When the Federal Trade Commission’s recent ruling takes effect in September, noncompete agreements will be over. Or will they? Cornell Law School professor Stewart J. Schwab and host Chris Wofford discuss the history of noncompetes and why the FTC might not have the final say.
The Federal Trade Commission (FTC) estimates that one in five American employees are bound by noncompete agreements that impose time or location restrictions on their ability to pursue work with or create competitor companies. In April, the FTC issued a rule banning noncompetes with the intent to “generate over 8,500 new businesses each year, raise worker wages, lower health care costs and boost innovation.”
Will a court issue an injunction against the rule? Does the FTC even have the power to make the call on noncompetes?
In this episode of the Cornell Keynotes podcast from eCornell, Stewart J. Schwab, the Jonathan and Ruby Zhu Professor of Law at Cornell Law School, joins host Chris Wofford to discuss these issues. The conversation covers:
Read about the FTC’s final rule on noncompetes.
Explore employee duties, including noncompetes, wage and benefit regulations, anti-discrimination principles and more in Stewart J. Schwab’s Employment Law for Leaders online certificate program from eCornell.
Interested in other aspects of law and business? Consider these programs:
Chris Wofford: Are non compete agreements really dead? Since the Federal Trade Commission's recent final ruling making non compete agreements unenforceable, the headlines read as if non competes are now a thing of the past. Not so fast, says Cornell Law Professor Stewart Schwab. The FTC may be overreaching as an agency here.
Chris Wofford: And the court certainly will be ruling on this in the months ahead on today's episode, Stewart and I dig into the dynamics at play here in employment law, and also look at the broader economic implications of non competes in the workplace. So check out the episode notes for a link to the FTC's summary of the ruling, and also for information on professor Schwab's online employment law for leaders Cornell certificate program.
Chris Wofford: Here's my conversation with Stewart.
Chris Wofford: Stewart, as a professor, as an employment attorney, as a highly published legal scholar, how do you think about and teach non compete agreements and contracts to your students?
Stewart Schwab: It's a big area. It's a fun area. I always teach it as a unit of my employment law course and I teach specialized seminars on it as well. I usually start, or one reason I find this such an interesting area of employment law is the onus is on the employee here. It's not so much employee rights, it's employee duties.
Stewart Schwab: Duties not to compete or the promise not to compete. That sort of thing. I usually start with, well, what are the background duties of an employee, and they fall under the general heading, a duty of loyalty. How far does that extend? Well, while you're working for one employer, you can't compete against that same employer, is a well known principle.
Stewart Schwab: But after you quit and leave that employer, another principle, this is free competition, you then can compete. Trade secrets is another big area. While you're working for an employer, you might get access to their trade secrets. Can you give them to someone else while working? No. Can you give them to someone else after you quit and leave?
Stewart Schwab: You had been working for Coca Cola. Now you go work for Pepsi to take sort of the classic case. Can you give them the recipe even after you leave? No. You've got a duty of loyalty not to divulge those trade secrets. That's without regard to any contract or specific clause. You're just an employee. In an employer and employee relationship, you have certain of these duties.
Stewart Schwab: So that, so I start with that background and there's case law and you know, what is a trade secret and what do we mean by competition? I'm thinking of striking out on my own. Can I consult a lawyer? Yes, that's not competition, that's preparing to compete. Can I incorporate my new business, articles of incorporation?
Stewart Schwab: Definitely yes, that's merely preparing to compete. Can I talk to my office mate and say, Hey, let's you and I both go out alone? Mmm, yeah, probably. Five of us? Ten of us? Twenty of us? While still working? Yeah, that's probably beyond the line. Yeah. Now a lot of employers don't want to just rely on that background or default duty of loyalty, and so they put in specific clauses.
Stewart Schwab: Now the most important one that we're talking about today is what about the non compete agreement? You can't compete with me while working for me, while getting my paycheck. I mean pretty much everyone nods and say, well, that makes sense, but you can afterwards. Well, what if we put in our contract, even afterwards for two years, Chris, you aren't going to compete against me.
Stewart Schwab: Is that enforceable? Well, one idea is, well, that sounds like a contract. We could treat it like any other contract. Under American contract law, there has to be an offer. There has to be acceptance. There has to be what's called consideration. You're giving something valuable in return for that promise. If it's unconscionable, it won't be enforced.
Stewart Schwab: If it was done under duress, I put a gun to your head, it, the contract won't be enforced, but these are just basic contract principles. No state treats a non compete agreement just like any other contract principle. On the other end of the spectrum some, a few states, California being the most prominent, says we will not enforce a non compete agreement at all.
Stewart Schwab: You may have promised your employer not to compete after you quit.
Chris Wofford: But not enforceable.
Stewart Schwab: Not enforceable.
Chris Wofford: In California.
Stewart Schwab: In California, or North Dakota, or Oklahoma. That's sort of a trivia question. What do those three states have in common?
Chris Wofford: Very little otherwise.
Stewart Schwab: Maybe have a few things, but they don't they totally will not enforce a non compete agreement.
Stewart Schwab: Just that. Last year Minnesota joined that group, so that's the fourth at least borders North Dakota.
Chris Wofford: So you get into the, you get into the raw legal fundamentals here. The way that most of us are familiar with this according to the FTC, about 30 million workers, that's one in five of us who are working are subject to a non compete clause.
Chris Wofford: And again, that aims to stop them from moving, creating a competitor company, and so on. What is the explicit intended purpose of non competes for employers? How did they think about this?
Stewart Schwab: Well, first, I want to say that that's a shocking number, and it shocked a lot of experts in the field when they thought 20 percent of the workforce.
Stewart Schwab: I was first there's now been a series of surveys, and this seems to be pretty well documented, but the first one was just in 2014. A professor named Evan Starr, who I've worked with, co authored with was just a graduate student at the time doing this survey, and went 20%, wow, that's a lot more than we thought of, you know, CEOs and, you know, a few other specialized people.
Stewart Schwab: And so that was the first thing. Wow, this really is affecting the American workforce in a, big way. Big way, so that's the first thing I would say how it sort of caught the eye. Specialists had known about these agreements for a long time and there was debate at the margins but the extent of the issue wasn't fully known originally.
Stewart Schwab: Around that same time, there was a sort of fame, infamous incident. Jimmy John's, the sandwich shop, required all its sandwiched artists to sign a non compete agreement. I won't work for another sandwich chain that's within three miles of a Jimmy John's for two years after I quit. Well, most people thought this is just ridiculous.
Stewart Schwab: There's no trade secret that you're trying to protect. I mean, yeah, our Jimmy John way of making a sandwich is it?
Chris Wofford: It's not magic.
Stewart Schwab: It's kind of ludicrous. Yeah. And people thought this was just a vast over extension of the legitimate purposes, which perhaps are to protect trade secrets, perhaps are to protect your customer base.
Stewart Schwab: If you really if people have significant connections, but who's going to choose Jimmy John's or go over to Burger King or whatever, based on the sandwich artist behind it. I have a certain, no one. Sure. And so why are, why is that company doing it? It had to be just to restrict those employees, to try to keep them down, to try to keep their wages down.
Stewart Schwab: And that's not the only example. Amazon emphasis, emphatically required all its, package workers to sign a non compete agreement too. I won't work for any firm that competes against Amazon. Well, you know, every firm tries to compete against Amazon selling something. And so it was, I think a lot of people woke up that, wow, this is going way beyond what traditionally we thought was an appropriate use or at least customary use and it woke up a lot of people.
Chris Wofford: You think among the low wage workforce that something like this would make you an incredibly unattractive employer whether it's Jimmy John's or Amazon, right?
Chris Wofford: You can work somewhere else. I don't understand it.
Stewart Schwab: Yeah. And even at uh, you know, little higher, your quality control manager at whatever firm, you know, in, I mean, let's put in the biotech industry. So okay is, is colorable, but you know, you're just quality control. You aren't developing the secrets, probably don't even care about the secrets.
Stewart Schwab: Yeah. And yet when you want to jump, often you're the next, the new employer, the first question they're going to ask them, are you qualified at all? Yeah, I've done this. I have experience. Do you have a non compete? Ooh, I do. Well, you're pretty good, but boy, that's going to be a hassle. It may even result to litigation.
Stewart Schwab: I tell you what, Chris, I'll put you on the back burner. This other person, similar qualifications, doesn't have a non compete. These can really be restrictive. Now if they serve a purpose, then we got counterbalancing. No, yes, you really do have access to trade secrets. You know, you really to take a, another example, sort of customer relationships.
Stewart Schwab: I, I bring you in to manage the large account, and I want you to get to know this person on behalf of Schwab Company, and you know take the person out to dinner, get to know them, get them to trust them, get their business. And I'm giving you my credit card and you know, asking you to do. It is your job to get to know this person.
Stewart Schwab: But my big fear is after a couple years, you may think you can do this better on your own than on me, and you'll quit and just grab that big client with you. Is it legitimate, or the fear is, me knowing this in advance, I'm unlikely to hire you or be more inefficient in what you can or cannot do. Uh, won't a non compete work.
Stewart Schwab: And so a lot of people say, you know, protecting customer relationships is another legitimate interest that employers might have in a non compete.
Chris Wofford: And through the FTC ruling, the Federal Trade Commission on April 23rd announced last month that non competes are now banned, and effectively, unenforceable.
Chris Wofford: Did you see this coming? I think we all did, right?
Stewart Schwab: Well, they did a notice of proposed rulemaking last year before in January. So we saw it coming.
Stewart Schwab: Before that uh, or a couple of years before that, probably didn't see it coming.
Chris Wofford: Why now?
Stewart Schwab: Uh, well, No, there's a new sheriff in town.
Stewart Schwab: New policies by the Federal Trade Commission more broadly. The Biden administration is enforcing the antitrust laws more vigorously. The Federal Trade Commission, along with the Department of Justice Antitrust Division, those are the two federal government agencies that worry about antitrust policy.
Stewart Schwab: Promoting competition, preventing monopolies. And so this is an outgrowth of that, and to that extent is within the jurisdiction of the Federal Trade Commission now. Rarely have the antitrust laws in recent decades or the last hundred years worried about labor markets too much. It's all product markets, you know, is, is Ford and, GM colluding or, you know, should we break up AT&T to go back?
Stewart Schwab: Should we break up Microsoft? Being just too big of a monopolist.
Stewart Schwab: None of that thought was what about on the labor side? They're hiring all these engineers or software types. No one really thought of that very much in antitrust terms. Now there is more thought. Both on the antitrust, although haltingly, and now this is a related thing.
Stewart Schwab: We're going after the non compete agreements and the effects it has on labor markets.
Chris Wofford: So organized labor is having a moment, pretty strong couple of years. Does this ruling have anything to do with larger developments through the Biden Labor Relations Board or any other administration going on that may be influencing this back to my why now question.
Stewart Schwab: Yeah, it's a good point I mean organized labor is having a moment and sort of pro-worker, let me say one thing about that. I think organized labor is having a moment 2023 was the lowest union density ever in since the 1950s in the United States. So I think we can exaggerate the union moment in the private sector, it's under 6%. Sure. And while there were some union successes in the last year or two, last month and last month you know, hundreds of thousands of newly organized workers, but there's been even more than that of growth of the labor force, which is why this statistic while there have been some additions, there's been a lot more additions in the non unionized workforce.
Stewart Schwab: So that's the one thing but your overall question is a good one. Is this workers rights? I'd say one of the thing about non competes. It's less of a employer versus employee, left right issue than a lot of issues in employment law, why? It's true that employers want to keep their talented workers but it's also true that employers want to hire experienced, talented workers.
Stewart Schwab: And so they don't want non compete clauses that would just be too onerous, particularly, you know, larger companies that are, but anybody who's trying to hire somebody. So I think in some sense, even within the employer community, they want sort of a balance, you know, let's use them non competes when on balance there, you know, the pluses outweigh the minuses, but you know, we recognize that there are minuses and if we can identify where they are, maybe we should ban those.
Stewart Schwab: Now the FTC has said, by and large, they recognize there's some pluses, but they say the minuses are so much more that we're going to ban them all. Small wrinkle here the, under the rule that becomes effective in September. C-suite top, top executives, the current non competes will continue to be enforceable, but no new ones, By C-suite people.
Stewart Schwab: For everyone else under the C-suite, come September 4th, those non competes are unenforceable.
Chris Wofford: Hey, let's talk about the ecosystem of agreements and contracts also. Non disclosure agreements, non solicitation, can we talk about that? You know, we talked about not being able to run around with your sales book, for instance, right?
Chris Wofford: All that stuff is already covered.
Stewart Schwab: It's a good point. All that is regulated by state law, a little bit less. Non competes are the ones that get the biggest focus because, you know, that's, that's the most onerous. You can't compete in this industry at all. But there are other restrictive agreements. You can't solicit my customers, you can't recruit my co workers separate, but still in the same family of restrictive agreements are training reimbursement agreements.
Stewart Schwab: I'll train you, but in return, you promise that if you leave, you'll pay me back $5,000 a year until it's repaid or something. Something like that.
Chris Wofford: Can you explain what was going on with truckers last year or I think it was the year before this was a this was a big...
Stewart Schwab: ...A big deal several, several companies.
Stewart Schwab: I mean, you have to have your commercial driver's license to drive the truck and that requires some training. And so what a lot of companies said is that we will train you, which involves, you know, several weeks of in class plus on the road training. And they would value it at like, six or seven thousand dollars, meaning if you leave, you know, within two years, say after getting your training, if you leave me and go work for a competitor, you're going to repay six thousand dollars.
Stewart Schwab: Now the when employers train by themselves, that's just called on the job training. That's called experience. That's called general knowledge. You get better as a producer. I get better as a law professor over time. That doesn't mean the company gets to keep me there forever.
Stewart Schwab: That's just sort of the antithesis of competition, but you know, a reasonable agreement. You know, reasonable repayment. The main thing with the truckers is that this, this $6,000 figure was highly inflated and yet did have the major effect of keeping those workers there. They couldn't jump for a, you know, someone who's going to pay them more fairly.
Stewart Schwab: I think the training reimbursement, for example is a good case where there's a balance there. There's some training, specialized training, at least for a certificate kind of program, a promise to reimburse the actual cost. Oh, that makes some sense. And people nod and say, yeah, employers should, we want, almost wanted to encourage employers to give that kind of training.
Stewart Schwab: But when it's overreaching, when it's, these costs are inflated, the employer themselves are doing it rather than I'll pay for your associate's degree or your MBA degree or something like that where it can easily be quantified at the outside person. That's one thing. So back to your question, there's this whole family I like to say of restrictive agreements.
Stewart Schwab: Non competes get most of the attention, but these non solicitation agreements, non recruitment of coworker agreements training reimbursement agreements, and then there's other variations are all part of the same family. The federal trade commission only is looking at non competes. Now, what it says in its rule and its regulation any agreement that is the functional equivalent of a non compete, that's what we are banning here.
Stewart Schwab: Now that's a recipe for a lot of litigation. You know, does this functional, does this non solicitational agreement functionally mean you can't work in this field or not? It's a little imprecise or maybe very imprecise, but they're focusing on non compete agreements.
Chris Wofford: I need some clarity on the final ruling.
Chris Wofford: The commission determined that it is quote unquote unfair method of competition. And therefore, a violation of Section 5 of the FTC Act for employers to enter in non competes with workers and, of course, enforce those certain non competes. So, can you explain how you think the FTC arrived at this determination of unfair method of competition?
Stewart Schwab: Well as a formal matter it did what's called notice and comment rule-making which agencies do, it set out a notice. This was in January of 2022, we are proposing rulemaking, which essentially was this rule, we're going to ban all non competes and it asks for comments and it got some 25,000 or so comments.
Stewart Schwab: I mean, lots and lots of comments. And then it, this is how agency rulemaking is done. It then goes through those comments and reacts to them in a lengthy report and then comes up with its final rule, which, as you say last month in April, it came up with the final rule, reacting to all those comments, modifying its initial proposal in some respects, but in the main, we're going to ban non competes is remaining.
Stewart Schwab: And then it has an effective date of uh, I think it's 100, it's September 4th, 150 days after the notice. And so it will go into effect if some court doesn't stop it.
Chris Wofford: Okay, so to cut right to it, Stewart, non competes dead? You know, I saw this ruling and everybody was kind of, across the nation sort of celebrating or at least thinking about it like, all right, finally, non competes were through that. What is ahead?
Stewart Schwab: Very interesting.
Stewart Schwab: I did put a non compete question on my final exam that I finished grading last week and several students noted, hey, come September we don't have to answer this question, right? And I said, well, maybe that's right. Maybe it's not.
Chris Wofford: What's going on in the courts?
Stewart Schwab: And so that's the question. What's going on in the courts?
Stewart Schwab: A lot of people are predicting that some court somewhere is going to issue an injunction, meaning this rule cannot come in to force until It fully works its way through the courts. And what's the question? The first is the technical question. Under Section 5 of the Federal Trade Commission Act, does it give the power to the Commission to do rulemaking like this?
Stewart Schwab: Complicated ad law question, you'd have to read it. How does Section 5 interact with Section 6? Has the FTC been in this area before on maybe on a case by case basis calling certain non competes unfair methods of competition. Answer, two days before they did the notice of proposed rulemaking was sort of the first time that they went after one of these companies.
Stewart Schwab: So they haven't been in it a long time. Traditionally, it's an area of state law, state regulation, not federal regulation. All this leads to it's going to be a great application of the major questions doctrine. What's the major questions doctrine? It's a, some say a new fangled thing by the Supreme Court that says Congress is the one that's supposed to be making major decisions. When it delegates to an agency, the power, and clearly the Federal Trade Commission has power to regulate unfair methods of competition.
Stewart Schwab: But does that cover non competes is, you know. I mean, the statute itself says nothing about that. Is that a decision that Congress should make, must make, before it delegates this power to, on a major question like this uh, it's got to speak with clarity. And a lot of people think that the Supreme Court has been into this in a couple of big cases, and this might be another one.
Stewart Schwab: This is unclear. The experts are sort of divided, and it's on a major question that has major economic and social importance, which I think...
Chris Wofford: One could argue this does, given its economic and employment impact.
Stewart Schwab: Exactly. Congress has got to basically speak more clearly that the agency has this power, and or make the decision itself.
Stewart Schwab: We are going to ban non competes. And I think Congress could have the power or that's a separate issue, but probably.
Chris Wofford: In the abstract...
Stewart Schwab: ...In the abstract sure...
Chris Wofford: Right.
Stewart Schwab: But will this be struck down until Congress speaks more clearly? This has been a very interesting recent issue, the well known case just two years ago now, West Virginia versus the Equal Protection Agency of the Supreme Court struck down a major EPA regulation about climate change, on precisely these grounds, the Clean Air Act, maybe, you know, section blah, blah, blah, it's sort of, is it there or is it not?
Stewart Schwab: Rather than get into that, what the Supreme Court said is, on a major question like this, Congress must speak more clearly on whether, in that case, the EPA had the authority or not, and a lot of people are predicting that they're going to say the same thing about this. And I don't know whether or not, whether FTC has the power to regulate non competes or not.
Stewart Schwab: It all depends on the congressional statute and what it means. But Congress, on a major question, must speak more clearly before an agency is allowed to do this.
Chris Wofford: So what can we expect to see in the short term?
Stewart Schwab: Well, in the short term, I predict this is a falsifiable statement in about three months, but before September 4th, I predict that it will be enjoined.
Stewart Schwab: There's already litigation filed very cleverly in the district courts in Texas. These are the judges who seem to like to do nationwide injunctions on federal action. They've done, you know, important or well publicized things on immigration, on abortion, on other things. You know, this is a little more technical than that, but certainly very important.
Stewart Schwab: And my prediction is they will enjoin it. If whether or not they enjoin it, I mean that applies in the short run. The real question is, will the court, ultimately the Supreme Court, strike down this regulation as under the major questions doctrine going beyond what the Federal Trade Commission is allowed to do.
Stewart Schwab: The other thing to know is, yeah, this is clearly a Biden administration proposal, goes back to your earlier point that you know, they want to be seen as pro worker consistent with the union. If another administration comes in now they'll have to go through a process. You can't just on day one, repeal these things.
Stewart Schwab: You have to have your own hearing on why we got it wrong a year ago or so, but you know, the next administration, a lot of people are wondering precisely because this is not a congressional statute, it's merely an agency regulation. Will the next administration come in and change the regulation?
Stewart Schwab: So whether this non compete ban will come into existence on September 4th and last through litigation and or last through subsequent administrations. Who knows? So maybe they're dead. Or I don't know, but maybe, you know, time will tell.
Stewart Schwab: I think the most interesting questions usually don't have yes or no answers. They're a little, the interesting questions are you know, by my definition at least a little more complicated than that.
Chris Wofford: I'm right there with you. Thank you Stewart Schwab for joining us in studio today.
Stewart Schwab: Thank you.
Chris Wofford: Thank you for listening to Cornell keynotes, check out the episode notes for information on Cornell University's employment law for leaders Cornell Certificate Program at eCornell. Thanks again, friends, and be sure to subscribe to stay in touch.