FTC Must Avoid ‘Whack-a-Mole’ to Make Its Noncompete Ban Stick

The fate of the Federal Trade Commission’s proposed bar of noncompete agreements hinges on the agency notching some early wins against a few companies to deter others from violating a ban.

The FTC will have to navigate a series of obstacles, from defending a final rule against legal challenges to deploying limited enforcement resources strategically, if it wants to pull off one of its most significant competition rulemakings in decades.

Unlike state bans on noncompete agreements, which often allow aggrieved workers to sue, only the FTC can enforce its own rules. That’s a tough problem for a federal agency that its chair, Lina Khan, has characterized as “outgunned.”

Future business compliance will require a few strong test cases to demonstrate the FTC’s ability—or it’ll be forced to play “whack-a-mole,” said Hill Wellford, a partner at Vinson & Elkins.

“If the rule gets finalized, I would expect the majority of companies would grudgingly comply with the great majority of their employees,” Wellford said. “Well-counseled companies with large litigation war chests that have particular employees that they are concerned about giving the keys to the kingdom—there’s still going to be a strong wind blowing to sign these things and take their chances with the FTC.”

Balancing Act

The commission has proposed a rule barring virtually all noncompete agreements, which cover up to one-in-five American workers. It will need to juggle its vast workload of merger reviews, consumer protection, and other tasks as it seeks to play a greater role in regulating labor markets.

“It’s no secret that the FTC generally is under-resourced,” Khan told reporters at a Jan. 4 briefing. She added that enforcing a noncompete ban is a question of “prioritization for the current commission as well as future commissions in terms of our ability to follow up.”

It’s not possible for the agency to bring enforcement actions against all violators, said Bruce Hoffman, a partner at Cleary Gottlieb and former head of the agency’s competition bureau.

“This rule covers an area of conduct that’s absolutely ubiquitous in the economy,” Hoffman said. “The FTC can’t sue everyone.”

The commission may have to make painful decisions between challenging a merger or suing to protect workers from restrictive covenants, Wellford said.

Antitrust lawyers differed on the likelihood that broad swaths of US businesses would voluntarily remove all noncompete agreements with their workers, if the rule proposal is finalized in its current form.

Most business clients “want to comply with the law,” said Amanda Wait, head of US antitrust at Norton Rose Fulbright. Holding on to noncompetes as a standard employment contract provision might not only trigger an investigation, but become a sticking point in merger reviews that would otherwise sail through, she said.

“If the rule ends up with carveouts for partners and senior executives,” not just the existing exemption for the founders of companies, “I think most companies would comply,” Hoffman said. Under a finalized noncompete ban, “if I’m counseling a company, I’d say get rid of them,” he said.

Grand Strategy

The FTC could streamline parts of its noncompete enforcement under a little-used section of the FTC Act which allows it to seek penalties for rule violations after notifying companies they aren’t in compliance, Hoffman said.

Otherwise, the law first requires the commission to investigate and then send an alleged offender a cease-and-desist letter. The agency can only move to seeking monetary penalties if a cease-and-desist fails, Hoffman said.

But if the commission finds a strong test case, it can use a company’s violation of the rule and resistance to a cease-and-desist letter to issue a written decision and create a notice of penalty offenses. The agency can send such a notice to other companies using noncompetes, if it can prove they knew their conduct violated the rule.

Rather than taking the extra time for the cease-and-desist process, notices allow the commission to more quickly seek penalties, Hoffman said. But reaching the point where they can quickly penalize companies will still take time, he said.

“They’d have to promulgate the rule, find someone violating it, bring an action, issue an order, survive appeal, and then issue the notices,” Hoffman said. “That’s not a short process—it will take a couple years.”

But the notices and the civil investigative demands the commission uses in place of subpoenas tend to be compelling, Wellford said. They aren’t difficult to issue, so companies continuing to use noncompete agreements could see a “blizzard” of demands, he said.

Still, some companies will weigh the risk of litigation with the potential loss of trade secrets and choose to roll the dice, Wellford said.

“If I’m a pharmaceutical company, and I’m faced with the possibility of $2 billion heading out the door versus $10 million for litigating against the agency, the business case for litigating against the agency is extremely strong,” Wellford said. “If anyone believes a general counsel doesn’t make business decisions like that, they have ‘t talked to a general counsel at a public company.”