The Biden Administration’s rule by regulation is gaining speed, and the latest example is the Federal Trade Commission’s plan to ban non-compete employment agreements. In a flash, Lina Khan’s bureaucracy will rewrite labor contracts for 30 million workers.
The FTC’s proposed rule is an air kiss to Big Labor, which demanded that the agency ban non-competes in 2019. Unions want opposition to non-competes as a tool in their organizing kit. Ms. Khan tweeted that one in five U.S. workers is currently “bound” by a non-compete clause that prevents them from switching jobs and thus keeps wages lower than they would be if the employees moved freely.
But job mobility in America hasn’t suffered despite non-compete clauses. The biggest threat to rising wages is inflation, not employment clauses. Companies use non-compete clauses to protect their intellectual capital, which is often between the ears of its employees. Tech firms in particular often pay higher compensation, including stock grants, in return for non-competes.
Non-competes can encourage innovation in firms because employees are less likely to take secrets to a rival. In a recent paper considering employment contracts, the Global Antitrust Institute at George Mason noted that a ban on non-competes risks harming productivity and “dampening the incentives to invest in trade secrets” or “disseminate firm-specific knowledge” among a firm’s workforce.
The FTC is stretching its authority here, perhaps past breaking the law. Chair Khan cites Section 5 of the Federal Trade Commission Act, which allows the agency to police “unfair methods of competition.” But “unfair methods” is typically used for individual cases, not for a blanket ban or policy-making.
In 2015 a bipartisan group of FTC commissioners issued a statement saying that Section 5’s power against unfair competition should only be used in cases of clear consumer harm. Ms. Khan rescinded that statement as one of her first actions as commissioner, the better to extend the agency’s reach to new frontiers. The Supreme Court is increasingly skeptical of aggressive claims of authority by federal agencies without clear Congressional direction, and the Chamber of Commerce says it is considering a lawsuit if the rule is adopted.
The sweeping FTC ban also raises separation-of-powers constitutional questions. In a 1935 New Deal-era case, Humphrey’s Executor, the Supreme Court approved the FTC Act as long as the independent agency refrained from exercising powers reserved for the executive branch. The FTC is an enforcement agency, not a policy-making shop like the Labor Department.
By the way, the FTC rule would pre-empt laws in 50 states, including those in California, North Dakota, Oklahoma and Washington, D.C., that ban non-compete contracts. More than a half dozen other states prohibit their use in low-wage jobs.
Ms. Khan has been chafing to impose her intrusive vision on the national economy, and she now has a 3-1 Democratic majority. She’s accelerating without looking both ways, which may mean a legal crackup is in the FTC’s future.
