starting their own competing business for 10 years. However, if a noncompete agreement is limited to one or two years in a narrowly defined area, it is reasonable.
FTC’s nationwide ban on noncompete agreements will leave companies such as ATS Tree Services LLC in a bind. Because ATS provides specialized training in tree climbing and cutting skills to their employees, including in ATS’s own methods for which they are highly regarded, ATS asks new hires to sign a noncompete agreement. This makes it feasible for ATS to invest in its employees’ training and professional development without the risk that the investment will immediately be transferred to a direct competitor. The noncompete agreements are part of a culture of mutual commitment between ATS and its employees, which is critical to ATS’s success.
Reasonable minds can disagree about whether noncompetes make sense in each situation, but that’s an issue for employers and employees to hash out on their own. Several states — California, Oklahoma, North Dakota, and Minnesota — have banned the agreements. But lawmakers in 46 states have weighed the pros and cons and decided that reasonable noncompete agreements should be legal. That is how lawmaking is supposed to work in America, especially on an issue such as contract law, which has always been the responsibility of the states, not the federal government.
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The federal government exists to deal with uniquely federal issues, not to meddle in the affairs of employers and employees on any issue on which a group of bureaucrats might disagree with state law. And if the federal government is to be involved in this issue, the decision must come from Congress, not the FTC.
Our nation’s workers can continue to earn a living even if they sometimes agree not to compete with their former employers for a limited time. But the rule of law and the Constitution’s separation of powers will be badly damaged if bureaucrats get to write the laws they enforce. That’s why we’re asking the courts to put a stop to this wanton abuse of power by the FTC.
Luke Wake and Josh Robbins are attorneys at Pacific Legal Foundation, a public interest law firm that defends Americans’ liberty against government overreach and abuse.
