Want Unfairness On the Job? Let the FTC Blanket Ban Non-Competes

Tomorrow the FTC will vote on a rule to ban non-compete clauses. The Agency’s hubris is quite something, but also almost certainly unconstitutional. These viewpoints come to readers care of someone who thinks non-compete clauses related to employment a generally bad idea. More on why they’re bad in a minute.

For now, imagine the FTC thinking it has the power to erase roughly 1/5^th of employment contracts across the U.S. with a mere vote. One guesses that neither President Biden nor his predecessor in Donald Trump ever thought they had this much power, yet a federal agency with officers appointed by the White House thinks it does? Again, the hubris exhibited by the Lina Khan-led FTC is quite something, after which it doesn’t take a constitutional scholar to deduce that the FTC’s actions blatantly violate our founding document.

In thinking about what the FTC is trying to do, it’s notable that in the roughly 112-year history of the U.S. Chamber of Commerce, it had never expressed a national opinion about non-compete clauses. With good reason. The Chamber not unreasonably viewed it as a subject for the states.

Of course, the fact that the U.S. Chamber hasn’t involved itself in this issue speaks to the man-bites-dog nature of the FTC’s actions. Or maybe not. Readers can conclude for themselves how odd it is that federal appointees are trying to make law for all fifty states.

By taking away the right of employers to set the terms of employment as they see fit, a blanket abolishment of non-compete clauses would by definition raise the cost of hiring for employers. Businesses aren’t presently utilizing these contracts just because, but instead they’re employing non-competes because they see them as a necessary pre-condition for hiring someone.

What are those pre-conditions? If we’re being realistic, they are too numerous to list. That they’re too numerous is yet another reason why a blanket ban by the FTC would result in such chaos. Right or wrong, businesses have all sorts of reasons for utilizing non-compete agreements ahead of hiring individual workers.

Looking at them broadly, come companies view them as necessary before committing the time and investment required to train new employees. Other businesses have made substantial R&D investments, and view non-competes as a way to keep company secrets within the company. Still others want to erect barriers to “free riding” whereby they train employees who can then take their newly-trained talents to the market in pursuit of better pay outside the company that first invested in them.

About the commonly expressed reasons listed above, the view here is that none of them are terribly compelling. If newly-trained employees might leave for greener pastures absent non-compete clauses, that’s perhaps a sign that their existing employer is “free-riding” on their talents by not paying the market rate for their services.

What about the reluctance of companies to invest the time, effort and money required to train an individual without ironclad non-compete contracts? Companies trust their hires so little that they essentially need a pre-nup? Looked at another way, if they’ve created a good, rewarding culture and have hired accordingly, why the need for the proverbial pre-nup?

As for R&D and company secrets escaping, it cannot be stressed enough that no contract measures up to the easy and relentless flow of information. Information, particularly if it’s valuable, will find its way out the door regardless of employment contracts in place. Much as there’s no accounting for the final destination of any market good in a trade sense, short of businesses spying on their employees at all times during and after employment, secrets will find their way out.

Which, when you think about it, is probably not as bad as it sounds. Why? Because if you have a good, innovative idea, there’s generally no need to hide it as is. That is so because most will reject it. Good ideas frequently only look good after they’re public, after which the secret is out. Lest readers forget, the iPhone was largely dismissed or ridiculed ahead of launch. Lastly, if as an employer you fear your employees leaking information, that’s likely a signal that you the employer should look in the mirror with regard to your taste in workers.

So while wise minds can debate the good or bad of non-compete clauses or contracts, a lot of companies DO employ them. And they have their reasons. Whether the reasons are good or bad is not for the FTC decide, but instead should be decided by duly elected legislators within the fifty states. From there, let the flow of people and corporations decide the good, bad or in between of employment contracts.