The FTC nixes non-competes
One of the earliest reported cases challenging a non-compete clause was Mitchell v. Reynolds, 1 P. Wms. 181, 24 Eng. Rep. 347 (Q.B. 1711). The clause survived the challenge, and a vigorous jurisprudence delineating the parameters of a reasonable restriction on competition evolved, matured, and found its way to America over the next five centuries. This history of the non-compete is as old as the United States itself. Through legislation and judicial wisdom, states have refined the doctrine to suit the needs of their individual states. Now, the Federal Trade Commission substitutes its divided opinion for that of scholars, judges, and legislators. “We know better,” the FTC proclaims. Why do I doubt that?
The FTC’s Notice of Proposed Rulemaking (“NPRM”) caused more than a stir in the press – even making segments on nightly news shows. Legal explanations of the proposed Rule abound, including ours. Apart from the radical change announced by the NPRM, the language of the FTC accused employers of being “coercive” and “oppressive,” so much so that, in the FTC’s opinion, the notion of a reasonable (and enforceable) restriction need not be countenanced. While paying unenthusiastic lip service to the proper purposes of restrictive covenants, the FTC substituted its blanket condemnation of employers for the long-standing assessment of fairness in any particular case. The only theoretical benefit of the proposed new Rule is efficiency. The patchwork of non-compete law will be tossed, but at the expense of eliminating an effective means of protecting business value.
The NPRM proposes some exemptions from the blanket condemnation of non-competes, and many in the franchise industry will relax after learning that one such exemption is the franchisor-franchisee relationship. But don’t exhale too early! The Statement of FTC Chair Lisa M. Khan specifically invites public comment on three issues, one being: “[S]hould the Rule cover noncompetes between franchisors and franchisees?” Significantly, and perhaps auguring the FTC’s desire to eliminate the franchise exemption, the Statement explains that non-competes in franchise relationships “raise concerns that are analogous to those raised by noncompetes between employers and workers.”
Concerns about this NPRM go beyond its content. Shortly after the composition of the FTC changed with the Biden administration, the FTC announced its intention to energize its statutory ability to address “unfair competition” beyond its historical focus on enforcement of the antitrust laws. Its efforts to do so thus far, challenging no-poach agreements and altering merger analysis, have been less than successful. But the agency has not waved the white flag. This NPRM is but one example. More to come? The FTC’s actions will undoubtedly meet serious legal challenges, prime among them the proper scope of the FTC’s unfair competition authority.
But the best defense is a good offense – respond to the invitation to comment! As the FTC Commission’s dissenter Christine Wilson reminds us in her statement, ”this is likely the only opportunity for public input before the commission issues a final rule.” Act now!