FTC proposal on noncompete clauses is harmful to businesses

This column originally appeared in The Phoenix Business Journal.

We believe employers and workers should be able to enter contracts that include noncompete clauses. These agreements protect intellectual property or other confidential information that could cause economic and sometimes reputational harm if it fell into the wrong hands.

Furthermore, noncompete agreements help encourage businesses to invest in their employees through specialized training that, if put to work for a competitor business, would put the company that provided the training originally at a competitive disadvantage.  

Not everyone agrees with us. Some say such agreements undermine labor mobility and limit a worker’s ability to pursue new employment opportunities. 

It’s a legitimate debate and one we’re happy to have. But where should this debate take place: at the state Capitol where the legislative process adheres to a set of rules and norms, or inside a Beltway bureaucracy where appointed officials can seemingly make up the rules as they go along? 

Based on a Notice of Proposed Rulemaking it issued in January, the Federal Trade Commission would say the latter.  

The FTC would prevent “employers from entering into noncompete clauses with workers and requiring employers to rescind existing noncompete clauses,” which means “an employer that entered into a noncompete clause with a worker prior to the compliance date must rescind the noncompete clause no later than the compliance date.”  

Order would supercede any state regulations

The proposed rule stretches the agency’s mission to the point of absurdity and seeks to unilaterally reinterpret the section of the Federal Trade Commission Act on “unfair methods of competition,” never mind what the pesky legislative branch or the 50 states might have to say on the subject. 

But what if state law allows for noncompete clauses? Too bad, says the FTC. The Commission’s rule “shall supersede any state statute, regulation, order, or interpretation,” thus eviscerating federalism and the right to contract in one fell swoop. Destructive but efficient.  

Three FTC commissioners, including the chair and Biden appointee Lina Khan, backed the proposal, saying the Commission is “particularly well suited” to delve into the issue. Thankfully, Commissioner Christine Wilson pushed back in her dissenting statement, pointing out to her colleagues that the FTC’s justification for the proposal was weak and that it lacks congressional authority.

“In short, today’s proposed rule will lead to protracted litigation in which the Commission is unlikely to prevail,” Wilson said.  

Despite the FTC’s cavalier attitude, the need to protect intellectual property is real. It’s the stuff that differentiates a business from its competitors, that gives it a leg up in the marketplace, and that creates value for customers.  

The FTC proposal also doesn’t give workers their due, implying they’re not sophisticated enough to negotiate with employers a mutually beneficial employment arrangement. And yet, despite fears of a cooling economy, the national unemployment rate is 3.5%, indicating that job creators and job seekers have somehow figured out how to achieve full employment without the meddling of the FTC.  Perhaps what’s most frustrating is the FTC’s tromping into an area of policymaking that should be left to the states, which aren’t subjects in the kingdom of Washington, D.C. Let Arizona be Arizona and let California be California. We’re more than willing to argue our case in front of our elected state legislators and governor, and we’re certain our opponents are just as willing to do the same. 

There are plenty of bills that we don’t like this legislative session and that we’ll oppose strongly; bills that would implement rent control or eliminate the state’s Right to Work laws or raise taxes. But those bills’ supporters must try to get them passed into law by presenting their position to lawmakers who face their voters every two years. An agency head cannot, thankfully, just waive their hand and make it so.  

Our organizations will file public comments providing an Arizona perspective on why this proposal is so harmful to intellectual property, employee retention, and investment, and we hope the Arizona congressional delegation will voice its displeasure to the Biden administration and FTC.  

A federal agency making a rule to eliminate a business practice whose regulation is best left to the states and legislative branch will only hurt job creation. If the FTC is really worried about helping workers, it will ditch this proposal.  

Danny Seiden is president and CEO of the Arizona Chamber of Commerce & Industry. Chad Heinrich is the Arizona state director for the National Federation of Independent Business.