Rule2024-09171
Non-Compete Clause Rule
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
May 7, 2024
Effective
September 4, 2024
Issuing agencies
Federal Trade Commission
Abstract
Pursuant to the Federal Trade Commission Act ("FTC Act"), the Federal Trade Commission ("Commission") is issuing the Non- Compete Clause Rule ("the final rule"). The final rule provides that it is an unfair method of competition for persons to, among other things, enter into non-compete clauses ("non-competes") with workers on or after the final rule's effective date. With respect to existing non-competes--i.e., non-competes entered into before the effective date--the final rule adopts a different approach for senior executives than for other workers. For senior executives, existing non-competes can remain in force, while existing non-competes with other workers are not enforceable after the effective date.
Full Text
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<title>Federal Register, Volume 89 Issue 89 (Tuesday, May 7, 2024)</title>
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[Federal Register Volume 89, Number 89 (Tuesday, May 7, 2024)]
[Rules and Regulations]
[Pages 38342-38506]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-09171]
[[Page 38341]]
Vol. 89
Tuesday,
No. 89
May 7, 2024
Part III
Federal Trade Commission
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16 CFR Parts 910 and 912
Non-Compete Clause Rule; Final Rule
Federal Register / Vol. 89 , No. 89 / Tuesday, May 7, 2024 / Rules
and Regulations
[[Page 38342]]
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FEDERAL TRADE COMMISSION
16 CFR Parts 910 and 912
RIN 3084-AB74
Non-Compete Clause Rule
AGENCY: Federal Trade Commission.
ACTION: Final rule.
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SUMMARY: Pursuant to the Federal Trade Commission Act (``FTC Act''),
the Federal Trade Commission (``Commission'') is issuing the Non-
Compete Clause Rule (``the final rule''). The final rule provides that
it is an unfair method of competition for persons to, among other
things, enter into non-compete clauses (``non-competes'') with workers
on or after the final rule's effective date. With respect to existing
non-competes--i.e., non-competes entered into before the effective
date--the final rule adopts a different approach for senior executives
than for other workers. For senior executives, existing non-competes
can remain in force, while existing non-competes with other workers are
not enforceable after the effective date.
DATES: The final rule is effective September 4, 2024.
FOR FURTHER INFORMATION CONTACT: Benjamin Cady or Karuna Patel, Office
of Policy Planning, 202-326-2939 (Cady), 202-326-2510 (Patel), Federal
Trade Commission, 600 Pennsylvania Avenue NW, Mail Stop CC-6316,
Washington, DC 20580.
SUPPLEMENTARY INFORMATION:
I. Background
A. Summary of the Final Rule's Provisions
The Commission proposed the Non-Compete Clause Rule on January 19,
2023 pursuant to sections 5 and 6(g) of the FTC Act.\1\ Based on the
Commission's expertise and after careful review and consideration of
the entire rulemaking record--including empirical research on how non-
competes affect competition and over 26,000 public comments--the
Commission adopts this final rule addressing non-competes.
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\1\ Non-Compete Clause Rule, NPRM, 88 FR 3482 (Jan. 19, 2023)
(hereinafter ``NPRM'').
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The final rule provides that it is an unfair method of
competition--and therefore a violation of section 5--for employers to,
inter alia, enter into non-compete clauses with workers on or after the
final rule's effective date.\2\ The Commission thus adopts a
comprehensive ban on new non-competes with all workers.
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\2\ Sec. 910.2(a)(1)(i) and Sec. 910.2(a)(2)(i).
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With respect to existing non-competes, i.e., non-competes entered
into before the final rule's effective date, the Commission adopts a
different approach for senior executives \3\ than for other workers.
Existing non-competes with senior executives can remain in force; the
final rule does not cover such agreements.\4\ The final rule allows
existing non-competes with senior executives to remain in force because
this subset of workers is less likely to be subject to the kind of
acute, ongoing harms currently being suffered by other workers subject
to existing non-competes and because commenters raised credible
concerns about the practical impacts of extinguishing existing non-
competes for senior executives. For workers who are not senior
executives, existing non-competes are no longer enforceable after the
final rule's effective date.\5\ Employers must provide such workers
with existing non-competes notice that they are no longer
enforceable.\6\ To facilitate compliance and minimize burden, the final
rule includes model language that satisfies this notice requirement.\7\
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\3\ See Sec. 910.1 (defining ``senior executive'').
\4\ See Part IV.C.3.
\5\ Sec. 910.2(a)(1)(ii).
\6\ Sec. 910.2(b)(1).
\7\ Sec. 910.2(b)(4).
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The final rule contains separate provisions defining unfair methods
of competition for the two subcategories of workers. Specifically, the
final rule provides that, with respect to a worker other than a senior
executive, it is an unfair method of competition for a person to enter
into or attempt to enter into a non-compete clause; to enforce or
attempt to enforce a non-compete clause; or to represent that the
worker is subject to a non-compete clause.\8\ The Commission describes
the basis for its finding that these practices are unfair methods of
competition in Parts IV.B.1 through IV.B.3.
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\8\ Sec. 910.2(a)(1).
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The final rule provides that, with respect to a senior executive,
it is an unfair method of competition for a person to enter into or
attempt to enter into a non-compete clause; to enforce or attempt to
enforce a non-compete clause entered into after the effective date; or
to represent that the senior executive is subject to a non-compete
clause, where the non-compete clause was entered into after the
effective date.\9\ The Commission describes the basis for its finding
that these practices are unfair methods of competition in Part IV.C.2.
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\9\ Sec. 910.2(a)(2).
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The final rule defines ``non-compete clause'' as ``a term or
condition of employment that prohibits a worker from, penalizes a
worker for, or functions to prevent a worker from (1) seeking or
accepting work in the United States with a different person where such
work would begin after the conclusion of the employment that includes
the term or condition; or (2) operating a business in the United States
after the conclusion of the employment that includes the term or
condition.'' \10\ The final rule further provides that, for purposes of
the final rule, ``term or condition of employment'' includes, but is
not limited to, a contractual term or workplace policy, whether written
or oral.\11\ The final rule further defines ``employment'' as ``work
for a person.'' \12\
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\10\ Sec. 910.1.
\11\ Id.
\12\ Id.
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The final rule defines ``worker'' as ``a natural person who works
or who previously worked, whether paid or unpaid, without regard to the
worker's title or the worker's status under any other State or Federal
laws, including, but not limited to, whether the worker is an employee,
independent contractor, extern, intern, volunteer, apprentice, or a
sole proprietor who provides a service to a person.'' \13\ The
definition further states that the term ``worker'' includes a natural
person who works for a franchisee or franchisor, but does not include a
franchisee in the context of a franchisee-franchisor relationship.\14\
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\13\ Id.
\14\ Id.
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The final rule does not apply to non-competes entered into by a
person pursuant to a bona fide sale of a business entity.\15\ In
addition, the final rule does not apply where a cause of action related
to a non-compete accrued prior to the effective date.\16\ The final
rule further provides that it is not an unfair method of competition to
enforce or attempt to enforce a non-compete or to make representations
about a non-compete where a person has a good-faith basis to believe
that the final rule is inapplicable.\17\
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\15\ Sec. 910.3(a).
\16\ Sec. 910.3(b).
\17\ Sec. 910.3(c); see also Part V.C.
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The final rule does not limit or affect enforcement of State laws
that restrict non-competes where the State laws do not conflict with
the final rule, but it preempts State laws that conflict with the final
rule.\18\ Furthermore, the final
[[Page 38343]]
rule includes a severability clause clarifying the Commission's intent
that, if a reviewing court were to hold any part of any provision or
application of the final rule invalid or unenforceable--including, for
example, an aspect of the terms or conditions defined as non-competes,
one or more of the particular restrictions on non-competes, or the
standards for or application to one or more category of workers--the
remainder of the final rule shall remain in effect.\19\ The final rule
has an effective date of September 4, 2024.\20\
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\18\ Sec. 910.4.
\19\ Sec. 910.5.
\20\ Sec. 910.6.
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B. Context for the Rulemaking
1. Growing Concerns Regarding the Harmful Effects of Non-Competes
The purpose of this rulemaking is to address conduct that harms
fair competition. Concern about non-competes dates back centuries, and
the evidence of harms has increased substantially in recent years.
However, the existing case-by-case and State-by-State approaches to
non-competes have proven insufficient to address the tendency of non-
competes to harm competitive conditions in labor, product, and service
markets.
The ability of employers \21\ to enforce non-competes has always
been restricted, based on public policy concerns that courts have
recognized for centuries. For example, in Mitchel v. Reynolds (1711),
an English case that provided the foundation for American common law on
non-competes,\22\ the court noted that workers were vulnerable to
exploitation through non-competes and that non-competes threatened a
worker's ability to practice a trade and earn a living.\23\ These
concerns have persisted. Today, non-competes between employers and
workers are generally subject to greater scrutiny under State common
law than other employment terms ``because they are often the product of
unequal bargaining power and because the employee is likely to give
scant attention to the hardship he may later suffer through loss of his
livelihood.'' \24\ For these reasons, State courts often characterize
non-competes as ``disfavored.'' \25\
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\21\ For ease of reference, the Commission uses the term
``employer'' in this Supplementary Information to refer to a person
for whom a worker works. The text of part 910 does not use the term
``employer.''
\22\ Harlan Blake, Employee Agreements Not to Compete, 73 Harv.
L. Rev. 625, 629-31 (1960).
\23\ The Mitchel court expressed concern that non-competes
threaten ``the loss of [the worker's] livelihood, and the
subsistence of his family.'' Mitchel v. Reynolds, 1 P. Wms. 181, 190
(Q.B. 1711). The court likewise emphasized ``the great abuses these
voluntary restraints'' are subject to--for example, ``from masters,
who are apt to give their apprentices much vexation'' by using
``many indirect practices to procure such bonds from them, lest they
should prejudice them in their custom, when they come to set up for
themselves.'' Id.
\24\ Restatement (Second) of Contracts sec. 188, cmt. g (1981).
\25\ See, e.g., Navarre Chevrolet, Inc. v. Begnaud, 205 So. 3d
973, 975 (La. Ct. App. 3d 2016); Eastman Kodak Co. v. Carmosino, 77
A.D.3d 1434, 1435 (N.Y. App. Div. 4th 2010); Access Organics, Inc.
v. Hernandez, 175 P.3d 899, 904 (Mont. 2008); Bybee v. Isaac, 178
P.3d 616, 621 (Idaho 2008); Softchoice, Inc. v. Schmidt, 763 NW2d
660, 666 (Minn. Ct. App. 2009).
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Furthermore, as ``contract[s] . . . in restraint of trade,'' \26\
non-competes have always been subject to our nation's antitrust
laws.\27\ As early as 1911, in the formative antitrust case of United
States v. American Tobacco Co., the Supreme Court held that several
tobacco companies violated both section 1 and section 2 of the Sherman
Act because of the ``constantly recurring'' use of non-competes, among
other practices.\28\
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\26\ 15 U.S.C. 1.
\27\ See, e.g., Newburger, Loeb & Co., Inc. v. Gross, 563 F.2d
1057, 1082 (2d Cir. 1977) (``Although such issues have not often
been raised in the federal courts, employee agreements not to
compete are proper subjects for scrutiny under section 1 of the
Sherman Act. When a company interferes with free competition for one
of its former employee's services, the market's ability to achieve
the most economically efficient allocation of labor is impaired.
Moreover, employee-noncompetition clauses can tie up industry
expertise and experience and thereby forestall new entry.'')
(internal citation omitted).
\28\ 221 U.S. 106, 181-83 (1911).
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Concerns about non-competes have increased substantially in recent
years in light of empirical research showing that they tend to harm
competitive conditions in labor, product, and service markets. Changes
in State laws governing non-competes \29\ in recent decades have
allowed researchers to better isolate the effects of non-competes,
giving rise to a body of empirical research documenting these harms.
This research has shown that the use of non-competes by employers tends
to negatively affect competition in labor markets, suppressing earnings
for workers across the labor force--including even workers not subject
to non-competes.\30\ This research has also shown that non-competes
tend to negatively affect competition in product and service markets,
suppressing new business formation and innovation.\31\
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\29\ See NPRM at 3494 (describing recent legislative activity at
the State level).
\30\ See Parts IV.B.3.a and IV.C.2.c.ii.
\31\ See Parts IV.B.3.b and IV.C.2.c.i.
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Alongside this large body of empirical work, news reports revealed
that employers subject even middle-income and low-wage workers to non-
competes on a widespread basis.\32\ Workers came forward to recount
how--by blocking them from taking a better job or starting their own
business, and subjecting them to threats and litigation from their
employers--non-competes derailed their careers, destroyed their
finances, and upended their lives.\33\
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\32\ See, e.g., Dave Jamieson, Jimmy John's Makes Low-Wage
Workers Sign `Oppressive' Noncompete Agreements, HuffPost, Oct. 13,
2014, <a href="https://www.huffpost.com/entry/jimmy-johns-non-compete_n_5978180">https://www.huffpost.com/entry/jimmy-johns-non-compete_n_5978180</a>; Spencer Woodman, Exclusive: Amazon Makes Even
Temporary Warehouse Workers Sign 18-Month Non-Competes, The Verge,
Mar. 26, 2015, <a href="https://www.theverge.com/2015/3/26/8280309/amazon-warehouse-jobs-exclusive-noncompete-contracts">https://www.theverge.com/2015/3/26/8280309/amazon-warehouse-jobs-exclusive-noncompete-contracts</a>.
\33\ See, e.g., Conor Dougherty, How Noncompete Clauses Keep
Workers Locked In, N.Y. Times, May 13, 2017, <a href="https://www.nytimes.com/2017/05/13/business/noncompete-clauses.html">https://www.nytimes.com/2017/05/13/business/noncompete-clauses.html</a>; Lauren
Weber, The Noncompete Clause Gets a Closer Look, Wall St. J., Jul.
21, 2021, <a href="https://www.wsj.com/articles/the-noncompete-clause-gets-a-closer-look-11626872430">https://www.wsj.com/articles/the-noncompete-clause-gets-a-closer-look-11626872430</a>.
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Yet despite the mounting empirical and qualitative evidence
confirming these harms and the efforts of many States to ban them, non-
competes remain prevalent in the U.S. economy. Based on the available
evidence, the Commission estimates that approximately one in five
American workers--or approximately 30 million workers--is subject to a
non-compete.\34\ The evidence also indicates that employers frequently
use non-competes even when they are unenforceable under State law.\35\
This suggests that employers may believe workers are unaware of their
legal rights; that employers may be seeking to take advantage of
workers' lack of knowledge of their legal rights; or that workers are
unable to enforce their rights through case-by-case litigation.\36\ In
addition, the ability of States to regulate non-competes effectively is
constrained by employers' use of choice-of-law provisions, significant
variation in how courts apply choice-of-law rules in disputes over non-
competes, and the increasingly interstate nature of work. As the public
comments attest, this patchwork of laws and legal uncertainty has
become extremely burdensome for both employers and workers.\37\
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\34\ See Part I.B.2. As described therein, this is likely a
conservative estimate.
\35\ See Part IV.B.2.b.i.
\36\ See id.
\37\ See Part IX.C.2.
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As concern about the harmful effects of non-competes increased, the
Commission began exploring the potential for Federal rulemaking on non-
competes. In 2018 and 2019, the Commission held several hearings on
twenty-first century competition and consumer protection issues,
including ``the use of non-competition agreements
[[Page 38344]]
and the conditions under which their use may be inconsistent with the
antitrust laws.'' \38\ In January 2020, the Commission held a public
workshop on non-competes. The speakers and panelists who participated
in the workshop--and the hundreds of public comments the Commission
received in response to the workshop--addressed a wide range of issues,
including statutory and judicial treatment of non-competes; the
economic literature regarding the effects of non-competes; and whether
the Commission should initiate a Federal rulemaking on non-
competes.\39\ The Commission also sought public comment on non-competes
as part of an August 2021 solicitation for public comment on contract
terms that may harm competition and a December 2021 public workshop on
competition in labor markets.\40\ The Commission has also addressed
non-competes in connection with its merger review work.\41\
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\38\ Hearings on Competition and Consumer Protection in the 21st
Century, Notice, 83 FR 38307, 38309 (Aug. 6, 2018).
\39\ FTC, Non-Competes in the Workplace: Examining Antitrust and
Consumer Protection Issues (Jan. 9, 2020), <a href="https://www.ftc.gov/news-events/events/2020/01/non-competes-workplace-examining-antitrust-consumer-protection-issues">https://www.ftc.gov/news-events/events/2020/01/non-competes-workplace-examining-antitrust-consumer-protection-issues</a>.
\40\ FTC, Solicitation for Public Comments on Contract Terms
that May Harm Competition (Aug 5, 2021), <a href="https://www.regulations.gov/document/FTC-2021-0036-0022">https://www.regulations.gov/document/FTC-2021-0036-0022</a>; FTC, Making
Competition Work: Promoting Competition in Labor Markets (Dec. 6-7,
2021), <a href="https://www.regulations.gov/docket/FTC-2021-0057/comments">https://www.regulations.gov/docket/FTC-2021-0057/comments</a>.
\41\ See NPRM at 3498-99.
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In 2021, the Commission initiated investigations into the use of
non-competes. In 2023, the Commission secured final consent orders
settling charges that certain firms engaged in an unfair method of
competition in violation of section 5 because their use of non-competes
tended to impede rivals' access to the restricted employees' labor,
harming workers, consumers, and competitive conditions.\42\
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\42\ FTC, Press Release, FTC Approves Final Orders Requiring Two
Glass Container Manufacturers to Drop Noncompete Restrictions That
They Imposed on Workers (Feb. 23, 2023), <a href="https://www.ftc.gov/news-events/news/press-releases/2023/02/ftc-approves-final-orders-requiring-two-glass-container-manufacturers-drop-noncompete-restrictions">https://www.ftc.gov/news-events/news/press-releases/2023/02/ftc-approves-final-orders-requiring-two-glass-container-manufacturers-drop-noncompete-restrictions</a>; FTC, Press Release, FTC Approves Final Order Requiring
Anchor Glass Container Corp. to Drop Noncompete Restrictions That It
Imposed on Workers (June 2, 2023), <a href="https://www.ftc.gov/news-events/news/press-releases/2023/06/ftc-approves-final-order-requiring-anchor-glass-container-corp-drop-noncompete-restrictions-it">https://www.ftc.gov/news-events/news/press-releases/2023/06/ftc-approves-final-order-requiring-anchor-glass-container-corp-drop-noncompete-restrictions-it</a>.
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The Commission also secured a final consent order settling charges
that another firm violated section 5 by using non-competes with its
employees.\43\ The Commission's complaint alleged the firm's imposition
of non-competes took advantage of the unequal bargaining power between
the firm and its employees, including low-wage security guard
employees, and thus reduced workers' job mobility; limited competition
for workers' services; and ultimately deprived workers of higher wages
and more favorable working conditions.\44\
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\43\ FTC, Press Release, FTC Approves Final Order Requiring
Michigan-Based Security Companies to Drop Noncompete Restrictions
That They Imposed on Workers (Mar. 8, 2023), <a href="https://www.ftc.gov/news-events/news/press-releases/2023/03/ftc-approves-final-order-requiring-michigan-based-security-companies-drop-noncompete-restrictions">https://www.ftc.gov/news-events/news/press-releases/2023/03/ftc-approves-final-order-requiring-michigan-based-security-companies-drop-noncompete-restrictions</a>.
\44\ FTC, Analysis of Agreement Containing Consent Order to Aid
Public Comment, In re Prudential Sec., Inc. et al. at 1 (Jan. 4,
2023).
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Based on the feedback obtained from years of extensive public
outreach and fact-gathering, in January 2023, the Commission published
a notice of proposed rulemaking (NPRM) concerning non-competes.\45\ The
proposed rule would have categorically banned employers from using non-
competes with all workers and required rescission of all existing non-
competes.\46\
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\45\ NPRM, supra note 1.
\46\ Id. at 3482-83.
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In response to the NPRM, the Commission received over 26,000 public
comments.\47\ The comments reflected a diverse cross-section of the
U.S. The Commission received comments from employers and workers in a
wide range of industries and from every State; \48\ from small, medium,
and large businesses; and from workers with wide-ranging income
levels.\49\ The Commission also received comments from representatives
of different industries through trade and professional groups as well
as from academics and researchers. Federal, State, and local
governmental representatives also submitted public comments.
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\47\ The public comments are available online. See
<a href="http://Regulations.gov">Regulations.gov</a>, Non-Compete Clause Rule (NPRM), FTC-2023-0007,
<a href="https://www.regulations.gov/docket/FTC-2023-0007/comments">https://www.regulations.gov/docket/FTC-2023-0007/comments</a>. The
Commission cannot quantify the number of individuals or entities
represented by the comments. The number of comments undercounts the
number of individuals or entities represented by the comments
because many comments, including comments from different types of
organizations, jointly represent the opinions or interests of many.
\48\ This reflects information provided by commenters.
Commenters self-identify their State and are not required to include
geographic information.
\49\ Though most commenters identifying as workers did not
provide information regarding their income or compensation levels,
many provided information about their particular jobs or industries
from which the Commission was able to infer a broad range of income
levels based on occupational data from the Bureau of Labor
Statistics (``BLS''). BLS wage data for each year can be found at
Occupational Employment and Wage Statistics, Tables Created by BLS,
<a href="https://www.bls.gov/oes/tables.htm">https://www.bls.gov/oes/tables.htm</a> (hereinafter ``BLS Occupational
Employment and Wage Statistics''). The Commission used data from the
May 2022 National XLS table, generally for private ownership.
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Among these comments, over 25,000 expressed support for the
Commission's proposal to categorically ban non-competes. Among the
public commenters were thousands of workers who described how non-
competes prevented them from taking a better job or starting a
competing business, as well as numerous small businesses who struggled
to hire talented workers. Commenters stated that non-competes have
suppressed their wages, harmed working conditions, negatively affected
their quality of life, reduced the quality of the product or service
their company provided, prevented their business from growing and
thriving, and created a climate of fear that deters competitive
activity. The following examples are illustrative of the comments the
Commission received: \50\
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\50\ To be clear, the Commission does not rely on any particular
individual comment submission for its findings, but rather provides
here (and throughout this final rule) examples of comments that were
illustrative of themes that spanned many comments. The Commission's
findings are based on consideration of the totality of the evidence,
including its review of the empirical literature, its review of the
full comment record, and its expertise in identifying practices that
harm competition.
<bullet> I currently work in sales for an asphalt company in
Michigan. The company had me sign a two year non-compete agreement
to not work for any other asphalt company within 50 miles if I
decide to resign. After two years with the company I have been
disheartened at how poorly customers are being treated and how often
product quality is sub-par. I would love to start my own business
because I see this as an opportunity to provide a better service at
a lower cost. However, the non-compete agreement stands in the way
even though there are no trade secrets and too many customers in
this market.\51\
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\51\ Individual commenter, FTC-2023-0007-2215. Comment excerpts
have been cleaned up for grammar, spelling, and punctuation.
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<bullet> [I] signed a non-compete clause for power-washing out
of duress. My boss said that if I didn't sign before the end of the
week, not to come in the next week. . . . I'd like to start my own
business but I would have to find another job and wait 5 years. All
I know is power-washing and these business owners all want me to
sign a non-compete clause. It's one big circle of wealthy business
owners keeping the little man down. Essentially, non-compete clauses
limit an employee's opportunity to excel in whatever skill or trade
they're familiar with. In the land of the free, we should be free to
start a business not limited by greedy business owners.\52\
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\52\ Individual commenter, FTC-2023-0007-12689.
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<bullet> In October 2020, I started working as a bartender at a
company called [REDACTED] for $10 an hour. On my first day, I
[[Page 38345]]
unknowingly signed a 2-year non-compete, slipped between other
paperwork while my boss rushed me, and downplayed its importance. .
. . At [REDACTED], I was sexually harassed and emotionally abused. I
needed money, so I searched for a new job while remaining at
[REDACTED] for one year. I was eventually offered a bartending job
at a family-owned bar with better wages, conditions, and
opportunities. Upon resigning, I was threatened with a non-compete I
didn't know existed. Still, I couldn't take it anymore, so believing
it was an unenforceable scare tactic, I took the new job, thinking
our legal system wouldn't allow a massive company with over 20
locations to sue a young entry-level worker with no degree. In
December 2021, I was sued for $30,000 in ``considerable and
irreparable damages'' for violating the non-compete. . . .\53\
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\53\ Individual commenter, FTC-2023-0007-8852.
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<bullet> I am a physician in a rural underserved area of
Appalachia. . . . ``[N]on-compete'' clauses have become ubiquitous
in the healthcare industry. With hospital systems merging, providers
with aggressive non compete clauses must abandon the community that
they serve if they chose to leave their employer. . . . Healthcare
providers feel trapped in their current employment situation,
leading to significant burnout that can shorten their career
longevity. Many are forced to retire early or take a prolonged pause
in their career when they have no other recourse to combat their
employer.\54\
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\54\ Individual commenter, FTC-2023-0007-0026.
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<bullet> I am a practicing physician who signed an employment
contract containing a noncompete agreement in 2012, entering into
this agreement with an organization that no longer exists. My
original employer merged with, and was made subsidiary to, a new
organization that is run under religious principles in conflict with
my own. . . . I would have never signed such an agreement with my
new employer, yet I am bound to this organization under threat of
legal coercion. To be clear, the forced compromise of my religious
principles does direct harm to me. My only recourse to this coercion
is to give up medical practice anywhere covered by my current
medical license, which is injurious to the patients in my care, and
to myself.\55\
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\55\ Individual commenter, FTC-2023-0007-9671.
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<bullet> I am the owner of a small-midsize freight brokerage,
and non-competes of large brokerages have time and time again
constrained talent from my business. Countless employees of [a] mega
brokerage . . . have left and applied for our company and we must
turn them away. These are skilled brokers that are serving the
market and their clients well due to THEIR skillsets. . . . These
non-competes affect not just me but the clients they work with as
these skilled brokers are forced out of the entire logistics market
for an entire year and possibly a lifetime when they pick up a new
career in a different field because of these aggressive non-
competes. . . .\56\
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\56\ Individual commenter, FTC-2023-0007-6142.
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<bullet> I was laid off from my company in 2008 due to the
economy, not to any fault of my own. However, when I was offered a
job at another company, my former company threatened them and my
offer was rescinded. I was unable to find gainful employment for
months, despite opportunities in my field, and had to utilize
unemployment when I otherwise would not have needed it. To find
work, I ultimately had to switch fields, start part time somewhere,
and just continue to work my way up. All of this because I was laid
off to no fault of my own.\57\
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\57\ Individual commenter, FTC-2023-0007-15497.
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<bullet> I was terminated by a large hospital organization
suddenly with a thriving, full Pediatric practice. . . . My lawyer
and I believe the non-compete does not apply in my circumstances and
that the noncompete is overly broad, restrictive and harmful to the
public (my patients). I started seeing my patients mostly
gratuitously in their homes so they would not go without the care
they wanted and needed . . . The judge awarded the order and I was
told I cannot talk to patients on the phone, text patients, zoom
visits or provide any pediatric care within my non-compete area.
Patients are angry and panicked. I'm worried every day about my
patients and how I can continue to care for them. . . . Patients
have a right to choose and keep their doctor. The trust built
between a patient and his doctor is crucial to keeping a patient
healthy. It's not a relationship that can or should be replaced. . .
. Patients should always come first and that is not happening.\58\
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\58\ Individual commenter, FTC-2023-0007-14956.
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<bullet> When I first graduated veterinary school I signed a
noncompete clause that was for 7 years. I tried to negotiate it to a
more reasonable time period but the employer wouldn't budge. There
weren't many job openings for new graduates at the time and I had
student loans to pay back so I signed it. . . . I moved back home to
a small town and took a job that required a 10-radial-mile, 2-year
noncompete (this is currently considered ``reasonable/standard'' in
my industry). Unfortunately since it's a rural area the 10 miles
blocked me out of the locations of all other veterinary clinics in
the county and I had to commute an hour each way to work in the next
metropolitan area. This put a lot of stress on my family since I
have young children. Some days I didn't even get to see them when
they were awake.\59\
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\59\ Individual commenter, FTC-2023-0007-0922.
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<bullet> I work for a large electronic health records company .
. . that is known for hiring staff right out of college, myself
included. I was impressed with their starting salary and well-
advertised benefits, so I was quick to accept their offer. After
accepting their offer, I was surprised to receive a contract
outlining a strict non-compete agreement . . . I feel disappointed
that this information was not made apparent to me prior to my
acceptance of the position, and now I feel stuck in a job that I've
quickly discovered is not a good long-term fit for me. I am certain
that many other recent graduates often find themselves in a similar
position--they accept shiny offers from a workplace, not knowing
whether the company and position will be the right fit for them, and
find themselves trapped by such contracts as mine.\60\
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\60\ Individual commenter, FTC-2023-0007-10729.
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<bullet> Non competes are awful. I am being sued right now for
going into business on my own in Boston, Massachusetts, by my former
employer who says I signed a non-compete in 2003, 20 years ago. . .
. I am fighting them in court. Hopefully I will prevail. . . . [The]
corporation I worked for is a billion-dollar corporation. And they
just keep trying scare tactics to make me back down. They went as
far as trying to get a preliminary injunction ordered against me.
And the judge refused but I still have to spend $1,000 an hour to
defend myself.\61\
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\61\ Individual commenter, FTC-2023-0007-10871.
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<bullet> I have been working in the field of multi-media in the
DC/Baltimore region since the early 2000s. . . . I was 26 when I
first became employed, and at that time a requirement was that I
sign a non-compete agreement. . . . This means I can't be an
entrepreneur- which kills any opportunities for me to grow something
of my own- which could potentially provide jobs for others in the
future. So what this non-compete does is basically enables
businesses to be small monopolies. I could literally have a new
lease on my career if non competes were abolished. As of now, when I
think of working someplace else I have to consider changing careers
altogether.\62\
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\62\ Individual commenter, FTC-2023-0007-10968.
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<bullet> A former employer had me sign a non-compete when I
started employment at an internship in college. It was a part-time
position of 20 hours of work as an electrical engineer, while I
finished university. After university, I worked for this employer
another 4 years full time, but then found a better job in another
state. It was not a competitor, but a customer of my former
employer. My former employer waited till the day after my 4-week
notice to tell me that I had signed a non-compete agreement and that
it [barred] me from working for any competitor, customer or any
potential customer up to 5 years after leaving the company with no
geographic limitations. This was effectively the entire semi-
conductor industry and put my entire career at risk.\63\
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\63\ Individual commenter, FTC-2023-0007-16347.
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<bullet> Non-competes serve little more purpose than to codify
and entrench inefficiencies. I have seen this firsthand in the
context of a sophisticated management consulting environment where
company owners provided ever less support in terms of contributing
to projects or even to sales of new business while still feeling
secure through agreements that substantially limited anyone from
working in the relevant industry for two years on a global basis
after leaving. . . . The reality is that there are innumerable
retention mechanisms (such as good working conditions, compensation,
culture, management, growth trajectory and/or strategy) that can
contribute to loyal employees without the need for non-competes.\64\
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\64\ Individual commenter, FTC-2023-0007-3963.
The Commission has undertaken careful review of the public comments
[[Page 38346]]
and the entirety of the rulemaking record. Based on this record and the
Commission's experience and expertise in competition matters, the
Commission issues this final rule pursuant to its authority under
sections 5 and 6(g) of the FTC Act.
2. Prevalence of Non-Competes
Based on its own data analysis, studies published by economists,
and the comment record, the Commission finds that non-competes are in
widespread use throughout the economy and pervasive across industries
and demographic groups, albeit with some differences in the magnitude
of the prevalence based on industries and demographics. The Commission
estimates that approximately one in five American workers--or
approximately 30 million workers--is subject to a non-compete.\65\
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\65\ This is likely a conservative estimate. Surveys of workers
likely underreport the share of workers subject to non-competes,
since many workers may not know they are subject to a non-compete.
See, e.g., Alexander J.S. Colvin & Heidi Shierholz, Econ. Policy
Inst., Noncompete Agreements, Report (Dec. 10, 2019) at 3.
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As described in Part II.F, the inquiry as to whether conduct is an
unfair method of competition under section 5 focuses on the nature and
tendency of the conduct, not whether or to what degree the conduct
caused actual harm.\66\ Although a finding that non-competes are
prevalent is not necessary to support the Commission's determination
that the use of non-competes by employers is an unfair method of
competition, the Commission finds that non-competes are prevalent and
in widespread use throughout the economy, which is why researchers have
observed such significant negative actual effects from non-competes on
competitive conditions in labor markets and markets for products and
services.\67\
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\66\ See infra note 288 and accompanying text.
\67\ See Parts IV.A through IV.C (describing this evidence).
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A 2014 survey of workers finds that 18% of respondents work under a
non-compete and 38% of respondents have worked under one at some point
in their lives.\68\ This study has the broadest and likely the most
representative coverage of the U.S. labor force among the prevalence
studies discussed here.\69\ This study reports robust results
contradicting the prior assumptions of some that non-competes were, in
most cases, bespoke agreements with sophisticated and highly-paid
workers. It finds that, among workers without a bachelor's degree, 14%
of respondents reported working under a non-compete at the time
surveyed and 35% reported having worked under one at some point in
their lives.\70\ For workers earning less than $40,000 per year, 13% of
respondents were working under a non-compete and 33% worked under one
at some point in their lives.\71\ Furthermore, this survey finds that
53% of workers covered by non-competes are hourly workers.\72\ The
survey suggests that a large share of workers subject to non-competes
are relatively low-earning workers. In addition, a survey from the
Federal Reserve Board of Governors found that 11.4% of workers have
non-competes, including workers with relatively low earnings and low
levels of education. The survey finds some degree of geographic
heterogeneity, though it finds that large numbers of workers in all
regions of the country have non-competes (including 7.0% of workers in
States which broadly do not enforce non-competes).\73\
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\68\ Evan P. Starr, J.J. Prescott, & Norman D. Bishara,
Noncompete Agreements in the US Labor Force, 64 J. L. & Econ. 53, 53
(2021).
\69\ The final survey sample of 11,505 responses represented
individuals from nearly every demographic in the labor force. Id. at
58.
\70\ Id. at 63.
\71\ Id.
\72\ Michael Lipsitz & Evan Starr, Low-Wage Workers and the
Enforceability of Noncompete Agreements, 68 Mgmt. Sci. 143, 144
(2022) (analyzing data from the Starr, Prescott, & Bishara survey).
\73\ Tyler Boesch, Jacob Lockwood, Ryan Nunn, & Mike Zabek, New
Data on Non-Compete Contracts and What They Mean for Workers (2023),
<a href="https://www.minneapolisfed.org/article/2023/new-data-on-non-compete-contracts-and-what-they-mean-for-workers">https://www.minneapolisfed.org/article/2023/new-data-on-non-compete-contracts-and-what-they-mean-for-workers</a>.
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Furthermore, a survey of workers conducted in 2017 estimates that
24.2% of workers are subject to a non-compete.\74\ This survey also
finds that non-competes are often used together with other restrictive
employment agreements, including non-disclosure agreements (``NDAs'')
and non-recruitment and non-solicitation agreements.\75\ A
methodological limitation of this survey is that it is a convenience
sample of individuals who visited <a href="http://Payscale.com">Payscale.com</a> during the time period
of the survey and is therefore unlikely to be fully representative of
the U.S. working population. While weighting based on demographics
helps, it does not fully mitigate this concern.
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\74\ Natarajan Balasubramanian, Evan Starr, & Shotaro Yamaguchi,
Employment Restrictions on Resource Transferability and Value
Appropriation from Employees (Jan. 18, 2024), <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3814403">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3814403</a>.
\75\ Id. at 11 (reporting that if a worker has a non-compete,
there is a 70%-75% chance that all three restrictive covenants are
present).
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Additionally, a 2017 survey of business establishments with 50 or
more employees estimates that 49% of such establishments use non-
competes for at least some of their employees, and 32% of such
establishments use non-competes for all of their employees.\76\
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\76\ Colvin & Shierholz, supra note 65 at 1.
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Other estimates of non-compete use cover subsets of the U.S. labor
force. One 2022 study is based on National Longitudinal Survey of Youth
(NLSY) data.\77\ The NLSY is an often-used labor survey conducted by
the Bureau of Labor Statistics (``BLS'') that consists of a nationally
representative sample of 8,984 men and women born from 1980-84 and
living in the U.S. at the time of the initial survey in 1997; it is a
subset of the workforce by age of worker.\78\ The 2022 study using NLSY
data reports prevalence of non-competes to be 18%, in line with the
number estimated based on the 2014 survey of workers directed solely at
calculating the prevalence of non-competes.\79\
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\77\ Donna S. Rothstein & Evan Starr, Noncompete Agreements,
Bargaining, and Wages: Evidence from the National Longitudinal
Survey of Youth 1997, June 2022 Mthly. Lab. Rev. (2022).
\78\ BLS, NLSY97 Data Overview, <a href="https://www.bls.gov/nls/nlsy97.htm">https://www.bls.gov/nls/nlsy97.htm</a>.
\79\ Rothstein & Starr, supra note 77 at 1.
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Non-competes are pervasive across occupations. For example, a
survey of independent hair salon owners finds that 30% of hair stylists
worked under a non-compete in 2015.\80\ A survey of electrical and
electronic engineers finds that 43% of respondents signed a non-
compete.\81\ A different study finds that 45% of physicians worked
under a non-compete in 2007.\82\ One study published in 2021 finds that
62% of CEOs worked under a non-compete between 1992 and 2014.\83\
Another, published in 2023, supports that finding and reflects an
upward trend in the use of non-competes among executives--specifically,
the proportion of executives working under a non-compete rose from
``57% in the early 1990s to 67% in the mid-2010s.'' \84\ The 2014
survey reports industry-specific rates ranging from 9% in the
Agriculture and Hunting category to 32% in the
[[Page 38347]]
Information category.\85\ The Balasubramaian et al. survey reports
industry-specific rates ranging from 12% in the Arts, Entertainment,
and Recreation category to 30% in the Professional, Scientific, and
Technical category.\86\ The same survey also reports occupation-
specific rates ranging from 8% in the Community and Social Services
category to 32% in the Computer and Mathematical category.\87\
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\80\ Matthew S. Johnson & Michael Lipsitz, Why Are Low-Wage
Workers Signing Noncompete Agreements?, 57 J. Hum. Res. 689, 700
(2022).
\81\ Matt Marx, The Firm Strikes Back: Non-Compete Agreements
and the Mobility of Technical Professionals, 76 a.m. Socio. Rev.
695, 702 (2011). Calculated as 92.60% who signed a non-compete of
the 46.80% who were asked to sign a non-compete.
\82\ Kurt Lavetti, Carol Simon, & William D. White, The Impacts
of Restricting Mobility of Skilled Service Workers: Evidence from
Physicians, 55 J. Hum. Res. 1025, 1042 (2020).
\83\ Omesh Kini, Ryan Williams, & Sirui Yin, CEO Noncompete
Agreements, Job Risk, and Compensation, 34 Rev. Fin. Stud. 4701,
4707 (2021).
\84\ Liyan Shi, Optimal Regulation of Noncompete Contracts, 91
Econometrica 425, 447 (2023).
\85\ Starr, Prescott, & Bishara, supra note 68 at 67.
\86\ Balasubramanian et al., supra note 74 at 47.
\87\ Id.
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In addition, commenters presented survey data on the prevalence of
non-competes in various occupations and industries. The Commission does
not rely on these surveys to support its finding that non-competes are
in widespread use throughout the economy. Because the Commission lacked
access to a detailed description of the methodology for these surveys
(unlike for the surveys described previously), the Commission cannot
evaluate how credible their research designs are. However, they
generally confirm the Commission's finding that non-competes are in
widespread use throughout the economy and pervasive across industries
and demographic groups.
For example, commenters reported that 33% of practitioners in the
applied behavioral analysis field reported being subject to a non-
compete,\88\ along with 68% of cardiologists,\89\ 42% of colorectal
surgeons,\90\ 72% of members of the American Association of Hip and
Knee Surgeons,\91\ and 31% of wireless telecommunications retail
workers.\92\ Other commenters cited a 2019 study finding that 29% of
businesses where the average wage is below $13 per hour use non-
competes for all their workers.\93\
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\88\ Kristopher J. Brown, Stephen R. Flora, & Mary K. Brown,
Noncompete Clauses in Applied Behavior Analysis: A Prevalence and
Practice Impact Survey, 13 Behavioral Analysis Practice 924 (2020)
(survey of 610 workers).
\89\ Comment of Am. Coll. of Cardiology, FTC-2023-0007-18077, at
2. The comment did not provide a citation to the survey or the
underlying data, including the number of respondents or the time
period.
\90\ William C. Cirocco. Restrictive Covenants in Physician
Contracts: An American Society of Colon and Rectal Surgeons' Survey,
54 Diseases of the Colon and Rectum 482 (2011). The survey examined
157 colorectal surgeons who had completed their residency in the
prior decade.
\91\ Comment of Am. Ass'n of Hip and Knee Surgeons, FTC-2023-
0007-21076, at 4. The comment said the internal poll was conducted
in early 2023, but the comment did not provide a citation to the
survey or the underlying data, including the number of respondents.
\92\ Comm. Workers of Am. and Nat'l Employment L. Project,
Broken Network: Workers Expose Harms of Wireless Telecom Carriers'
Outsourcing to `Authorized Retailers' (Feb. 2023), <a href="https://cwa-union.org/sites/default/files/2023-02/20230206_BrokenNetwork.pdf">https://cwa-union.org/sites/default/files/2023-02/20230206_BrokenNetwork.pdf</a>, at
12. The survey had 204 respondents.
\93\ Colvin & Shierholz, supra note 65 at 13.
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Several trade organizations included information in their comments
about the percentage of their members that use non-competes for at
least some of their workers, based on surveys of their membership. For
the National Association of Wholesaler-Distributors, this figure was
80%; \94\ for the Independent Lubricant Manufacturing Association, 69%;
\95\ for the Michigan Chamber of Commerce, 73%; \96\ for the Gas and
Welding Distributors Association, 80%; \97\ and for the National
Association of Manufacturers, 70%.\98\ One industry organization said
its survey found that 57% of respondents require workers earning over
$150,000 to sign non-competes.\99\ A survey by the Authors Guild finds
that 19.2% of respondents reported that non-competes prevented them
from publishing a similar or competing book.\100\ The HR Policy
Association stated that 75% of respondents indicated they use non-
competes for less than 10% of their workers, and nearly one third
indicated they use non-competes for less than 1% of their workers.\101\
The association stated that its survey covered 3 million workers and
argued that its survey finding less usage of non-competes was more
representative than studies cited in the NPRM.\102\ However, the
commenter did not provide the data underlying its claims. The Retail
Industry Leaders Association stated that a recent survey of its members
indicated that, among members that use non-competes, the majority do so
with less than 1% of their workforce and an additional quarter use non-
competes with less than 10% of their workforce.\103\ Additionally, a
commenter referenced a survey of small business owners finding that 48%
use non-competes for their own business.\104\
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\94\ Comment of Nat'l Assoc. of Wholesaler-Distribs., FTC-2023-
0007-19347, at 2. The comment did not provide a citation to the
survey or the underlying data, including the number of respondents.
\95\ Comment of Indep. Lubricant Mfrs. Ass'n, FTC-2023-0007-
19445, at 3. The comment did not provide a citation to the survey or
the underlying data, including the number of respondents.
\96\ Calculated as 77%*95% (assuming that the 95% reported in
their comment applies to the 77% who reported using restrictive
covenants). Comment of Mich. Chamber of Com., FTC-2023-0007-20855.
The comment did not provide a citation to the survey or the
underlying data, including the number of respondents.
\97\ Comment of Gas and Welding Distribs. Ass'n, FTC-2023-0007-
20934, at 2-3. The comment did not provide a citation to the survey
or the underlying data. The comment said the survey took place after
the NPRM was proposed and had 161 respondents.
\98\ Comment of Nat'l Ass'n of Mfrs., FTC-2023-0007-20939, at 2
(citing Nat'l Ass'n of Mfrs., Noncompete Survey Data Report, <a href="https://www.nam.org/wp-content/uploads/2023/03/Noncompete_Survey_Data_Report.pdf">https://www.nam.org/wp-content/uploads/2023/03/Noncompete_Survey_Data_Report.pdf</a>). The survey had 150 respondents.
\99\ Comment of Soc. for Hum. Res. Mgmt., FTC-2023-0007-20903,
at 5 n.2. The comment did not provide a citation to the survey or
the underlying data, including the number of respondents.
\100\ Comment of The Authors Guild, FTC-2023-0007-20854, at 7.
The comment did not provide a citation to the survey or the
underlying data, but said it had 630 respondents.
\101\ Comment of HR Policy Ass'n, FTC-2023-0007-20998, at 8.
\102\ Id.
\103\ Comment of Retail Indus. Leaders Ass'n, FTC-2023-0007-
20989, at 6. The comment did not provide a citation to the survey or
the underlying data, including the number of respondents or the time
period.
\104\ Comment of Sm. Bus. Majority, FTC-2023-0007-21093 (citing
Small Business Majority, Opinion Poll: Small Business Owners Support
Banning Non-Compete Agreements (Apr. 13, 2013), <a href="https://smallbusinessmajority.org/sites/default/files/research-reports/2023-non-compete-poll-report.pdf">https://smallbusinessmajority.org/sites/default/files/research-reports/2023-non-compete-poll-report.pdf</a>).
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Several commenters misrepresented the Commission's finding related
to prevalence as based on ``a single study from 2021'' (Starr,
Prescott, and Bishara, 2021), which relied on survey data from 2014.
The Commission's finding is not based on a single study. The NLSY study
reaches similar conclusions about the prevalence of non-competes across
the economy,\105\ and the occupation-specific studies indicate that
non-competes are pervasive in various occupations.\106\ Furthermore,
despite its methodological limitations, the data submitted by
commenters generally comport with the estimates reported in the
academic literature. One commenter stated the respondents to the Starr,
Prescott, and Bishara survey were not necessarily representative of the
population. The Commission believes that the weighting of the data
sufficiently addresses this concern.
---------------------------------------------------------------------------
\105\ See Rothstein & Starr, supra note 77 and accompanying
text.
\106\ See supra notes 80-87 and accompanying text.
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Another commenter argued that individuals may misunderstand
contracts that they have signed, leading them to mistakenly believe
they are bound by a non-compete. The Commission does not find this to
be a plausible explanation for the high numbers of workers, businesses,
and trade associations that report that non-competes are prevalent.
The Commission appreciates the additional estimates provided by
commenters. The comments broadly corroborate the Commission's finding
that non-competes are used across the workforce, with some
heterogeneity in the magnitude of the prevalence. The
[[Page 38348]]
Commission finds that this heterogeneity is insufficient to warrant
industry-specific exclusions from coverage under the final rule in part
because employers' use of non-competes is prevalent across labor
markets and for the reasons discussed in Part V.D regarding requests
for exclusions.
II. Legal Authority
A. The History of the Commission and Section 5 of the FTC Act
The FTC Act was enacted in 1914.\107\ Section 5 of that Act
``declared'' that ``unfair methods of competition in commerce'' are
``unlawful,'' and it ``empowered and directed'' the Commission ``to
prevent'' entities subject to its jurisdiction from ``using'' such
methods.\108\ Congress removed certain enumerated industries,
activities, or entities--such as banks \109\--from the Commission's
jurisdiction but otherwise envisioned a Commission whose purview would
cover commerce across the national economy.
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\107\ Federal Trade Commission Act of 1914, Public Law 63-203,
38 Stat. 717, 719 (hereinafter ``FTC Act of 1914'').
\108\ FTC Act of 1914, 38 Stat. at 719. Section 5 is codified as
amended at 15 U.S.C. 45. Congress later amended the term ``in
commerce'' to ``in or affecting commerce.'' The Supreme Court has
explained that this amended phrase makes section 5 of the FTC Act
``coextensive with the constitutional power of Congress under the
Commerce Clause.'' United States v. Am. Bldg. Maintenance Indus.,
422 U.S. 271, 277 n.6 (1975). For simplicity, this statement of
basis and purpose often refers to ``unfair methods of competition''
without the commerce requirement, but the Commission acknowledges
that it has power to prevent only such methods that are in or affect
commerce as that term is defined in the Act. See 15 U.S.C. 44.
\109\ See 15 U.S.C. 45(a)(2).
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The term ```unfair methods of competition' . . . was an expression
new in the law'' when it first appeared in the FTC Act.\110\ Congress
purposely introduced this phrase to distinguish the Commission's
authority from the definition of ``unfair competition'' at common law.
Because the ``meaning which the common law had given to [`unfair
competition'] was . . . too narrow,'' Congress adopted ``the broader
and more flexible phrase `unfair methods of competition.' '' \111\
Using this new phrase also made clear that Congress designed section 5
to extend beyond the reach of other antitrust laws--most notably, the
Sherman Act--whose text did not include the term ``unfair methods of
competition.'' \112\ In particular, Congress wanted the Commission to
apply a standard that would reach conduct not captured by other
antitrust laws and the rule of reason, which courts applied when
interpreting the Sherman Act, making it ``impossible to predict with
any certainty'' whether courts would condemn the many ``practices that
seriously interfere with competition.'' \113\ Allowing the Commission
to prevent unfair methods of competition would also help the Commission
achieve a core purpose of the Act: to stop ``trade restraints in their
incipiency'' before they grew into violations of other antitrust
laws.\114\
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\110\ A.L.A. Schechter Poultry Corp. v. United States, 295 U.S.
495, 532 (1935).
\111\ See FTC v. R. F. Keppel & Bro., Inc., 291 U.S. 304, 310-11
(1934); see also Schechter Poultry, 295 U.S. at 532.
\112\ See E.I. du Pont de Nemours v. FTC (Ethyl), 729 F.2d 128,
136 (2d Cir. 1984) (``Congress' aim was to protect society against
oppressive anti-competitive conduct and thus assure that the conduct
prohibited by the Sherman and Clayton Acts would be supplemented as
necessary and any interstices filled.'').
\113\ S. Rep. No. 62-1326, at 14 (1913) (hereinafter ``Cummins
Report''). After analyzing a series of Supreme Court decisions
interpreting the Sherman Act--e.g., Standard Oil Co. of New Jersey
v. United States, 221 U.S. 1, 60 (1911)--the Senate committee feared
that the rule of reason meant that ``in each instance it [would be]
for the court to determine whether the established restraint of
trade is a due restraint or an undue restraint'' and that this made
it ``imperative to enact additional legislation.'' Cummins Report at
11-12.
\114\ FTC v. Brown Shoe Co., 384 U.S. 316, 322 (1966); see also
FTC v. Motion Picture Advert. Serv. Co., 344 U.S. 392, 394-95
(1953).
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By design, the new phrase ``unfair methods of competition'' did
``not `admit of precise definition.' '' \115\ Congress intentionally
gave the Commission flexibility to adapt to changing
circumstances.\116\ The Supreme Court has affirmed the more inclusive
scope of section 5 on numerous occasions \117\ and has affirmed the
Commission's power under the Act to condemn coercive and otherwise
unfair practices that have a tendency to stifle or impair
competition.\118\ Federal appellate courts have likewise consistently
held that the Commission's authority under section 5 extends beyond
``the letter'' of other antitrust laws.\119\
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\115\ R.F. Keppel & Bro., 291 U.S. at 312.
\116\ Id. at 311 n.2.
\117\ See, e.g., id. at 311; A.L.A. Schechter Poultry Corp. v.
United States, 295 U.S. 495, 532 (1935); Brown Shoe Co., 384 U.S. at
320-22.
\118\ FTC v. Texaco, 393 U.S. 223, 225-26 (1968) (citing Atl.
Refin. Co. v. FTC, 381 U.S. 357, 376 (1965)).
\119\ Spiegel, Inc. v. FTC, 540 F.2d 287, 292 (7th Cir. 1976)
(quoting FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244 (1972));
cf., Chuck's Feed & Seed Co. v. Ralston Purina Co., 810 F.2d 1289,
1292-93 (4th Cir. 1987).
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Congress further expanded the Commission's jurisdiction over time.
Congress extended the Commission's authority in 1938 by adding the
further prohibition on ``unfair or deceptive acts or practices.'' \120\
And in 1975, Congress amended the phrase ``in commerce'' in section 5
to ``in or affecting commerce,'' a change that was ``specifically
designed to expand the Commission's jurisdiction . . . to make it
coextensive with the constitutional power of Congress under the
Commerce Clause.'' \121\
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\120\ Federal Trade Commission Act, Public Law 447, 75th Cong.,
3d Sess. (March 21, 1938) c. 49; 52 Stat. 111 (1938).
\121\ United States v. Am. Bldg. Maintenance Indus., 422 U.S.
271, 277 n.6 (1975). As noted, the Commission's authority does not
reach certain enumerated industries or activities--a list that has
also grown over time. See 15 U.S.C. 45(a)(2); see also Part II.E.1.
Some of these industries are statutorily prohibited from engaging in
unfair or deceptive practices or unfair methods of competition under
different laws overseen by other agencies. See, e.g., 49 U.S.C.
41712(a) (allowing the Secretary of Transportation to ``decide
whether an air carrier, foreign air carrier, or ticket agent'' has
engaged in such conduct).
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Congress gave careful thought to the structure of the FTC as an
independent agency entrusted with this considerable responsibility. The
Commission would consist of five members, no more than three of whom
could be part of the same political party, who would serve for terms of
seven years.\122\ The Commission would draw on trained expert staff to
develop the body of law regarding what constitutes unfair methods of
competition (and, later, unfair and deceptive practices),\123\ both
through acting as ``a quasi judicial body'' \124\ that determines
whether conduct is an unfair method of competition in adjudications and
through authority to promulgate legislative rules delineating conduct
that constitutes an unfair method of competition. Recognizing that the
Commission is an expert agency in making such determinations about
anticompetitive conduct, courts reviewing Commission determinations as
to what practices constitute an unfair method of competition have given
the Commission's decisions ``great weight.'' \125\
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\122\ 15 U.S.C. 41.
\123\ Id. (anticipating that the Commission would ``build up a
comprehensive body of information for the use and advantage of the
Government and the business world''); id. at 11,092 (``[W]e want
trained experts; we want precedents; we want a body of
administrative law built up.'').
\124\ A.L.A. Schechter Poultry Corp. v. United States, 295 U.S.
495, 533 (1935).
\125\ FTC v. Cement Inst., 333 U.S. 683, 720 (1948); Atl. Ref.
Co. v. FTC, 381 U.S. 357, 368 (1965); FTC v. Texaco, 393 U.S. 223,
226 (1968); Official Airline Guides, Inc. v. FTC, 630 F.2d 920, 927
(2d. Cir. 1980) (quoting Cement Inst., 333 U.S. at 720); see also
FTC v. Motion Picture Advert. Serv. Co., 344 U.S. 392, 396 (1953);
FTC v. Ind. Fed'n of Dentists, 476 U.S. 447, 454 (1986).
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The FTC Act today reflects a careful balance from Congress.
Congress has directed the Commission to proceed
[[Page 38349]]
against a broader range of anticompetitive conduct than other antitrust
laws like the Sherman and Clayton Acts can reach. On the other hand,
Congress has never established a private right of action under section
5,\126\ nor has it authorized the Commission to recover civil penalties
or other monetary relief from parties who engage in unfair methods of
competition.\127\ Instead, the Commission may either pursue an
adjudication under section 5(b) or seek an injunction in Federal court
under section 13(b) against a party that has engaged in an unfair
method of competition.\128\ As explained below, it may also promulgate
rules prohibiting unfair methods of competition. The Commission cannot
obtain civil penalties or other monetary relief against parties for
using an unfair method of competition, although it can obtain civil
penalties in court if a party is ordered to cease and desist from a
violation and fails to do so.\129\
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\126\ See, e.g., Holloway v. Bristol-Myers Corp., 485 F.2d 986,
988-89 (D.C. Cir. 1973); Liu v. Amerco, 677 F.3d 489, 492 (1st Cir.
2012).
\127\ Congress has authorized the FTC to seek civil monetary
remedies against parties who engage in unfair or deceptive acts or
practices under some circumstances. See 15 U.S.C. 45(m); 15 U.S.C.
57b.
\128\ See 15 U.S.C. 45(b); 15 U.S.C. 53(b).
\129\ See 15 U.S.C. 45(l).
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B. The Commission's Authority To Promulgate the Rule
Alongside section 5, Congress adopted section 6(g) of the Act, in
which it authorized the Commission to ``make rules and regulations for
the purpose of carrying out the provisions of'' the FTC Act, which
include the Act's prohibition of unfair methods of competition.\130\
The plain text of section 5 and section 6(g), taken together, empower
the Commission to promulgate rules for the purpose of preventing unfair
methods of competition. That includes legislative rules defining
certain conduct as an unfair method of competition.
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\130\ 15 U.S.C. 46(g).
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The Commission has exercised its authority under section 6(g) to
promulgate legislative rules on many occasions stretching back more
than half a century. Between 1963 and 1978,\131\ the Commission relied
on section 6(g) to promulgate the following rules: (1) a rule declaring
it an unfair method of competition (``UMC'') and an unfair or deceptive
act or practice (``UDAP'') to mislead consumers about the size of
sleeping bags by representing that the ``cut size'' represents the
finished size; \132\ (2) a rule declaring it a UMC and UDAP to use the
word ``automatic'' or similar words to describe household electric
sewing machines; \133\ (3) a rule declaring it a UMC and UDAP to
misrepresent nonprismatic instruments as prismatic; \134\ (4) a rule
declaring it a UMC and UDAP to advertise or market dry cell batteries
as ``leakproof;'' \135\ (5) a rule declaring it a UMC and UDAP to
misrepresent the ``cut size'' as the finished size of tablecloths and
similar products; \136\ (6) a rule declaring it a UMC and UDAP to
misrepresent that belts are made of leather if they are made of other
materials; \137\ (7) a rule declaring it a UMC and UDAP to represent
used lubricating oil as new; \138\ (8) a rule declaring it a UDAP to
fail to disclose certain health warnings in cigarette advertising and
on cigarette packaging (``Cigarette Rule''); \139\ (9) a rule declaring
it a UMC and UDAP to fail to disclose certain features of light bulbs
on packaging; \140\ (10) a rule declaring it a UMC and UDAP to
misrepresent the actual size of the viewable picture area on a TV;
\141\ (11) a rule declaring a presumption of a violation of section
2(d) and (e) of the amended Clayton Act for certain advertising and
promotional practices in the men's and boy's clothing industry; \142\
(12) a rule declaring it a UMC and UDAP to fail to make certain
disclosures about the handling of glass fiber products and contact with
certain products containing glass fiber; \143\ (13) a rule declaring it
a UMC and UDAP to make certain misrepresentations about transistors in
radios; \144\ (14) a rule declaring it a UDAP to fail to disclose
certain effects about inhaling certain aerosol sprays; \145\ (15) a
rule declaring it a UMC and UDAP to misrepresent the length or size of
extension ladders; \146\ (16) a rule declaring it a UDAP to make
certain misrepresentations, or fail to disclose certain information,
about games of chance; \147\ (17) a rule declaring it a UMC and UDAP to
mail unsolicited credit cards; \148\ (18) a rule declaring it a UMC and
UDAP to fail to disclose the minimum octane number on gasoline pumps
(``Octane Rule''); \149\ (19) a rule declaring it a UMC and UDAP to
sell finished articles of clothing without a permanent tag or label
disclosing care and maintenance
[[Page 38350]]
instructions; \150\ (20) a rule declaring a UMC and UDAP for a grocery
store to offer products for sale at a stated price if those products
will not be readily available to consumers (``Unavailability Rule'');
\151\ (21) a rule declaring it a UMC and UDAP for a seller to fail to
make certain disclosures in connection with a negative option plan
(``Negative Options Rule''); \152\ (22) a rule declaring it a UDAP for
door-to-door sellers to fail to furnish certain information to buyers;
\153\ (23) a rule declaring it a UMC and UDAP to fail to make certain
disclosures about sound power amplification for home entertainment
products; \154\ (24) a rule declaring it a UDAP for sellers failing to
include certain contract provisions preserving claims and defenses in
consumer credit contracts (``Holder Rule''); \155\ (25) a rule
declaring it a UMC or UDAP to solicit mail order merchandise from a
buyer unless the seller can ship the merchandise within 30 days (``Mail
Order Rule''); \156\ and (26) a rule declaring it a UDAP for a
franchisor to fail to furnish a franchisee with certain
information.\157\
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\131\ As explained in more detail later in this Part, Congress
added section 18 to the FTC Act in 1975, and that section provides
the process the Commission must go through to promulgate rules
defining unfair or deceptive acts or practices. See Magnuson-Moss
Warranty--Federal Trade Commission Improvement Act, Public Law 93-
637, 88 Stat. 2183 (Jan. 4, 1975) (hereinafter ``Magnuson-Moss
Act''); 15 U.S.C. 57a. Congress provided, however, that ``[a]ny
proposed rule under section 6(g) . . . with respect to which
presentation of data, views, and arguments was substantially
completed before'' section 18 was enacted ``may be promulgated in
the same manner and with the same validity as such rule could have
been promulgated had'' section 18 ``not been enacted.'' 88 Stat.
2198; 15 U.S.C. 57a note. This list therefore includes a handful of
rules promulgated under section 6(g) but after 1975 because those
rules were substantially completed before section 18's enactment.
\132\ Advertising and Labeling as to Size of Sleeping Bags, 28
FR 10900 (Oct. 11, 1963), repealed by 60 FR 65528 (Dec. 20, 1995).
\133\ Misuse of ``Automatic'' or Terms of Similar Import as
Descriptive of Household Electric Sewing Machines, 30 FR 8900 (Jul.
15, 1965), repealed by 55 FR 23900 (June 13, 1990).
\134\ Deception as to Nonprismatic and Partially Prismatic
Instruments Being Prismatic Binoculars, 29 FR 7316 (Jun. 5, 1964),
repealed by 60 FR 65529 (Dec. 20, 1995).
\135\ Deceptive Use of ``Leakproof,'' ``Guaranteed Leakproof,''
etc., as Descriptive of Dry Cell Batteries, 29 FR 6535 (May 20,
1964), repealed by 62 FR 61225 (Nov. 17, 1997).
\136\ Deceptive Advertising and Labeling as to Size of
Tablecloths and Related Products, 29 FR 11261 (Aug. 5, 1964),
repealed by 60 FR 65530 (Dec. 20, 1995).
\137\ Misbranding and Deception as to Leather Content of Waist
Belts, 29 FR 8166 (Jun. 27, 1964), repealed by 61 FR 25560 (May 22,
1996).
\138\ Deceptive Advertising and Labeling of Previously Used
Lubricating Oil, 29 FR 11650 (Aug. 14, 1964), repealed by 61 FR
55095 (Oct. 24, 1996).
\139\ Unfair or Deceptive Advertising and Labeling of Cigarettes
in Relation to the Health Hazards of Smoking, 29 FR 8324 (July 2,
1964), repealed by 30 FR 9485 (July 29, 1965). As explained in more
detail herein, Congress superseded this rule with legislation.
\140\ Incandescent Lamp (Light Bulb) Industry, 35 FR 11784 (Jul.
23, 1970), repealed by 61 FR 33308 (Jun. 27, 1996).
\141\ Deceptive Advertising as to Sizes of Viewable Pictures
Shown by Television Receiving Sets, 31 FR 3342 (Mar. 3, 1966),
repealed by 83 FR 50484 (Oct. 9, 2018).
\142\ Discriminatory Practices in Men's and Boys' Tailored
Clothing Industry, 32 FR 15584 (Nov. 9, 1967), repealed by 59 FR
8527 (Feb. 23, 1994).
\143\ Failure to Disclose that Skin Irritation May Result from
Washing or Handling Glass Fiber Curtains and Draperies and Glass
Fiber Curtain and Drapery Fabrics, 32 FR 11023 (Jul. 28, 1967),
repealed by 60 FR 65532 (Dec. 20, 1995).
\144\ Deception as to Transistor Count of Radio Receiving Sets,
Including Transceivers, 33 FR 8446 (Jun. 7, 1968), repealed by 55 FR
25090 (Jun. 20, 1990).
\145\ Failure to Disclose the Lethal Effects of Inhaling Quick-
Freeze Aerosol Spray Products Used for Frosting Cocktail Glasses, 34
FR 2417 (Feb. 20, 1969), repealed by 60 FR 66071 (Dec. 21, 1995).
\146\ Deceptive Advertising and Labeling as to Length of
Extension Ladders, 34 FR 929 (Jan. 22, 1969), repealed by 60 FR
65533 (Dec. 20, 1995).
\147\ Games of Chance in the Food Retailing and Gasoline
Industries, 34 FR 13302 (Aug. 16, 1969), repealed by 61 FR 68143
(Dec. 27, 1996).
\148\ Unsolicited Mailing of Credit Cards, 35 FR 4614 (Mar. 17,
1970), repealed by 36 FR 45 (Jan. 5, 1971). This rule was rescinded
in response to an amendment to the Truth in Lending Act that
prohibited similar conduct. See Public Law 91-508, 84 Stat. 1126
(1970).
\149\ Posting of Minimum Octane Numbers on Gasoline Dispensing
Pumps, 36 FR 23871 (Dec. 16, 1971), repealed by 43 FR 43022 (Sept.
22, 1978). This rule was superseded by the Petroleum Marketing
Practices Act, Public Law 95-297, 92 Stat. 333 (June 19, 1978). A
similar regulation was promulgated under that law at 16 CFR part
306.
\150\ Care Labeling of Textile Wearing Apparel, 36 FR 23883
(Dec. 16, 1971).
\151\ Retail Food Store Advertising and Marketing Practices, 36
FR 8777 (May 13, 1971).
\152\ Use of Negative Option Plans by Sellers in Commerce, 38 FR
4896 (Feb. 22, 1973).
\153\ Cooling-off Period for Door-to-Door Sales, 37 FR 22934
(Oct. 26, 1972).
\154\ Power Output Claims for Amplifiers Used in Home
Entertainment Products, 39 FR 15387 (May 3, 1974).
\155\ Preservation of Consumers' Claims and Defenses, 40 FR
53506 (Nov. 18, 1975).
\156\ Mail Order Merchandise, 40 FR 49492 (Oct. 22, 1975)
(regulatory text), 40 FR 51582 (Nov. 5, 1975) (statement of basis
and purpose). The Mail Order Rule has since been updated to become
the Mail, internet, or Telephone Order Merchandise Rule, or MITOR.
See 79 FR 55619 (Sept. 17, 2014). The updates to the rule were based
on the Commission's authority to regulate unfair or deceptive acts
or practices.
\157\ Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures, 43 FR 59614 (Dec. 21,
1978).
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Some of these rules attracted significant attention. For instance,
the Commission began the rulemaking process to require warnings on
cigarette packages just one week after the Surgeon General's ``landmark
report'' that determined smoking is a health hazard,\158\ and that rule
was front-page news.\159\ Following a lobbying campaign by the tobacco
industry,\160\ Congress supplanted the Commission's regulation with the
Cigarette Labeling and Advertising Act but did not disturb the
Commission's rulemaking authority.\161\ The Unavailability Rule was
likewise front-page news upon its release in 1971, and Congress left it
intact.\162\
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\158\ Teresa Moran Schwartz & Alice Saker Hrdy, FTC Rulemaking:
Three Bold Initiatives and Their Legal Impact, 2-3 (Sept. 22, 2004).
\159\ U.S. to Require Health Warning for Cigarettes, N.Y. Times
(June 25, 1964) at 1, 15 (tobacco industry indicating plans to
immediately challenge the Commission's authority to issue the
regulation), <a href="https://www.nytimes.com/1964/06/25/archives/us-to-require-health-warning-for-cigarettes-trade-commission-orders.html">https://www.nytimes.com/1964/06/25/archives/us-to-require-health-warning-for-cigarettes-trade-commission-orders.html</a>.
\160\ Tobacco Inst., Tobacco--A Vital U.S. Industry (1965),
<a href="https://acsc.lib.udel.edu/exhibits/show/legislation/cigarette-labeling">https://acsc.lib.udel.edu/exhibits/show/legislation/cigarette-labeling</a>.
\161\ Public Law 89-92, 79 Stat. 282 (July 27, 1965); see 15
U.S.C. 1331 et seq.
\162\ FTC Bars Grocery Ads for Unavailable Specials, N.Y. Times
(May 13, 1971) at 1, <a href="https://www.nytimes.com/1971/05/13/archives/f-t-c-bars-grocery-ads-for-unavailable-specials-bars-grocery">https://www.nytimes.com/1971/05/13/archives/f-t-c-bars-grocery-ads-for-unavailable-specials-bars-grocery</a>; 16 CFR
424.1 and 424.2. The rule was amended after its enactment in 1971 to
add an exception and defenses but otherwise remains intact as
promulgated. Amendment to Trade Regulation Rule Concerning Retail
Food Store Advertising and Marketing Practices, 54 FR 35456-08 (Aug.
28, 1989); see also Retail Food Store Advertising and Marketing
Practices Rule, 79 FR 70053-01 (Nov. 25, 2014).
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In National Petroleum Refiners Association v. FTC (``Petroleum
Refiners''), the D.C. Circuit expressly upheld the Octane Rule as a
proper exercise of the Commission's power under section 6(g) to make
rules regulating both unfair methods of competition and unfair or
deceptive acts or practices.\163\ After construing ``the words of the
statute creating the Commission and delineating its powers,'' the court
held ``that under the terms of its governing statute . . . and under
Section 6(g) . . . the Federal Trade Commission is authorized to
promulgate rules defining the meaning of the statutory standards of the
illegality the Commission is empowered to prevent.'' \164\ That
interpretation was also ``reinforced by the construction courts have
given similar provisions in the authorizing statutes of other
administrative agencies.'' \165\ The Seventh Circuit later agreed with
the D.C. Circuit's decision and ``incorporate[d] [it] by reference''
when rejecting a challenge to the Mail Order Rule.\166\
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\163\ Nat'l Petroleum Refiners Ass'n v. FTC, 482 F.2d 672 (D.C.
Cir. 1973).
\164\ Nat'l Petroleum Refiners, 482 F.2d at 674, 698; see also
Am. Fin. Servs. Ass'n v. FTC, 767 F.2d 957, 967 (D.C. Cir. 1985)
(concluding, after extensive review of the legislative history
related to the FTC's rulemaking authority originating in 1914 and
extending through amendments to the FTC Act in 1980, that ``Congress
has not at any time withdrawn the broad discretionary authority
originally granted the Commission in 1914 to define unfair practices
on a flexible, incremental basis.'').
\165\ Nat'l Petroleum Refiners, 482 F.2d at 678.
\166\ United States v. JS & A Grp., Inc., 716 F.2d 451, 454 (7th
Cir. 1983).
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Following such rulemakings and the D.C. Circuit's confirmation of
the Commission's rulemaking power in Petroleum Refiners, Congress in
1975 enacted a new section 18 of the FTC Act. This new section
introduced special procedures, beyond those required under the
Administrative Procedure Act, for promulgating rules for unfair or
deceptive acts or practices, and it eliminated the Commission's
authority to issue such rules under section 6(g).\167\ But Congress
pointedly chose not to restrict the Commission's authority to
promulgate rules regulating unfair methods of competition under section
6(g). That choice was deliberate. While considering this legislation,
Congress knew that the Commission had promulgated rules regulating
unfair methods of competition and that the D.C. Circuit in Petroleum
Refiners had confirmed the Commission's authority to do so.\168\ And
Congress expressly considered--but rejected--an amendment to the FTC
Act under which ``[t]he FTC would have been prohibited from prescribing
rules with respect to unfair competitive practices.'' \169\
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\167\ Magnuson-Moss Act, 88 Stat. 2183; see 15 U.S.C. 57a.
\168\ S. Rep. No. 93-151, at 32 (1973).
\169\ H.R. Conf. Rep. No. 93-1606, at 30 (1974).
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Instead, the enacted section 18 confirmed the Commission's
authority to make rules under section 6(g). The law expressly preserved
``any authority of the Commission to prescribe rules (including
interpretive rules), and general statements of policy, with respect to
unfair methods of competition in or affecting commerce.'' \170\
Congress also made clear that Section 18 ``shall not affect the
validity of any rule which was promulgated under section 6(g).'' \171\
And it provided that ``[a]ny proposed rule under section 6(g)'' with
certain components that were ``substantially completed before'' section
18's enactment ``may be promulgated in the same manner and with the
same validity as such rule could have been promulgated had this section
not been enacted.'' \172\ Among the substantially completed rules at
the time was the Mail Order Rule, which proposed to define--and upon
promulgation did define--certain conduct as both an unfair method of
competition and an unfair or deceptive act or practice.\173\ The 1975
legislation thus expressly permitted the Commission to promulgate a
rule under section 6(g) that defined an unfair method of competition
and evinces Congress's
[[Page 38351]]
intent to leave in place the Commission's authority to promulgate such
rules under section 6(g). As the Seventh Circuit later put it,
``Congress . . . considered the controversy surrounding the
Commission's substantive rulemaking power under Section 6(g) to have
been settled by the Octane Rating case.'' \174\
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\170\ 15 U.S.C. 57a(a)(2).
\171\ Magnuson-Moss Act, 88 Stat. 2183.
\172\ Magnuson-Moss Act, 88 Stat. 2183.
\173\ See Undelivered Mail Order Merchandise and Services, 36 FR
19092 (Sept. 28, 1971) (initial NPRM); 39 FR 9201 (Mar. 8, 1974)
(amended NPRM); 40 FR 49492 (Oct. 22, 1975) (final regulatory text).
\174\ United States v. JS & A Grp., 716 F.2d 451, 454 (7th Cir.
1983).
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Congress again confirmed the Commission's authority to promulgate
rules regulating unfair methods of competition under section 6(g) when
it enacted section 22 of the FTC Act as part of the Federal Trade
Commission Improvements Act of 1980.\175\ Section 22 imposes certain
procedural requirements the Commission must follow when it promulgates
any ``rule.'' Section 22(a) defines ``rule'' as ``any rule promulgated
by the Commission under section 6 or section 18'' while excluding from
that definition ``interpretive rules, rules involving Commission
management or personnel, general statements of policy, or rules
relating to Commission organization, procedure, or practice.'' \176\
Thus, by its terms, section 22(a) demonstrates the 1980 Congress's
understanding that the Commission maintained authority to promulgate
rules under section 6 that are not merely ``interpretive rules, rules
involving Commission management or personnel, general statements of
policy, or rules relating to Commission organization, procedure, or
practice.'' \177\ Section 22 envisions rules that will have the force
of law as legislative rules and defines ``rule'' based on whether it
may ``have an annual effect on the national economy of $100,000,000 or
more,'' ``cause a substantial change in the cost or price of goods or
services,'' or ``have a significant impact upon'' persons and
consumers.\178\ Section 22(b) of the Act similarly contemplates
authority to make legislative rules by imposing regulatory analysis
obligations on any rules that the Commission promulgates under section
6.\179\ The specific obligations in section 22(b), such as the
requirement for the Commission to conduct a cost-benefit analysis,
assume that section 6(g) authorizes substantive and economically
significant rules.
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\175\ Public Law 96-252, 94 Stat. 374 (1980).
\176\ Id.; see 15 U.S.C. 57b-3(a)(1).
\177\ 15 U.S.C. 57b-3(a)(1).
\178\ Id.
\179\ 15 U.S.C. 57b-3(b).
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Both the 1975 and 1980 amendments to the FTC Act thus indicate that
Congress understood the Commission possessed rulemaking power under
section 6(g) and chose to leave that authority in place.\180\ As the
Supreme Court has observed, ``[t]he long time failure of Congress to
alter'' a statutory provision, like section 6(g) here, ``after it had
been judicially construed, and the enactment by Congress of legislation
which implicitly recognizes the judicial construction as effective, is
persuasive of legislative recognition that the judicial construction is
the correct one.'' \181\ That is especially true when, as here, ``the
matter has been fully brought to the attention of the public and the
Congress, the latter has not seen fit to change the statute.'' \182\
Were there any doubt that the 1914 Congress granted the Commission the
authority to make rules under section 6(g) to prevent unfair methods of
competition, the Congresses of 1975 and 1980 eliminated such doubt by
ratifying the D.C. Circuit's decision holding that the Commission has
such authority.
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\180\ Congress has also amended section 6 since the D.C. Circuit
decided Petroleum Refiners, but it left section 6(g) untouched. See
Public Law 109-455, 120 Stat. 3372 (2006).
\181\ Apex Hosiery Co. v. Leader, 310 U.S. 469, 488 (1940).
\182\ Id. at 489.
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C. Comments and Responses Regarding the Commission's Legal Authority
The Commission received many comments supporting, discussing, or
questioning its authority to promulgate the final rule. Numerous
commenters supported that the Commission has such authority, including,
among others, legal scholars and businesses.\183\ In addition, hundreds
of small businesses--hailing from 45 States and the District of
Columbia--joined a comment by the Small Business Majority supporting
the final rule.\184\
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\183\ See, e.g., Comment of Lev Menand et al., FTC-2023-0007-
20871; Comment of Peter Shane et al., FTC-2023-0007-21024; Comment
of Yelp, FTC-2023-0007-20974; Comment of Veeva Systems, FTC-2023-
0007-18078.
\184\ Comment of Sm. Bus. Majority, FTC-2023-0007-21022.
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Commenters questioning the Commission's authority typically
advanced one of three arguments. First, some commenters claimed the FTC
Act does not grant the Commission authority to promulgate the rule.
Second, some commenters contended that the validity of non-competes is
a major question that Congress has not given the Commission the
authority to address. And third, some commenters argued that Congress
had impermissibly delegated to the Commission authority to promulgate
nationwide rules governing methods of competition. A smaller number of
comments asserted other, miscellaneous reasons the Commission allegedly
lacked authority to promulgate the rule. The Commission has considered
these comments and disagrees for the reasons explained below.
1. The Commission's Authority Under the FTC Act
The Commission received numerous comments claiming that it lacks
authority under the FTC Act to promulgate rules prohibiting unfair
methods of competition. The Commission disagrees. Congress expressly
granted the Commission authority to promulgate such rules in the
original FTC Act of 1914, Congress enacted legislation in 1975
expressly preserving that authority,\185\ and it imposed requirements
in 1980 that presumed that authority.
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\185\ Some commenters argued that the 1975 Magnuson-Moss Act,
which created additional procedures the Commission must use to
promulgate rules regulating unfair or deceptive acts or practices,
implies that the Commission entirely lacks authority to promulgate
rules regulating unfair methods of competition. The Commission
disagrees with these comments and notes the effect of the 1975
legislation, which preserved the Commission's existing rulemaking
authority.
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The Commission is not persuaded by commenters' arguments in
opposition to its authority. For instance, some commenters argued that
Congress's choice to exclude certain industries from the Commission's
jurisdiction indicates that Congress did not intend to give the
Commission power to pass rules that affect commerce across the national
economy.\186\ But Congress expressly ``empowered and directed'' the
Commission to prevent unfair methods of competition throughout the
economy,\187\ in any activities ``in or affecting commerce,'' subject
only to limited exceptions. The final rule will apply only to the
extent that the Commission has jurisdiction under the FTC Act. The Act
does not limit the Commission's authority to pursue, for example,
industry-specific rulemaking. Where Congress wished to limit the scope
of the Commission's authority over particular entities or activities,
it did so expressly, demonstrating its intent to give the Commission
broad enforcement authority over activities in or affecting commerce
outside the scope of the enumerated exceptions.\188\ That section 22 of
the FTC Act requires the Commission to perform a regulatory analysis
for amendments to rules based on, inter alia, ``their annual effect on
the
[[Page 38352]]
national economy'' confirms the same.\189\
---------------------------------------------------------------------------
\186\ E.g., Comment of Fed'n of Am. Hosps., FTC-2023-0007-21034.
\187\ 15 U.S.C. 45(a)(2).
\188\ 15 U.S.C. 45(a)(2), (3).
\189\ 15 U.S.C. 57b-3 (outlining requirements of the
Commission's rulemaking process for new rules and amendments); see
also Part II.E (discussing the Commission's jurisdiction).
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Other commenters argued that the Commission is relying on vague or
ancillary provisions for its authority and invoked the familiar refrain
that Congress ``does not . . . hide elephants in mouseholes.'' \190\
None of the provisions on which the Commission is relying are either
vague or ancillary. As explained earlier, preventing unfair methods of
competition is at the core of the Commission's mandate, the plain text
of the Act gives the Commission rulemaking authority to carry out that
mandate, and the Commission has exercised this rulemaking authority
before.\191\ The D.C. Circuit and Seventh Circuits have upheld that
exercise of authority, and Congress preserved this authority in
subsequent amendments to the Act following the D.C. Circuit's
decision.\192\
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\190\ Whitman v. Am. Trucking Ass'ns, 531 U.S. 457, 468 (2001);
see, e.g., Comment of La. And 12 Other States, FTC-2023-0007-21094.
\191\ See Part II.B (discussing the Commission's history of
using section 6(g) to promulgate rules).
\192\ Id.
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Additional commenters cited select legislative history from the
1914 FTC Act to suggest the Commission lacks authority to promulgate
rules regulating competition.\193\ ``[T]here is no reason to resort to
legislative history'' when, as here, the text of the statute speaks
plainly.\194\ Even if that were not the case, however, the legislative
history does not unambiguously compel a different conclusion. Faced
with similar arguments to those raised by commenters here, in National
Petroleum Refiners, the D.C. Circuit conducted an exhaustive review of
the 1914 FTC Act and concluded ``the legislative history of section 5
and Section 6(g) is ambiguous'' and ``certainly does not compel the
conclusion that the Commission was not meant to exercise the power to
make substantive rules with binding effect[.]'' \195\ As the D.C.
Circuit explained, even individual statements by some Congresspeople
that might suggest otherwise,\196\ when properly contextualized, ``can
be read to support substantive rule-making of the kind asserted by
the'' Commission.\197\
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\193\ E.g., Comment of Nat'l Ass'n of Mfrs., FTC-2023-0007-
20939; Comment of La. And 12 Other States, FTC-2023-0007-21094.
\194\ United States v. Gonzales, 520 U.S. 1, 6 (1997).
\195\ Nat'l Petroleum Refiners Ass'n v. FTC, 482 F.2d 672, 686
(D.C. Cir. 1973).
\196\ Id. at 704; see also, e.g., Comment from La. and 12 Other
States, FTC-2023-0007-21094 (identifying statements and failed bills
that, the commenters say, show the Commission was not intended to
possess rulemaking authority).
\197\ Nat'l Petroleum Refiners, 482 F.2d at 709.
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Statements from the enactment of the 1975 Magnuson Moss Act, which
added section 18 to the FTC Act, confirm the Commission's authority to
promulgate rules under section 6(g). That legislative history reveals
Congress in 1975 made a considered decision to reject an effort to
overturn the D.C. Circuit's interpretation of the FTC Act and instead
confirmed that section 6(g) authorizes the Commission to promulgate
legislative rules concerning unfair methods of competition.\198\ More
importantly, these sorts of individual statements cannot trump the
plain text of the Act that Congress passed,\199\ which gave the
Commission the authority ``to make rules and regulations for the
purpose of carrying out the provisions'' of the FTC Act. Indeed, even
if the legislative history were to be selectively read to cut against
the Commission's authority, the Commission would still conclude that
section 6(g) confers authority to promulgate this final rule because
the plain text of the statute (including both the original 1914 Act and
subsequent enacted amendments to the FTC Act) unambiguously confers
that authority.
---------------------------------------------------------------------------
\198\ For example, while the Senate was considering amendments
to the FTC Act, Senator Hart read excerpts of Nat'l Petroleum
Refiners into the record. See 120 Cong. Rec. 40712 (Dec. 18, 1974).
These short excerpts included the court acknowledging that it was
considering whether the Commission ``is empowered to promulgate
substantive rules'' that would ``give greater specificity and
clarity to the broad standard of illegality--`unfair methods of
competition' . . .--which the agency is empowered to prevent.'' Id.
(quoting Nat'l Petroleum Refiners, 482 F.2d at 673). Senator Hart
then explained that the ``procedural requirements . . . respecting
FTC rulemaking'' in the bill under consideration ``are limited to
unfair or deceptive acts or practices rules.'' Id. ``These
provisions and limitations,'' he explained, ``are not intended to
affect the Commission's authority to prescribe and enforce rules
respecting unfair methods of competition.'' Id. ``Rules respecting
unfair methods of competition,'' Senator Hart said, ``should
continue to be prescribed in accordance with'' the APA. Id.; see
also Comment of Lev Menand et al., FTC-2023-0007-20871 at 3-6
(recounting legislative history that preceded the 1975 amendments to
the FTC Act).
\199\ See Barnhart v. Sigmon Coal Co., 534 U.S. 438, 457 (2002)
(``Floor statements from two Senators [who were sponsors of the
bill] cannot amend the clear and unambiguous language of a
statute.'').
---------------------------------------------------------------------------
In short, neither the legislative history of the FTC Act, nor any
of the other arguments commenters raised about the Commission's
rulemaking authority overcome the plain meaning of the Act or
Congress's ratification of the Commission's power to make rules
preventing unfair methods of competition, as discussed in Part
II.B.\200\
---------------------------------------------------------------------------
\200\ This includes arguments about the legislative intent,
structure, or post-enactment history of the 1914 FTC Act.
---------------------------------------------------------------------------
The Commission acknowledges that individual members of the
Commission have, at times, disclaimed the Commission's authority to
promulgate rules regulating unfair methods of competition.\201\ The
statement of an individual Commissioner does not reflect the views of
or bind ``[t]he Commission itself,'' which has concluded--just as it
did when it issued such rules in the past--that it does possess such
authority.\202\ In any event, the Commission has reviewed these
statements, along with the many comments it received, and does not
believe any of the arguments raised in support of that position
overcome the plain meaning of the FTC Act provisions.
---------------------------------------------------------------------------
\201\ See, e.g., Nat'l Petroleum Refiners, 482 F.2d at 695-96 &
n. 32, 38-39; NPRM at 3544 (dissenting statement of Commissioner
Wilson).
\202\ Nat'l Petroleum Refiners, 482 F.2d at 694; see also 16 CFR
4.14(c) (``Commission action'' requires ``the affirmative
concurrence of a majority of the participating Commissioners'').
---------------------------------------------------------------------------
2. Major Questions Doctrine
Many commenters assert that the Commission lacks the authority to
adopt the final rule based on the major questions doctrine. That
doctrine, as the Supreme Court recently explained in West Virginia v.
EPA, ``teaches that there are extraordinary cases . . . in which the
history and the breadth of the authority that the agency has asserted,
and the economic and political significance of that assertion, provide
a reason to hesitate before concluding that Congress meant to confer
such authority.'' \203\ In such cases, ``something more than a merely
plausible textual basis for the agency action is necessary. The agency
instead must point to clear congressional authorization for the power
it claims.'' \204\ Having considered the factors that the Supreme Court
has used to identify major questions, the Commission concludes that the
final rule does not implicate the major questions doctrine. And even if
that doctrine did apply, the Commission concludes that Congress
provided clear authorization for the Commission to promulgate this
rule.\205\
---------------------------------------------------------------------------
\203\ W. Va. v. EPA, 597 U.S. 697, 721 (2022) (cleaned up).
\204\ Id. at 723 (cleaned up).
\205\ The Commission notes that some commenters either
implicitly or explicitly focused on the Commission's rulemaking
authority, as opposed to the Commission's authority to define non-
competes as an unfair method of competition, as a major question.
The Commission has already addressed the source of its rulemaking
authority, see Part II.B. But to be clear, the Commission concludes
that neither its rulemaking authority under section 6(g) nor its
authority to use that power to define non-competes as an unfair
method of competition implicates the major questions doctrine, and
that even assuming either did, Congress has provided express
statutory authority for both.
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[[Page 38353]]
The agency authority underlying this final rule rests on firm
historical footing. There is nothing novel about the Commission's
assertion of authority to promulgate legislative rules under section
6(g).\206\ As explained in Part II.B, the Commission has used this
authority for more than 60 years to promulgate many rules defining
unfair methods of competition and/or unfair or deceptive acts or
practices.\207\ The Commission's use of this power sometimes garnered
significant attention, such as when it made national news by requiring
cigarette warnings in the immediate wake of the Surgeon General's
groundbreaking report on the health effects of smoking.\208\ And the
Commission's rulemaking authority was long ago ``addressed''--and
affirmed--``by a court.'' \209\ Moreover, after that high-profile
rulemaking and judicial affirmation, Congress considered--and twice
reaffirmed--the Commission's authority to issue legislative rules
defining unfair methods of competition under section 6(g).\210\ Indeed,
even when Congress decided to displace the FTC's Cigarette Rule with
legislation, it left the Commission's rulemaking authority in
place.\211\ Likewise, when Congress added procedural steps the
Commission must take when promulgating rules concerning unfair or
deceptive acts or practices, it expressly allowed the Commission to
complete certain ongoing rulemakings, including one that relied on
section 6(g) to define an unfair method of competition.\212\ This is
not a situation where Congress ``conspicuously and repeatedly''
declined to grant the agency the claimed power.\213\
---------------------------------------------------------------------------
\206\ W. Va. v. EPA, 597 U.S. at 725.
\207\ See Part II.B (discussing the Commission's history of
promulgating rules under section 6(g)).
\208\ See Part II.B (discussing Cigarette Rule and Holder Rule);
see also ``U.S. to Require Health Warning for Cigarettes,'' N.Y.
Times (June 25, 1964) at 1, 15 (tobacco industry indicating plans to
immediately challenge the Commission's authority to issue the
regulation).
\209\ W. Va. v. EPA, 597 U.S. at 725; see Part II.B (discussing
decisions from the D.C. Circuit and Seventh Circuit affirming the
Commission's rulemaking power under section 6(g)).
\210\ See Part II.B (discussing the history and content of
sections 18 and 22 of the FTC Act).
\211\ See Federal Cigarette Labeling and Advertising Act, Public
Law 89-92, 79 Stat. 282 (July 27, 1965).
\212\ 15 U.S.C. 57a(a)(2); see Part II.B (discussing the Mail
Order Rule).
\213\ W. Va. v. EPA, 597 U.S. at 724.
---------------------------------------------------------------------------
Nor does the substance of the rule represent any departure from the
Commission's past practices. Since its establishment in 1914, the
Commission has had the authority to determine whether given practices
constitute unfair methods of competition. Rather than trying to define
all the many and varied practices that are unfair, Congress empowered
the Commission to respond to changing market conditions and to bring
specialized expertise to bear when making unfairness
determinations.\214\ As noted in Part I.B, the Commission has
previously secured consent orders premised on the use of non-competes
being an unfair method of competition,\215\ and there is little
question that the Commission has the authority to determine that non-
competes are unfair methods of competition through adjudication.\216\
Indeed, one commenter who asserted the rule would violate the major
questions doctrine expressly agreed that the Commission could determine
that a specific non-compete is an unfair method of competition through
case-by-case adjudication.\217\ The Commission is making the same kind
of determination here through rulemaking rather than adjudication.\218\
And because the rulemaking process allows all interested parties a
chance to weigh in, this process ``may actually be fairer to parties
than total reliance on case-by-case adjudication.'' \219\ This is thus
not a situation where the agency's action would fundamentally change
the nature of the regulatory scheme. Determining whether a practice is
an ``unfair method of competition'' under section 5 has been a core
task of the Commission for more than a century--and, indeed, goes to
the heart of its mandate.
---------------------------------------------------------------------------
\214\ See, e.g., FTC v. R.F. Keppel & Bro., 291 U.S. 304, 311
n.2, 314 (1934).
\215\ In those orders, the party agreed, inter alia, to cease
and desist from enforcing or attempting to enforce existing non-
competes and from entering into or attempting to enter into new
ones, and also agreed to provide notice to affected employees that
they are no longer subject to a non-compete. See Part I.B n.42-44
(citing recent Commission investigations and consent orders
involving non-competes).
\216\ To the extent that any commenters argued the Commission
lacked authority over the entire subject matter of non-compete
agreements, the Commission did not see any compelling explanation
that an agreement not to compete falls outside the meaning of a
``method of competition.''
\217\ Comment of Int'l Ctr. For L. & Econs., FTC-2023-0007-
20753, at 75-76.
\218\ Nat'l Petroleum Refiners Ass'n v. FTC, 482 F.2d 672 at 685
(D.C. Cir. 1973) (recognizing that the Commission may ``choose[ ]to
elaborate'' section 5's ``comprehensive statutory standards through
rule-making or through case-by-case adjudication'').
\219\ Id. at 681; see generally Part IX.C.2 (discussing the
value of rulemaking).
---------------------------------------------------------------------------
Additionally, non-competes have already been the subject of FTC
scrutiny and enforcement actions, so subjecting them to rulemaking is a
more incremental--and thus less significant--step than it would be for
an agency to wade into an area not currently subject to its enforcement
authority. And the present rulemaking is consistent with both
Congress's intent for the Commission and the Commission's prior
practice. Congress ``empowered and directed'' the Commission ``to
prevent persons, partnerships, or corporations'' within the
Commission's jurisdiction ``from using unfair methods of competition in
or affecting commerce.'' \220\ Following that directive, the Commission
has previously used its section 6(g) authority to promulgate rules that
reach industries across the economy. For example, the Mail Order Rule
placed restrictions on any sale conducted by mail,\221\ and the
Negative Option Rule requires certain disclosures for some negative
option plans. These rules--promulgated nearly 50 or more years ago--
applied across the industries within the FTC's jurisdiction, yet no
court has held that they exceeded the Commission's authority.\222\
Indeed, the Seventh Circuit upheld the Mail Order Rule as a valid
exercise of that authority.\223\
---------------------------------------------------------------------------
\220\ 15 U.S.C. 45(a)(2).
\221\ Mail Order Merchandise, 40 FR 49492 (Oct. 22, 1975); see
16 CFR part 435.
\222\ See Part II.B (listing rules promulgated by the FTC
exercising authority under sections 5 and 6(g)).
\223\ United States v. JS & A Grp., 716 F.2d 451, 454 (7th Cir.
1983).
---------------------------------------------------------------------------
Congress itself recognized that the Commission's authority will
sometimes affect firms across the economy. Indeed, addressing unfair
methods of competition and unfair and deceptive practices across
industries (other than the industries, activities, or entities Congress
expressly exempted) is the core of the Commission's mandate--and the
Commission has long pursued that mandate through both rulemaking \224\
and adjudication.\225\ Congress imposed
[[Page 38354]]
certain requirements in section 22 on any amendment to a Commission
rule promulgated under section 6 (or section 18) that would have
certain substantial effects on the national economy, the price of goods
or services, or regulated entities and consumers.\226\ Congress thus
anticipated--and intended--that the Commission's rulemaking power
carried the potential to affect the economy in considerable ways, and
Congress already considered and specified the necessary steps and
checks to ensure the Commission's exercise of that power is
appropriate. For all these reasons, the final rule does not involve a
``major question'' as the Supreme Court has used that term.
---------------------------------------------------------------------------
\224\ See Part II.B.
\225\ The Commission's adjudicatory power, like its rulemaking
power, stretches across the national economy. For instance, the
Commission has found companies in a variety of industries
participated in price-fixing conspiracies that violated section 5
and ordered them to cease and desist from such practices following
an adjudication. See, e.g., Eugene Dietzgen Co. v. FTC, 142 F.2d 321
(7th Cir. 1944) (scientific instruments); U.S. Maltsters Ass'n v.
FTC, 152 F.2d 161 (7th Cir. 1945) (malt manufacturers); Keasbey &
Mattison Co. v. FTC, 159 F.2d 940 (6th Cir. 1947) (asbestos
insulation); Allied Paper Mills v. FTC, 168 F.2d 600 (7th Cir. 1948)
(book paper manufacturers); Bond Crown & Cork. Co. v. FTC, 176 F.2d
974 (4th Cir. 1949) (bottle cap manufacturers). Price-fixing is just
one example. The Commission's adjudicatory power also supported a
cease-and-desist order concerning a food manufacturer's resale
practices more than 100 years ago. FTC v. Beech-Nut Packing, 257
U.S. 441 (1922). And it supported a cease-and-desist order within
the past few years enjoining a pharmaceutical company from entering
into reverse payment settlement schemes. Impax Labs., Inc. v. FTC,
994 F.3d 484 (5th Cir. 2021). In the century between, the Commission
has found section 5 violations based on false advertising, monopoly
maintenance, exclusive dealing, and more in diverse sectors
throughout the country.
\226\ 15 U.S.C. 57b-3; see also Part II.B.
---------------------------------------------------------------------------
Even if the final rule does present a major question, the final
rule passes muster because the FTC Act provides clear authorization for
the Commission's action. In cases involving major questions, courts
expect Congress to ``speak clearly'' if it wishes to assign the
disputed power.\227\ Congress did so when it ``declared unlawful'' in
the FTC Act ``[u]nfair methods of competition'' and empowered the
Commission ``to make rules and regulations for the purpose of carrying
out the provisions of th[e] Act.'' \228\ Congress ``[i]n large
measure'' left ``the task of defining `unfair methods of competition' .
. . to the Commission.'' \229\ That is precisely what the Commission
has done here, for the reasons elaborated in Part IV. Finally, there is
no doubt that the Commission has expertise in the field (competition)
it is regulating here.\230\ For these reasons, even if the final rule
involves a major question, Congress has clearly delegated to the
Commission the authority to address that question.
---------------------------------------------------------------------------
\227\ W. Va. v. EPA, 597 U.S. 697, 716, 723 (2002).
\228\ FTC Act of 1914, 38 Stat. at 721-22; see 15 U.S.C. 45(a),
46(g); see also Part II.A (discussing the Commission's rulemaking
authority).
\229\ FTC v. Texaco, Inc., 393 U.S. 223, 225 (1968).
\230\ Cf. W. Va. v. EPA, 597 U.S. at 729 (noting the Court's
view that the EPA had traditionally lacked the expertise needed to
develop the rule at issue); Ala. Ass'n of Realtors v. HHS, 594 U.S.
758, at 764-65 (2021) (questioning the link between the Center for
Disease Control and an eviction moratorium); see also Part II.A
(discussing Congress's creation of the Commission as an expert
body); Parts IV.B and IV.C (discussing the rationale for the rule
and explaining the negative effects non-competes have on
competition). The Commission also notes that through, inter alia,
the roundtables and enforcement actions described in Part I.B, and
through this rulemaking process, it has acquired expertise on non-
competes specifically. The Commission further notes that non-
competes are, inherently, a method of competition.
---------------------------------------------------------------------------
3. Non-Delegation Doctrine
Some commenters also objected that Congress violated the non-
delegation doctrine by empowering the Commission to promulgate rules
regulating unfair methods of competition. The Commission disagrees. The
non-delegation doctrine provides that ``Congress generally cannot
delegate its legislative power to another Branch.'' \231\ But the
Constitution does not ``prevent Congress from obtaining the assistance
of its coordinate Branches.'' \232\ ``So long as Congress shall lay
down by legislative act an intelligible principle to which the person
or body authorized to [exercise the delegated authority] is directed to
conform, such legislative action is not a forbidden delegation of
legislative power.'' \233\ Applying this rule, the Supreme Court has
``over and over upheld even very broad delegations'' including those
directing agencies ``to regulate in `the public interest,' . . . to set
`fair and equitable' prices and `just and reasonable' rates,'' and ``to
issue whatever air quality standards are `requisite to protect the
public health.' '' \234\ ``The Supreme Court has'' also ``explained
that the general policy and boundaries of a delegation `need not be
tested in isolation' '' and ``[i]nstead, the statutory language may
derive content from the `purpose of the Act, its factual background and
the statutory context in which they appear.' '' \235\
---------------------------------------------------------------------------
\231\ Mistretta v. United States, 488 U.S. 361, 372 (1989).
\232\ Id.
\233\ Id. (alteration in original).
\234\ Gundy v. United States, 139 S. Ct. 2116, 2121 (2019)
(citing Nat'l Broadcasting Co. v. United States, 319 U.S. 190, 216
(1943); N.Y. Cent. Secs. Corp. v. United States, 287 U.S. 12, 24
(1932); Yakus v. United States, 321 U.S. 414, 422 (1944); Fed. Power
Comm'n v. Hope Natural Gas Co., 320 U.S. 591 (1944); and Whitman v.
Am. Trucking Ass'ns, 531 U.S. 457, 472 (2001)).
\235\ TOMAC, Taxpayers of Mich. Against Casinos v. Norton, 433
F.3d 852, 866 (D.C. Cir. 2006) (quoting Am. Power & Light Co. v.
SEC, 329 U.S. 90, 104 (1946)).
---------------------------------------------------------------------------
Here, Congress ``declared unlawful'' any ``unfair methods of
competition in or affecting commerce'' and ``empowered and directed''
the Commission ``to prevent'' entities within its jurisdiction ``from
using unfair methods of competition.'' \236\ Congress also instructed
the Commission to ``make rules and regulations for the purpose of
carrying out the provisions'' of the FTC Act.\237\ Congress's stated
purpose and policy in section 5 provides the Commission with an
intelligible principle to guide its section 6(g) rulemaking
authority.\238\
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\236\ 15 U.S.C. 45(a)(1)-(2).
\237\ 15 U.S.C. 46(g).
\238\ As the D.C. Circuit noted in Nat'l Petroleum Refiners
Ass'n v. FTC, ``the Supreme Court has ruled that the powers
specified in Section 6 do not stand isolated from the Commission's
enforcement and law applying role laid out in Section 5.'' 482 F.2d
672, 677 (D.C. Cir. 1973) (citing United States v. Morton Salt Co.,
338 U.S. 632 (1950)).
---------------------------------------------------------------------------
Were there any doubt, the Supreme Court has laid it to rest in
A.L.A. Schechter Poultry Corp. v. United States.\239\ Schechter Poultry
marked one of two occasions ``in this country's history'' that the
Supreme Court ``found a delegation excessive,'' and ``in each case . .
. Congress had failed to articulate any policy or standard to confine
discretion.'' \240\ The Court offered the FTC Act, however, as a
counterexample of proper Congressional delegation. The Court recognized
that the phrase ``unfair methods of competition'' in the FTC Act was
``an expression new in the law'' without ``precise definition,'' but
that Congress had empowered the Commission to ``determine[ ] in
particular instances, upon evidence, in the light of particular
competitive conditions and of what is found to be a specific and
substantial public interest'' whether a method of competition is
unfair.\241\ The FTC Act stood in contrast, the Court explained, to the
National Industrial Recovery Act (``NIRA''), which the Court held
included an unconstitutional delegation.\242\
---------------------------------------------------------------------------
\239\ A.L.A. Schechter Poultry Corp. v. United States, 295 U.S.
495 (1935).
\240\ Gundy, 588 U.S. at 2129 (internal quotation omitted); cf.
also Panama Refin. Co. v. Ryan, 293 U.S. 388 (1935) (finding
impermissible delegation).
\241\ Schechter Poultry, 295 U.S. at 532-33.
\242\ Id. at 529-42.
---------------------------------------------------------------------------
The Commission recognizes that Schechter Poultry approved of the
FTC Act's adjudicatory process for determining unfair methods of
competition without commenting on the Act's rulemaking provision. But
the ``unfair method of competition'' authority the Court approvingly
cited in Schechter Poultry is the same intelligible principle the
Commission is applying in this rulemaking. And just as the adjudication
process provides for a ``formal complaint, for notice and hearing, for
appropriate findings of fact supported by adequate evidence, and for
judicial review,'' \243\ the APA rulemaking process provides for a
public notice of proposed rulemaking, the opportunity to ``submi[t] . .
. written data, views, or arguments,'' agency consideration of those
comments, and judicial review.\244\ If Congress may permissibly
delegate the
[[Page 38355]]
authority to determine through adjudication whether a given practice is
an unfair method of competition, it may also permit the Commission to
do the same through rulemaking.\245\
---------------------------------------------------------------------------
\243\ Id. at 533.
\244\ 5 U.S.C. 553, 702.
\245\ Nat'l Petroleum Refiners Ass'n v. FTC, 482 F.2d 672, 685
(D.C. Cir. 1973); cf. SEC v. Chenery Corp., 332 U.S. 194, 202-03
(1947) (``Some principles must await their own development, while
others must be adjusted to meet particular, unforeseeable
situations. In performing its important functions in these respects,
therefore, an administrative agency must be equipped to act either
by general rule or by individual order. To insist upon one form of
action to the exclusion of the other is to exalt form over
necessity.'').
---------------------------------------------------------------------------
For these reasons, the Commission concludes that its authority to
promulgate rules regulating unfair methods of competition is not an
impermissible delegation of legislative authority.
4. Other Challenges to the Commission's Authority
Finally, a handful of comments raised other, miscellaneous
arguments contending that the Commission lacks authority to promulgate
the rule. The Commission has reviewed and considered these comments and
concludes they do not undercut the Commission's authority to promulgate
the final rule.
The Commission received several comments about the Commerce Clause.
That clause allows Congress ``to regulate Commerce with foreign
Nations, and among the several States, and with the Indian tribes.''
\246\ Consistent with that clause, the FTC Act empowers the Commission
to prevent unfair methods of competition ``in or affecting commerce,''
which the Act also defines consistently with the Constitution.\247\ One
commenter wrote to support the rule and emphasized that non-competes
restrict the free flow of interstate commerce. Others argued that the
proposed rule would violate the Commerce Clause by regulating local
commerce. The Commission has considered these comments and concludes
that it may promulgate the final rule consistent with the Commerce
Clause. The final rule extends to the full extent of the FTC's
jurisdiction, which in turn extends no further than the Commerce Clause
permits. As the Supreme Court has explained, the phrase ``in or
affecting commerce'' in section 5 of the FTC Act is ``coextensive with
the constitutional power of Congress under the Commerce Clause.'' \248\
In this final rule, the Commission finds the use of non-competes by
employers substantially affects commerce as that term is defined in the
FTC Act. The final rule is therefore a lawful exercise of Congress's
delegated power.\249\
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\246\ U.S. Const. art. I, sec. 8, cl. 3.
\247\ 15 U.S.C. 44, 45(a)(1).
\248\ United States v. Am. Bldg. Maintenance Indus., 422 U.S.
271, 277, n.6 (1975).
\249\ See Nat'l Fed'n of Indep. Bus. v. Sebelius, 567 U.S. 519,
549 (2012) (``Congress's power'' under the Commerce Clause ``is not
limited to regulation of an activity that by itself substantially
affects interstate commerce, but also extends to activities that do
so only when aggregated with similar activities of others.''); see
also Part I.B.2 (discussing prevalence of non-competes) and Part
IX.C.2 (addressing the need for a nationwide regulation prohibiting
non-competes).
---------------------------------------------------------------------------
Relatedly, one commenter objected that the rule would violate the
Tenth Amendment, which provides that ``[t]he powers not delegated to
the United States by the Constitution, nor prohibited by it to the
States, are reserved to the States respectively, or to the people.''
\250\ But as just explained, the Constitution grants Congress the power
to regulate interstate commerce, and pursuant to that power Congress
granted the Commission authority to prevent unfair methods of
competition in or affecting commerce. The Commission is not intruding
on any power reserved to the States.
---------------------------------------------------------------------------
\250\ U.S. Const. amend. X.
---------------------------------------------------------------------------
Some commenters objected that the rule infringes on the right to
contract. One of these commenters acknowledged that the Constitution's
Contracts Clause does not apply to the Federal government.\251\
Regardless, even assuming the Constitution protects a right to contract
that can be asserted against a Federal regulation, that right sounds in
substantive due process, and the Commission must offer only a rational
basis for the rule.\252\ As relevant here, the final rule advances the
Commission's congressional mandate to prevent unfair methods of
competition and will promote competition and further innovation among
its many benefits.\253\ There is a rational relationship between
regulating non-competes and these legitimate government purposes.
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\251\ See U.S. Const. art. I, sec. 10, cl. 1.
\252\ See, e.g., L & H Sanitation, Inc. v. Lake City Sanitation,
Inc., 769 F.2d 517, 522 (8th Cir. 1985).
\253\ See Parts IV.B and IV.C, Part X.F.6.
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One commenter argued that the proposed rule was unconstitutionally
vague. This commenter's objection focused on the proposed provision
governing de facto non-competes. The Commission is not adopting that
proposed language in the final rule. Instead, the Commission has
clarified the scope of its definition of non-compete clause. Whether a
specific clause falls within the scope of the final rule will
necessarily depend on the precise language of the agreement at issue,
but the text of the final rule provides regulated parties with
sufficient notice of what the law demands to satisfy any due process
vagueness concerns.
D. Compliance With the Administrative Procedure Act (``APA'')
Some commenters also contended that the Commission has not complied
with the Administrative Procedure Act (``APA'').\254\ At a high level,
the APA requires prior public notice, an opportunity to comment, and
consideration of those comments before an agency can promulgate a
legislative rule.\255\ The Commission has engaged in that process,
which has led to this final rule and the accompanying explanation. Some
comments failed to recognize the NPRM was a preliminary step that did
not fossilize the Commission's consideration of arguments or weighing
of evidence. Moreover, the APA ``limits causes of action under the APA
to final agency action.'' \256\ It is this final rule, not the NPRM,
that constitutes final agency action. Before adopting this final rule,
the Commission reviewed and considered all comments received. In many
instances, the Commission has made changes relative to the proposed
rule to address concerns that commenters raised. In all cases, however,
the Commission has complied with the APA.
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\254\ This includes, for example, a commenter who argued that
the NPRM was not the product of reasoned decision-making, asserting
that the Commission had failed to consider key aspects of the rule
or misconstrued evidence; commenters who argued that the rule was
arbitrary and capricious for failing to consider less restrictive
alternatives; commenters who argued that the NPRM failed to consider
State policy or that the Commission would be acting arbitrarily by
not passing a uniform rule; and commenters who argued that the
Commission had failed to consider reliance interests. The Commission
has addressed the concerns underlying these comments in other parts
of this statement of basis and purpose.
\255\ 5 U.S.C. 553; see also Elec. Priv. Info. Ctr. v. DHS, 653
F.3d 1, 5 (D.C. Cir. 2011) (APA ``generally require[s] an agency to
publish notice of a proposed rule in the Federal Register and to
solicit and consider public comments upon its proposal.'').
\256\ Trudeau v. FTC, 456 F.3d 178, 188-89 (D.C. Cir. 2006)
(internal quotation marks omitted); see 5 U.S.C. 704.
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E. The Commission's Jurisdiction Under the FTC Act
The Commission's jurisdiction derives from the FTC Act. Employers
that are outside the Commission's jurisdiction under the FTC Act are
not subject to the final rule. The Commission clarifies in the
definition of person in Sec. 910.1, that the rule applies only to
those within the Commission's jurisdiction. Some commenters sought a
more detailed accounting of the
[[Page 38356]]
Commission's jurisdiction under the FTC Act. The Commission addresses
those comments in this section. Comments seeking an exclusion for
entities within the Commission's jurisdiction are addressed in Parts
V.D.3 and V.D.4.
1. Generally
Certain entities that would otherwise be subject to the final rule
may fall outside the FTC's jurisdiction under the FTC Act. The FTC Act
exempts certain entities or activities from the Commission's
enforcement jurisdiction, which otherwise applies to ``persons,
partnerships, or corporations.'' \257\ For example, the Act exempts
``banks'' and ``persons, partnerships, or corporations insofar as they
are subject to the Packers and Stockyards Act.'' \258\ And the Act
excludes from its definition of ``corporation'' any entity that is not
``organized to carry on business for its own profit or that of its
members.'' \259\ The NPRM explained that, where an employer is exempt
from coverage under the FTC Act, the employer would not be subject to
the rule.\260\ The NPRM also explained State and local government
entities--as well as some private entities--may not be subject to the
rule when engaging in activity protected by the State action
doctrine.\261\ Some commenters stated that the Commission should
restate, clarify, interpret, or limit the reach of its authority under
the FTC Act in the rule.
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\257\ 15 U.S.C. 45(a)(2); see also FTC v. AT&T Mobility LLC, 883
F.3d 848, 853-56 (9th Cir. 2018) (en banc).
\258\ 15 U.S.C. 45(a)(2).
\259\ 15 U.S.C. 44.
\260\ NPRM at 3510.
\261\ Id. (citing Parker v. Brown, 317 U.S. 341, 350-51 (1943)).
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In response, the Commission explains that the final rule extends to
covered persons that are within the Commission's jurisdiction. The
Commission does not believe restating or further specifying each
jurisdictional limit in the final rule's text is necessary; the FTC Act
defines the limits of the Commission's jurisdiction and those limits
govern this rule. Moreover, the Commission cannot here provide guidance
that applies to every fact and circumstance. Whether an entity falls
under the Commission's jurisdiction can be a fact-specific
determination. An attempt by the Commission to capture all potential
interpretations of the laws governing exclusions from the FTC Act may
create confusion rather than clarity. In response to commenters who
asked the Commission to affirm that the final rule does not bind
agencies that regulate firms outside the Commission's jurisdiction
under the FTC Act, the Commission affirms that the Commission applies
the final rule only to entities that are covered by the FTC Act.\262\
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\262\ For example, a few community bank commenters expressed
concern that because the Federal Deposit Insurance Corporation
(``FDIC'') can enforce the FTC Act against banks, the rule could be
applied by the FDIC to banks. The FTC Act is the Commission's
organic statute, and interpretive authority of the FTC Act rests
with the Commission. Whether other agencies enforce section 5 or
apply the rule to entities under their own jurisdiction is a
question for those agencies. At the same time, as discussed in this
Part II.E.1, the Commission applies and enforces the rule only to
the extent of its jurisdiction.
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A State government agency commenter suggested that the Commission
explicitly exempt State and local governments from the rule. The
commenter pointed to conflicts-of-interest policies used by some State
agencies to preclude former employees from working on related projects
or jobs in the private sector, which the commenter stated do not
implicate the policy concerns the FTC seeks to address in the rule. The
commenter also noted the complexity of when the Commission's
jurisdiction might extend to State and local governments. The
Commission clarifies in the definition of ``person'' in Sec. 910.1
that the final rule applies only to a legal entity within the
Commission's jurisdiction. The Commission also explains in Part III.E
that the definition of ``person'' is coextensive with the Commission's
authority to issue civil investigative demands. Nothing in this rule
changes the extent of the Commission's jurisdiction over State and
local governments. The Commission declines to specify all circumstances
under which a governmental entity or quasi-governmental entity would or
would not be subject to the Commission's jurisdiction and, thus, this
final rule. In any event, with respect to the government ethics
policies referenced by the commenter, to the extent the commenter is
referring to traditional ``cooling off'' policies that preclude former
government employees from working on discrete, specific projects that
fell within the scope of their former official governmental position to
address ethical concerns, such policies would not meet the definition
of ``non-compete clause'' in Sec. 910.1 because they do not prohibit,
penalize or function to prevent a worker from switching jobs or
starting a new business.
2. Jurisdiction Over Entities Claiming Nonprofit Status Under the FTC
Act or the Internal Revenue Code
Commenters from the healthcare industry argued that the Commission
should restate, clarify, interpret, or limit the reach of its authority
under the FTC Act specifically for the healthcare industry. They
pointed to the prevalence of healthcare organizations registered under
section 501(c) of the Internal Revenue Code claiming tax-exempt status
as nonprofits. Commenters contended that these organizations are
categorically outside the Commission's authority under the FTC Act. In
fact, under existing law, these organizations are not categorically
beyond the Commission's jurisdiction. To dispel this misunderstanding,
the Commission summarizes the existing law pertaining to its
jurisdiction over non-profits.
a. Comments Received
Business and trade industry commenters from the healthcare
industry, including, for example, hospitals, physician practices, and
surgery centers, focused on whether the Commission has jurisdiction
over nonprofit organizations registered under section 501(c)(3) of the
Internal Revenue Code in light of the FTC Act's definition of
``corporation.'' Section 501(c)(3) exempts from taxation certain
religious, charitable, scientific, educational, and other corporations,
``no part of the net earnings of which inure[] to the benefit of any
private shareholder or individual.'' \263\ An entity is a
``corporation'' under the FTC Act only if it is ``organized to carry on
business for its own profit or that of its members.'' \264\ Several
industry commenters argued the Commission does not have jurisdiction
over entities that claim tax-exempt status as nonprofits because they
are, by definition, not ``organized to carry on business for [their]
own profit or that of [their] members.'' The Commission presumes that
commenters self-identifying as or referring to ``nonprofits,'' ``not-
for-profits,'' or other similar terms without further explanation are
referencing entities claiming tax-exempt status under section 501(c)(3)
or other provisions of the Internal Revenue Code. Some commenters
contended that, to avoid confusion, the rule should state it does
[[Page 38357]]
not apply to entities claiming tax-exempt status as non-profits. At
least one commenter stated that the Commission should clarify whether
and how the rule would apply to healthcare entities claiming tax-exempt
status as nonprofits and then reopen the comment period. One commenter
sought clarification on how ownership interest in a for-profit entity
or joint venture with a for-profit partner by an entity that claims
tax-exempt status as a nonprofit would affect the rule's applicability.
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\263\ 26 U.S.C. 501(c)(3). Other, less frequently invoked
paragraphs of section 501(c) also identify corporations and
organizations that qualify for tax-exempt status. The distinctions
between these entities and those claiming tax-exempt status under
501(c)(3) are analyzed under the same standard.
\264\ 15 U.S.C. 44.
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b. The Final Rule
The final rule applies to the full scope of the Commission's
jurisdiction. Many of the comments about nonprofits erroneously assume
that the FTC's jurisdiction does not capture any entity claiming tax-
exempt status as a nonprofit. Given these comments, the Commission
summarizes Commission precedent and judicial decisions construing the
scope of the Commission's jurisdiction as it relates to entities that
claim tax-exempt status as nonprofits and to other entities that may or
may not be organized to carry on business for their own profit or the
profit of their members.
Congress empowered the Commission to ``prevent persons,
partnerships, or corporations'' from engaging in unfair methods of
competition.\265\ To fall within the definition of ``corporation''
under the FTC Act, an entity must be ``organized to carry on business
for its own profit or that of its members.'' \266\ These FTC Act
provisions, taken together, have been interpreted in Commission
precedent \267\ and judicial decisions \268\ to mean that the
Commission lacks jurisdiction to prevent section 5 violations by a
corporation not organized to carry on business for its own profit or
that of its members.
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\265\ 15 U.S.C. 45(a)(2). The Commission focuses on coverage as
``corporations'' in this section.
\266\ 15 U.S.C. 44.
\267\ In the Matter of Coll. Football Ass'n, 117 F.T.C. 971,
992-999 (1990).
\268\ California Dental Ass'n v. FTC, 526 U.S. 756, 766 (1999);
Cmty. Blood Bank of Kansas City Area, Inc. v. FTC, 405 F.2d 1011,
1016 (8th Cir. 1969); FTC v. Univ. Health, Inc., 938 F.2d 1206, 1214
(11th Cir. 1991).
---------------------------------------------------------------------------
The Commission stresses, however, that both judicial decisions and
Commission precedent recognize that not all entities claiming tax-
exempt status as nonprofits fall outside the Commission's jurisdiction.
As the Eighth Circuit has explained, ``Congress took pains in drafting
Sec. 4 [15 U.S.C. 44] to authorize the Commission to regulate so-
called nonprofit corporations, associations and all other entities if
they are in fact profit-making enterprises.'' \269\ The Commission
applies a two-part test to determine whether a corporation is organized
for profit and thus within the Commission's jurisdiction. As the
Commission has explained, ``[t]he not-for profit jurisdictional
exemption under Section 4 requires both that there be an adequate nexus
between an organization's activities and its alleged public purposes
and that its net proceeds be properly devoted to recognized public,
rather than private, interests.'' \270\ Alternatively stated, the
Commission looks to both ``the source of the income, i.e., to whether
the corporation is organized for and actually engaged in business for
only charitable purposes, and to the destination of the income, i.e.,
to whether either the corporation or its members derive a profit.''
\271\ This test reflects the Eighth Circuit's analysis in Community
Blood Bank of Kansas City Area, Inc. v. FTC and ``the analogous body of
federal law which governs treatment of not-for-profit organizations
under the Internal Revenue Code.'' \272\ Under this test, a
corporation's ``tax-exempt status is certainly one factor to be
considered,'' but that status ``does not obviate the relevance of
further inquiry into a [corporation's] operations and goals.'' \273\
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\269\ Blood Bank, 405 F.2d at 1018; see also, e.g., FTC v. Nat'l
Comm'n on Egg Nutrition, 517 F.2d 485, 488 (7th Cir. 1975).
\270\ Coll. Football Ass'n, 117 F.T.C. at 998.
\271\ Id. at 994 (internal quotation and citation omitted).
\272\ Id. at 994.
\273\ In the Matter of the Am. Med. Assoc., 94 F.T.C. 701, 1979
WL 199033, at *221 (FTC Oct. 12, 1979).
---------------------------------------------------------------------------
Merely claiming tax-exempt status in tax filings is not
dispositive. At the same time, if the Internal Revenue Service
(``IRS'') concludes that an entity does not qualify for tax-exempt
status, such a finding would be meaningful to the Commission's analysis
of whether the same entity is a corporation under the FTC Act.
Administrative proceedings and judicial decisions involving the
Commission or the IRS \274\ have identified numerous private benefits
that, if offered, could render an entity a corporation organized for
its own profit or that of its members under the FTC Act, bringing it
within the Commission's jurisdiction. For instance, the Commission has
exercised jurisdiction in a section 5 enforcement action over a
physician-hospital organization because the organization engaged in
business on behalf of for-profit physician members.\275\ That
organization, which consisted of over 100 private physicians and one
non-profit hospital, claimed tax-exempt status as a nonprofit.\276\
Similarly, the Commission has exercised jurisdiction over an
independent physician association claiming tax-exempt status as a
nonprofit. The association consisted of private, independent physicians
and private, small group practices.\277\ That association was organized
for the pecuniary benefit of its for-profit members because it
``contract[ed] with payers, on behalf of its [for-profit] physician
members, for the provision of physician services for a fee.'' \278\
Under IRS precedent in the context of purportedly tax-exempt nonprofit
hospitals and other related entities that partner with for-profit
entities, where the purportedly nonprofit entity ``has ceded effective
control'' to a for-profit partner, ``conferring impermissible private
benefit,'' the entity loses tax-exempt status.\279\ The IRS has also
rejected claims of nonprofit tax-exempt status for entities that pay
unreasonable compensation, including percentage-based compensation, to
founders, board members, their families, or other insiders.\280\
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\274\ The Commission offers examples of decisions from the IRS
and Tax Court as examples that the Commission may deem persuasive.
Although ``[r]ulings of the Internal Revenue Services are not
binding upon the Commission,'' the Commission has recognized that
``a determination by another Federal agency that a respondent is or
is not organized and operated exclusively for eleemosynary purposes
should not be disregarded.'' Am. Med. Assoc., 1979 WL 199033 at
*221.
\275\ In the Matter of Preferred Health Servs., Inc., FTC No.
41-0099, 2005 WL 593181, at *1 (Mar. 2, 2005).
\276\ Id. at *1.
\277\ In the Matter of Boulder Valley Individual Prac. Assoc.,
149 F.T.C. 1147, 2010 WL 9434809, at *2 (Apr. 2, 2010).
\278\ Boulder Valley, 2010 WL 9434809, at *2. The Commission has
similarly exercised jurisdiction where an entity claiming nonprofit
tax-exempt status provides pecuniary benefit to for-profit entities
or individuals. See, e.g., In the Matter of Mem'l Hermann Health
Network Providers, 137 F.T.C. 90, 92 (2004); Preferred Health, 2005
WL 593181, at *1-*2; Advoc. Health Partners, F.T.C. No. 31-0021,
2007 WL 643035, at *3-*4 (Feb. 7, 2007); Conn. Chiropractic Ass'n,
F.T.C. No. 71-0074, 2008 WL 625339, at *2 (Mar. 5, 2008); Am. Med.
Ass'n v. FTC, 638 F.2d 443 (2d Cir. 1980), aff'd, 455 U.S. 676
(1982).
\279\ Redlands Surgical Servs. v. Comm'r, 242 F.3d 904, 904-05
(9th Cir. 2001); see also St. David's Health Care Sys. v. United
States, 349 F.3d 232, 239 (5th Cir. 2003).
\280\ See Fam. Tr. of Mass., Inc. v. United States, 892 F. Supp.
2d 149, 155-156 (D.D.C. 2012); I.R.S. G.C.M. 39,674 (Oct. 23, 1987);
Bubbling Well Church of Universal Love, Inc. v. Comm'r, No. 5717-
79X, 1980 WL 4453 (T.C. June 9, 1980) (``[E]xcessive payments made
purportedly as compensation constitute benefit inurement in
contravention of section 501(c)(3).'').
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These examples are illustrative. As has been the case for decades,
under Commission precedent and judicial
[[Page 38358]]
decisions construing the scope of the Commission's jurisdiction, any
entity satisfying the two-prong test falls within the Commission's
jurisdiction. Such entities would thus be bound by the final rule.\281\
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\281\ The Commission cannot predict precisely how many entities
claiming nonprofit tax-exempt status may be subject to the final
rule. The Commission finds that the benefits of the final rule
justify implementing it no matter how many nonprofit entities
claiming tax-exempt status it ultimately reaches--including under
the unlikely assumption that it does not reach any of them.
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F. The Legal Standard for Unfair Methods of Competition Under Section 5
In section 5 of the FTC Act, ``unfair methods of competition in or
affecting commerce'' are ``declared unlawful.'' \282\ In enacting
section 5, Congress intentionally did not mirror either the common law
or the text or judicial interpretations of the Sherman Act, but instead
adopted this new term.\283\ As the Supreme Court has confirmed, this
different term reflects a distinct standard.\284\ Under section 5, the
Commission assesses two elements: (1) whether the conduct is a method
of competition, as opposed to a condition of the marketplace, and (2)
whether it is unfair, meaning that it goes beyond competition on the
merits. The latter inquiry has two components: (a) whether the conduct
has indicia of unfairness and (b) whether the conduct tends to
negatively affect competitive conditions. These two components are
weighed according to a sliding scale.
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\282\ 15 U.S.C. 45(a)(1).
\283\ The Clayton Antitrust Act (38 Stat. 730, ch. 323, Pub. L.
63-212, Oct. 15, 1914) was signed into law weeks after the FTC Act
of 1914, 38 Stat. 717.
\284\ See FTC v. Ind. Fed'n of Dentists, 476 U.S. 447, 454
(1986); FTC v. Sperry & Hutchinson, 405 U.S. 233, 243-44 (1972); FTC
v. Brown Shoe Co., 384 U.S. 316, 321 (1966); FTC v. Motion Picture
Advert. Serv., 344 U.S. 392, 394-95 (1953); FTC v. R.F. Keppel &
Bro., 291 U.S. 304, 309-10 (1934). While some commenters argued the
Commission should apply the rule of reason in this rule, as outlined
in Parts II.A, II.B, II.C, and II.F, neither the text of section 5,
the Supreme Court and other courts' interpretation of section 5, nor
the legislative history support the conclusion that the Commission
should apply the rule of reason to determine whether conduct
violates section 5 as an unfair method of competition. The
Commission outlines the legal standard for finding certain uses of
non-competes to be unfair methods of competition in the final rule
in this Part II.F.
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Indicia of unfairness include the extent to which the conduct may
be coercive, exploitative, collusive, abusive, deceptive, predatory, or
involve the use of economic power of a similar nature.\285\ Indicia of
unfairness may also be present if the conduct is otherwise restrictive
or exclusionary, depending on the circumstances, such as the nature of
the commercial setting and the current and potential future effects of
the conduct.\286\ Notably, section 5 does not limit indicia of
unfairness to conduct that benefits one or more firms and necessarily
disadvantages others. Instead, restrictive and exclusionary conduct may
also be unlawful where it benefits specific firms while tending to
negatively affect competitive conditions.\287\
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\285\ See e.g., Sperry & Hutchinson Co., 405 U.S. at 243
(holding section 5 reaches conduct shown to exploit consumers,
citing R.F. Keppel & Bro., 291 U.S. at 313); Atl. Refin. Co. v. FTC,
381 U.S. 357, 369 (1965) (holding that the ``utilization of economic
power in one market to curtail competition in another . . . .
bolstered by actual threats and coercive practices'' was an unfair
method of competition); FTC v. Texaco, 393 U.S. 223, 228-29 (1968)
(finding that use of ``dominant economic power . . . in a manner
which tended to foreclose competition'' is an unfair method of
competition); E.I. du Pont de Nemours v. FTC (Ethyl), 729 F.2d 128,
137, 140 (2d Cir. 1984) (finding that unfair methods of competition
includes practices that are ``collusive, coercive, predatory,
restrictive or deceitful'' as well as ``exclusionary'').
\286\ See, e.g., Motion Picture Advert. Serv. Co., 344 U.S. at
395-96; Luria Bros. & Co. v. FTC, 389 F.2d 847, 860-61 (3d Cir.
1968). As the Supreme Court has made clear, the inquiry into the
nature of the commercial setting does not, however, require market
definition or proof of market power. See, e.g., Atl. Refin. Co., 381
U.S. at 371 (finding it ``unnecessary to embark upon a full scale
economic analysis of competitive effect''). On November 10, 2022,
the Commission issued a policy statement describing the key
principles of general applicability concerning whether conduct is an
unfair method of competition under section 5. FTC, Policy Statement
Regarding the Scope of Unfair Methods of Competition Under Section 5
of the Federal Trade Commission Act (Nov. 10, 2022) (hereinafter
``FTC Policy Statement''). The FTC Policy Statement cites a number
of cases explaining that section 5 does not require market
definition or proof of market power. Id. at 10.
\287\ See, e.g., Brown Shoe Co., 384 U.S. at 320 (``Thus the
question . . . is whether the Federal Trade Commission can declare
it to be an unfair practice for Brown, the second largest
manufacturer of shoes in the Nation, to pay a valuable consideration
to hundreds of retail shoe purchasers in order to secure a
contractual promise from them that they will deal primarily with
Brown and will not purchase conflicting lines of shoes from Brown's
competitors. We hold that the Commission has power to find, on the
record here, such an anticompetitive practice unfair . . . .'')
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The second prong, whether conduct tends to negatively affect
competitive conditions, focuses on the nature and tendency of the
conduct. It does not turn on whether the conduct directly caused actual
harm in the specific instance at issue and therefore does not require a
detailed economic analysis or current anticompetitive effects.\288\
Instead, the inquiry examines whether the conduct has a tendency to
negatively affect competitive conditions, including by raising prices,
reducing output, limiting choice, lowering quality, reducing
innovation, impairing or excluding other market participants, reducing
the likelihood of potential or nascent competition, reducing labor
mobility, suppressing worker compensation or degrading working
conditions for workers. These concerns may arise when the conduct is
examined in the aggregate along with the conduct of others engaging in
the same or similar conduct.\289\ Section 5 does not require a separate
showing of market power or market definition.\290\ Nor does section 5
import the rule-of-reason analysis applied under other antitrust laws,
including in some Sherman Act cases.\291\
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\288\ Atl. Refin. Co., 381 U.S. at 371 (It is ``unnecessary to
embark upon a full scale economic analysis of competitive
effect.''); Texaco, 393 U.S. at 230 (``It is enough that the
Commission found that the practice in question unfairly burdened
competition for a not insignificant volume of commerce.''); Union
Circulation Co. v. FTC, 241 F.2d 652, 657 (2d Cir. 1957) (``The
agreements should be struck down if their reasonable tendency, as
distinguished from actual past effect, is to injure or obstruct
competition. Under the Federal Trade Commission Act, industry
agreements and practices have been enjoined without an actual
showing of injury to competition . . . .''). See also Sperry &
Hutchinson Co., 405 U.S. at 244 (``[U]nfair competitive practices
[are] not limited to those likely to have anticompetitive
consequences after the manner of the antitrust laws.''); Ethyl, 729
F.2d at 138 (finding that evidence of actual harm is not required);
In re Coca-Cola Co., 117 F.T.C. 795, 915 n.25 (1994) (rejecting
argument that section 5 violation requires showing of
``anticompetitive effects'').
\289\ Motion Picture Advert. Serv. Co., 344 U.S. at 395; Union
Circulation Co., 241 F.2d at 658 (``The tendency of the `no-
switching' agreements is to discourage labor mobility, and thereby
the magazine-selling industry may well become static in its
composition to the obvious advantage of the large, well-established
signatory agencies and to the disadvantage of infant
organizations.'').
\290\ Atl. Refin. Co., 381 U.S. at 371; Texaco, 393 U.S. at 230;
L.G. Balfour Co. v. FTC, 442 F.2d 1, 19-20 (7th Cir. 1971) (no proof
of foreclosure of a relevant market necessary in an exclusive
dealing contract case under section 5 (citing Brown Shoe)).
\291\ See Part II.A.
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The Commission weighs the two elements--indicia of unfairness and
tendency to negatively affect competitive conditions--on a sliding
scale. Where the indicia of unfairness are clear, conduct may be an
unfair method of competition with only a limited showing of a tendency
to negatively affect competitive conditions.\292\ For example, conduct
that is coercive and exploitative evinces facial unfairness and weighs
heavily as clear indicia of unfairness.\293\ Where indicia of
unfairness are less clear, conduct may still violate section 5 where it
tends to negatively affect
[[Page 38359]]
competitive conditions, but a stronger showing of such tendency is
required.
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\292\ See, e.g., Ethyl, 729 F.2d at 137-39; FTC Policy
Statement, supra note 286, at 9.
\293\ See e.g., Sperry & Hutchinson Co., 405 U.S. at 243; Ethyl,
729 F.2d at 139, 140 (finding that unfair methods of competition
include practices that are ``collusive, coercive, predatory,
restrictive, or deceitful'' as well as ``exclusionary''); FTC Policy
Statement, supra note 286, at 7, 9.
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In many cases the Commission (and courts) have held conduct to
constitute an unfair method of competition by pointing to clear indicia
of unfairness, including coercive or exploitative conduct, without
conducting a detailed economic analysis of its effects. In Atlantic
Refining Co. v. FTC and FTC v. Texaco, Inc., the Supreme Court held
that the Commission established an unfair method of competition where
an oil company used its economic power over its gas stations to coerce
them into buying certain tires, batteries, or accessories only from
firms that paid the oil company a commission.\294\ The Court determined
in Atlantic Refining that ``a full-scale economic analysis of
competitive effect'' was not required and the Commission needed only to
show that the conduct burdened ``a not insubstantial portion of
commerce.'' \295\ The Court reiterated this standard in Texaco holding
that, even though the impact was less harmful than the conduct in
Atlantic Refining, ``the anticompetitive tendencies of [the challenged]
system are clear, and . . . the Commission was properly fulfilling the
task that Congress assigned it in halting this practice in its
incipiency.'' \296\ As the Court observed, ``[t]he Commission is not
required to show that a practice it condemns has totally eliminated
competition.'' \297\ In FTC v. R.F. Keppel & Brother, Inc., the Supreme
Court held that the Commission established an unfair method of
competition where a manufacturer exploited the inability of children to
protect themselves in the marketplace by marketing inferior goods to
them through use of a gambling scheme.\298\ The Court considered the
extent of the practice and concluded ``[the practice] is successful in
diverting trade from competitors'' without engaging in a full-scale
economic analysis.\299\
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\294\ Atl. Refin. Co., 381 U.S. at 369-70; Texaco, 393 U.S. at
228-29.
\295\ Atl. Refin. Co., 381 U.S. at 371. See also Texaco, 393
U.S. at 230 (finding that the practice unfairly burdened competition
for a not insignificant volume of commerce); FTC v. R.F. Keppel &
Bro., 291 U.S. 304, 309 (1934) (``A practice so widespread and so
far reaching in its consequences is of public concern if in other
respects within the purview of the statute.'').
\296\ Texaco, 393 U.S. at 230 (further noting that ``[i]t is
enough that the Commission found that the practice in question
unfairly burdened competition for a not insignificant volume of
commerce.'').
\297\ Id. at 230. See also Shell Oil Co. v. FTC, 360 F.2d 470,
487 (5th Cir. 1966) (``A man operating a gas station is bound to be
overawed by the great corporation that is his supplier, his banker,
and his landlord.'').
\298\ 291 U.S. 304, 313.
\299\ 291 U.S. at 308-09.
---------------------------------------------------------------------------
In other cases, the Commission (and courts) have held exclusionary
or restrictive conduct was an unfair method of competition based on
evidence of the conduct's tendency to negatively affect competitive
conditions without focusing on the indicia of unfairness, including
whether the conduct is coercive or exploitative. But an evidentiary
showing or detailed economic analysis that such conduct generated
actual anticompetitive effects or would do so in the future still was
not required. For example, in Union Circulation Company v. FTC, the
Second Circuit held the Commission established an unfair method of
competition where a group of door-to-door subscription solicitation
agencies agreed not to hire workers who were previously employed by
another signatory agency.\300\ The court looked to whether the
``reasonably foreseeable effect'' of the agencies' conduct would be to
``impair or diminish competition between existing [competitors]'' or
prevent potential new rivals.\301\ In finding the conduct was an unfair
method of competition, the court concluded that ``[t]he tendency of the
. . . agreements is to discourage labor mobility, and thereby the
magazine-selling industry may well become static in its composition to
the obvious advantage of the large, well established signatory agencies
and to the disadvantage of infant organizations.'' \302\ In FTC v.
Brown Shoe Co., the Supreme Court held that an exclusive dealing
arrangement under which the Brown Shoe Company offered shoe retailers
``a valuable consideration . . . to secure a contractual promise from
them that they will deal primarily with Brown and will not purchase
conflicting lines of shoes from Brown's competitors'' violated section
5 consistent with the Commission's authority ``to arrest trade
restraints in their incipiency.'' \303\ Of course, evidence of actual
adverse effects on competition meets the requirement to show a tendency
to negatively affect competitive conditions. For example, in FTC v.
Motion Picture Advertising Service Co., the Supreme Court held that an
exclusive dealing arrangement violated section 5 where there was
``substantial evidence'' that the contracts ``unreasonably restrain
competition.'' \304\
---------------------------------------------------------------------------
\300\ 241 F.2d 652, 655 (2d Cir. 1957).
\301\ Id. at 658. Notably, the court also considered facially
coercive conduct by which the door-to-door subscription agencies
coerced magazine publishers into not doing business with one of
their competitors because the competitor hired their former workers.
Id. at 655-56. The court upheld the Commission's order concluding
this conduct was an unfair method of competition under section 5.
The court did not conduct any related economic analysis and simply
concluded that the ``illegal scheme of coercion . . . is clearly
unjustified.'' Id.
\302\ Id. at 658; see also Nichols v. Spencer Intern. Press,
Inc., 371 F.2d 332, 334 (7th Cir. 1967) (``Granting that the
antitrust laws were not enacted for the purpose of preserving
freedom in the labor market, nor of regulating employment practices
as such, nevertheless it seems clear that agreements among supposed
competitors not to employ each other's employees not only restrict
freedom to enter into employment relationships, but may also,
depending upon the circumstances, impair full and free competition
in the supply of a service or commodity to the public.'')
\303\ FTC v. Brown Shoe Co., 384 U.S. 316, 320, 322 (1966).
\304\ FTC v. Motion Picture Advert. Serv. Co., 344 U.S. 392,
395-96 (1953); see also L.G. Balfour Co. v. FTC, 442 F.2d 1, 14 (7th
Cir. 1971) (holding that a firm's exclusive dealing contracts
violated section 5 where such contracts were `anti-competitive' '').
---------------------------------------------------------------------------
Respondents in unfair method of competition cases sometimes assert
purported justifications as an affirmative defense. Some courts have
declined to consider justifications altogether. However, where
defendants raise justifications as an affirmative defense, the
Commission and courts have consistently held that pecuniary benefit to
the party responsible for the conduct in question is not cognizable as
a justification.\305\ Additionally, to the extent justifications are
asserted, they must be legally cognizable,\306\ non-pretextual,\307\
and any restriction used to bring about the benefit must be narrowly
tailored to limit any adverse impact on competitive conditions.\308\
---------------------------------------------------------------------------
\305\ Atl. Refin. Co. v. FTC, 381 U.S. 357, 371 (1965)
(considering that defendant's distribution contracts at issue ``may
well provide Atlantic with an economical method of assuring
efficient product distribution among its dealers'' and holding that
the ``Commission was clearly justified in refusing the participants
an opportunity to offset these evils by a showing of economic
benefit to themselves''); FTC v. Texaco, 393 U.S. 223, 230 (1968)
(following the same reasoning as Atlantic Refining and finding that
the ``anticompetitive tendencies of such system [were] clear'');
Balfour, 442 F.2d at 15 (while relevant to consider the advantages
of a trade practice on individual companies, this cannot excuse an
otherwise illegal business practice). For provisions of the
antitrust laws where courts have not accepted justifications as part
of the legal analysis, the Commission will similarly not accept
justifications when these claims are pursued through section 5.
\306\ See, e.g., FTC v. Ind. Fed. Dentists, 476 U.S. 447, 463
(1986); Fashion Originators' Guild of Am. v. FTC, 312 U.S. 457, 468
(1941); FTC v. Superior Ct. Trial Lawyers Ass'n, 493 U.S. 411, 423-
24 (1990).
\307\ See, e.g., Ind. Fed'n of Dentists, 476 U.S. at 464. See
also United States v. Microsoft Corp., 253 F.3d 35, 62-64, 72, 74,
76-77 (D.C. Cir. 2001); Eastman Kodak Co. v. Image Technical Tech.
Svcs, 504 U.S. 541, 472, 484-85 (1992); Aspen Skiing Co. v. Aspen
Highlands Skiing Corp., 472 U.S. 585, 608-10 (1985).
\308\ NCAA v. Alston, 594 U.S. 69, 100-101 (2021); Polygram
Holding, Inc. v. FTC, 416 F.3d 29, 38 (D.C. Cir. 2005); 2000
Collaboration Guidelines, sec. 3.36b. See also Union Circulation Co.
v. FTC, 241 F.2d 652, 658 (2d Cir. 1957) (``The agreements here went
beyond what was necessary to curtail and eliminate fraudulent
practices.'').
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[[Page 38360]]
III. Section 910.1: Definitions
Section 910.1 sets forth definitions of several terms used in the
final rule.
A. Definition of ``Business Entity''
The Commission adopts the definition of ``business entity'' as
proposed.
1. Proposed Definition
The Commission proposed to define ``business entity'' as ``a
partnership, corporation, association, limited liability company, or
other legal entity, or a division or subsidiary thereof.'' \309\ The
term ``business entity'' was used in two places: (1) in proposed Sec.
910.3, which contained an exception for certain non-competes entered
into in the context of a sale of a business by a substantial owner of,
or substantial member or substantial partner in, the business
entity,\310\ and (2) in proposed Sec. 910.1(e), which defined
``substantial owner, substantial member, or substantial partner'' as an
owner, member, or partner holding at least a 25% ownership interest in
a business entity.
---------------------------------------------------------------------------
\309\ NPRM, proposed Sec. 910.1(a).
\310\ Id. at 3508.
---------------------------------------------------------------------------
The Commission explained in the NPRM that it proposed including
divisions and subsidiaries in the definition of ``business entity'' to
apply the sale-of-a-business exception where a person is selling a
division or subsidiary of a business entity.\311\ The Commission stated
the primary rationale for the sale-of-business exception--to help
protect the value of a business acquired by a buyer--also applies where
a person is selling a division or subsidiary of a business entity.\312\
---------------------------------------------------------------------------
\311\ Id. at 3509.
\312\ Id.
---------------------------------------------------------------------------
2. Comments Received
Two commenters specifically addressed the definition of business
entity. One commenter suggested a new definition using a functional
test that the commenter asserted would prevent employers from
structuring their businesses as several smaller legal entities in order
to fall within the sale-of-a-business exception. Another commenter also
suggested that the definition be amended to explicitly include
``general partnerships'' and trusts.
3. The Final Rule
The Commission adopts the definition of ``business entity'' as
proposed. The Commission declines to adopt a functional test for the
definition of ``business entity.'' As described in greater detail in
Part V.A, the sale-of-a-business exception in the final rule does not
contain a 25% ownership threshold, so employers will not have an
incentive to structure their businesses as several smaller legal
entities in order to fall within the sale-of-a-business exception. The
Commission also believes replacing the current bright-line definition
of ``business entity'' with a functional test would make it more
difficult for workers and employers to know whether a given non-compete
is enforceable in the context of the sale of a business. The Commission
concludes adding the terms ``general partnerships'' and ``trusts'' to
the definition is unnecessary, because the phrase ``other legal
entity'' already includes those entity types.
B. Definition of ``Employment''
The Commission proposed to define ``employment'' as ``work for an
employer, as the term employer is defined in Sec. 910.1(c).'' \313\
That provision defined ``employer'' as ``a person, as defined in 15
U.S.C. 57b-1(a)(6) [section 20 of the FTC Act], that hires or contracts
with a worker to work for the person.'' \314\ Section 20 defines
``person'' as ``any natural person, partnership, corporation,
association, or other legal entity, including any person acting under
color or authority of State law.'' The Commission intended the proposed
definition of ``employer'' to clarify that an employment relationship
exists, for purposes of the final rule, regardless of whether an
employment relationship exists under another law, such as a Federal or
State labor law.\315\ The final rule clarifies the definitions to
better reflect that intent.
---------------------------------------------------------------------------
\313\ Id., proposed Sec. 910.1(d).
\314\ Id., proposed Sec. 910.1(c).
\315\ Id. at 3510.
---------------------------------------------------------------------------
While commenters generally did not address the proposed definition
of ``employment,'' many commenters expressed concern that the proposed
definition of ``employer'' would exclude workers hired by one entity to
work for another, such as workers hired through a staffing agency. To
avoid excluding such workers, and consistent with the Commission's
intent to cover workers irrespective of whether they are classified as
in an ``employer-employee'' relationship under other State and Federal
laws, the final rule defines ``employment'' as ``work for a person''
and makes corresponding changes to the definition of ``employer,''
described in Part III.C. This definition of ``employment'' better
clarifies that an employment relationship exists, for purposes of the
final rule, regardless of whether an employment relationship exists
under another law, such as a Federal or State labor law.
C. Proposed Definition of ``Employer''
The Commission proposed to define employer as a ``person, as
defined in 15 U.S.C. 57b-1(a)(6) [section 20 of the FTC Act], that
hires or contracts with a worker to work for the person.'' \316\
Section 20 defines ``person'' as ``any natural person, partnership,
corporation, association, or other legal entity, including any person
acting under color or authority of State law.'' \317\ The Commission
clarified in the NPRM that a person meeting the definition of an
employer under proposed Sec. 910.1(c) would be an employer regardless
of whether the person meets another legal definition of employer, such
as a definition in Federal or State labor law.\318\ In response to
concerns raised by commenters, the final rule does not adopt a
definition of ``employer.''
---------------------------------------------------------------------------
\316\ Id., proposed Sec. 910.1(c).
\317\ 15 U.S.C. 57b-1(a)(6).
\318\ NPRM at 3510.
---------------------------------------------------------------------------
1. Comments Received
Several commenters expressed support for the proposed definition of
``employer.'' A few commenters suggested changes to the definition of
``employer'' to maximize the final rule's coverage and close potential
loopholes. Worker and employer advocates noted the proposed definition
appeared to exclude certain persons who are commonly understood to be a
worker's employer because it assumed that a worker's employer is the
same legal entity that hired or contracted with the worker. These
commenters contended the proposed definition would not cover
arrangements such as when a worker is employed through a contractual
relationship with a professional employer organization or staffing
agency; under a short-term ``loan-out arrangement,'' during which a
worker hired by one employer may work for another employer; under
contract with a parent, subsidiary, or affiliate of the business who
hired them; or by persons or entities who share common control over the
worker's work. A few of these commenters also stated that the proposed
definition creates a loophole allowing evasion of the rule through
third-party hiring. Most commenters that addressed this issue suggested
listing one or more such arrangements in the definition of ``employer''
to
[[Page 38361]]
ensure these kinds of arrangements are covered.
One worker advocacy group argued the term ``hires or contracts'' in
the proposed definition of ``employer'' is in tension with the
Commission's stated intent to broadly cover all workers, including
externs, interns, and volunteers. This commenter suggested the
definition of ``employer'' incorporate language from the Fair Labor
Standards Act (``FLSA'') definition of ``employ,'' which includes to
``suffer or permit to work.'' \319\ The commenter suggested this
language because of its breadth, noting the language originated in
State laws designed to reach businesses that use third parties to
illegally hire and supervise children.
---------------------------------------------------------------------------
\319\ 29 U.S.C. 203(g).
---------------------------------------------------------------------------
One industry trade organization argued that, to minimize
inconsistencies with the FLSA, the Commission should incorporate the
FLSA's definition of ``employer.''
2. Final Rule
After considering the comments, the Commission has revised the
definitions of ``non-compete clause'' and ``worker'' as described in
Parts III.D and III.G. These revisions make the definition of
``employer'' unnecessary, so the Commission is not finalizing a
definition of ``employer.''
These revisions clarify that the final rule covers all workers
regardless of whether they work for the same person that hired or
contracted with them to work. As explained in Part III.D, in the
definition of ``non-compete clause,'' the Commission has revised the
phrase ``contractual term between an employer and a worker'' to read
``term or condition of employment'' and has revised the phrase ``after
the conclusion of the worker's employment with the employer'' to read
``after the conclusion of the employment that includes the term or
condition.'' Furthermore, as explained in Part III.G, in the definition
of ``worker,'' the Commission has revised the phrase ``a natural person
who works, whether paid or unpaid, for an employer'' to read ``a
natural person who works or who previously worked, whether paid or
unpaid.''
The Commission is adopting this more general language, rather than
listing the exact kinds of contractual arrangements and entities (e.g.,
staffing agencies, affiliates, joint employers, etc.) to avoid
unnecessary or confusing terminology, evasion of the final rule through
complex employment relationships, and the need to specify myriad fact-
specific scenarios. The language is designed to capture indirect
employment relationships as a general matter without regard to the
label used.
D. Definition of ``Non-Compete Clause''
Based on the comments received, the Commission adopts a slightly
modified definition of ``non-compete clause'' in Sec. 910.1. Section
910.1 defines a ``non-compete clause'' as a term or condition of
employment that prohibits a worker from, penalizes a worker for, or
functions to prevent a worker from (A) seeking or accepting work in the
United States with a different person where such work would begin after
the conclusion of the employment that includes the term or condition;
or (B) operating a business in the United States after the conclusion
of the employment that includes the term or condition. Section 910.1
further provides that, for purposes of the final rule, ``term or
condition of employment ``includes, but is not limited to, a
contractual term or workplace policy, whether written or oral.''
Similar to the proposed rule, the final rule applies to terms and
conditions that expressly prohibit a worker from seeking or accepting
other work or starting a business after their employment ends, as well
as agreements that penalize or effectively prevent a worker from doing
the same.
1. Proposed Definition
The Commission's proposed definition of ``non-compete clause''
consisted of proposed Sec. 910.1(b)(1) and (b)(2). Proposed Sec.
910.1(b)(1) would have defined ``non-compete clause'' as ``a
contractual term between an employer and a worker that prevents the
worker from seeking or accepting employment with a person, or operating
a business, after the conclusion of the worker's employment with the
employer.'' Proposed Sec. 910.1(b)(2) would have provided that the
definition in proposed Sec. 910.1(b)(1) includes ``a contractual term
that is a de facto non-compete clause because it has the effect of
prohibiting the worker from seeking or accepting employment with a
person or operating a business after the conclusion of the worker's
employment with the employer.''
The Commission explained that the proposed definition of non-
compete clause would be limited to non-competes between employers and
workers and would not apply to other types of non-competes, for
example, non-competes between two businesses.\320\ The Commission
further explained the definition would be limited to post-employment
restraints (i.e., restrictions on what the worker may do after the
conclusion of the worker's employment) and would not apply to
concurrent-employment restraints (i.e., restrictions on what the worker
may do during the worker's employment).\321\
---------------------------------------------------------------------------
\320\ NPRM at 3509.
\321\ Id.
---------------------------------------------------------------------------
In the NPRM, the Commission noted that, rather than expressly
prohibiting a worker from competing against their employer, some non-
competes require workers to pay damages if they compete against their
employer. The Commission explained that courts generally view these
contractual terms as non-competes and that proposed Sec. 910.1(b)(1)
encompassed them.\322\
---------------------------------------------------------------------------
\322\ Id.
---------------------------------------------------------------------------
The Commission also expressed concern that workplace policies--for
example, a term in an employee handbook stating that workers are
prohibited from working for certain types of firms or in certain fields
after their employment ends--could have the same effects as a
contractual non-compete even if they are not enforceable, because
workers may believe they are bound by the policy. The Commission sought
comment on whether the term ``non-compete clause'' should expressly
include a provision in a workplace policy.\323\
---------------------------------------------------------------------------
\323\ Id. at 3510.
---------------------------------------------------------------------------
The Commission stated that proposed Sec. 910.1(b)(1) was a
generally accepted definition of non-compete clause that covers both
express non-competes and terms purporting to bind a worker that have
the same functional effect as non-competes.\324\ The Commission stated
that the definition would generally not apply to other types of
restrictive employment agreements that do not altogether prevent a
worker from seeking or accepting other work or starting a business
after their employment ends and do not generally prevent other
employers from competing for that worker's labor.\325\ At the same
time, the Commission expressed concern about unusually restrictive
employment agreements that, while not formally triggered by seeking or
accepting other work or starting a business after their employment
ends, nevertheless restrain such an unusually large scope of activity
that they have the same functional effect as non-competes.\326\ The
Commission noted judicial opinions finding some such
[[Page 38362]]
restrictive employment agreements to be de facto non-competes.\327\
---------------------------------------------------------------------------
\324\ Id. at 3509.
\325\ Id.
\326\ Id.
\327\ Wegmann v. London, 648 F.2d 1072, 1073 (5th Cir. 1981)
(holding that liquidated damages provisions in a partnership
agreement were de facto non-compete clauses ``given the prohibitive
magnitudes of liquidated damages they specify''); Brown v. TGS Mgmt.
Co., LLC, 57 Cal. App. 5th 303, 306, 319 (Cal. Ct. App. 2020)
(holding that an NDA that defined ``confidential information'' ``so
broadly as to prevent [the plaintiff] in perpetuity from doing any
work in the securities field'' operated as a de facto non-compete
clause and therefore could not be enforced under California law,
which generally prohibits enforcement of non-compete clauses).
---------------------------------------------------------------------------
Proposed Sec. 910.1(b)(2) accordingly sought to clarify that the
definition in proposed Sec. 910.1(b)(1) includes contractual terms
that are de facto non-competes because they have the effect of
prohibiting the worker from seeking or accepting employment with a
person or operating a business after the conclusion of the worker's
employment with the employer. It then provided two illustrative, non-
exhaustive examples of contractual terms that may be such functional
non-competes: (1) an NDA between an employer and a worker written so
broadly that it effectively precludes the worker from working in the
same field after the conclusion of the worker's employment with the
employer; and (2) a training-repayment agreement (``TRAP'') that
requires the worker to pay the employer or a third-party entity for
training costs if the worker's employment terminates within a specified
time period, where the required payment is not reasonably related to
the costs the employer incurred to train the worker.\328\
---------------------------------------------------------------------------
\328\ NPRM, proposed Sec. 910.1(b)(2).
---------------------------------------------------------------------------
2. Coverage of the Definition
a. Comments Received
Most of the comments on the definition of ``non-compete clause''
addressed whether, and under what circumstances, the rule should apply
to functional non-competes.\329\ Many commenters that generally
supported the NPRM agreed the definition of non-compete clause should
cover other restrictive employment agreements when they function as
non-competes. These commenters argued that, when restraints on labor
mobility are banned, companies switch to functionally equivalent
restraints. Some commenters asked the Commission to adopt a broader
definition of functional non-competes or to expand the rule to ban
additional types of restrictive employment agreements altogether. A few
commenters asked the Commission to broaden proposed Sec. 910.1(b)(1)
and (2) by replacing the terms ``prevent'' and ``prohibit'' with
``restrains'' and ``limits.''
---------------------------------------------------------------------------
\329\ While the NPRM generally used the term ``de facto non-
competes,'' the final rule uses the term ``functional non-
competes.'' The Commission believes this term more clearly conveys
that certain terms are considered non-competes under the final rule
where they function to prevent workers from seeking or accepting
other work or starting a business after their employment ends.
---------------------------------------------------------------------------
In contrast, many commenters who generally opposed the NPRM stated
that proposed Sec. 910.1(b)(2) was overinclusive. Many such commenters
also asserted the definition was vague and could lead to confusion and
significant litigation. Several comments suggested clarifications, such
as including additional examples of functional non-competes; creating
safe harbors for certain restrictive employment covenants; replacing
proposed Sec. 910.1(b)(2) with a standard based on antitrust law's
``quick look'' test; \330\ or revising the provision to focus on the
``primary purpose'' of a restrictive employment covenant. Several
commenters argued the Commission failed to cite evidence that
functional non-competes are anti-competitive. Other commenters
expressed concern that prohibiting functional non-competes would
undermine the rule's intent to permit less restrictive alternatives to
non-competes.
---------------------------------------------------------------------------
\330\ See, e.g., Cal. Dental Ass'n v. FTC, 526 U.S. 756, 770-71
(1999).
---------------------------------------------------------------------------
At least one commenter argued that proposed Sec. 910.1(b)(2)
should be removed because it was redundant, as the proposed definition
of non-compete clause in proposed Sec. 910.1(b)(1) already captured
any term that prevents an employee from seeking alternative employment,
without regard to how the term is labeled. Some commenters who
generally supported the NPRM also expressed concern that ambiguity in
proposed Sec. 910.1(b)(2) could enable employers to intimidate workers
by suggesting that restrictive employment agreements used to evade a
final rule are not non-competes under the functional test. Other
commenters who generally supported the rule asked for greater
specificity in proposed Sec. 910.1(b)(2) to prevent adverse judicial
interpretations that could undermine the effectiveness of the rule.
Many commenters addressed issues specific to other types of
restrictive employment agreements, including NDAs (also sometimes
referred to as confidentiality agreements), TRAPs, non-solicitation
agreements, and garden leave and severance agreements.
With respect to NDAs, some commenters stated that the Commission
rightly identified overbroad NDAs as a potential method of evasion of
the rule and supported the Commission's recognition of overbroad NDAs
as functional non-competes. In contrast, some commenters contended that
by covering functional non-competes, the proposed rule would limit
their ability to use NDAs. Some commenters argued that providing that
overbroad NDAs may be functional non-competes would be inconsistent
with the proposed rule's separate preliminary finding that NDAs are
less restrictive alternatives to non-competes. Similarly, some
commenters contended that a functional test may frustrate employers'
ability to use NDAs to protect legitimate trade secrets or to enjoin a
former worker employed with a competitor under the Defend Trade Secrets
Act of 2016, in part because they would be concerned about potential
legal liability. Some commenters contended that the example of an
overbroad NDA in proposed Sec. 910.1(b)(2) would discourage the use of
NDAs, including the use of narrowly tailored NDAs, and undermine
confidence in their enforceability. Some commenters stated that
reference to cases, including Brown v. TGS Management Co.\331\ and
similar cases, represent outliers that are likely to cause more
confusion than clarity.
---------------------------------------------------------------------------
\331\ See supra note 327 and accompanying text.
---------------------------------------------------------------------------
Other commenters addressed the proposed definition's application to
TRAPs, which are agreements in which the worker agrees to pay the
employer for purported training expenses if the worker leaves their job
before a certain date. Several commenters asked the Commission to ban
all forms of TRAPs. These commenters argued that employers are
increasingly adopting TRAPs and that abusive TRAPs are pervasive
throughout the economy. Some commenters asserted millions of workers
are likely bound by TRAPs. Commenters stated TRAPs may impose penalties
that are disproportionate to the value of training workers received or
require the worker to pay alleged training expenses for on-the-job
training. Some commenters contended TRAPs may be even more harmful than
non-competes, because while non-competes prohibit or prevent workers
from seeking or accepting other work or starting a business after they
leave their job, TRAPs can prevent workers from leaving their job for
any reason.
Some commenters expressed concern that the example in proposed
Sec. 910.1(b)(2)(ii) of a TRAP that was a functional non-compete was
too narrow, and that the Commission should not imply that TRAPs with
penalties that are reasonably related to an employer's training
expenses cannot be functional
[[Page 38363]]
non-competes. One commenter asked the Commission to adopt the standard
for TRAPs in the Uniform Restrictive Employment Agreement Act.\332\
Another commenter suggested that the Commission ban TRAPs below an
income threshold of $75,000. Another commenter asked the Commission to
clarify that costs that are inherent in any employer-employee
relationship--such as time spent by a supervisor training a new
employee how to perform routine business procedures typical for their
position or role--should not be considered costs that are ``reasonably
related to the costs'' of training.
---------------------------------------------------------------------------
\332\ See ULC, Uniform Restrictive Employment Agreement Act
(2021), sec. 14.
---------------------------------------------------------------------------
At least one commenter urged the Commission to treat as functional
non-competes other employment terms similar to TRAPs such as equipment
loans, where employers provide employees with a loan to purchase
equipment that the worker needs in order to perform their job, and
damages provisions containing open-ended costs related to the
employee's departure--including hiring and training replacements or
vague harms such as reputational damages, loss of good will or lost
profits. In contrast, some commenters argued that TRAPs should be
excluded from coverage under proposed Sec. 910.1(b)(2) because they
are not unfair or anti-competitive.
Regarding non-solicitation agreements--which prohibit a worker from
soliciting former clients or customers of the employer--a few
commenters expressed concern that overbroad non-solicitation agreements
may be permitted because they were not listed in the regulatory text
for proposed Sec. 910.1(b)(2) as examples of functional non-competes
(although the Commission described them in the preamble to the proposed
rule as restrictive employment agreements that may fall within the
definition of non-compete clause if they restrain such an unusually
large scope of activity that they are de facto non-compete
clauses).\333\ These commenters asked the Commission to revise proposed
Sec. 910.1(b)(2) to expressly cover non-solicitation agreements that
prohibit workers from doing business with prospective or actual
customers to an extent that would effectively preclude them from
continuing to work in the same field or that prevent a worker from
doing business with their former employer's client where the client
solicits the worker directly. Other commenters, however, expressed
concern that the proposed rule could undermine employers' confidence in
the enforceability of non-solicitation agreements and asked that the
final rule clarify that non-solicitation agreements are generally not
prohibited, or exclude them altogether.
---------------------------------------------------------------------------
\333\ NPRM at 3509.
---------------------------------------------------------------------------
Some comments addressed no-hire clauses, which bar former workers
from hiring their former colleagues. One employment lawyer stated that
these are less restrictive than non-compete clauses. Other commenters
stated that no-hire clauses can still limit careers or make it hard for
new businesses to find staff. Some commenters expressed concerns with
no-business or non-dealing clauses, which bar former workers from doing
business with former clients or customers even if the clients or
customers sought them out. These commenters stated such agreements
limit the options of clients and customers.
Many commenters raised questions about forfeiture-for-competition
clauses, which they stated are often a component of deferred
compensation arrangements for executives. Commenters stated that
deferred compensation plans often include forfeiture clauses, or
contingencies on receiving the promised compensation, to incentivize
their recipients to act in ways that benefit the employer. These
commenters stated that agreements not to compete for a period
[…truncated; see source link]Indexed from Federal Register on May 7, 2024.
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