The FTC is Overreaching on Non-Competes

David Stafford
Chairman, FEDA
President/CEO, Stafford-Smith

Dealers have enough to worry about each day without government agencies attempting across-the-board overhauls to how businesses operate. But that’s exactly what the Federal Trade Commission (FTC) is attempting with its proposed ban on all non-compete agreements. The rule would effectively act as a blanket prohibition on non-competes and apply even to independent contractors. It’s an overreaching, reactionary and unnecessary rule.

The FTC’s primary reasoning for the ban is to protect employees from non-competes that restrict their ability to pursue higher wages and better benefits by moving to other jobs. The agency claims the ban will increase wages by nearly $300 billion annually for about 30 million Americans. However, the math isn’t there to confirm the numbers and it’s likely this so-called wage increase fails to account for the already robust benefits and wages typically offered to higher skilled employees as compensation for signing a non-compete agreement.

Business advocacy groups have stated, and they are right, that improperly used non-competes can harm workers and employers alike. But a total ban goes much too far. If anything, the proposed rule should look at specific industry segments to identify areas where non-competes may be necessary to protect competition and trade secrets — a role the FTC was established to play — rather than instituting mass reforms of how all businesses operate.

The agency further asserts the ban will allow innovative entrepreneurs to form competing businesses. If the FTC removes a business’ ability to use a non-compete to protect their trade secrets, intellectual property and other proprietary business data, it is essentially requiring businesses to hand over this information to, in most cases, a high-level employee who could take that exact information immediately to their own new business, founded on their former employer’s data. Worse, c-suite executives could carry sensitive business data or customer contacts to an existing competitor, giving their new employer an unfair and unearned advantage in the market.

This possibility certainly runs counter to the FTC’s stated belief that non-competes stifle competition. In fact, reasonable non-competes are an impetus for growth, innovation and competition. Entrepreneurs should form start-ups on the strength of their own ideas, not building on the foundation of their current employer’s core business data or client base.

As it Gets More Aggressive, the FTC Has Been Losing
The proposal is symptomatic of the current iteration of the FTC, which appears eager to overstep its purpose and inject itself more directly into how businesses compete and operate. This has led to increasing conflict between the agency and businesses of all sizes. Fortunately, our court system is pushing back.

In February, the U.S. District Court for the Northern District of California rejected the FTC’s argument that Facebook parent Meta’s planned $400 million purchase of Within, a developer that makes virtual reality fitness software, would reduce competition in the VR market. The FTC also lost recent challenges to the mergers between UnitedHealth Group and Change Healthcare, Illumina and Grail Inc. and U.S. Sugar and Imperial Sugar Co. Further, last July, the agency failed to convince a jury that chicken producers were engaged in price fixing. Taken together, those rulings have served as a series of setbacks to the agency’s aggressive attempts to unilaterally reshape anti-trust rules.

The FTC has continually been unable to make a convincing case for why it should be allowed to intercede in day-to-day business operations. This hostile approach creates uncertainty and obstacles for businesses without having a clear benefit to consumers or employees.

FEDA will continue to monitor this and other new FTC proposals, which seem to keep coming out every week.