Dive Brief:

• The Federal Trade Commission should move forward with its proposed ban on noncompetes because it would benefit workers and advance competition and innovation in business, the attorneys general in 18 states say in a letter to the agency.
• “States have led the way on restricting the use of noncompetes and our experiences inform our support of the proposed rule,” says the letter, signed by a mix of states that ban, and don’t ban, the agreements. “State action has both revealed the harm caused by noncompetes and allowed researchers to quantify the benefits of banning noncompetes on worker earnings and job mobility.”
• To improve the proposal, the agency shouldn’t preempt state bans if they’re stronger than the federal proposal nor impose an income threshold, says the letter, signed by the AGs in California, Colorado, District of Columbia, Illinois, Maine, Maryland, Oregon, Rhode Island and Washington, which already impose a ban on noncompetes, and by the AGs in Delaware, Massachusetts, Michigan, Minnesota, New Jersey, New Mexico, Nevada, New York and Pennsylvania, which don’t.

Dive Insight:

By looking at the mix of states that do and don’t have a ban, researchers have been able to quantify the impact the agreements have, and it’s not good, the letter says.  

In states that have bans in place, employees have seen their wages go up, no matter what income range they’re in, research has found, according to the AGs.  

“After Oregon passed a law in 2008 banning noncompetes for low-wage workers,” the letter says, “the legislation was associated with increased wages and job mobility.”

Other research has found that, in states that allow noncompetes and enforce them, wages and job mobility dropped, including for employees who aren’t subject to the agreements.  

“This indicates that the use of noncompetes in a labor market creates significant negative externalities, placing downward pressure on job mobility and wages that extends to all workers in the same labor market,” the letter says. 

State experiences

The argument that businesses typically make in favor of the agreements — that they help companies innovate by protecting trade secrets, among other things — isn’t convincing, the letter says. 

“Over 150 years of prohibition [of the agreements] has not stopped California from cultivating a thriving and innovative business sector that powers the largest state economy in the nation,” the letter says. The state banned the agreements in 1872.  

Colorado, Illinois and Washington are other states with strong economies that ban the agreements.

In any case, if businesses are worried about protecting trade secrets, there are other ways to do that, the letter says.

“Employers can turn to more targeted protections to address such concerns, including trade secret law and non-disclosure agreements,” it says, “and the proposed [FTC] rule expressly recognizes that employers can continue to avail themselves of such protections.”

Consistency sought

The problem with the existing state patchwork of laws is enforcement confusion. 

In states with no ban, employees must sue and rely on common-law assessments — which are fact-intensive — to win the right to go where they want, and even if they win, there’s no guarantee there’s an agency in the state to enforce the decision.

In states with bans in place, enforcement can be complicated by uncertainty over which state law applies, an especially big problem in metro areas spanning more than one state, like the District of Columbia, and because of the increase in remote workers.  

The AGs say they like the approach the FTC is taking by looking at noncompetes functionally — that is, whether an agreement is a noncompete by another name. They like the plan to ban de facto noncompete provisions in other agreements and to use a functionality test to prohibit other types of agreements that function as a noncompete.

“This definition [of noncompete] accords with the approaches taken by many of our states that have legislated on noncompetes, which have also adopted functional approaches,” the letter says.

If a nondisclosure agreement is so broad that no employee can realistically take another job without breaching it, for example, that would meet the functionality test. So, too, would an overly broad non-solicitation agreement.

Avoid preemption

The AGs used the letter to advocate for allowing states to enforce their own noncompete bans if they’re as strong as or stronger than what the FTC is proposing. They don’t want to rely on the FTC to bring an action against an employer, for example. If that were the case, “states and their residents … would not be able to enforce the proposed rule,” the letter says, and that wouldn't be good. 

Nor should the FTC impose an income threshold on when the ban would kick in, because doing that could stifle upward mobility.

“Permitting noncompetes above a certain income threshold could have negative downstream effects on low-wage workers,” the letter says. 

The FTC released its proposed rule at the start of this year and took comments on it until a few weeks ago.