CRS Reviews Legal Challenges to FTC's Non-Compete Rule
The Congressional Research Service ("CRS") reviewed the legal challenges concerning the Federal Trade Commission's ("FTC") final rule banning non-compete clauses for employees. (See related coverage.)
In an edition of Legal Sidebar, the CRS highlighted that at least three lawsuits challenging the non-compete rule have been filed in federal district court. According to CRS, the lawsuits challenge the rule on a variety of grounds, including:
- that the FTC lacks substantive rulemaking authority as per the history and structure of the FTC Act and the "major questions doctrine";
- the non-compete rule unlawfully interprets the "Unfair Methods of Competition" rules;
- the non-compete rule violates the non-delegation doctrine, which requires Congress to provide agencies with an "intelligible principle" in delegating legislative authority;
- by invalidating preexisting non-compete clauses for workers other than senior executives, the non-compete rule is impermissibly retroactive. In particular, one suit claims that the FTC Act does not authorize retroactive rulemaking and that, even if it did, the non-compete rule’s retroactive effect would "raise serious questions under the Fifth Amendment of the U.S. Constitution";
- the non-compete rule is "arbitrary and capricious" and thus violates the Administrative Procedure Act; and
- the FTC’s structure violates Article II of the Constitution by preventing the President from removing FTC Commissioners for reasons other than "inefficiency, neglect of duty, or malfeasance in office."
CRS highlighted that Congress could consider, among others:
- whether the FTC possesses general competition rulemaking authority;
- legislation to limit or prohibit non-compete clauses. (The Workforce Mobility Act would prohibit non-competes, subject to exceptions for the sale of a business or the dissolution of a partnership; the Freedom to Compete Act would ban non-compete clauses in employment contracts that are subject to the wage and overtime requirements of the Fair Labor Standards Act); and
- leaving existing law unchanged.
Related Articles
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The FTC issued a rule to ban non-compete clauses for employees. The final rule provides that "it is an unfair method of competition—and therefore a violation of Section 5 of the FTC Act—for employers to enter into non-compete agreements with workers."
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The FTC extended the comment period on a proposed rule banning employers from subjecting their employees to noncompete clauses. The extension is from March 20 until April 19, 2023.
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House Republicans criticized the FTC rulemaking proposal to ban noncompete clauses, asserting that the proposal "exceeds its delegated authority and imposes a top-down, one-size-fits-all approach that violates basic American principles of federalism and free markets."
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FTC proposed the "Non-Compete Clause Rule," which would prohibit employers from (i) entering into, or attempting to enter into a non-compete clause and (ii) representing to employees that they are subject to a non-compete clause.
