As you all know, in September of last year, the FTC requested public comment on noncompete agreements. Because I believe that many noncompete agreements likely violate our antitrust laws, I asked for the public to help us identify potentially illegal noncompete agreements as a first step toward enforcing the antitrust laws against those agreements. We have convened this workshop for a similar purpose: to improve the Commission’s understanding of the real-world effects of noncompete agreements, and to ensure that the Commission prioritizes its enforcement resources against those noncompete agreements that cause the most damage to competition and America’s workers.
Given the controversy surrounding the Biden Administration’s proposed rule on noncompete agreements, I want to begin my remarks with a brief explanation of my principal objection to the proposed rule. On April 23, 2024, my predecessor, joined by two of her fellow Commissioners, promulgated the Non-Compete Clause Rule. In response, Commissioner Holyoak and I wrote vigorous and lengthy dissents. For my part, I did not object to the majority Commissioners’ claim that noncompete agreements can have anticompetitive effects. That much is plain. Instead, I objected to their unconstitutional seizure of power in pursuit of preventing the potentially anticompetitive effects of noncompete agreements. Why? Well, the Biden Administration’s proposed rule would have banned almost all noncompete agreements, invalidated over thirty million existing contracts across the nation, redistributed over half a trillion dollars of wealth, and preempted 46 state laws addressing the use of noncompete agreements. It was an extraordinary and unprecedented assertion of regulatory authority, and it rested on a century-old statute that no one had ever claimed included the power to impose a nationwide ban on any sort of contract—much less a contract that all 50 States treated as lawful when Congress adopted that statute.
Really, my objections were about whether we are a self-governing people. When unelected bureaucrats assert the power to “prescribe general rules for the government of society,” which is the essence of lawmaking, they appropriate a power that our Constitution vests exclusively in Congress. Because we elect individuals to represent us in Congress, its members are answerable to the electorate. This is government for the people and by the people. But if unelected bureaucrats can appropriate to themselves the power of lawmaking, we no longer have a government for the people and by the people; instead, we have government for the government and by the government. In the end, the courts checked the extraordinary hubris of Biden regulators. For all the past administration’s bluster surrounding this rule, it never even went into effect. It never protected a single worker.
We are here today because I believe we can chart a course toward protecting American workers from unlawful noncompete agreements by using the tools Congress actually gave us, rather than arrogating to ourselves new powers that Congress has denied us. Indeed, we do have the power to prosecute anticompetitive noncompete agreements. Consequent to our request for public comment on noncompete agreements, the FTC has filed two complaints against companies whose restrictive employment agreements are anticompetitive and harmful to American workers. In each case, we found that these agreements not only harmed employees by denying them the ability to seek better job opportunities, but also harmed competing companies and consumers who would benefit from greater mobility of workers.
Such agreements have been around for centuries. In the earliest known case—Dyer’s Case from 1414—the judge refused to enforce what amounted to a six-month noncompete agreement as infringing on the right of a worker to practice his trade. As time went on, however, and the economy changed and grew more complex, courts and lawmakers began to look more closely at the circumstances of these agreements and began to consider their justifications. If someone wished to buy a business from someone else, for instance, the purchaser wanted assurances that the former owner would not immediately establish a competing business. Without those assurances, the owner would find it hard to sell his business. What emerged in the common law was a reasonableness test that considered whether the noncompete agreement was limited to the “fair protection” of the interests of one party to the contract and “not so large as to interfere with the interests of the public.” Notably, one of the early opinions applying the Sherman Act summarized this history. Then-Judge William Howard Taft for the Sixth Circuit in Addyston Pipe related noncompete agreements’ treatment at common law to Sherman Act principles, describing an approach that looked to the facts of each situation to determine whether the agreements were reasonably necessary to some procompetitive purpose. Subsequently, and in parallel to the development of the Rule of Reason in antitrust law, American state courts adapted the common law approach to noncompete agreements with their own reasonableness tests.
So, what are the potentially harmful effects of noncompete agreements? Let me mention just two. First, noncompete agreements reduce an employee’s bargaining power vis-à-vis his or her employer. Because the noncompete agreement reduces the risk that an employee might leave for better compensation or working conditions elsewhere, an employer has less incentive to provide, and an employee has less leverage to demand, better compensation or working conditions. Thus, we can reasonably assume that noncompete agreements will tend to decrease employee wages, benefits, and working conditions. And, indeed, empirical evidence bears out this assumption in at least some circumstances. Second, because noncompete agreements prohibit an employee from working for a rival business and from forming a new competing business, they reduce competition by raising barriers to entry or expansion for potential rivals. Put differently, noncompete agreements tend to suppress competition by limiting the supply of skilled labor needed to make a rival business competitive. And because a noncompete agreement restricts the supply of skilled labor by lawfare rather than by providing better pay or working conditions than a competitor, it works to the disadvantage of employees, for reasons already mentioned. But it also works to the disadvantage of consumers because it impedes the formation or expansion of rival businesses, which would potentially reduce prices, increase innovation and choice, and improve quality. And here we should be clear: suppression of competition with actual or potential rivals is not a legitimate interest of an employer. Let me give an example from a recent complaint filed by our agency against noncompete agreements used by the country’s largest pet cremation firm. According to our complaint, the employer acknowledged that his company “could get comfortable with the risk” of not having noncompete agreements in a particular market because competitors in that market were at a “smaller scale and less of a threat.” Similarly, that same employer allegedly stated that they should execute a noncompete agreement with an employee because of the “risk” that employee would leave for a competitor and the increased financial costs of dealing with such “competitive concerns.” Both of the employer’s statements make clear that the noncompete agreements were not protecting a legitimate interest of the employer, but instead were suppressing competition to the detriment of workers, rival businesses, and consumers.
So what can the FTC do about noncompete agreements? In keeping with the authority conferred on us by Congress and with the centuries of tradition and experience accrued in addressing noncompete agreements, we must proceed on a case-by-case basis, acting against specific noncompete agreements that clearly lack justification and likely have adverse effects. When evaluating the reasonableness of noncompete agreements under any authority, courts look to (1) whether the agreement advances a legitimate end of the employer and (2) whether the agreement is narrowly tailored to achieve that end. Indeed, for centuries common-law courts enforced noncompete agreements where they were necessary to ensure that the buyer of some business would have some limited time or space to develop its competitive capacities vis-à-vis potential rivals, including, most especially, the seller of that business. Similarly, a business may have legitimate, procompetitive interests in protecting against the transmission of competitively sensitive information to its competitors—information regarding technological innovation, pricing, wages, business practices, or trade secrets—because preserving the confidentiality of this knowledge is essential to the capacity of the business to compete against its rivals and to ensure that the market rewards merit rather than espionage. It may also be legitimate for a business to wish to protect its investment in training its employees to acquire a skillset unique to that business if that training and skillset is essential to its capacity to compete with its rivals. But the assertion of a procompetitive justification is not enough. As is true in other antitrust contexts, we must consider whether the noncompete agreement is narrowly tailored to achieve a procompetitive purpose sought by the employer. The easiest way to answer this is to ask whether a less restrictive type of restraint could accomplish the goal or goals that the noncompete is purportedly meant to promote. We have heard time and again that employers use noncompete agreements to prevent workers from soliciting their customers. At the same time, those same employers use non-solicitation agreements which, as their name suggests, are directly targeted to address that concern. The same is true for nondisclosure agreements—and trade secret law—which can promote investments in confidential information. Even where no less restrictive alternative is available, the scope and duration of the noncompete agreement still must be limited to what is necessary to advance the employer’s procompetitive interest. It is hard to imagine any case in which a noncompete of unlimited duration or nationwide geography, for example, is reasonably necessary to promote an interest or transaction that cannot be achieved through a more tailored restraint.
Now, some will object that this is a too piecemeal approach to be an effective solution to the problem of noncompete agreements. To such critics, only a blanket ban on noncompete agreements can prevent their harmful effects. They might be right, but the objection is beside the point for a couple reasons. For one thing, the Commission lacks the power to issue such a rule. Taking a case-by-case enforcement approach, then, is consistent with the power Congress has given us, with centuries of legal tradition, and with the antitrust laws. The case-by-case approach will have effects beyond each individual case. Basically, it is education through enforcement. By bringing enforcement actions against specific businesses executing unjustified, overbroad, unfair, or anticompetitive noncompete agreements, others will take notice and adjust their agreements accordingly. For anyone like me who has worked in a big law firm, lots of client alerts will be sent out from law firms every time the FTC brings an enforcement action, explaining to clients the risk in light of the way the FTC understands the law and its planned enforcement policies. We want each enforcement action to protect as many workers as possible. We want to focus on the industries most burdened by noncompete agreements.
If a firm imposes a noncompete agreement that is not tailored to achieve a procompetitive objective; that is intended to suppress competition or the bargaining power of workers; or that contains an unlimited scope or duration, then the FTC will enforce the antitrust laws against that firm. To mitigate this risk, it would be prudent for all companies to review all their existing noncompete agreements in light of the principles I’ve laid out here today and to apply them to any future employment agreements. The days of unreflective, unjustified, and anticompetitive noncompete agreements are over. If a company wants to execute a noncompete agreement, they better be prepared to defend it.
Source: U.S. Federal Trade Commission (FTC), remarks at the FTC workshop on noncompete agreements (Jan. 27, 2026, Washington, D.C.)
0 Comments
No comments yet.