Non-Compete Clause Rule, 3482-3546 [2023-00414]

Agencies

• FEDERAL TRADE COMMISSION

[Federal Register Volume 88, Number 12 (Thursday, January 19, 2023)]
[Proposed Rules]
[Pages 3482-3546]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-00414]



[[Page 3481]]

Vol. 88

Thursday,

No. 12

January 19, 2023

Part II





Federal Trade Commission





-----------------------------------------------------------------------





16 CFR Part 910





Non-Compete Clause Rule; Proposed Rule

Federal Register / Vol. 88 , No. 12 / Thursday, January 19, 2023 / 
Proposed Rules

[[Page 3482]]


-----------------------------------------------------------------------

FEDERAL TRADE COMMISSION

16 CFR Part 910

RIN 3084-AB74


Non-Compete Clause Rule

AGENCY: Federal Trade Commission.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: Pursuant to Sections 5 and 6(g) of the Federal Trade 
Commission Act, the Federal Trade Commission (``Commission'') is 
proposing the Non-Compete Clause Rule. The proposed rule would, among 
other things, provide that it is an unfair method of competition for an 
employer to enter into or attempt to enter into a non-compete clause 
with a worker; to maintain with a worker a non-compete clause; or, 
under certain circumstances, to represent to a worker that the worker 
is subject to a non-compete clause.

DATES: Comments must be received on or before March 20, 2023.

ADDRESSES: Interested parties may file a comment online or on paper by 
following the instructions in the Request for Comment part of the 
SUPPLEMENTARY INFORMATION section below. Write ``Non-Compete Clause 
Rulemaking, Matter No. P201200'' on your comment, and file your comment 
online at https://www.regulations.gov, by following the instructions on 
the web-based form. If you prefer to file your comment on paper, mail 
your comment to the following address: Federal Trade Commission, Office 
of the Secretary, 600 Pennsylvania Avenue NW, Suite CC-5610 (Annex C), 
Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT: Shannon Lane (202-876-5651), Attorney, 
Office of Policy Planning, Federal Trade Commission.

SUPPLEMENTARY INFORMATION:

I. Overview of the Proposed Rule

    A non-compete clause is a contractual term between an employer and 
a worker that typically blocks the worker from working for a competing 
employer, or starting a competing business, within a certain geographic 
area and period of time after the worker's employment ends. Non-compete 
clauses limit competition by their express terms. As a result, non-
compete clauses have always been considered proper subjects for 
scrutiny under the nation's antitrust laws.\1\ In addition, non-compete 
clauses between employers and workers are traditionally subject to more 
exacting review under state common law than other contractual terms, 
due, in part, to concerns about unequal bargaining power between 
employers and workers and the fact that non-compete clauses limit a 
worker's ability to practice their trade.\2\
---------------------------------------------------------------------------

    \1\ See, e.g., U.S. v. Am. Tobacco Co., 221 U.S. 106, 181-83 
(1911) (holding several tobacco companies violated Sections 1 and 2 
of the Sherman Act due to the collective effect of six of the 
companies' practices, one of which was the ``constantly recurring'' 
use of non-compete clauses); 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).
    \2\ See infra Part II.C.
---------------------------------------------------------------------------

    In recent decades, important research has shed light on how the use 
of non-compete clauses by employers affects competition. Changes in 
state laws governing non-compete clauses have provided several natural 
experiments that have allowed researchers to study the impact of non-
compete clauses on competition. This research has shown the use of non-
compete clauses by employers has negatively affected competition in 
labor markets, resulting in reduced wages for workers across the labor 
force--including workers not bound by non-compete clauses.\3\ This 
research has also shown that, by suppressing labor mobility, non-
compete clauses have negatively affected competition in product and 
service markets in several ways.\4\
---------------------------------------------------------------------------

    \3\ See infra Part II.B.1.
    \4\ See infra Part II.B.2.
---------------------------------------------------------------------------

    In this rulemaking, the Commission seeks to ensure competition 
policy is aligned with the current economic evidence about the 
consequences of non-compete clauses. In the Commission's view, the 
existing legal frameworks governing non-compete clauses--formed decades 
ago, without the benefit of this evidence--allow serious 
anticompetitive harm to labor, product, and service markets to go 
unchecked.
    Section 5 of the Federal Trade Commission Act (``FTC Act'') 
declares ``unfair methods of competition'' to be unlawful.\5\ Section 5 
further directs the Commission ``to prevent persons, partnerships, or 
corporations . . . from using unfair methods of competition in or 
affecting commerce.'' \6\ Section 6(g) of the FTC Act authorizes the 
Commission to ``make rules and regulations for the purpose of carrying 
out the provisions of'' the FTC Act, including the Act's prohibition of 
unfair methods of competition.\7\
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 45(a)(1).
    \6\ 15 U.S.C. 45(a)(2).
    \7\ 15 U.S.C. 46(g).
---------------------------------------------------------------------------

    Pursuant to Sections 5 and 6(g) of the FTC Act, the Commission 
proposes the Non-Compete Clause Rule. The proposed rule would provide 
it is an unfair method of competition--and therefore a violation of 
Section 5--for an employer to enter into or attempt to enter into a 
non-compete clause with a worker; maintain with a worker a non-compete 
clause; or, under certain circumstances, represent to a worker that the 
worker is subject to a non-compete clause.\8\
---------------------------------------------------------------------------

    \8\ See proposed Sec.  910.2(a). For ease of reference, this 
NPRM employs the term ``use of non-compete clauses'' as a shorthand 
to refer to the conduct that the proposed rule would provide is an 
unfair method of competition.
---------------------------------------------------------------------------

    The proposed rule would define the term ``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.\9\ The proposed rule would also clarify that whether a 
contractual provision is a non-compete clause would depend not on what 
the provision is called, but how the provision functions. As the 
Commission explains below, the definition of non-compete clause would 
generally not include other types of restrictive employment covenants--
such as non-disclosure agreements (``NDAs'') and client or customer 
non-solicitation agreements--because these covenants generally do not 
prevent a worker from seeking or accepting employment with a person or 
operating a business after the conclusion of the worker's employment 
with the employer. However, under the proposed definition of ``non-
compete clause,'' such covenants would be considered non-compete 
clauses where they are so unusually broad in scope that they function 
as such.\10\
---------------------------------------------------------------------------

    \9\ See proposed Sec.  910.1(b)(1).
    \10\ See infra Part V (in the section-by-section analysis for 
proposed Sec.  910.1(b)).
---------------------------------------------------------------------------

    The proposed rule would define ``employer'' as a person--as the 
term ``person'' is defined in 15 U.S.C. 57b-1(a)(6)--that hires or 
contracts with a worker to work for the person.\11\ The proposed rule 
would define ``worker'' as a natural person who works, whether paid or 
unpaid, for an employer. The proposed rule would clarify that the term 
``worker'' includes an employee, individual classified as an 
independent contractor, extern, intern, volunteer, apprentice, or sole 
proprietor who

[[Page 3483]]

provides a service to a client or customer.\12\
---------------------------------------------------------------------------

    \11\ See proposed Sec.  910.1(c).
    \12\ See proposed Sec.  910.1(f).
---------------------------------------------------------------------------

    In addition to prohibiting employers from entering into non-compete 
clauses with workers starting on the rule's compliance date, the 
proposed rule would require employers to rescind existing non-compete 
clauses no later than the rule's compliance date.\13\ The proposed rule 
would also require an employer rescinding a non-compete clause to 
provide notice to the worker that the worker's non-compete clause is no 
longer in effect.\14\ To facilitate compliance, the proposed rule would 
(1) include model language that would satisfy this notice requirement 
\15\ and (2) establish a safe harbor whereby an employer would satisfy 
the rule's requirement to rescind existing non-compete clauses where it 
provides the worker with a notice that complies with this notice 
requirement.\16\
---------------------------------------------------------------------------

    \13\ See proposed Sec.  910.2(b)(1).
    \14\ See proposed Sec.  910.2(b)(2)(A).
    \15\ See proposed Sec.  910.2(b)(2)(C).
    \16\ See proposed Sec.  910.2(b)(3).
---------------------------------------------------------------------------

    The proposed rule would include a limited exception for non-compete 
clauses between the seller and buyer of a business.\17\ This exception 
would only be available where the party restricted by the non-compete 
clause is an owner, member, or partner holding at least a 25% ownership 
interest in a business entity.\18\ The proposed regulatory text would 
clarify that non-compete clauses covered by this exception would remain 
subject to federal antitrust law as well as all other applicable law.
---------------------------------------------------------------------------

    \17\ See proposed Sec.  910.3.
    \18\ See proposed Sec. Sec.  910.3 and 910.1(e).
---------------------------------------------------------------------------

    The proposed rule would establish an effective date of 60 days, and 
a compliance date of 180 days, after publication of a final rule in the 
Federal Register.\19\
---------------------------------------------------------------------------

    \19\ See proposed Sec.  910.5.
---------------------------------------------------------------------------

    In this notice of proposed rulemaking (``NPRM''), the Commission 
describes and seeks comment on several alternatives to the proposed 
rule, including whether non-compete clauses between employers and 
senior executives should be subject to a different standard than non-
compete clauses with other workers.\20\ The Commission also assesses 
the benefits and costs of the proposed rule, the impact of the proposed 
rule on small businesses, and compliance costs related to the proposed 
rule's notice requirement.\21\
---------------------------------------------------------------------------

    \20\ See infra Part VI.
    \21\ See infra Parts VII-IX.
---------------------------------------------------------------------------

    The Commission seeks comment on all aspects of this NPRM. Comments 
must be received on or before March 20, 2023.\22\
---------------------------------------------------------------------------

    \22\ Pursuant to Section 22(d)(4) of the FTC Act, 15 U.S.C. 57b-
3(d)(4), this NPRM was not included in the Commission's Spring 2022 
Regulatory Agenda because the Commission first considered it after 
the publication deadline for the Regulatory Agenda.
---------------------------------------------------------------------------

II. Factual Background

A. What are non-compete clauses?

    A non-compete clause is 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.\23\ A typical non-compete clause 
blocks the worker from working for a competing employer, or starting a 
competing business, within a certain geographic area and period of time 
after their employment ends. A non-compete clause may be part of the 
worker's employment contract or may be contained in a standalone 
contract. Employers and workers may enter into non-compete clauses at 
the start of, during, or at the end of a worker's employment.
---------------------------------------------------------------------------

    \23\ See proposed Sec.  910.1(b). The term ``non-compete 
clause'' has also been used describe agreements between one or more 
business not to compete against one another, see, e.g., Lumber 
Liquidators, Inc. v. Cabinets To Go, LLC, 415 F. Supp. 3d 703, 709 
(E.D. Va. 2009), as well as certain kinds of moonlighting during a 
worker's employment, see, e.g., In the Matter of the Investigation 
by Barbara D. Underwood, Att'y Gen. of the State of N.Y. of WeWork 
Companies, Inc., Assurance of Discontinuance No. 18-101 (Sept. 18, 
2018) at Exhibit B. As underscored above, however, this proposed 
rule focuses only on post-employment restraints that employers 
impose on workers.
---------------------------------------------------------------------------

    If a worker violates a non-compete clause, the employer may sue the 
worker for breach of contract. An employer may be able to obtain a 
preliminary injunction ordering the worker, for the duration of the 
lawsuit, to stop the conduct that allegedly violates the non-compete 
clause. If the employer wins the lawsuit, the employer may be able to 
obtain a permanent injunction ordering the worker to stop the conduct 
that violates the non-compete clause; a payment of monetary damages 
from the worker; or both.\24\ Where workers are subject to arbitration 
clauses,\25\ the employer may seek to enforce the non-compete clause 
through arbitration.
---------------------------------------------------------------------------

    \24\ Donald J. Aspelund & Joan E. Beckner, Employee 
Noncompetition Law Sec.  8:2, Sec.  8:22 (Aug. 2021).
    \25\ See, e.g., Alexander J.S. Colvin, Econ. Pol'y Inst., 
Report, The Growing Use of Mandatory Arbitration (Apr. 6, 2018).
---------------------------------------------------------------------------

    The below examples of non-compete clauses from recent news reports, 
legal settlements, and court opinions are illustrative.
     A contractual term between a security guard firm and its 
security guards requiring that, for two years following the conclusion 
of the security guards' employment with the firm, the security guard 
may not ``[a]ccept employment with or be employed by'' a competing 
business ``within a one hundred (100) mile radius'' of the security 
guard's primary jobsite with the firm and stating that the security 
guards may not ``[a]ssist, aid or in any manner whatsoever help any 
firm, corporation, partnership or other business to compete with'' the 
firm. The non-compete clause also contains a ``liquidated damages'' 
clause requiring the security guard to pay the firm $100,000 as a 
penalty for any conduct that contravenes the agreement.\26\
---------------------------------------------------------------------------

    \26\ Fed. Trade Comm'n, Complaint, In re Prudential Sec., Inc. 
et al., Matter No. 221 0026 at ] 12-] 13 (December 28, 2022).
---------------------------------------------------------------------------

     A contractual term between a glass container manufacturing 
company and its workers typically requiring that, for two years 
following the conclusion of the worker's employment with the company, 
the worker may not directly or indirectly ``perform or provide the same 
or substantially similar services'' to those the worker performed for 
the company to any business in the U.S., Canada, or Mexico that is 
``involved with or that supports the sale, design, development, 
manufacture, or production of glass containers'' in competition with 
the company.\27\
---------------------------------------------------------------------------

    \27\ Fed. Trade Comm'n, Complaint, In re Ardagh Group S.A. et 
al., Matter No. 211 0182 at ] 9 (December 28, 2022).
---------------------------------------------------------------------------

     A contractual term between a sandwich shop chain and its 
workers stating that, for two years after the worker leaves their job, 
the worker may not perform services for ``any business which derives 
more than ten percent (10%) of its revenue from selling submarine, 
hero-type, deli-style, pita and/or wrapped or rolled sandwiches'' 
located within three miles of any of the chain's more than 2,000 
locations in the United States.\28\
---------------------------------------------------------------------------

    \28\ Dave Jamieson, Jimmy John's Makes Low-Wage Workers Sign 
`Oppressive' Noncompete Agreements, HuffPost (Oct. 13, 2014). The 
company agreed to remove the non-compete clause in 2016 as part of a 
settlement. Office of the Att'y Gen. of the State of N.Y., Press 
Release, A.G. Schneiderman Announces Settlement With Jimmy John's To 
Stop Including Non-Compete Agreements In Hiring Packets (June 22, 
2016).
---------------------------------------------------------------------------

     A contractual term between a steelmaker and one of its 
executives prohibiting the executive from working for ``any business 
engaged directly or indirectly in competition with'' the steelmaker 
anywhere in the world for

[[Page 3484]]

one year following the termination of the executive's employment.\29\
---------------------------------------------------------------------------

    \29\ AK Steel Corp. v. ArcelorMittal USA, LLC, 55 N.E.3d 1152, 
1156 (Ohio Ct. App. 2016).
---------------------------------------------------------------------------

     A contractual term between an office supply company and 
one of its sales representatives stating that, for two years after the 
sales representative's last day of employment, the sales representative 
is prohibited from ``engag[ing] directly or indirectly, either 
personally or as an employee, associate, partner, or otherwise, or by 
means of any corporation or other legal entity, or otherwise, in any 
business in competition with Employer,'' within a 100-mile radius of 
the sales representative's employment location.\30\
---------------------------------------------------------------------------

    \30\ Osborne v. Brown & Saenger, Inc., 904 N.W.2d 34, 36 (N.D. 
2017).
---------------------------------------------------------------------------

     A contractual term between a nationwide payday lender and 
its workers stating that, for one year after the worker leaves their 
job, they are prohibited from performing any ``consumer lending 
services or money transmission services'' for any entity that provides 
such services, or to ``sell products or services that are competitive 
with or similar to the products or services of the Company,'' within a 
15-mile radius of any of the payday lender's 1,000 locations in the 
United States.\31\
---------------------------------------------------------------------------

    \31\ People of the State of Ill. v. Check Into Cash of Ill., 
LLC, Complaint, 2017-CH-14224 (Ill. Circuit Ct. Oct. 25, 2017), ] 
29, ] 70, https://illinoisattorneygeneral.gov/pressroom/2017_10/Check_Into_Cash-Complaint.pdf.
---------------------------------------------------------------------------

     A contractual term between an online retailer and its 
warehouse workers prohibiting the workers, for 18 months after leaving 
their job, from ``directly or indirectly . . . engag[ing] or 
support[ing] the development, manufacture, marketing, or sale of any 
product or service that competes or is intended to compete with any 
product or service sold, offered, or otherwise provided by'' the 
retailer--or that is ``intended to be sold, offered, or otherwise 
provided by [the retailer] in the future''--that the worker ``worked on 
or supported'' or about which the worker obtained or received 
confidential information.\32\
---------------------------------------------------------------------------

    \32\ Spencer Woodman, Exclusive: Amazon makes even temporary 
warehouse workers sign 18-month non-compete clauses, The Verge (Mar. 
26, 2015). The company removed the non-compete clause following the 
media coverage. Josh Lowensohn, Amazon does an about-face on 
controversial warehouse worker non-compete contracts, The Verge 
(Mar. 27, 2015).
---------------------------------------------------------------------------

     A contractual term between a medical services firm and an 
ophthalmologist stating that, for two years after the termination of 
the ophthalmologist's employment with the firm, the ophthalmologist 
shall not engage in the practice of medicine in two Idaho counties 
unless the ophthalmologist pays the firm a ``practice fee'' of either 
$250,000 or $500,000, depending on when the ophthalmologist's 
employment ends.\33\
---------------------------------------------------------------------------

    \33\ Intermountain Eye & Laser Ctrs. P.L.L.C. v. Miller, 127 
P.3d 121, 123 (Idaho 2005).
---------------------------------------------------------------------------

    In addition to non-compete clauses, other types of contractual 
provisions restrict what a worker may do after they leave their job. 
These other types of provisions include, among others:
     Non-disclosure agreements (NDAs)--also known as 
``confidentiality agreements''--which prohibit the worker from 
disclosing or using certain information;
     Client or customer non-solicitation agreements, which 
prohibit the worker from soliciting former clients or customers of the 
employer (referred to in this NPRM as ``non-solicitation agreements''); 
\34\
---------------------------------------------------------------------------

    \34\ The term ``non-solicitation agreement'' can also refer to a 
type of agreement between employers not to solicit one another's 
employees. In this NPRM, however, the term refers only to 
contractual provisions between employers and workers prohibiting the 
worker from soliciting clients or customers of the employer.
---------------------------------------------------------------------------

     No-business agreements, which prohibit the worker from 
doing business with former clients or customers of the employer, 
whether or not solicited by the worker;
     No-recruit agreements, which prohibit the worker from 
recruiting or hiring the employer's workers;
     Liquidated damages provisions, which require the worker to 
pay the employer a sum of money if the worker engages in certain 
conduct; and
     Training-repayment agreements (TRAs), a type of liquidated 
damages provision in which the worker agrees to pay the employer for 
the employer's training expenses if the worker leaves their job before 
a certain date.\35\
---------------------------------------------------------------------------

    \35\ See, e.g., Norman D. Bishara, Kenneth J. Martin, and 
Randall S. Thomas, An Empirical Analysis of Non-Competition Clauses 
and Other Restrictive Post-Employment Covenants, 68 Vand. L. Rev. 1, 
13 (2015); Uniform Law Comm'n, Uniform Restrictive Employment 
Agreement Act, Draft For Approval (2021) at Sec.  2.
---------------------------------------------------------------------------

    These other types of restrictive employment covenants can sometimes 
be so broad in scope that they serve as de facto non-compete 
clauses.\36\
---------------------------------------------------------------------------

    \36\ See, e.g., Wegmann v. London, 648 F.2d 1072, 1073 (5th Cir. 
1981); Brown v. TGS Mgmt. Co., LLC, 57 Cal. App. 5th 303, 306, 319 
(Cal. Ct. App. 2020).
---------------------------------------------------------------------------

    In addition to restricting what workers may do after they leave 
their jobs, employers have also entered into agreements with other 
employers in which they agree not to compete for one another's workers. 
These include no-poach agreements, in which employers agree not to 
solicit or hire one another's workers, and wage-fixing agreements, in 
which employers agree to limit wages or salaries (or other terms of 
compensation).\37\
---------------------------------------------------------------------------

    \37\ Fed. Trade Comm'n & U.S. Dep't of Justice Antitrust 
Division, Antitrust Guidance for Human Resource Professionals (Oct. 
2016) at 3.
---------------------------------------------------------------------------

    The Commission seeks comment on its description in this Part II.A 
of non-compete clauses. The Commission also encourages workers, 
employers, and other members of the public to submit comments 
describing their experiences with non-compete clauses.

B. Evidence Relating to the Effects of Non-Compete Clauses on 
Competition

    Non-compete clauses have presented challenging legal issues for 
centuries.\38\ But only in the last two decades has empirical evidence 
emerged to help regulators and the general public understand how non-
compete clauses affect competition in labor markets and product and 
service markets.
---------------------------------------------------------------------------

    \38\ See infra Part II.C.
---------------------------------------------------------------------------

    In the early 2000s, researchers began to shed new light on the 
impacts of non-compete clauses on innovation and productivity. As this 
new body of research was evolving, news reports revealed non-compete 
clauses were being imposed even on low-wage workers.\39\ These reports 
surprised many observers, who had assumed only highly skilled workers 
were subject to non-compete clauses.\40\ Researchers responded by 
applying the tools of economic research to better understand how 
employers were using non-compete clauses and how they were affecting 
competition.
---------------------------------------------------------------------------

    \39\ See, e.g., Jamieson, supra note 28.
    \40\ See, e.g., Alan B. Kreuger & Eric A. Posner, The Hamilton 
Project, Policy Proposal 2018-05, A Proposal for Protecting Low-
Income Workers from Monopsony and Collusion (February 2018) at 7.
---------------------------------------------------------------------------

1. Labor Markets
    The empirical research on how non-compete clauses affect 
competition shows that the use of non-compete clauses in the aggregate 
is interfering with competitive conditions in labor markets.
    Labor markets function by matching workers and employers. Workers 
offer their skills and time to employers. In return, employers offer 
pay, benefits, and job satisfaction.\41\ In a well-functioning labor 
market, a worker who is seeking a better job--more pay, better hours, 
better working conditions, more enjoyable work, or whatever the worker 
may be seeking--can enter the labor market by looking for work. 
Employers who have positions available compete for the worker's 
services. The worker's

[[Page 3485]]

current employer may also compete with these prospective employers by 
seeking to retain the worker--for example, by offering to raise the 
worker's pay or promote the worker. Ultimately, the worker chooses the 
job that best meets their objectives. In general, the more jobs 
available--i.e., the more options the worker has--the stronger the 
match the worker will find.
---------------------------------------------------------------------------

    \41\ See, e.g., Dep't of the Treasury, Report, The State of 
Labor Market Competition (March 7, 2022) at 3.
---------------------------------------------------------------------------

    Just as employers compete for workers in a well-functioning labor 
market, workers compete for jobs. An employer who needs a worker will 
make it known that the employer has a position available. Workers who 
learn of the opening will apply for the job. From among the workers who 
apply, the employer will choose the worker that best meets the 
employer's needs--in general, the worker most likely to be the most 
productive. In general, the more workers who are available--i.e., the 
more options the employer has--the stronger the match the employer will 
find.
    Through these processes--employers competing for workers, workers 
competing for jobs, and employers and workers matching with one 
another--competition in the labor market leads to higher earnings for 
workers, greater productivity for employers, and better economic 
conditions.
    In a perfectly competitive labor market, if a job that a worker 
would prefer more--for example, because it has higher pay or is in a 
better location--were to become available, the worker could switch to 
it quickly and easily. Due to this ease of switching, in a perfectly 
competitive labor market, workers would easily match to the optimal job 
for them. If a worker were to find themselves in a job where the 
combination of their happiness and productivity is less than in some 
other job, they would simply switch jobs, making themselves better off.
    However, this perfectly competitive labor market exists only in 
theory. In practice, labor markets deviate substantially from perfect 
competition. Non-compete clauses, in particular, impair competition in 
labor markets by restricting a worker's ability to change jobs. If a 
worker is bound by a non-compete clause, and the worker wants a better 
job, the non-compete clause will prevent the worker from accepting a 
new job that is within the scope of the non-compete clause. These are 
often the most natural alternative employment options for a worker: 
jobs in the same geographic area and in the worker's field of 
expertise. For example, a non-compete clause might prevent a nurse in 
Cleveland from working in the health care field in Northeast Ohio, or a 
software engineer in Orlando from working for another technology 
company in Central Florida. The result is less competition among 
employers for the worker's services and less competition among workers 
for available jobs. Since the worker is prevented from taking these 
jobs, the worker may decide not to enter the labor market at all. Or 
the worker may enter the labor market but take a job in which they are 
less productive, such as a job outside their field.
    Non-compete clauses affect competition in labor markets through 
their use in the aggregate. The effect of an individual worker's non-
compete clause on competition in a particular labor market may be 
marginal or may be impossible to discern statistically. However, the 
use of a large number of non-compete clauses across a labor market 
markedly affects the opportunities of all workers in that market, not 
just those with non-compete clauses. By making it more difficult for 
many workers in a labor market to switch to new jobs, non-compete 
clauses inhibit optimal matches from being made between employers and 
workers across the labor force. As a result, where non-compete clauses 
are prevalent in a market, workers are more likely to remain in jobs 
that are less optimal with respect to the worker's ability to maximize 
their productive capacity. This materially reduces wages for workers--
not only for workers who are subject to non-compete clauses, but for 
other workers in a labor market as well, since jobs that would 
otherwise be better matches for an unconstrained worker are filled by 
workers subject to non-compete clauses.
a. Estimates of Non-Compete Clause Use
    Based on the available evidence, the Commission estimates that 
approximately one in five American workers--or approximately 30 million 
workers--is bound by a non-compete clause.
    A 2014 survey of workers by Evan Starr, JJ Prescott, and Norman 
Bishara, which resulted in 11,505 responses, found 18% of respondents 
work under a non-compete clause and 38% of respondents have worked 
under one at some point in their lives.\42\ Among the studies of non-
compete clause use discussed here, this study has the broadest and 
likely the most representative coverage of the U.S. labor force.\43\ 
Starr, Prescott, and Bishara also found that, among workers without a 
bachelor's degree, 14% of respondents reported working under a non-
compete clause at the time surveyed and 35% reported having worked 
under one at some point in their lives.\44\ For workers earning less 
than $40,000 per year, 13% of respondents work under a non-compete 
clause and 33% worked under one at some point in their lives.\45\ 
Furthermore, this survey shows 53% of workers who are covered by non-
compete clauses are hourly workers.\46\
---------------------------------------------------------------------------

    \42\ Evan P. Starr, James J. Prescott, & Norman D. Bishara, 
Noncompete Agreements in the U.S. Labor Force, 64 J.L. & Econ. 53, 
53 (2021). A survey of workers conducted in 2017 by Payscale.com 
reached similar results. This survey estimated that 24.2% of workers 
are subject to a non-compete clause. Natarajan Balasubramanian, Evan 
Starr, & Shotaro Yamaguchi, Bundling Employment Restrictions and 
Value Appropriation from Employees 35 (2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3814403. This survey 
also found that non-compete clauses are often used together with 
other restrictive employment covenants, including non-disclosure, 
non-recruitment, and non-solicitation covenants. Id. at 17 
(reporting that respondents that had a non-compete clause reported 
having all three of the other restrictive employment covenants 74.7% 
of the time). However, a key limitation of the Payscale.com survey 
is that it is a convenience sample of individuals who visited 
Payscale.com during the time period of the survey and is therefore 
unlikely to be fully representative of the U.S. working population. 
Id. at 13. While weighting based on demographics helps, it does not 
fully mitigate this concern.
    \43\ The final survey sample contained 11,505 responses, 
representing individuals from nearly every demographic in the labor 
force. Id. at 58.
    \44\ Id. at 63.
    \45\ Id.
    \46\ Michael Lipsitz & Evan Starr, Low-Wage Workers and the 
Enforceability of Noncompete Agreements, 68 Mgmt. Sci. 143, 144 
(2021) (analyzing data from the Starr, Prescott, & Bishara survey).
---------------------------------------------------------------------------

    Starr, Prescott, and Bishara also found, in states where non-
compete clauses are unenforceable, workers are covered by non-compete 
clauses at approximately the same rate as workers in other states.\47\ 
This suggests employers maintain non-compete clauses even where they 
likely cannot enforce them.
---------------------------------------------------------------------------

    \47\ Starr, Prescott, & Bishara, supra note 42 at 81.
---------------------------------------------------------------------------

    Other estimates of non-compete clause use cover subsets of the U.S. 
labor force. One study, a 2021 study by Rothstein and Starr, is based 
on National Longitudinal Survey of Youth (NLSY) data.\48\ The NLSY 
consists of a nationally representative sample of 8,984 men and women 
born from 1980-84 and living in the United States at the time of the 
initial survey in 1997.\49\ The survey is an often-used labor survey 
conducted by the Bureau of Labor Statistics, rather than a one-off 
survey

[[Page 3486]]

directed solely at calculating the prevalence of non-compete clauses. 
Using this data, Rothstein and Starr estimate the prevalence of non-
compete clauses to be 18%, which is comparable to the number estimated 
by Starr, Prescott, and Bishara.\50\
---------------------------------------------------------------------------

    \48\ Donna S. Rothstein & Evan Starr, Mobility Restrictions, 
Bargaining, and Wages: Evidence from the National Longitudinal 
Survey of Youth 1997 (2021), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3974897.
    \49\ U.S. Bureau of Labor Statistics, NLSY97 Data Overview, 
https://www.bls.gov/nls/nlsy97.htm.
    \50\ Rothstein & Starr, supra note 48 at 7.
---------------------------------------------------------------------------

    Finally, four occupations have been studied individually: 
executives, physicians, hair stylists, and electrical and electronics 
engineers. Both Shi (2021) and Kini et al. (2021) estimate prevalence 
of non-compete clauses for executives. Shi (2021) finds the proportion 
of executives working under a non-compete clause rose from ``57% in the 
early 1990s to 67% in the mid-2010s.'' \51\ Kini et al. (2021) find 
that 62% of CEOs worked under a non-compete clause between 1992 and 
2014.\52\ Lavetti et al. (2020) find 45% of physicians worked under a 
non-compete clause in 2007.\53\ In a survey of independent hair salon 
owners, Johnson and Lipsitz (2021) find 30% of hair stylists worked 
under a non-compete clause in 2015.\54\ Finally, in a survey of 
electrical and electronic engineers, Marx (2011) finds that 43% of 
respondents signed a non-compete clause.\55\
---------------------------------------------------------------------------

    \51\ Liyan Shi, Optimal Regulation of Noncompete Contracts 27 
(2022), https://static1.squarespace.com/static/59e19b282278e7ca5b9ff84f/t/626658ffb73adb2959bd4371/1650874624095/noncompete_shi.pdf.
    \52\ Omesh Kini, Ryan Williams, & Sirui Yin, CEO Noncompete 
Agreements, Job Risk, and Compensation, 34 Rev. Fin. Stud. 4701, 
4707 (2021).
    \53\ 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).
    \54\ Matthew S. Johnson & Michael Lipsitz, Why Are Low-Wage 
Workers Signing Noncompete Agreements?, 57 J. Hum. Res. 689, 700 
(2022).
    \55\ Matt Marx, The Firm Strikes Back: Non-Compete Agreements 
and the Mobility of Technical Professionals, 76Am. Socio. Rev. 695, 
702 (2011). Calculated as 92.60% who signed a non-compete clause of 
the 46.80% who were asked to sign a non-compete clause.
---------------------------------------------------------------------------

    Some observers have stated that the use of non-compete clauses by 
employers appears to have increased over time.\56\ However, there is no 
consistent data available on the prevalence of non-compete clauses over 
time.
---------------------------------------------------------------------------

    \56\ See, e.g., Rachel Arnow-Richman, Cubewrap Contracts and 
Worker Mobility: The Dilution of Employee Bargaining Power via 
Standard Form Noncompetes, 2006 Mich. St. L. Rev. 963, 981 n.59; 
John W. Lettieri, American Enterprise Institute, Policy Brief, A 
Better Bargain: How Noncompete Reform Can Benefit Workers and Boost 
Economic Dynamism (December 2020) at 2.
---------------------------------------------------------------------------

    While many workers are bound by non-compete clauses, many workers 
do not know whether their non-compete clause is legally enforceable or 
not. As part of their 2014 survey, Starr et al. asked surveyed 
individuals ``Are noncompetes enforceable in your state?'' Of the 
respondents, 37% indicated that they did not know whether or not their 
non-compete clause was enforceable.\57\ Additionally, 11% of 
individuals were misinformed: they believed that non-compete clauses 
were enforceable in their state when they were not, or they believed 
that non-compete clauses were not enforceable when they were.\58\
---------------------------------------------------------------------------

    \57\ J.J. Prescott & Evan Starr, Subjective Beliefs About 
Contract Enforceability 10 (2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3873638.
    \58\ Id. at 11.
---------------------------------------------------------------------------

    Starr et al. also find that only 10.1% of workers with non-compete 
clauses report bargaining over it.\59\ Additionally, only 7.9% report 
consulting a lawyer, and only 11.4% of respondents thought that they 
still would have been hired if they had refused to sign the non-compete 
clause.\60\ Marx finds that only 30.5% of electrical engineers who 
signed non-compete clauses were asked to sign prior to accepting their 
job offer, and 47% of non-compete clause signers were asked to sign on 
or after their first day of work.\61\
---------------------------------------------------------------------------

    \59\ Starr, Prescott, & Bishara, supra note 42, at 72.
    \60\ Id.
    \61\ Marx (2011), supra note 55 at 706. Forty-seven percent is 
calculated as the sum of 24.43% and 22.86%, the respective 
percentage of requests that were made on the first day or after the 
first day at the company.
---------------------------------------------------------------------------

b. Earnings--Effects on Workers Across the Labor Force
    By inhibiting optimal matches from being made between employers and 
workers across the labor force, non-compete clauses reduce the earnings 
of workers. Several studies have found that increased enforceability of 
non-compete clauses reduces workers' earnings across the labor market 
generally and for specific types of workers.
    Each of the studies described below analyzes the effects of non-
compete clause enforceability on earnings. While different studies have 
defined enforceability of non-compete clauses in slightly different 
ways, each uses enforceability as a proxy for the chance that a given 
non-compete clause will be enforced.\62\
---------------------------------------------------------------------------

    \62\ All the studies described below rely on twelve concepts of 
enforceability based on Malsberger's ``Non-Compete Clauses: A State-
by-State Survey'' and Kini et al. supplemented with data from Beck, 
Reed, and Riden LLP's state-by-state survey of non-compete clauses.
---------------------------------------------------------------------------

    These studies use ``natural experiments'' resulting from changes in 
state law to assess how changes in the enforceability of non-compete 
clauses affect workers' earnings. The use of a natural experiment 
allows for the inference of causal effects, since the likelihood that 
other variables are driving the outcomes is minimal.
    First, a study conducted by Matthew Johnson, Kurt Lavetti, and 
Michael Lipsitz finds that decreasing non-compete clause enforceability 
from the approximate enforceability level of the fifth-strictest state 
to that of the fifth-most-lax state would increase workers' earnings by 
3-4%.\63\ Johnson, Lavetti, and Lipsitz also estimate that a nationwide 
ban on non-compete clauses would increase average earnings by 3.3-
13.9%.\64\ The authors also find that non-compete clauses limit the 
ability of workers to leverage favorable labor markets to receive 
greater pay: when non-compete clauses are more enforceable, workers' 
earnings are less responsive to low unemployment rates (which workers 
may typically leverage to negotiate pay raises).\65\
---------------------------------------------------------------------------

    \63\ Matthew S. Johnson, Kurt Lavetti, & Michael Lipsitz, The 
Labor Market Effects of Legal Restrictions on Worker Mobility 2 
(2020), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3455381.
    \64\ Id.
    \65\ Id. at 36.
---------------------------------------------------------------------------

    The second study of the effects of non-compete clause 
enforceability on earnings, conducted by Evan Starr, estimates that if 
a state that does not enforce non-compete clauses shifted its policy to 
that of the state with an average level of enforceability, earnings 
would fall by about 4%.\66\ Unlike many of the other studies described 
here, this study does not use a change in enforceability of non-compete 
clauses to analyze the impact of enforceability. Rather, it examines 
the differential impact of enforceability on workers in occupations 
which use non-compete clauses at a high rate versus workers in 
occupations which use non-compete clauses at a low rate. While the 
Commission believes that this research design may be less informative 
with respect to the proposed rule than designs which examine changes in 
enforceability, the study's estimated effects are in line with the rest 
of the literature.
---------------------------------------------------------------------------

    \66\ Evan Starr, Consider This: Training, Wages, and the 
Enforceability of Non-Compete Clauses, 72 I.L.R. Rev. 783, 799 
(2019).
---------------------------------------------------------------------------

    The third study, conducted by Michael Lipsitz and Evan Starr, 
estimates that when Oregon stopped enforcing non-compete clauses for 
workers who are paid hourly, their wages increased by 2-3%, relative to 
workers in states which did not experience legal changes. The study 
also found a greater effect (4.6%) on workers

[[Page 3487]]

in occupations that used non-compete clauses at a relatively high 
rate.\67\
---------------------------------------------------------------------------

    \67\ Lipsitz & Starr, supra note 46 at 143.
---------------------------------------------------------------------------

    The fourth study, conducted by Natarajan Balasubramanian, Jin Woo 
Chang, Mariko Sakakibara, Jagadeesh Sivadasan, and Evan Starr, found 
that when Hawaii stopped enforcing non-compete clauses for high-tech 
workers, earnings of new hires increased by about 4%.\68\
---------------------------------------------------------------------------

    \68\ Natarajan Balasubramanian, Jin Woo Chang, Mariko 
Sakakibara, Jagadeesh Sivadasan, & Evan Starr, Locked In? The 
Enforceability of Non-Compete Clauses and the Careers of High-Tech 
Workers, 57 J. Hum. Res. S349, S349 (2022).
---------------------------------------------------------------------------

    The fifth and sixth studies both show that enforceable non-compete 
clauses reduce earnings for executives. One study, by Mark Garmaise, 
finds that decreased enforceability of non-compete clauses increases 
executives' earnings by 12.7%.\69\ Another study, by Omesh Kini, Ryan 
Williams, and David Yin, finds that decreased enforceability of non-
compete clauses led to lower earnings for CEOs when use of non-compete 
clauses is held constant. However, the study also finds use of non-
compete clauses decreases when non-compete clause enforceability 
decreases. When that relationship is taken into account, decreased 
enforceability results in greater earnings for CEOs. For example, if 
the state which enforces non-compete clauses most strictly (Florida) 
hypothetically moved to a policy of non-enforcement, then a CEO who had 
a non-compete clause prior to the policy change would experience an 
estimated 11.4% increase in their earnings, assuming their non-compete 
clause was dropped.\70\
---------------------------------------------------------------------------

    \69\ Mark J. Garmaise, Ties that Truly Bind: Noncompetition 
Agreements, Executive Compensation, and Firm Investment, 27 J.L., 
Econ., & Org. 376, 403 (2011). The reduction in earnings is 
calculated as e-1.3575*0.1-1, where -1.3575 is taken from 
Table 4.
    \70\ Kini, Williams, & Yin, supra note 52 at 4731. The 11.4% 
increase is calculated as e\X\-1, where X is calculated as 9 times 
the coefficient on CEO Noncompete x HQ Enforce (0.047), where 9 is 
the enforceability index in Florida, plus the coefficient on CEO 
Noncompete (-0.144), plus 9 times the coefficient on HQ Enforce (-
0.043).
---------------------------------------------------------------------------

    Among the studies listed above, Johnson, Lavetti, and Lipsitz 
likely has the broadest coverage. The study spans the years 1991 to 
2014, examines workers across the labor force, and uses all known 
common law and statutory changes in non-compete clause enforceability 
to arrive at its estimates. The study by Starr also covers the entire 
labor force, from 1996 to 2008. However, the Starr study is only able 
to compare effects for occupations that use non-compete clauses at a 
high rate to those that use them at a low rate. The next two studies 
cover just one legal change, and only a subset of the labor force: 
hourly workers in Oregon, in the case of Lipsitz and Starr, and high-
tech workers in Hawaii, in the case of Balasubramanian et al. Finally, 
while the studies conducted by Garmaise and Kini et al. examine 
multiple legal changes, they focus solely on executives.
    One limitation of studies of enforceability alone--i.e., studies 
which do not consider the use of non-compete clauses--is that it is 
difficult to disentangle the effects of increased enforceability on 
workers who are subject to non-compete clauses and workers who are not 
subject to non-compete clauses. In other words, since effects are 
observed across the labor force (or some subset of it), they include 
both effects on workers with and without non-compete clauses. However, 
due to the research cited in the next subsection--indicating non-
compete clauses reduce earnings for workers who are not subject to non-
compete clauses--the Commission believes it is reasonable to conclude 
based on contextual evidence that the labor-force-wide effects 
described in the studies above include effects on both workers with and 
without non-compete clauses.
    Three additional studies examine the association between non-
compete clause use--rather than enforceability--and earnings. Using the 
2014 survey described in Part II.B.1.a, Starr et al. find that the use 
of non-compete clauses is associated with 6.6% higher earnings in the 
model including the most control variables among those they 
observe.\71\ Using the Payscale.com data, Balasubramanian et al. find 
that while non-compete clause use is associated with 2.1-8.2% greater 
earnings (compared with individuals with no post-contractual 
restrictions), this positive association is due to non-compete clauses 
often being bundled with non-disclosure agreements. Compared with 
individuals only using non-disclosure agreements, use of non-compete 
clauses is associated with a 3.0-7.3% decrease in earnings, though the 
authors do not disentangle this effect from the effects of use of non-
solicitation and non-recruitment provisions.\72\ Finally, Lavetti et 
al. find that use of non-compete clauses among physicians is associated 
with greater earnings (by 14%) and greater earnings growth.\73\ (The 
Commission notes, however, this study does not consider how changes in 
non-compete clause enforceability affect physicians' earnings. As 
described below in the cost-benefit analysis for the proposed rule, the 
Commission estimates the proposed rule may increase physicians' 
earnings, though the study does not allow for a precise 
calculation.\74\)
---------------------------------------------------------------------------

    \71\ Starr, Prescott, & Bishara, supra note 42 at 75.
    \72\ Balasubramanian, Starr, & Yamaguchi, supra note 42 at 40. 
The percentage range is calculated as e-0.030-1 and 
e-0.076-1, respectively.
    \73\ Lavetti, Simon, & White, supra note 53 at 1051. The 
increase in earnings is calculated as e\0.131\-1.
    \74\ See infra Part VII.B.1.a.ii.
---------------------------------------------------------------------------

    However, the Commission does not believe that studies examining the 
association between non-compete clause use--rather than 
enforceability--and earnings are sufficiently probative of the effects 
of non-compete clauses on earnings. The Commission's concern is that 
non-compete clause use and earnings may both be determined by one or 
more confounding factors. It may be the case, for example, that 
employers who rely most on trade secrets both pay more and use non-
compete clauses at a high rate (which would not necessarily be captured 
by the control variables observed in studies of non-compete clause 
use). This means these studies do not necessarily inform how 
restricting the use of non-compete clauses through a rule would impact 
earnings. This methodological limitation contrasts with studies 
examining enforceability of non-compete clauses, in which changes in 
enforceability are ``natural experiments'' that allow for the inference 
of causal effects, since the likelihood that other variables are 
driving the outcomes is minimal. A ``natural experiment'' refers to 
some kind of change in the real world that allows researchers to study 
the impact of the change on an outcome. In a natural experiment, the 
change is effectively random, uninfluenced by other factors which could 
have simultaneously affected the outcome. In such situations, it is 
therefore most likely the change itself caused any impact that is 
observed on the outcomes.
    The belief that studies of non-compete clause use do not reflect 
causal estimates is shared by the authors of at least one of the 
studies of non-compete clause use. As noted in Starr et al., ``Our 
analysis of the relationships between noncompete use and labor market 
outcomes . . . is best taken as descriptive and should not be 
interpreted causally.'' \75\ As a result, the Commission gives these 
studies minimal weight. The study of physicians conducted by Lavetti et 
al. partially mitigates this concern by comparing earnings effects in 
high- versus low-enforceability states, though this analysis compares 
only California and Illinois, meaning that it is

[[Page 3488]]

impossible to disentangle underlying differences in those two states 
from the effects of non-compete clause enforceability.
---------------------------------------------------------------------------

    \75\ Starr, Prescott, & Bishara, supra note 42 at 73.
---------------------------------------------------------------------------

c. Earnings--Effects on Workers Not Covered by Non-Compete Clauses
    As described above, non-compete clauses negatively affect 
competition in labor markets, thereby inhibiting optimal matches from 
being made between employers and workers across the labor force. As a 
result, non-compete clauses reduce earnings not only for workers who 
are subject to non-compete clauses, but also for workers who are not 
subject to non-compete clauses.
    Two studies show non-compete clauses reduce earnings for workers 
who are not subject to non-compete clauses. The first study, a 2019 
study of the external effects of non-compete clauses conducted by Evan 
Starr, Justin Frake, and Rajshree Agarwal, analyzed workers without 
non-compete clauses who worked in states and industries in which non-
compete clauses were used at a high rate.\76\ They find that, when the 
use of non-compete clauses in a given state and industry combination 
increases by 10%, the earnings of workers who do not have non-compete 
clauses, but who work in that same state and industry, go down by about 
6.12% more when that state has an average enforceability level, 
compared with a state which does not enforce non-compete clauses.\77\ 
In effect, this study finds when the use of non-compete clauses by 
employers increases, that drives down wages for workers who do not have 
non-compete clauses but who work in the same state and industry. This 
study also finds this effect is stronger where non-compete clauses are 
more enforceable.
---------------------------------------------------------------------------

    \76\ Evan Starr, Justin Frake, & Rajshree Agarwal, Mobility 
Constraint Externalities, 30 Org. Sci. 961, 6 (2019).
    \77\ Id. at 11.
---------------------------------------------------------------------------

    The Commission notes that, similar to some of the studies described 
above, this study relies on use of non-compete clauses, as well as 
cross-sectional differences in enforceability of non-compete clauses, 
to arrive at their conclusions. While this approach calls into question 
the causal relationship outlined in the study, the authors employ tests 
to increase confidence in the causal interpretation; however, the tests 
rely on what data the authors have available, and therefore cannot rule 
out explanations outside of the scope of their data. This study also 
analyzes the effect of non-compete clause use for certain workers on 
workers in a different firm, meaning that factors simultaneously 
driving non-compete clause use and outcomes within a certain firm will 
not break the causal chain identified in the study.
    Starr, Frake, and Agarwal show the reduction in earnings (and 
mobility, discussed below) is due to a reduction in the rate of the 
arrival of job offers. Individuals in state/industry combinations which 
use non-compete clauses at a high rate do not receive job offers as 
frequently as individuals in state/industry combinations where non-
compete clauses are not frequently used.\78\ The authors also 
demonstrate decreased mobility and earnings are not due to increased 
job satisfaction (i.e., if workers are more satisfied with their jobs, 
they may be less likely to change jobs, and more likely to accept lower 
pay).\79\ Finally, they show that decreased mobility and earnings are 
not because workers are searching for jobs less frequently, suggesting 
that job openings and firm behavior matter more to the underlying 
mechanism.\80\
---------------------------------------------------------------------------

    \78\ Id. at 10.
    \79\ Id. at 13.
    \80\ Id.
---------------------------------------------------------------------------

    The second study, conducted by Johnson, Lavetti, and Lipsitz, 
isolates the impact of a state's enforceability policy on workers not 
directly affected by that policy to demonstrate non-compete clauses 
affect not just the workers subject to those non-compete clauses, but 
the broader labor market as well. In particular, the study finds that 
increases in non-compete clause enforceability in one state have 
negative impacts on workers' earnings in bordering states, and the 
effects are nearly as large as the effects in the state in which 
enforceability changed. Johnson, Lavetti, and Lipsitz estimate that the 
impact on earnings of a law change in one state on workers just across 
that state's border is 87% as great as for workers in the state in 
which the law was changed (the effect tapers off as the distance to the 
bordering state increases).\81\ When a law change in one state 
decreases workers' earnings in that state by 4%, that would therefore 
mean that workers just across the border (i.e., workers who share a 
commuting zone--a delineation of a local economy \82\--but who live in 
another state) would experience decreased earnings of 3.5%. The authors 
conclude that, since the workers across the border are not directly 
affected by the law change (i.e., contracts that they have signed do 
not become more or less enforceable), this effect must be due to 
changes in the local labor market.\83\
---------------------------------------------------------------------------

    \81\ Johnson, Lavetti, & Lipsitz, supra note 63 at 51. Eighty 
seven percent is calculated as the coefficient on the donor state 
NCA score (-.181) divided by the coefficient on own state NCA score 
(-.207).
    \82\ See U.S. Econ. Rsch. Serv., Commuting Zones and Labor 
Market Areas, https://www.ers.usda.gov/data-products/commuting-zones-and-labor-market-areas/.
    \83\ Johnson, Lavetti, & Lipsitz, supra note 63 at 30.
---------------------------------------------------------------------------

d. Earnings--Distributional Effects
    There is evidence that non-compete clauses increase racial and 
gender wage gaps by disproportionately reducing the wages of women and 
non-white workers. This may be, for example, because firms use the 
monopsony power which results from use of non-compete clauses as a 
means by which to wage discriminate. The study by Johnson, Lavetti, and 
Lipsitz finds that while earnings of white men would increase by about 
3.2% if a state's enforceability moved from the fifth-strictest to the 
fifth most lax, the comparable earnings increase for workers in other 
demographic groups would be 3.7-7.7%, depending on the characteristics 
of the group (though it is not clear from the study whether or not the 
differences are statistically significant).\84\ The authors estimate 
that banning non-compete clauses nationwide would close racial and 
gender wage gaps by 3.6-9.1%.\85\
---------------------------------------------------------------------------

    \84\ Id. at 38.
    \85\ Id.
---------------------------------------------------------------------------

e. Job Creation
    While non-compete clauses may theoretically incentivize firms to 
create jobs by increasing the value associated with any given worker 
covered by a non-compete clause, the evidence is inconclusive. One 
study, by Gerald Carlino, estimates the job creation rate at startups 
increased by 7.8% when Michigan increased non-compete clause 
enforceability.\86\ However, the job creation rate calculated in this 
study is the ratio of jobs created by startups to overall employment in 
the state: therefore, the job creation rate at startups may rise either 
because the number of jobs created by startups rose, or because 
employment overall fell. The study does not investigate which of these 
two factors drives the increase in the job creation rate at startups.
---------------------------------------------------------------------------

    \86\ Gerald A. Carlino, Do Non-Compete Covenants Influence State 
Startup Activity? Evidence from the Michigan Experiment at 16 (Fed. 
Reserve Bank of Phila. Working Paper 21-26, 2021).
---------------------------------------------------------------------------

    Another study finds that several increases in non-compete clause 
enforceability were associated with a 1.4% increase in average per-firm 
employment at new firms (though not necessarily total employment).\87\ 
In this

[[Page 3489]]

study, the authors attribute the increase in average employment to a 
change in the composition of newly founded firms. The increases in non-
compete clause enforceability prevented the entry of relatively small 
startups which would otherwise have existed. Therefore, the firms which 
entered in spite of increases in non-compete clause enforceability had 
more workers on average: this increased the average job creation rate 
at new firms, because the average entering firm was relatively larger. 
However, if the mechanism identified by the authors is correct, 
increases in enforceability generate fewer total jobs, because the same 
number of large firms may enter (regardless of non-compete clause 
enforceability), but fewer small firms enter.
---------------------------------------------------------------------------

    \87\ Evan Starr, Natarajan Balasubramanian, & Mariko Sakakibara, 
Screening Spinouts? How Noncompete Enforceability Affects the 
Creation, Growth, and Survival of New Firms, 64 Mgmt. Sci. 552, 561 
(2018).
---------------------------------------------------------------------------

    A similar mechanism may explain the results in both studies above. 
If that is indeed the case, then an increase in average per-firm 
employment among startups is not a positive effect of non-compete 
clause enforceability: instead, it could actually represent a negative 
effect, since non-compete clauses prevent small firms from existing in 
the first place, and overall job creation may decrease. The Commission 
therefore believes, with respect to job creation rates, the evidence is 
inconclusive.
2. Product and Service Markets
    In addition to analyzing how non-compete clauses affect competition 
in labor markets, researchers have also analyzed whether non-compete 
clauses affect competition in markets for products and services. The 
available evidence indicates the use of non-compete clauses interferes 
with competitive conditions in product and service markets as well.
    The adverse effects of non-compete clauses on product and service 
markets likely result from reduced voluntary labor mobility. Non-
compete clauses directly impede voluntary labor mobility by restricting 
workers subject to non-compete clauses from moving to new jobs covered 
by their non-compete clause. Since non-compete clauses prevent some job 
openings from occurring (by keeping workers in their jobs), they also 
prevent workers who are not subject to non-compete clauses from finding 
new jobs (since the new jobs are already occupied by workers with non-
compete clauses).
    Influenced by Ronald Gilson's research positing that high-tech 
clusters in California may have been aided by increased labor mobility 
because non-compete clauses are generally unenforceable in that 
state,\88\ many studies have examined how non-compete clauses affect 
labor mobility. Even literature primarily focused on other outcomes has 
examined labor mobility as a secondary outcome. Across the board, all 
studies have found decreased rates of mobility, measured by job 
separations, hiring rates, job-to-job mobility, implicit mobility 
defined by job tenure, and within- and between-industry mobility. We 
briefly describe each of these studies in turn.
---------------------------------------------------------------------------

    \88\ Ronald J. Gilson, The Legal Infrastructure of High 
Technology Industrial Districts: Silicon Valley, Route 128, and Non-
Compete Clauses, 74 N.Y.U. L. Rev. 575 (1999).
---------------------------------------------------------------------------

    A 2006 study conducted by Fallick, Fleischman, and Rebitzer 
supported Gilson's hypothesis by showing that labor mobility in 
information technology industries in metropolitan statistical areas 
(MSAs) in California was 56% higher than in comparison MSAs outside 
California. They note, however, the estimates may not be fully (or at 
all) attributable to non-compete clause enforceability. Although the 
Commission therefore does not find this particular study to be 
sufficiently probative of the relationship between non-compete clauses 
and labor mobility, its qualitative findings are in line with the rest 
of the literature.\89\
---------------------------------------------------------------------------

    \89\ Bruce Fallick, Charles A. Fleischman, & James B. Rebitzer, 
Job-Hopping in Silicon Valley: Some Evidence Concerning the 
Microfoundations of a High-Technology Cluster, 88 Rev. Econ. & 
Statistics 472, 477 (2006).
---------------------------------------------------------------------------

    To estimate the impacts of non-compete clause enforceability in a 
fashion that may more plausibly attribute causality to the 
relationship, in 2009, Marx, Strumsky, and Fleming examined the impact 
on labor mobility of Michigan's switch to enforcing non-compete 
clauses. They found that Michigan's increase in enforceability led to 
an 8.1% decline in the mobility of inventors.\90\
---------------------------------------------------------------------------

    \90\ Matt Marx, Deborah Strumsky, & Lee Fleming, Mobility, 
Skills, and the Michigan Non-Compete Experiment, 55 Mgmt. Sci. 875, 
884 (2009).
---------------------------------------------------------------------------

    In 2011, Mark Garmaise examined how a suite of changes in non-
compete clause enforceability affected labor mobility. Garmaise found 
executives made within-industry job changes 47% more often, between-
industry job changes 25% more often (though this result was not 
statistically significant), and any job change 35% more often when non-
compete clauses were less enforceable.\91\
---------------------------------------------------------------------------

    \91\ Garmaise, supra note 69 at 398.
---------------------------------------------------------------------------

    A 2019 study by Jessica Jeffers uses several legal changes to 
analyze the impact of non-compete clauses on workers' mobility, finding 
that decreases in non-compete clause enforceability were associated 
with an 8.6% increase in departure rates of workers, and a 15.4% 
increase in within-industry departure rates of workers.\92\
---------------------------------------------------------------------------

    \92\ Jessica Jeffers, The Impact of Restricting Labor Mobility 
on Corporate Investment and Entrepreneurship 22 (2019), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3040393.
---------------------------------------------------------------------------

    Evan Starr's 2019 study comparing workers in occupations which use 
non-compete clauses at a high versus low rate found that a state moving 
from mean enforceability to no enforceability would cause a decrease in 
employee tenure for workers in high-use occupations of 8.2%, compared 
with those in low-use occupations. Here, tenure serves as a proxy for 
mobility, since tenure is the absence of prior mobility.\93\
---------------------------------------------------------------------------

    \93\ Starr, supra note 66 at 798. The value is calculated as 
8.2% = 0.56/6.46, where 0.56 is the reported impact on tenure and 
6.46 is mean tenure in the sample.
---------------------------------------------------------------------------

    Returning to an examination of executives, Liyan Shi's 2020 paper 
qualitatively confirmed Garmaise's results, showing that executives 
with enforceable non-compete clauses were 1.8 percentage points less 
likely to separate from their employers, compared with executives 
without enforceable non-compete clauses.\94\
---------------------------------------------------------------------------

    \94\ Shi, supra note 51 at 26.
---------------------------------------------------------------------------

    Starr, Prescott, and Bishara's 2020 study found that having a non-
compete clause was associated with a 35% decrease in the likelihood a 
worker would leave for a competitor.\95\ However, they also found 
enforceability does not impact this prediction, in contrast with prior 
studies. Digging deeper into the mechanism, they find that what matters 
is the worker's belief about the likelihood their employer would seek 
to enforce a non-compete clause in court. Workers who did not believe 
employers would enforce non-compete clauses in court were more likely 
to report they would be willing to leave for a competitor.\96\ This 
result confirms the need to ensure that workers are aware of the 
proposed rule, though it suffers from the same limitations as do 
previously discussed studies of the impacts of non-compete clause use, 
rather than enforceability: that studies of use are not causally 
interpretable, since they may conflate the effects of factors which 
cause use for the effects of use itself.
---------------------------------------------------------------------------

    \95\ Evan Starr, J.J. Prescott, & Norm Bishara, The Behavioral 
Effects of (Unenforceable) Contracts, 36 J.L., Econ., & Org. 633, 
652 (2020).
    \96\ Id. at 664.
---------------------------------------------------------------------------

    Two recent studies examined subgroups of the population affected by

[[Page 3490]]

state law changes. Balasubramanian et al., in 2022, focused on high-
tech workers whose non-compete clauses were banned in Hawaii, and 
Lipsitz and Starr, in 2022, focused on hourly workers whose non-compete 
clauses were banned in Oregon. The former found that the ban increased 
mobility by 12.5% in the high-tech sector,\97\ while the latter found 
that mobility of hourly workers increased by 17.3%.\98\
---------------------------------------------------------------------------

    \97\ Balasubramanian et al., supra note 68 at S351.
    \98\ Lipsitz & Starr, supra note 46 at 157.
---------------------------------------------------------------------------

    Finally, a 2022 study by Johnson, Lavetti, and Lipsitz examined the 
impact on labor mobility of all legal changes after 1991 across the 
entire labor force. They found moving from the enforceability level of 
the fifth strictest state to that of the fifth most lax state causes a 
6.0% increase in job-to-job mobility in industries using non-compete 
clauses at a high rate.\99\ Furthermore, they found when a state 
changes its non-compete clause enforceability in that fashion, workers 
in neighboring states experience 4.8% increases in mobility as measured 
by job separations, and 3.9% increases as measured by hiring rates, 
though neither result was statistically significant.\100\
---------------------------------------------------------------------------

    \99\ Johnson, Lavetti, & Lipsitz, supra note 63 at 21.
    \100\ Id. at 76.
---------------------------------------------------------------------------

    As described below in Part IV.A.1.a.ii, the Commission does not 
view reduced labor mobility from non-compete clauses--in and of 
itself--as evidence non-compete clauses negatively affect competition 
in product and service markets. Instead, reduced labor mobility is best 
understood as the primary driver of effects in product and service 
markets that the Commission is concerned about. These effects are 
described below.
a. Consumer Prices and Concentration
    There is evidence that non-compete clauses increase consumer prices 
and concentration in the health care sector. There is also evidence 
non-compete clauses increase industrial concentration more broadly. 
Non-compete clauses may have these effects by inhibiting 
entrepreneurial ventures (which could otherwise enhance competition in 
goods and service markets) or by foreclosing competitors' access to 
talented workers.
    One study, by Naomi Hausman and Kurt Lavetti, finds increased 
concentration, as measured by the Herfindahl-Hirschman Index (HHI), at 
the firm level \101\ and increased final goods prices \102\ as the 
enforceability of non-compete clauses increases. Hausman and Lavetti's 
study focuses on physician markets, showing that while non-compete 
clauses allow physician practices to allocate clients more efficiently 
across physicians, this comes at the cost of greater concentration and 
prices for consumers. Generally, greater concentration may or may not 
lead to greater prices in all situations and may arise for reasons 
which simultaneously cause higher prices (indicating, therefore, a 
noncausal relationship between concentration and prices). In this case, 
the authors claim that researching the direct link between changes in 
law governing non-compete clauses and changes in concentration allows 
them to identify a causal chain starting with greater enforceability of 
non-compete clauses, which leads to greater concentration, and higher 
consumer prices.
---------------------------------------------------------------------------

    \101\ Naomi Hausman & Kurt Lavetti, Physician Practice 
Organization and Negotiated Prices: Evidence from State Law Changes, 
13 a.m. Econ. J. Applied Econ. 258, 284 (2021). Note that Hausman 
and Lavetti find decreased HHI at the establishment level (where an 
establishment is a physical location, and a firm is a company which 
may own multiple establishments). For the purposes of consumer 
outcomes such as a price or product quality, the relevant measure of 
concentration is at the firm level, since firms are unlikely to 
compete against themselves on price or quality.
    \102\ Id. at 280.
---------------------------------------------------------------------------

    While there is no additional direct evidence on the link between 
non-compete clauses and consumer prices, another study, by Michael 
Lipsitz and Mark Tremblay, shows increased enforceability of non-
compete clauses at the state level increases concentration, as measured 
by an employment-based HHI.\103\ Lipsitz and Tremblay theorize non-
compete clauses inhibit entrepreneurial ventures which could otherwise 
enhance competition in goods and service markets, and show that the 
potential for harm is greatest in exactly those industries in which 
non-compete clauses are likely to be used at the highest rate.\104\ If 
the general causal link governing the relationship between 
enforceability of non-compete clauses, concentration, and consumer 
prices acts similarly to that identified in the study by Hausman and 
Lavetti, then it is plausible that increases in concentration 
identified by Lipsitz and Tremblay would lead to higher prices in a 
broader set of industries.
---------------------------------------------------------------------------

    \103\ Michael Lipsitz & Mark Tremblay, Noncompete Agreements and 
the Welfare of Consumers 6 (2021), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3975864.
    \104\ Id. at 3.
---------------------------------------------------------------------------

    In many settings, it is also theoretically plausible that increases 
in worker earnings from restricting non-compete clauses may increase 
consumer prices by raising firms' costs (though there is countervailing 
evidence, especially in goods manufacturing \105\). However, we are not 
aware of empirical evidence that this occurs, and there are also 
countervailing forces--such as the impacts on concentration described 
above and positive impacts on innovation \106\--that would tend to 
decrease consumer prices. Additionally, the greater wages observed for 
workers where non-compete clauses are less enforceable may be due to 
better worker-firm matching, which could simultaneously increase wages 
and increase productivity, which could lead to lower prices.
---------------------------------------------------------------------------

    \105\ Sebastian Heise, Fatih Karahan, & Ay[scedil]eg[uuml]l 
[Scedil]ahin The Missing Inflation Puzzle: The Role of the 
Wage[hyphen]Price Pass[hyphen]Through, 54 J. Money, Credit & Banking 
7 (2022).
    \106\ See infra Part II.B.2.d.
---------------------------------------------------------------------------

    In addition, the only study of how non-compete clauses affect 
prices--the Hausman and Lavetti study described above--finds decreased 
non-compete clause enforceability decreases prices in the healthcare 
market, rather than increasing them. The study notes that, in theory, 
changes in non-compete clause enforceability could impact physicians' 
earnings, which could subsequently pass through to prices in healthcare 
markets. However, the authors show that, where prices decrease due to 
decreased non-compete clause enforceability, labor cost pass-through is 
not driving price decreases. As the authors note, if price decreases 
associated with non-compete clause enforceability decreases were due to 
pass-through of decreases in physicians' earnings, then the most labor-
intensive procedures would likely experience the greatest price 
decreases when enforceability decreased. However, they find the 
opposite: there is little to no effect on prices for the most labor-
intensive procedures, in contrast with procedures which use relatively 
less labor. As the authors explain, this shows that decreases in 
healthcare prices associated with decreases in non-compete clause 
enforceability are not due to pass-through of lower labor costs.\107\
---------------------------------------------------------------------------

    \107\ Hausman & Lavetti, supra note 101 at 278.
---------------------------------------------------------------------------

b. Foreclosing Competitors' Ability To Access Talent
    There is evidence that non-compete clauses foreclose the ability of 
competitors to access talent by effectively forcing future employers to 
buy out workers from their non-compete clauses if they want to hire 
them. Firms must either make inefficiently high payments to buy workers 
out of non-compete clauses with a former employer, which leads to 
deadweight economic loss, or forego the payment--

[[Page 3491]]

and, consequently, the access to the talent the firm seeks. Whatever 
choice a firm makes, its economic outcomes in the market are harmed, 
relative to a scenario in which no workers are bound by non-compete 
clauses.
    Liyan Shi studies this effect in a 2022 paper. This paper finds 
non-compete clauses are used to ensure that potential new employers of 
executives make a buyout payment to the executive's current 
employer.\108\ Such a mechanism could be tempered by the ability of a 
labor market to provide viable alternative workers for new or competing 
businesses. However, when a particular type of labor is somewhat 
scarce, when on-the-job experience matters significantly, or when 
frictions prevent workers from moving to new jobs, there is no way for 
the market to fill the gap created by non-compete clauses. By studying 
CEOs, who are difficult to replace and relatively scarce, Shi's paper 
shows that non-compete clauses foreclose the ability of competitors to 
access talent by effectively forcing them to make inefficiently high 
buyout payments. Shi ultimately concludes that ``imposing a complete 
ban on noncompete clauses would be close to implementing the social 
optimum.'' \109\
---------------------------------------------------------------------------

    \108\ Shi, supra note 51.
    \109\ Id. at 35.
---------------------------------------------------------------------------

c. New Business Formation
    The weight of the evidence indicates non-compete clauses likely 
have a negative impact on new business formation. Three studies show 
that non-compete clauses and increased enforceability of non-compete 
clauses reduce entrepreneurship, new business formation, or both. A 
fourth study also finds that non-compete clauses reduce the rate at 
which men and women found new startups, though the result is not 
statistically significant for men. A fifth study finds mixed effects 
which likely support the theory that non-compete clauses reduce new 
business formation, and a sixth study finds no effect.
    New business formation may refer to entrepreneurs creating new 
businesses from scratch or to businesses being spun off from existing 
businesses. New business formation increases competition first by 
bringing new ideas to market, and second, by forcing incumbent firms to 
respond to new firms' ideas instead of stagnating. New businesses 
disproportionately create new jobs and are, as a group, more resilient 
to economic downturns.\110\ Recent evidence that new business formation 
is trending downward has led to concerns that productivity and 
technological innovation are not as strong as they would have been had 
new business formation remained at higher levels.\111\ Non-compete 
clauses restrain new business formation by preventing workers subject 
to non-compete clauses from starting their own businesses. In addition, 
firms are more willing to enter markets in which they know there are 
potential sources of skilled and experienced labor, unhampered by non-
compete clauses.
---------------------------------------------------------------------------

    \110\ See, e.g., The Importance of Young Firms for Economic 
Growth, Policy Brief, Ewing Marion Kauffman Foundation (Sept. 24, 
2015).
    \111\ See, e.g., Cong. Budget Off., Federal Policies in Response 
to Declining Entrepreneurship (December 2020).
---------------------------------------------------------------------------

    Three studies show that non-compete clauses and increased 
enforceability of non-compete clauses reduce entrepreneurship and new 
business formation. First, Sampsa Samila and Olav Sorenson, in a 2011 
study, examined the differential impacts of venture capital on business 
formation, patenting, and employment growth. They found when non-
compete clauses are more enforceable, rates of entrepreneurship, 
patenting, and employment growth slow. They find that a 1% increase in 
venture capital funding increased the number of new firms by 0.8% when 
non-compete clauses were enforceable, and by 2.3% when non-compete 
clauses were not enforceable.\112\ Similarly, a 1% increase in the rate 
of venture capital funding increased employment by 0.6% when non-
compete clauses were enforceable, versus 2.5% where non-compete clauses 
were not enforceable.\113\
---------------------------------------------------------------------------

    \112\ Sampsa Samila & Olav Sorenson, Noncompete Covenants: 
Incentives to Innovate or Impediments to Growth, 57 Mgmt. Sci. 425, 
432 (2011). The values are calculated as 0.8% = e\0.00755\-1 and 
2.3% = e\0.00755+0.0155\-1, respectively.
    \113\ Id. at 433. The values are calculated as 0.6% = 
e\0.00562\-1 and 2.3% = e\0.00562+0.0192\-1, respectively.
---------------------------------------------------------------------------

    The second study, conducted by Jessica Jeffers in 2019, uses 
several state law changes to show a decline in new firm entry when non-
compete clauses are more enforceable. When non-compete clause 
enforceability is made stricter (based on the relatively meaningful 
changes examined in her study), the entry rate of new firms decreased 
by 10% in the technology sector and the professional, scientific, and 
technical services sector.\114\
---------------------------------------------------------------------------

    \114\ Jeffers, supra note 92 at 32.
---------------------------------------------------------------------------

    The third study, conducted by Evan Starr, Natarajan 
Balasubramanian, and Mariko Sakakibara in 2018, finds that the rate of 
within-industry spinouts (WSOs) decreases by 0.13 percentage points 
(against a mean of 0.4%) when non-compete clause enforceability 
increases by one standard deviation.\115\ The study's measured impact 
on the entry rate of non-WSOs (i.e., spinoffs into other industries) is 
statistically indistinguishable from zero (0.07 percentage point 
increase associated with a one standard deviation increase in 
enforceability).\116\ WSOs have been shown to be highly successful, on 
average, when compared with typical entrepreneurial ventures.\117\ By 
reducing intra-industry spinoff activity, non-compete clauses prevent 
entrepreneurial activity that is likely to be highly successful.
---------------------------------------------------------------------------

    \115\ Starr, Balasubramanian, & Sakakibara, supra note 87 at 
561.
    \116\ Id. at 561.
    \117\ For reviews of the literature, see, e.g., Steven Klepper, 
Spinoffs: A Review and Synthesis, 6 European Mgmt. Rev. 159-71 
(2009) and April Franco, Employee Entrepreneurship: Recent Research 
and Future Directions, in Handbook of Entrepreneurship Research 
(2005) 81-96.
---------------------------------------------------------------------------

    The fourth study, published by Matt Marx in 2021, examines the 
impact of several changes in non-compete clause enforceability between 
1991 and 2014.\118\ Marx finds that, when non-compete clauses are more 
enforceable, men are 46% less likely to found a rival startup after 
leaving their employer (though this result is statistically 
insignificant), that women are 69% less likely to do so, and that the 
difference in the effect of non-compete clause enforceability on 
founding rates between men and women is statistically significant.\119\ 
This study therefore supports both the theory that non-compete clauses 
inhibit new business formation and that non-compete clauses tend to 
have more negative impacts for women than for men.
---------------------------------------------------------------------------

    \118\ Matt Marx, Employee Non-compete Agreements, Gender, and 
Entrepreneurship, Org. Sci. (Online ahead of print) (2021).
    \119\ Id. at 9.
---------------------------------------------------------------------------

    A fifth study finds mixed effects of non-compete clause 
enforceability on the entry of businesses into the State of Florida. 
Hyo Kang and Lee Fleming, in a 2020 study, examine a legal change in 
Florida which made non-compete clauses more enforceable. This study 
finds that larger businesses entered the state more frequently (by 
8.5%), but smaller businesses entered less frequently (by 5.6%) 
following the change.\120\ Similarly, Kang and Fleming found that 
employment at large businesses rose by 15.8% following the change, 
while employment at smaller businesses effectively did not change.\121\
---------------------------------------------------------------------------

    \120\ Hyo Kang & Lee Fleming, Non[hyphen]Competes, Business 
Dynamism, and Concentration: Evidence From a Florida Case Study, 29 
J. Econ. & Mgmt. Strategy 663, 673 (2020).
    \121\ Id. at 674. The value is calculated as 15.8% = e\0.1468\-
1.

---------------------------------------------------------------------------

[[Page 3492]]

    In the Commission's view, however, the results of this study do not 
necessarily show how non-compete clauses affect new business formation. 
This study does not examine new business formation specifically; 
instead, it assesses the number of ``business entries'' into the state. 
As the authors acknowledge, many of these business entries are not new 
businesses being formed in Florida (i.e., startups), but existing 
businesses that are moving to the state.\122\ Because startups are 
almost never large businesses, the authors' finding that larger 
businesses entered the state more frequently is much more likely to 
reflect businesses moving to the state, rather than new businesses 
being formed in the state. (While a business's relocation to Florida 
may benefit Florida, it is not net beneficial from a national 
perspective, since the business is simply moving from somewhere else.) 
The authors' finding that increased non-compete clause enforceability 
decreased the entry of smaller businesses is more likely to reflect an 
effect of non-compete clause enforceability on new business formation, 
since smaller businesses are relatively more likely than larger 
businesses to be startups.
---------------------------------------------------------------------------

    \122\ Id. at 668.
---------------------------------------------------------------------------

    A sixth study finds no effect of non-compete clauses on new 
business formation. A 2021 study by Gerald Carlino analyzes the impact 
of a legal change in Michigan that allowed the courts to enforce non-
compete clauses. This study finds no significant impact on new business 
formation.\123\
---------------------------------------------------------------------------

    \123\ Carlino, supra note 86 at 36.
---------------------------------------------------------------------------

d. Innovation
    The weight of the evidence indicates non-compete clauses decrease 
innovation. Innovation may directly improve economic outcomes by 
increasing product quality or decreasing prices, or may promote 
competition because successful new products and services force 
competing firms to improve their own products and services. Non-compete 
clauses affect innovation by reducing the movement of workers between 
firms, which decreases knowledge flow between firms. Non-compete 
clauses also prevent workers from starting businesses in which they can 
pursue innovative new ideas.
    One study shows increased enforceability of non-compete clauses 
decreases the value of patenting, using a variety of legal changes. 
Another study shows that increased non-compete clause enforceability 
decreases the rate at which venture capital funding increases 
patenting. Finally, using a legal change in Michigan which increased 
enforceability, one study shows there were mixed effects on patenting 
in terms of both quantity and quality, but mechanical patenting (a 
large part of patenting in Michigan) increased.
    The first study, a 2021 study by Zhaozhao He, finds the value of 
patents, relative to the assets of the firm, increase by about 31% when 
non-compete clause enforceability decreases.\124\ In contrast to the 
other two studies of innovation, the study uses the value of patents, 
rather than the number of patents, to mitigate concerns that patenting 
activity may not represent innovation, but rather substitutions of 
protections (in other words, that when non-compete clauses are made 
less enforceable, firms may use patents instead of non-compete clauses 
to seek to protect sensitive information).\125\ The study also analyzes 
the impact of several legal changes to non-compete clause 
enforceability, which means that the results may be most broadly 
applicable.
---------------------------------------------------------------------------

    \124\ Zhaozhao He, Motivating Inventors: Non-Competes, 
Innovation Value and Efficiency 21 (2021), https://ssrn.com/abstract=3846964. Thirty one percent is calculated as e\0..272\-1.
    \125\ Id. at 17.
---------------------------------------------------------------------------

    The second study, by Samila and Sorensen, found that, when non-
compete clauses are enforceable, venture capital induced less 
patenting, by 6.6 percentage points.\126\ However, as explained above, 
the authors note patenting may or may not reflect the true level of 
innovation, as firms may use patenting as a substitute for non-compete 
clauses where they seek to protect sensitive information.\127\ The 
final study of innovation, a 2021 study by Gerald Carlino, examined how 
patenting activity in Michigan was affected by an increase in non-
compete enforceability. The study finds that mechanical patenting 
increased following the law change, but drug patenting fell, and the 
quality of computer patents fell (as measured by citations).\128\ The 
increase in mechanical patenting appears to have primarily occurred 
approximately 14 years after non-compete clause enforceability changed, 
however, suggesting some other mechanism may have led to the increase 
in patenting activity.\129\ We place relatively greater weight on 
studies focused on multiple legal changes to non-compete clause 
enforceability (such as the above referenced study by He), in which 
factors unrelated to the legal changes at issue are less likely to 
drive the results. The Carlino study also does not discuss whether 
patenting activity is an appropriate measure of innovation, though the 
other two studies suggest that it may be an unreliable measure at best. 
The study by Samila and Sorensen examines the enforceability of non-
compete clauses across all states but does not consider changes in 
enforceability: they are therefore unable to rule out that their 
results could be due to underlying differences in the states rather 
than non-compete clause enforceability.
---------------------------------------------------------------------------

    \126\ Samila & Sorenson, supra note 112 at 432. The value is 
calculated as 6.6% = e\0.0208+0.0630\-e\0.0208\.
    \127\ Id.
    \128\ Carlino, supra note 86 at 40.
    \129\ Id. at 48.
---------------------------------------------------------------------------

    The Commission therefore places greatest weight on the study by He, 
which suggests innovation is largely harmed by non-compete clause 
enforceability. Though the results from Carlino countervail this 
finding, those results are subject to criticism (as is the 
corroborating evidence found in Samila and Sorensen).
    Two additional studies address firm strategies related to 
innovation. The first, by Raffaele Conti, uses two changes in non-
compete clause enforceability (in Texas and Florida), and indicates 
that firms engage in riskier strategies with respect to research and 
development when non-compete clause enforceability is greater.\130\ 
Riskier research and development strategies lead to more breakthrough 
innovations, but also lead to more failures, leaving the net impact 
unclear. The paper does not quantify the total impact on innovation.
---------------------------------------------------------------------------

    \130\ Raffaele Conti, Do Non-Competition Agreements Lead Firms 
to Pursue Riskier R&D Strategies?, 35 Strategic Mgmt. J. 1230 
(2014).
---------------------------------------------------------------------------

    The second, by Fenglong Xiao, found increases in non-compete clause 
enforceability led to increases in exploitative innovation (i.e., 
innovation which stays within the bounds of the innovating firm's 
existing competences), and decreases in exploratory innovation (i.e., 
innovation which moves outside those bounds) in medical devices.\131\ 
Overall, this leads to an increase in the quantity of innovation as 
measured by the introduction of new medical devices. This increase in 
quantity, however, is the net result of an increase in exploitative 
innovation and a decrease in explorative innovation, where the latter 
is the mode of innovation which the empirical

[[Page 3493]]

literature has found to be associated with high growth firms.\132\
---------------------------------------------------------------------------

    \131\ Fenglong Xiao, Non-Competes and Innovation: Evidence from 
Medical Devices, 51 Rsch. Pol'y 1 (2022).
    \132\ Alessandra Colombelli, Jackie Krafft & Francesco Quatraro, 
High-Growth Firms and Technical Knowledge: Do Gazelles Follow 
Exploration or Exploitation Strategies?, 23.1 Industrial and 
Corporate Change 262 (2014).
---------------------------------------------------------------------------

    While these two additional studies bring nuance to the changes in 
the types of innovation pursued by firms when non-compete clause 
enforceability changes, neither undermines the weight of the evidence 
described above: that increased non-compete clause enforceability 
broadly diminishes the rate of innovation.
e. Training and Other Investment
    There is evidence that non-compete clauses increase employee 
training and other forms of investment. Four studies have examined 
investment outcomes: two examine the effects of non-compete clause 
enforceability on investment (both of which find positive impacts on 
investment), while two examine the relationship between non-compete 
clause use and investment (only one of which finds positive impacts on 
investment).
    Of the two studies that examine the effects of non-compete clause 
enforceability on investment, one looks at employee training, and one 
looks at firm capital expenditures (e.g., investment in physical 
assets, such as machines). The first study, a 2020 study by Evan Starr, 
finds that moving from mean non-compete clause enforceability to no 
non-compete clause enforceability would decrease the number of workers 
receiving training by 14.7% in occupations that use non-compete clauses 
at a high rate (relative to a control group of occupations that use 
non-compete clauses at a low rate).\133\ The study further finds 
changes in training are primarily due to changes in firm-sponsored, 
rather than employee-sponsored, training.\134\ Firm-sponsored training 
is the type of training non-compete clauses are often theorized to 
protect, as the firm may be unwilling to make an unprotected 
investment.
---------------------------------------------------------------------------

    \133\ Starr, supra note 66 at 796-97.
    \134\ Id. at 797.
---------------------------------------------------------------------------

    The second study, a 2021 study by Jessica Jeffers, finds knowledge-
intensive firms invest 32% less in capital equipment following 
decreases in the enforceability of non-compete clauses.\135\ While 
firms may invest in capital equipment for many different reasons, 
Jeffers examines this outcome (as opposed to labor-focused outcomes) to 
avoid looking at research and development expenditure as a whole, which 
is in large part composed of labor expenses. This allows the study to 
isolate the effects of non-compete clause enforceability on investment 
from other effects of non-compete clauses, such as reduced worker 
earnings. Jeffers finds that there are likely two mechanisms driving 
these effects: first, that firms may be more likely to invest in 
capital when they train their workers because worker training and 
capital expenditure are complementary (i.e., the return on investment 
in capital equipment is greater when workers are more highly trained); 
and second, that non-compete clauses reduce competition, and firms' 
returns to capital expenditure are greater when competition is lower, 
incentivizing firms to invest more in capital.\136\
---------------------------------------------------------------------------

    \135\ Jeffers, supra note 92 at 28.
    \136\ Id. at 29.
---------------------------------------------------------------------------

    The first study that examines the impact of non-compete clause use 
on investment is a 2021 study by Starr et. al. using their 2014 survey 
of non-compete clause use. They find no statistically significant 
impact on either training or the sharing of trade secrets (after 
inclusion of control variables) but cannot examine other investment 
outcomes.\137\ The second study, a 2021 study by Johnson and Lipsitz, 
examines investment in the hair salon industry. It finds that firms 
that use non-compete clauses train their employees at a higher rate and 
invest in customer attraction through the use of digital coupons (on 
so-called ``deal sites'') to attract customers at a higher rate, both 
by 11 percentage points.\138\ However, the authors of both studies 
caution that these results do not necessarily represent a causal 
relationship.\139\ In each study, the use of non-compete clauses and 
the decision to invest may be jointly determined by other 
characteristics of the firms, labor markets, or product markets. For 
this reason, the Commission places relatively minimal weight on these 
studies in terms of how they inform the relationship between the 
proposed rule and future potential firm investment.
---------------------------------------------------------------------------

    \137\ Starr, Prescott, & Bishara, supra note 42 at 76.
    \138\ Johnson & Lipsitz, supra note 54 at 711.
    \139\ Starr, Prescott, & Bishara, supra note 42 at 73; Johnson & 
Lipsitz, supra note 54 at 711.
---------------------------------------------------------------------------

    Overall, the additional incentive to invest (in assets like 
physical capital, human capital, or customer attraction, or in the 
sharing of trade secrets and confidential commercial information) is 
the primary justification for use of non-compete clauses. Any 
investment which is lost due to the inability of firms to use non-
compete clauses would likely represent the greatest cost of the 
proposed rule. Indeed, one study, by Kenneth Younge and Matt Marx, 
finds that the value of publicly traded firms increased by 9% due to an 
increase in non-compete clause enforceability.\140\ However, they 
attribute this increase to the value of retaining employees, which 
comes with the negative effects to parties other than the firm 
(employees, competitors, and consumers) described in this Part II.B. In 
particular, if benefits to the firm arise primarily from reductions in 
labor costs, then the increase in the value of firms is in part a 
transfer from workers to firms, and is therefore not necessarily a 
procompetitive benefit of non-compete clauses. However, the authors do 
not explore the extent to which increases in firm value arise from 
decreases in labor costs. The authors additionally note that since the 
time frame used in the study is short, ``there may be deleterious 
effects of non-competes in the long run'' which are absent in their 
findings.\141\
---------------------------------------------------------------------------

    \140\ Kenneth A. Younge & Matt Marx, The value of employee 
retention: evidence from a natural experiment, 25 J. Econ. & Mgmt. 
Strategy 652 (2016).
    \141\ Id. at 674.
---------------------------------------------------------------------------

    The Commission requests comment on all aspects of its description, 
in this Part II.B, of the empirical evidence relating to non-compete 
clauses and their effects on competition. In particular, the Commission 
seeks submissions of additional data that could inform the Commission's 
understanding of these effects.

C. Current Law Governing Non-Compete Clauses

    The states have always placed a variety of restrictions on the 
ability of employers to enforce non-compete clauses. These restrictions 
are based on public policy concerns American courts--and English courts 
before them--have recognized for centuries. For example, in the English 
opinion Mitchel v. Reynolds (1711), which provided the foundation for 
the American common law on non-compete clauses,\142\ the court 
expressed concerns that workers were vulnerable to exploitation under 
non-compete clauses and these clauses threatened workers' ability to 
practice their trades and earn a living.\143\
---------------------------------------------------------------------------

    \142\ Harlan Blake, Employment Agreements Not to Compete, 73 
Harv. L. Rev. 625, 630-31 (1960).
    \143\ Mitchel v. Reynolds, 1 P. Wms. 181, 190 (Q.B. 1711) 
(expressing concern that non-compete clauses threaten ``the loss of 
[the worker's] livelihood, and the subsistence of his family,'' and 
also ``the great abuses these voluntary restraints are liable 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.'').
---------------------------------------------------------------------------

    Today, while the enforceability of non-compete clauses varies 
between

[[Page 3494]]

states, all fifty states restrict non-compete clauses between employers 
and workers to some degree.\144\ Non-compete clauses between employers 
and workers are generally subject to greater scrutiny under state 
common law than other employment terms, due to ``the employee's 
disadvantageous bargaining position at the time of contracting and 
hardship at the time of enforcement.'' \145\ For these reasons, state 
courts often characterize non-compete clauses as ``disfavored.'' \146\
---------------------------------------------------------------------------

    \144\ Cynthia Estlund, Between Rights and Contract: Arbitration 
Agreements and Non-Compete Covenants as a Hybrid Form of Employment 
Law, 155 U. Pa. L. Rev. 379, 391 (2006).
    \145\ Id. See also Restatement (Second) of Contracts sec. 188, 
cmt. g (1981) (``Postemployment restraints are scrutinized with 
particular care 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.'').
    \146\ 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).
---------------------------------------------------------------------------

    In addition to state common law, non-compete clauses have always 
been considered proper subjects for scrutiny under the nation's 
antitrust laws.\147\
---------------------------------------------------------------------------

    \147\ See, e.g., Am. Tobacco Co., 221 U.S. at 181-83 (holding 
several tobacco companies violated Sections 1 and 2 of the Sherman 
Act due to the collective effect of six of the companies' practices, 
one of which was the ``constantly recurring'' use of non-compete 
clauses); Newburger, Loeb & Co., Inc., 563 F.2d at 1082 (``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).
---------------------------------------------------------------------------

1. State Law on Non-Compete Clauses
    The question of whether or under what conditions an employer can 
enforce a particular non-compete clause depends on the applicable state 
law. Three states--California, North Dakota, and Oklahoma--have adopted 
statutes rendering non-compete clauses void for nearly all 
workers.\148\ Among the 47 states where non-compete clauses may be 
enforced under certain circumstances, 11 states and the District of 
Columbia have enacted statutes making non-compete clauses void or 
unenforceable--or have banned employers from entering into non-compete 
clauses--based on the worker's earnings or a similar factor.\149\ In 
addition, the majority of these 47 states have statutory provisions 
that ban or limit the enforceability of non-compete clauses for workers 
in certain specified occupations. In most states, those limits apply to 
just one or two occupations (most commonly, physicians).\150\
---------------------------------------------------------------------------

    \148\ See Cal. Bus. & Prof. Code sec. 16600; N.D. Cent. Code 
sec. 9-08-06; Okla. Stat. Ann. tit. 15, sec. 219A. While California 
law permits non-compete clauses if they are necessary to protect an 
employer's trade secrets, see Muggill v. Reuben H. Donnelley Corp., 
62 Cal. 2d 239, 242 (Cal. 1965), the scope of this exception is 
unclear. In a recent case, the California Supreme Court declined to 
address the issue. Edwards v. Arthur Andersen LLP, 189 P.3d 285, 289 
n.4 (Cal. 2008).
    \149\ Colorado, Colo Rev. Stat. Ann. sec. 8-2-113(2)(a)-(b), as 
amended by H.B. 22-1317 (effective Aug. 10, 2022) (non-compete 
clauses are void except where they apply to a ``highly compensated 
worker,'' currently defined as a worker earning at least $101,250 
annually, see Colo. Code Regs. sec. 1103-14:1.2); District of 
Columbia, DC Code sec. 32-581.02(a)(1) (effective Oct. 1, 2022) 
(where the employee's compensation is less than $150,000, or less 
than $250,000 if the employee is a medical specialist, employers may 
not require or request that the employee sign an agreement or comply 
with a workplace policy that includes a non-compete clause); 
Illinois, 820 Ill. Comp. Stat. 90/10(a) (effective Jan. 1, 2017) (no 
employer shall enter into a non-compete clause unless the worker's 
actual or expected earnings exceed $75,000/year); Maine, Me. Rev. 
Stat. Ann. tit. 26, sec. 599-A(3) (effective Sep. 19, 2019) (an 
employer may not require or permit an employee earning wages at or 
below 400% of the federal poverty level to enter into a non-compete 
clause with the employer); Maryland, Md. Code Ann., Lab. & Empl. 
sec. 3-716(a)(1)(i) (effective Oct. 1, 2019) (non-compete clauses 
are void where an employee earns equal to or less than $15 per hour 
or $31,200 per year); Massachusetts, Mass. Gen. Laws Ann. ch. 149, 
sec. 24L(c) (effective Jan. 14, 2021) (non-compete clauses shall not 
be enforceable against workers classified as nonexempt under the 
Fair Labor Standards Act (``FLSA'')); Nevada, Nev. Rev. Stat. sec. 
613.195(3) (effective Oct. 1, 2021) (non-compete clauses may not 
apply to hourly workers); New Hampshire, N.H. Rev. Stat. Ann. sec. 
275:70-a(II) (effective Sept. 8, 2019) (employers shall not require 
a worker who earns an hourly rate less than or equal to 200% of the 
federal minimum wage to enter into a non-compete clause, and non-
compete clauses with such workers are void and unenforceable); 
Oregon, Or. Rev. Stat. sec. 653.295(1)(e) (effective Jan. 1, 2022) 
(non-compete clauses are void and unenforceable except where the 
worker's annualized gross salary and commissions at the time of the 
worker's termination exceed $100,533); Rhode Island, R.I. Gen Laws 
sec. 28-59-3(a)(1) (effective Jan. 15, 2020) (non-compete clauses 
shall not be enforceable against workers classified as nonexempt 
under the FLSA); Virginia, Va. Code Ann. sec. 40.1-28.7:8(B) 
(effective July 1, 2020) (no employer shall enter into, enforce, or 
threaten to enforce a non-compete clause with an employee whose 
average weekly earnings are less than the Commonwealth's average 
weekly wage); Washington, Wash. Rev. Code Ann. sec. 49.62.020(1)(b) 
and 49.62.030(1) (effective Jan. 1, 2020) (non-compete clause is 
void and unenforceable unless worker's annualized earnings exceed 
$100,000 for employees and $250,000 for independent contractors, to 
be adjusted for inflation).
    \150\ See Russell Beck, Beck Reed Riden LLP, Employee 
Noncompetes: A State-by-State Survey (August 17, 2022), (hereinafter 
``Beck Reed Riden Chart'').
---------------------------------------------------------------------------

    States have been particularly active in restricting non-compete 
clauses in recent years. Of the twelve state statutes restricting non-
compete clauses based on a worker's earnings or a similar factor 
(including the DC statute), eleven were enacted in the past ten 
years.\151\ States have also recently passed legislation limiting the 
use of non-compete clauses for certain occupations.\152\ Other recent 
state legislation has imposed additional requirements on employers that 
use non-compete clauses. For example, Oregon, Maine, Massachusetts, New 
Hampshire, and Washington have enacted laws requiring employers to 
provide prior notice that a non-compete clause will be required as a 
condition of employment.\153\ Massachusetts and Oregon have enacted 
``garden leave'' provisions, which require employers to compensate 
workers during the post-employment period in which the workers are 
bound by the non-compete clause.\154\ Washington limited the 
permissible duration of non-compete clauses to 18 months,\155\ and 
Massachusetts and Oregon limited it to one year.\156\
---------------------------------------------------------------------------

    \151\ See supra note 149.
    \152\ See, e.g., Connecticut, Conn. Gen. Stat. Ann. sec. 20-681 
(effective June 26, 2019) (home health care workers); Florida, Fla. 
Stat. Ann. sec. 542.336 (effective June 25, 2019) (certain 
physicians in certain counties); Hawaii, Haw. Rev. Stat. sec. 480-
4(d) (effective July 1, 2015) (technology workers); Indiana, Ind. 
Code sec. 25-22.5-5.5-2 (effective July 1, 2020) (physicians); Utah, 
Utah Code Ann. sec. 34-51-201 (effective May 18, 2018) (broadcasting 
employees).
    \153\ Oregon, Or. Rev. Stat. sec. 653.295(1)(a)(A) (effective 
Jan. 1, 2008); Maine, Me. Rev. Stat. Ann. tit. 26, sec. 599-A(4) 
(effective Sep. 19, 2019); Massachusetts, Mass. Gen. Laws Ann. ch. 
149, sec. 24L(b)(i) (effective Jan. 14, 2021); New Hampshire, N.H. 
Rev. Stat. Ann. sec. 275:70 (effective July 28, 2014); Washington, 
Wash. Rev. Code Ann. sec. 49.62.020(1)(a)(i) (effective Jan. 1, 
2020).
    \154\ Massachusetts, Mass. Gen. Laws Ann. ch. 149, sec. 
24L(b)(vii) (effective Jan. 14, 2021); Oregon, Or. Rev. Stat. sec. 
653.295(7) (effective Jan. 1, 2022).
    \155\ Washington, Wash. Rev. Code Ann. sec. 49.62.020(2) 
(effective Jan. 1, 2020).
    \156\ Massachusetts, Mass. Gen. Laws Ann. ch. 149, sec. 
24L(b)(iv) (effective Jan. 14, 2021); Oregon, Or. Rev. Stat. sec. 
653.295(3) (effective Jan. 1, 2022).
---------------------------------------------------------------------------

    For workers not covered by these statutory restrictions, the 
question of whether or under what conditions a non-compete clause may 
be enforced against them depends on state common law.
    In the 47 states where at least some non-compete clauses may be 
enforced, courts use a reasonableness inquiry to determine whether to 
enforce a non-compete clause, in addition to whatever statutory limits 
they are bound to apply. While the precise language of the test differs 
from state to state, states typically use a test similar to the test in 
the Restatement (Second) of Contracts:
    A promise to refrain from competition that imposes a restraint that 
is ancillary

[[Page 3495]]

to an otherwise valid transaction or relationship is unreasonably in 
restraint of trade if (a) the restraint is greater than is needed to 
protect the promisee's legitimate interest, or (b) the promisee's need 
is outweighed by the hardship to the promisor and the likely injury to 
the public.\157\
---------------------------------------------------------------------------

    \157\ Restatement (Second) of Contracts sec. 188 (1981).
---------------------------------------------------------------------------

    The first basis on which a non-compete clause can be found 
unreasonable is where the restraint is greater than needed to protect 
the employer's legitimate interest. Nearly all states recognize the 
protection of an employer's trade secrets as a legitimate 
interest.\158\ Some states also recognize an interest in protecting 
confidential information that is not a trade secret.\159\ Some states 
also recognize an interest in protecting the employer's investment in 
training, although many of these states define the interest as 
protecting specialized training.\160\ A few states recognize an 
interest in preventing an worker who provides ``unique'' services from 
working for a competitor.\161\ Courts do not recognize protection from 
ordinary competition as a legitimate business interest.\162\
---------------------------------------------------------------------------

    \158\ See. e.g., Reed, Roberts Assocs. v. Strauman, 40 N.Y.2d 
303, 308-09 (N.Y. 1976); see Beck Reed Riden Chart, supra note 150 
(listing each state's approach).
    \159\ See. e.g., Proudfoot Consulting Co. v. Gordon, 576 F.3d 
1223, 1233-34 (11th Cir. 2009); see Beck Reed Riden Chart, supra 
note 150 (listing each state's approach).
    \160\ See, e.g., IDMWORKS LLC v. Pophaly, 192 F. Supp. 3d 1335, 
1342 (S.D. Fla. 2016); see Beck Reed Riden Chart, supra note 150 
(listing each state's approach).
    \161\ See, e.g., Ticor Title Ins. v. Cohen, 173 F.3d 63, 70 (2d 
Cir. 1999); see Beck Reed Riden Chart, supra note 150 (listing each 
state's approach).
    \162\ See, e.g., Valley Med. Specialists v. Farber, 982 P.2d 
1277, 1281 (Ariz. 1999).
---------------------------------------------------------------------------

    If the employer can demonstrate a legitimate interest, the employer 
must then show the non-compete clause is tailored to that interest. 
This analysis typically considers whether the non-compete clause 
prohibits a greater scope of activity than necessary to protect the 
employer's legitimate interests; \163\ covers a geographic area more 
extensive than necessary to protect those interests; \164\ or lasts 
longer than needed to protect those interests.\165\
---------------------------------------------------------------------------

    \163\ See, e.g., Diversified Hum. Res. Grp., Inc. v. Levinson-
Polakoff, 752 SW2d 8, 11 (Tex. Ct. App. 1988).
    \164\ See, e.g., Orkin Exterm. Co., Inc. v. Girardeau, 301 So. 
2d 38, 39 (Fla. Ct. App. 1st 1974).
    \165\ See, e.g., Jorgensen v. Coppedge, 181 P.3d 450, 454 (Idaho 
2008).
---------------------------------------------------------------------------

    The second basis under which a non-compete clause can be found 
unreasonable is where the employer's need for the non-compete clause is 
outweighed by the hardship to the worker and the likely injury to the 
public. When assessing the ``hardship to the worker'' prong, courts 
typically consider whether the non-compete clause would be unreasonable 
in light of the worker's personal circumstances. For example, courts 
have invalidated non-compete clauses where they would destroy a 
worker's sole means of support.\166\
---------------------------------------------------------------------------

    \166\ See, e.g., Chavers v. Copy Prods. Co. of Mobile, 519 So. 
2d 942, 945 (Ala. 1988).
---------------------------------------------------------------------------

    When assessing the ``likely injury to the public'' prong, the 
factor most frequently considered by courts is whether enforcing the 
non-compete clause against the worker would deprive the community of 
essential goods and services.\167\ Because these cases arise in the 
context of individual litigation, courts focus the ``likely injury to 
the public'' inquiry on the loss of the individual worker's services 
and not on the aggregate effects of non-compete clauses on competition 
in the relevant market.
---------------------------------------------------------------------------

    \167\ See, e.g., Dick v. Geist, 693 P.2d 1133, 1136-37 (Idaho 
Ct. App. 1985).
---------------------------------------------------------------------------

    State law also differs with respect to the steps courts take when 
they conclude that a non-compete clause is unenforceable as drafted. 
The majority of states have adopted the ``reformation'' or ``equitable 
reform'' doctrine, which allows courts to revise the text of an 
unenforceable non-compete clause to make it enforceable.\168\ Some 
states have adopted the ``blue pencil'' doctrine, under which courts 
may remove any defective provisions and may enforce the non-compete 
clause if the remaining provisions constitute a valid non-compete 
clause.\169\ A few states have adopted the ``red pencil'' doctrine, 
under which courts declare an entire non-compete clause void if one or 
more of its provisions are found to be defective.\170\
---------------------------------------------------------------------------

    \168\ See, e.g., Butler v. Arrow Mirror & Glass, Inc., 51 SW3d 
787, 794 (Tex. Ct. App. 2001). See also Beck Reed Riden Chart, supra 
note 150 (listing each state's approach).
    \169\ See, e.g., Compass Bank v. Hartley, 430 F. Supp. 2d 973, 
980 (D. Ariz. 2006). See also Beck Reed Riden Chart, supra note 150 
(listing each state's approach).
    \170\ See, e.g., Hassler v. Circle C Res., 505 P.3d 169, 178 
(Wyo. 2022). See also Beck Reed Riden Chart, supra note 150 (listing 
each state's approach).
---------------------------------------------------------------------------

    As noted above, the general language of the test for whether a non-
compete clause is reasonable is fairly consistent from state to state. 
However, the specifics of non-compete clause law differ from state to 
state. For example, states vary in how narrowly or broadly they define 
legitimate interests for using a non-compete clause and the extent to 
which courts are permitted to modify an unenforceable non-compete 
clause to render it enforceable. As a result, among the 47 states where 
non-compete clauses may be enforced, variation exists with respect to 
the enforceability of non-compete clauses.\171\
---------------------------------------------------------------------------

    \171\ Norman D. Bishara, Fifty Ways to Leave Your Employer: 
Relative Enforcement of Non-Compete Clauses, Trends, and 
Implications for Employee Mobility Policy, 13 U. Pa. J. Bus. L. 751, 
778-79 (2011).
---------------------------------------------------------------------------

    Because the enforceability of non-compete clauses varies from state 
to state, the question of which state's law applies in a legal dispute 
between an employer and a worker can determine the outcome of the case. 
Non-compete clauses often contain choice-of-law provisions designating 
a particular state's law for resolution of any future dispute.\172\ 
Some non-compete clauses include forum-selection provisions specifying 
the court and location where any dispute will be heard.\173\ The 
default rule under conflict-of-laws principles is that the court honors 
the parties' choice of law, meaning the burden is typically on the 
worker to argue that the law of a different forum should apply.\174\
---------------------------------------------------------------------------

    \172\ Gillian Lester & Elizabeth Ryan, Choice of Law and 
Employee Restrictive Covenants: An American Perspective, 31 Comp. 
Lab. & Pol'y J. 389, 396-402 (2010).
    \173\ Id. at 402-04.
    \174\ Lester & Ryan, supra note 172 at 394. Cf. Cal. Lab. Code 
Sec.  925(a) (stating that employers shall not require an employee 
who primarily resides and works in California, as a condition of 
employment, to agree to a provision that would either (1) require 
the employee to adjudicate outside of California a claim arising in 
California or (2) deprive the employee of the substantive protection 
of California law with respect to a controversy arising in 
California.
---------------------------------------------------------------------------

    In addition, there is significant variation in how courts apply 
choice of law rules in disputes over non-compete clauses.\175\ As a 
result, it can be difficult for employers and workers to predict how 
disputes over choice of law will be resolved.\176\ Additionally--aside 
from the question of which state's law should apply--employers and 
workers may be uncertain about whether the non-compete clause is 
enforceable under the state's law. Furthermore, state non-compete law 
may change; as described above in Part II.C.1, there have been many 
changes in state non-compete law in recent years. The result is that 
employers and workers may face considerable uncertainty as to whether

[[Page 3496]]

a particular non-compete clause may be enforced.
---------------------------------------------------------------------------

    \175\ Id.
    \176\ Id. at 394-95 (``The state of the law is perhaps 
characterized more by inconsistency than anything else, so much so 
that commentators lament the `disarray' and `mish-mash' of the law, 
and criticize courts for their `post-hoc rationalizing of 
intuitions' or their use of a `hodgepodge of factors, often with 
insignificant explanation of how they decide what weight to give 
each.''') (internal citations omitted).
---------------------------------------------------------------------------

    Workers may also be subject to arbitration clauses, which require 
that legal disputes with the employer--including disputes related to 
non-compete clauses--be resolved through binding arbitration rather 
than in court. Where such clauses are valid, the Federal Arbitration 
Act requires that courts enforce them.\177\
---------------------------------------------------------------------------

    \177\ See, e.g., Nitro-Lift Techs. v. Howard, 568 U.S. 17, 21-22 
(2012).
---------------------------------------------------------------------------

    Most state courts apply different rules to non-compete clauses when 
they are entered into between the seller and buyer of a business, 
compared with non-compete clauses that arise solely out of the 
employment relationship.\178\ The three states in which non-compete 
clauses are void in nearly all instances--California, North Dakota, and 
Oklahoma--permit enforcement when non-compete clauses are entered into 
between the seller and buyer of a business.\179\ In most of the other 
states, non-compete clauses between the seller and buyer of a business 
are either exempted from the state's non-compete clause statute, 
subject to a more lenient test under the statute, or subject to more 
lenient standard under the state's case law.\180\ Courts cite several 
different reasons for why they accord different treatment to non-
compete clauses between the seller and buyer of a business. These 
reasons include the relatively equal bargaining power of both parties 
in the context of a business sale, relative to the employer-worker 
context, where there is more likely to be unequal bargaining power; the 
need to protect the buyer's right to the goodwill for which it has 
paid; and the fact that the proceeds from the sale will ensure that the 
seller of the business will not experience undue hardship.\181\
---------------------------------------------------------------------------

    \178\ Based on a review of the state cases in Malsberger (2017), 
supra note 62 and Fenwick & West LLC, Summary of Non-Compete 
Clauses: A Global Perspective, https://assets.fenwick.com/legacy/FenwickDocuments/RS_Summary-of-Covenants.pdf.
    \179\ Cal. Bus. & Prof. Code sec. 16601; N.D. Cent. Code sec. 9-
08-06; Okla. Stat. Ann. tit. 15, sec. 218.
    \180\ See, e.g., Colo. Rev. Stat. Ann. sec. 8-2-113(3)(c) 
(statutory exemption); Ga. Code Ann. sec. 13-8-57(d) (more lenient 
statutory test); Jiffy Lube Int'l, Inc. v. Weiss Bros., Inc., 834 F. 
Supp. 683, 691 (D.N.J. 1993) (more lenient standard under case law).
    \181\ See, e.g., Woodward v. Cadillac Overall Supply Co., 240 NW 
2d 710, 715 (Mich. 1976) (bargaining power); Bybee, 178 P.3d at 622 
(Idaho 2008) (goodwill); Centorr-Vacuum Indus., Inc. v. Lavoie, 609 
A.2d 1213, 1215 (N.H. 1992) (undue hardship).
---------------------------------------------------------------------------

2. Non-Compete Clauses and Antitrust Law
    Non-compete clauses are ``contract[s] . . . in restraint of 
trade.'' Therefore, they are subject to Section 1 of the Sherman 
Act.\182\ The Commission has identified 17 cases in cases in which 
private plaintiffs or the federal government have challenged a non-
compete clause between an employer and a worker under either Section 1 
or an analogous provision in a state antitrust statute.\183\ (Three of 
these 17 cases concerned non-compete clauses between the seller and 
buyer of a business,\184\ and two of these 17 cases were brought under 
state antitrust statutes.\185\)
---------------------------------------------------------------------------

    \182\ See, e.g., Newburger, Loeb & Co., Inc., 563 F.2d at 1082.
    \183\ U.S. v. Am. Tobacco Co., 221 U.S. 106 (1911); Alders v. 
AFA Corp. of Fla., 353 F. Supp. 654 (S.D. Fla. 1973) (non-compete 
clause between seller and buyer of a business); Bradford v. N.Y. 
Times Co., 501 F.2d 51 (2d Cir. 1974); Golden v. Kentile Floors, 
Inc., 512 F.2d 838 (5th Cir. 1975); U.S. v. Empire Gas Corp., 537 
F.2d 296 (8th Cir. 1976); Newburger, Loeb & Co., Inc. v. Gross, 563 
F.2d 1057 (2d Cir. 1977); Lektro-Vend Corp. v. Vendo Co., 660 F.2d 
255 (7th Cir. 1981) (non-compete clause between seller and buyer of 
a business); Aydin Corp. v. Loral Corp., 718 F.2d 897 (9th Cir. 
1983); Consultants & Designers, Inc. v. Butler Serv. Grp., Inc., 720 
F.2d 1553 (11th Cir. 1983); Caremark Homecare, Inc. v. New England 
Critical Care, Inc., 700 F. Supp. 1033 (D. Minn. 1988); GTE Data 
Servs., Inc. v. Elec. Data Sys. Corp., 717 F. Supp. 1487 (M.D. Fla. 
1989); DeSantis v. Wackenhut Corp., 793 SW2d 670 (Tex. 1990) (state 
antitrust law case); Borg-Warner Protective Servs. Corp. v. 
Guardsmark, Inc., 946 F. Supp. 495 (E.D. Ky. 1996); Caudill v. 
Lancaster Bingo Co., Inc., 2005 WL 2738930 (S.D. Ohio Oct. 24, 
2005); Dallas South Mill, Inc. v. Kaolin Mushroom Farms, Inc., 2007 
WL 9712116 (N.D. Tex. Feb. 23, 2007); Cole v. Champion Enters., 
Inc., 496 F. Supp. 2d 613 (M.D.N.C. 2007) (non-compete clause 
between seller and buyer of a business) (state antitrust law case); 
Signature MD, Inc. v. MDVIP, Inc., 2015 WL 3988959 (C.D. Cal. Apr. 
21, 2015). There are also several opinions addressing whether non-
compete clauses between businesses violate Section 1. Courts 
generally apply a less restrictive legal standard to non-compete 
clauses between businesses. See, e.g., Lumber Liquidators, Inc., 415 
F. Supp. 3d at 715-16.
    \184\ Alders, 353 F. Supp. 654; Lektro-Vend, 660 F.2d 255; Cole, 
496 F. Supp. 2d 613.
    \185\ DeSantis, 793 SW2d 670; Cole, 496 F. Supp. 2d 613.
---------------------------------------------------------------------------

    In two of these 17 cases, the parties challenging the non-compete 
clause were successful to some degree. In the early 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 collective effect of six of the companies' 
practices, one of which was the ``constantly recurring'' use of non-
compete clauses.\186\ This is the only case the Commission has 
identified in which a court analyzed the collective, rather than 
isolated, use of non-compete clauses.
---------------------------------------------------------------------------

    \186\ Am. Tobacco Co., 221 U.S. at 181-83. Section 2 of the 
Sherman Act, 15 U.S.C. 2, prohibits monopolization or attempted 
monopolization.
---------------------------------------------------------------------------

    More recently, a federal district court denied a motion to dismiss 
a plaintiff's claim that a non-compete clause between a concierge 
medicine firm and physicians violated Section 1. The court held that 
while the reasonableness of the non-compete clause ultimately would be 
a factual determination, the plaintiff stated a valid claim under 
Section 1 where it alleged the firm ``includes post-contract non-
compete clauses with an unreasonably large liquidated damage provision 
in its employment contracts,'' in addition to other practices.\187\
---------------------------------------------------------------------------

    \187\ Signature MD, Inc., 2015 WL 3988959 at *7.
---------------------------------------------------------------------------

    In the other 15 Sherman Act cases, the challenge to the individual 
non-compete clause was unsuccessful. These claims failed for three main 
reasons. First, in several of these cases, the parties challenging the 
non-compete clause argued solely that the non-compete clause they were 
challenging should be per se unlawful under Section 1. Courts rejected 
these arguments, reasoning that non-compete clauses may serve 
legitimate business interests in some instances \188\ and that courts 
have had insufficient experience with non-compete clauses to warrant a 
per se categorization under Section 1.\189\
---------------------------------------------------------------------------

    \188\ See, e.g., Lektro-Vend, 660 F.2d at 265.
    \189\ See, e.g., Aydin, 718 F.2d at 900.
---------------------------------------------------------------------------

    The second main reason these challenges have been unsuccessful is 
that, in the vast majority of these 15 cases, the party challenging the 
non-compete clause did not allege the non-compete clause adversely 
affected competition, which is an essential element of a Section 1 
claim in rule of reason cases.\190\ In only one case did the plaintiff 
appear to allege facts related to anticompetitive effect beyond the 
effect on the person bound by the non-compete clause. In that case, the 
court dismissed the plaintiff's claim because the plaintiff did not 
sufficiently allege ``the amount of competition foreclosed by 
defendant.'' \191\
---------------------------------------------------------------------------

    \190\ See, e.g., Ohio v. Am. Express Co., -- U.S.--, 138 S. Ct. 
2274, 2284 (2018).
    \191\ GTE Data Servs., 717 F. Supp. at 1492.
---------------------------------------------------------------------------

    Third, courts have also rejected challenges to non-compete clauses 
based on reasoning that a corporation is not capable of conspiring with 
its employees as a matter of law.\192\
---------------------------------------------------------------------------

    \192\ See, e.g., Borg-Warner, 946 F. Supp. 499; Dallas South 
Mill, 2007 WL 9712116 at *3.
---------------------------------------------------------------------------

    Plaintiffs have also challenged non-compete clauses between 
employers and workers under Section 2 of the Sherman Act, which 
prohibits monopolization or attempted monopolization.\193\ The 
Commission is not aware of a case in which a Section 2 claim relating 
to an

[[Page 3497]]

employer's use of a non-compete clause has been successful.
---------------------------------------------------------------------------

    \193\ 15 U.S.C. 2. See, e.g., BRFHH Shreveport, LLC. v. Willis 
Knighton Med. Ctr., 176 F. Supp. 3d 606, 616-26 (W.D. La. 2016).
---------------------------------------------------------------------------

3. Federal and State Enforcement Activity Related to Non-Compete 
Clauses
    In recent years, state attorneys general in Illinois, New York, and 
Washington have sued companies for unlawfully using non-compete 
clauses. As of January 2020, state attorneys general have publicly 
announced settlements with seven companies regarding the use of non-
compete clauses.\194\ In February 2022, the Antitrust Division filed a 
statement of interest in a state non-compete clause case brought by 
private plaintiffs.\195\
---------------------------------------------------------------------------

    \194\ See Public Comments of 19 State Attorneys General in 
Response to the Federal Trade Commission's January 9, 2020 Workshop 
on Non-Compete Clauses in the Workplace at 6 n.23 (listing the 
settlements).
    \195\ Statement of Interest of the United States, Beck v. 
Pickert Med. Grp., No. CV21-02092 (Nev. Dist. Ct. Feb. 25, 2022).
---------------------------------------------------------------------------

    The Antitrust Division and the Commission have also taken steps in 
recent years to address other types of contractual provisions that 
restrict competition in labor markets. The Antitrust Division has 
brought civil enforcement actions under Section 1 against several 
technology companies for entering into no-poach agreements with 
competitors. These enforcement actions ended with consent judgments 
against the companies.\196\ In addition, the Antitrust Division has 
brought criminal charges for wage-fixing and no-poach agreements 
against companies and individuals.\197\ The Commission too has brought 
civil enforcement actions against companies related to competition for 
employment, which ended in consent judgments against the 
companies.\198\ In addition, the attorney general of the State of 
Washington has entered into settlement agreements with over 200 
companies in which the companies have agreed to stop using no-poach 
clauses.\199\
---------------------------------------------------------------------------

    \196\ See Antitrust Guidance for Human Resource Professionals, 
supra note 37 at 3-4 (citing cases).
    \197\ U.S. v. Neeraj Jindal and John Rodgers, No. 4:20-cr-358-
ALM-KPJ (E.D. Tex. Dec. 9, 2020); U.S. v. Surgical Care Affiliates, 
LLC and SCAI Holdings, LLC, No. 3:21-cr-011-L (N.D. Tex. Jan. 5, 
2021); U.S. v. Ryan Hee and VDA OC, LLC, formerly ADVANTAGE ON CALL, 
LLC, No. 2:21-cr-00098-RFB-BNW (D. Nev. Mar. 26, 2021); U.S. v. 
DaVita, Inc. and Kent Thiry, No. 21-cr-00229-RBJ (D. Colo. Nov. 3, 
2021); U.S. v. Patel, et al., 3:21-cr-220-VHB-RAR (D. Conn. Dec. 15, 
2021); U.S. v. Manahe, et al., 2:22-cr-00013-JAW (D. Me. Jan. 27, 
2022). The defendants in the Jindal case were found not guilty of 
the wage-fixing charge, and the defendants in the DaVita cases were 
found not guilty of all charges. Jindal, Jury Verdict (E.D. Tex. 
Apr. 14, 2022); DaVita, Verdict (D. Colo. Apr. 15, 2022). However, 
both courts found that the conduct alleged in the indictment 
properly fell within the confines of the per se rule. Jindal, 
Memorandum Opinion and Order, 2021 WL 5578687 (E.D. Tex. Nov. 29, 
2021) at *4-*8; DaVita, Order Denying Defendants' Motion to Dismiss, 
2022 WL 266759 (D. Colo. Jan. 28, 2022) at *4-*8. The court in 
Manahe likewise recently denied a motion to dismiss, holding the 
indictment charged a recognized form of per se illegal conduct. 2022 
WL 3161781, at **7, 9 (D. Me. Aug. 8, 2022).
    \198\ See Antitrust Guidance for Human Resource Professionals, 
supra note 37 at 4 (citing cases).
    \199\ Office of the Att'y Gen. of the State of Wash., Press 
Release, AG Report: Ferguson's Initiative Ends No-Poach Practices 
Nationally at 237 Corporate Franchise Chains (June 16, 2020).
---------------------------------------------------------------------------

    The Commission seeks comment on all aspects of its description, in 
this Part II.C, of the law currently governing non-compete clauses. The 
Commission specifically seeks comment on the extent to which employers 
use choice-of-law provisions to evade the laws of states where non-
compete clauses are relatively less enforceable. The Commission also 
seeks comment on the extent to which a uniform federal standard for 
non-compete clauses would promote certainty for employers and workers.

D. The Commission's Work on Non-Compete Clauses

    This rulemaking represents the culmination of several years of 
activity by the Commission related to non-compete clauses and their 
effects on competition. This activity has included extensive public 
outreach and fact-gathering related to non-compete clauses, other 
restrictive employment covenants that may harm competition, and 
competition in labor markets generally. The Commission has also 
analyzed non-compete clauses in connection with its enforcement, 
research, and merger review work.
    The Commission first began focusing on non-compete clauses in the 
mid-2010s, as a growing body of empirical research raised concerns 
about the anticompetitive effects of non-compete clauses. In 2018 and 
2019, the Commission held several ``Hearings on Competition and 
Consumer Protection in the 21st Century.'' \200\ The Commission invited 
public comment on a wide range of topics, including ``the use of non-
competition agreements and the conditions under which their use may be 
inconsistent with the antitrust laws.'' \201\ Participants addressed 
non-compete clauses at two of the hearings.\202\
---------------------------------------------------------------------------

    \200\ Fed. Trade Comm'n, Hearings on Competition and Consumer 
Protection in the 21st Century, https://www.ftc.gov/enforcement-policy/hearings-competition-consumer-protection.
    \201\ Fed. Trade Comm'n, Notice, Hearings on Competition and 
Consumer Protection in the 21st Century, 83 FR 38307, 38309 (Aug. 6, 
2018).
    \202\ Fed. Trade Comm'n, Transcript, Competition and Consumer 
Protection in the 21st Century (Oct. 16, 2018), https://www.ftc.gov/system/files/documents/public_events/1413712/ftc_hearings_session_3_transcript_day_2_10-16-18_1.pdf; Fed. Trade 
Comm'n, Transcript, Competition and Consumer Protection in the 21st 
Century (June 12, 2019), https://www.ftc.gov/system/files/documents/public_events/1519667/ftc_hearings_session_14_transcript_6-12-19_0.pdf.
---------------------------------------------------------------------------

    Also in 2019, the Open Markets Institute, 19 labor and public 
interest organizations, and 46 individual advocates and scholars 
petitioned the Commission to initiate a rulemaking to prohibit non-
compete clauses.\203\
---------------------------------------------------------------------------

    \203\ Open Markets Inst. et al., Petition for Rulemaking to 
Prohibit Worker Non-Compete Clauses (March 20, 2019).
---------------------------------------------------------------------------

    As evidence mounted regarding the anticompetitive effects of non-
compete clauses, the Commission's focus on this issue increased. On 
January 9, 2020, the Commission held a public workshop on non-compete 
clauses. At the workshop, speakers and panelists addressed topics 
including statutory and judicial treatment of non-compete clauses; the 
Commission's authority to address non-compete clauses; the economic 
literature regarding the effects of non-compete clauses; and whether 
the Commission should initiate a rulemaking on non-compete 
clauses.\204\ In connection with the workshop, the Commission sought 
public comment on a wide range of topics related to a potential 
rulemaking on non-compete clauses. The Commission received 328 comments 
addressing these topics from researchers, advocates for workers, 
employers, trade associations, attorneys, members of Congress, state 
and local officials, unions, other organizations, and individual 
members of the public.\205\
---------------------------------------------------------------------------

    \204\ Fed. Trade Comm'n, Non-Competes in the Workplace: 
Examining Antitrust and Consumer Protection Issues, https://www.ftc.gov/news-events/events/2020/01/non-compete clauses-
workplace-examining-antitrust-consumer-protection-issues.
    \205\ Fed. Trade Comm'n, Docket FTC-2019-0093, Workshop on Non-
Compete Clauses Used in Employment Contracts, https://www.regulations.gov/document/FTC-2019-0093-0001/comment.
---------------------------------------------------------------------------

    In addition, on August 5, 2021, the Commission issued a 
solicitation for public comment on contract terms that may harm 
competition, including ``non-compete clauses that prevent workers from 
seeking employment with other firms.'' The Commission received 280 
comments on this solicitation from a wide range of stakeholders.\206\ 
On December 6-7, 2021, the Commission and the Antitrust Division held a 
workshop entitled ``Making Competition Work: Promoting Competition in 
Labor Markets.'' The Commission sought

[[Page 3498]]

comment from the public in connection with this event and received 27 
comments.\207\
---------------------------------------------------------------------------

    \206\ Fed. Trade Comm'n, Solicitation for Public Comments on 
Contract Terms that May Harm Competition (Aug 5, 2021), https://www.regulations.gov/document/FTC-2021-0036-0022.
    \207\ Fed. Trade Comm'n, Docket FTC-2021-0057, Making 
Competition Work: Promoting Competition in Labor Markets, https://www.regulations.gov/docket/FTC-2021-0057/comments.
---------------------------------------------------------------------------

    As it has developed this proposed rule, the Commission has closely 
considered the views expressed at these forums and the public comments 
it has received through these engagement efforts. The comments have 
informed the Commission's understanding of the evidence regarding the 
effects of non-compete clauses; the law currently governing non-compete 
clauses; and the options for how the Commission may seek to restrict 
the unfair use of non-compete clauses through rulemaking, among other 
topics.
    The Commission has also focused on non-compete clauses in 
connection with its enforcement, merger review, and research work. With 
respect to enforcement, in 2021, the Commission initiated 
investigations into the use of non-compete clauses by manufacturers of 
glass containers used for food and beverage packaging. On December 28, 
2022, the Commission accepted, subject to final approval, consent 
agreements with two manufacturers in the industry.\208\ The glass 
container industry is highly concentrated and is characterized by 
substantial barriers to entry and expansion. Among these barriers, it 
is difficult to identify and employ personnel with skills and 
experience in glass container manufacturing.\209\
---------------------------------------------------------------------------

    \208\ Fed. Trade Comm'n, Decision and Order, In re O-I Glass, 
Inc. et al, Matter No. 211 0182 (December 28, 2022); Fed. Trade 
Comm'n, Decision and Order, In re Ardaugh Group S.A. et al, Matter 
No. 211 0182 (December 28, 2022).
    \209\ Fed. Trade Comm'n, Analysis of Agreements Containing 
Consent Order to Aid Public Comment, In re O-I Glass Inc. et al., In 
re Ardaugh Group S.A. et al, Matter No. 211 0182 (December 28, 2022) 
at 2.
---------------------------------------------------------------------------

    The complaints allege the manufacturers required employees across a 
variety of positions--including employees who work with the glass 
plants' furnaces and forming equipment and in other glass production, 
engineering, and quality assurance roles--to enter into non-compete 
clauses. The complaints allege this conduct has a tendency or 
likelihood to impede rivals' access to the restricted employees' labor, 
to limit workers' mobility, and thus to harm workers, consumers, 
competition, and the competitive process. As such, the complaints 
allege each company has engaged in an unfair method of competition in 
violation of Section 5 of the FTC Act.\210\ The proposed consent orders 
would prohibit each manufacturer from ``entering or attempting to 
enter, maintaining or attempting to maintain, or enforcing or 
attempting to enforce a Non-Compete Restriction with an Employee, or 
communicating to an Employee or a prospective or current employer of 
that Employee that the Employee is subject to a Non-Compete 
Restriction.'' \211\
---------------------------------------------------------------------------

    \210\ Id. at 1-2.
    \211\ Id. at 7.
---------------------------------------------------------------------------

    In 2021, the Commission also initiated investigations into the use 
of non-compete clauses in the security guard services industry. On 
December 28, 2022, the Commission accepted, subject to final approval, 
a consent agreement with Prudential Security, Inc., Prudential Command 
Inc., and the firms' co-owners (collectively ``Prudential 
Respondents''). Prudential Security, Inc. and Prudential Command Inc. 
provided security guard services to clients in several states.
    The Commission's complaint alleges the Prudential Respondents' use 
of non-compete clauses is an unfair method of competition under Section 
5 because it is restrictive, coercive, and exploitative and negatively 
affects competitive conditions.\212\ The complaint further alleges the 
Prudential Respondents' imposition of non-compete clauses took 
advantage of the unequal bargaining power between Prudential 
Respondents and their employees, particularly 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.\213\ Under the terms of the 
proposed order, Prudential Respondents--including any companies the co-
owners may control in the future--must cease and desist from entering, 
maintaining, enforcing, or attempting to enforce any non-compete 
clause.\214\
---------------------------------------------------------------------------

    \212\ Fed. Trade Comm'n, Analysis of Agreement Containing 
Consent Order to Aid Public Comment, In re Prudential Sec., Inc. et 
al., Matter No. 211 0026 at 1, 5-7 (December 28, 2022).
    \213\ Id. at 1.
    \214\ Id.
---------------------------------------------------------------------------

    These consent orders have been placed on the public record for 30 
days in order to receive comments from interested persons. After 30 
days, the Commission will again review the consent agreements and the 
comments received and will decide whether it should make the proposed 
orders final or take other appropriate action.\215\
---------------------------------------------------------------------------

    \215\ Id. at 1-2; Glass Container Analysis to Aid Public 
Comment, supra note 209 at 1.
---------------------------------------------------------------------------

    In addition, as part of a 2020 settlement with the Commission, 
three national rent-to-own companies agreed to refrain from enforcing 
non-compete clauses that were entered into in connection with 
reciprocal purchase agreements.\216\
---------------------------------------------------------------------------

    \216\ Fed. Trade Comm'n, Press Release, Rent-to-Own Operators 
Settle Charges that They Restrained Competition through Reciprocal 
Purchase Agreements (Feb. 21, 2020), https://www.ftc.gov/news-events/news/press-releases/2020/02/rent-own-operators-settle-charges-they-restrained-competition-through-reciprocal-purchase-agreements.
---------------------------------------------------------------------------

    With respect to merger review, on August 11, 2015, the Commission 
approved a final order settling charges that Zimmer Holdings, Inc.'s 
acquisition of Biomet, Inc. would have eliminated competition between 
the companies in the markets for certain orthopedic medical products. 
Among other things, the order requires Zimmer to ``remove any 
impediments or incentives'' that may deter workers from accepting 
employment with the divested businesses, including non-compete 
clauses.\217\
---------------------------------------------------------------------------

    \217\ Fed. Trade Comm'n, In the Matter of Zimmer Holdings, Inc. 
et al., No. C-4534, Decision and Order (Aug. 11, 2015), https://www.ftc.gov/system/files/documents/cases/150820zimmerdo.pdf.
---------------------------------------------------------------------------

    On November 10, 2021, the Commission approved a final order 
settling charges that 7-Eleven's acquisition of Marathon Petroleum 
Corporation's Speedway subsidiary violated federal antitrust laws. 
Among other things, the order prohibits 7-Eleven from enforcing any 
non-compete clauses against any franchisees or employees working at or 
doing business with the divested assets.\218\
---------------------------------------------------------------------------

    \218\ Fed. Trade Comm'n, Press Release, FTC Approves Final Order 
Requiring Divestitures of Hundreds of Retail Gas and Diesel Fuel 
Stations Owned by 7-Eleven, Inc. (Nov. 10, 2021), https://www.ftc.gov/news-events/news/press-releases/2021/11/ftc-approves-final-order-requiring-divestitures-hundreds-retail-gas-diesel-fuel-stations-owned-7.
---------------------------------------------------------------------------

    On January 10, 2022, the Commission approved a final order settling 
charges that dialysis service provider DaVita, Inc.'s acquisition of 
University of Utah Health's dialysis clinics would reduce competition 
in vital outpatient dialysis services in the Provo, Utah market. As 
part of the order, DaVita was required to remove certain non-compete 
clauses and prohibited from enforcing or entering into non-compete 
clauses with certain parties.\219\ And on August 9, 2022, the 
Commission issued a final consent order in which ARKO Corp. and its 
subsidiary GPM agreed to roll back a sweeping non-compete clause they

[[Page 3499]]

imposed on a company to which they sold 60 gas stations.\220\
---------------------------------------------------------------------------

    \219\ Fed. Trade Comm'n, In the Matter of Davita Inc. and Total 
Renal Care, Inc., No. C-4752, Decision and Order (Jan. 10, 2022) at 
12-14, https://www.ftc.gov/system/files/documents/cases/211_0056_c4752_davita_utah_health_order.pdf.
    \220\ Fed. Trade Comm'n, Press Release, FTC Approves Final Order 
Restoring Competitive Markets for Gasoline and Diesel in Michigan 
and Ohio (Aug. 9, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/08/ftc-approves-final-order-restoring-competitive-markets-gasoline-diesel-michigan-ohio.
---------------------------------------------------------------------------

    With respect to research, in September 2021, the Commission issued 
a study analyzing acquisitions by five large technology companies that 
were not reported to the Commission and the U.S. Department of Justice 
under the Hart-Scott-Rodino Act.\221\ The study found 76.7% of 
transactions included non-compete clauses for founders and key 
employees of the acquired entities. The study also found that higher-
value transactions were more likely to use non-compete clauses.\222\ 
The study does not explain why the companies used non-compete clauses 
or analyze the effects of these particular non-compete clauses on 
competition.
---------------------------------------------------------------------------

    \221\ Fed. Trade Comm'n, Non-HSR Reported Acquisitions by Select 
Technology Platforms, 2010-2019: An FTC Study (September 2021) at 1.
    \222\ Id. at 21-22. The table states that the figure is 77.3%. 
The reason for this discrepancy is not clear.
---------------------------------------------------------------------------

    The Commission seeks comment on its description, in this Part II.D, 
of the Commission's work on non-compete clauses prior to this NPRM.

III. Legal Authority

    Section 5 of the FTC Act declares ``unfair methods of competition'' 
to be unlawful.\223\ Section 5 further directs the Commission ``to 
prevent persons, partnerships, or corporations . . . from using unfair 
methods of competition in or affecting commerce.'' \224\ Section 6(g) 
of the FTC Act authorizes the Commission to ``make rules and 
regulations for the purpose of carrying out the provisions of'' the FTC 
Act, including the Act's prohibition of unfair methods of 
competition.\225\ Taken together, Sections 5 and 6(g) provide the 
Commission with the authority to issue regulations declaring practices 
to be unfair methods of competition.\226\
---------------------------------------------------------------------------

    \223\ 15 U.S.C. 45(a)(1).
    \224\ 15 U.S.C. 45(a)(2).
    \225\ 15 U.S.C. 46(g).
    \226\ Nat'l Petroleum Refiners Ass'n v. Fed. Trade Comm'n, 482 
F.2d 672, 697-98 (D.C. Cir. 1973).
---------------------------------------------------------------------------

    Courts have made clear Section 5's prohibition of unfair methods of 
competition encompasses all practices that violate either the Sherman 
or Clayton Acts.\227\ However, courts have long held the scope of 
Section 5 is not confined to the conduct that is prohibited under the 
Sherman Act, Clayton Act, or common law.\228\ Section 5 reaches 
incipient violations of the antitrust laws--conduct that, if left 
unrestrained, would grow into an antitrust violation in the foreseeable 
future.\229\ Additionally, Section 5 reaches conduct that, while not 
prohibited by the Sherman or Clayton Acts, violates the spirit or 
policies underlying those statutes.\230\
---------------------------------------------------------------------------

    \227\ See, e.g., Fed. Trade Comm'n v. Cement Inst., 333 U.S. 
683, 693 (1948) (holding practices that violate the Sherman Act are 
unfair methods of competition); Fashion Originators' Guild of Am. v. 
Fed. Trade Comm'n, 312 U.S. 457, 464 (1941) (holding practices that 
violate the Clayton Act are unfair methods of competition).
    \228\ See, e.g., Fed. Trade Comm'n v. Motion Picture Advert. 
Serv. Co., 344 U.S. 392, 394-95 (1953) (``The `Unfair methods of 
competition', which are condemned by [Section] 5(a) of the [FTC] 
Act, are not confined to those that were illegal at common law or 
that were condemned by the Sherman Act. Congress advisedly left the 
concept flexible to be defined with particularity by the myriad of 
cases from the field of business.'') (internal citations omitted).
    \229\ See, e.g., Cement Inst., 333 U.S. at 708 (``A major 
purpose of [the FTC] Act was to enable the Commission to restrain 
practices as `unfair' which, although not yet having grown into 
Sherman Act dimensions would most likely do so if left 
unrestrained.''); Fashion Originators' Guild, 312 U.S. at 466; 
Triangle Conduit & Cable Co. v. Fed. Trade Comm'n, 168 F.2d 175, 176 
(7th Cir. 1948).
    \230\ See, e.g., Fashion Originators' Guild, 312 U.S. at 463 
(stating that ``[i]f the purpose and practice of the combination of 
garment manufacturers and their affiliates runs counter to the 
public policy declared in the Sherman and Clayton Acts, the Federal 
Trade Commission has the power to suppress it as an unfair method of 
competition''); E.I. du Pont de Nemours & Co. v. Fed. Trade Comm'n 
(Ethyl), 729 F.2d 128, 136-37 (2d Cir. 1984) (finding that the 
Commission may bar ``conduct which, although not a violation of the 
letter of the antitrust laws, is close to a violation or is contrary 
to their spirit''). 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. Fed. Trade Comm'n, Policy Statement 
Regarding the Scope of Unfair Methods of Competition Under Section 5 
of the Federal Trade Commission Act (Nov. 10, 2022).
---------------------------------------------------------------------------

IV. The Commission's Preliminary Determination That Non-Compete Clauses 
Are an Unfair Method of Competition

    The Commission preliminarily determines it is an unfair method of 
competition for an employer to enter into or attempt to enter into a 
non-compete clause with a worker; maintain with a worker a non-compete 
clause; or represent to a worker that the worker is subject to a non-
compete clause where the employer has no good faith basis to believe 
the worker is subject to an enforceable non-compete clause.\231\ This 
preliminary determination is the basis for this proposed rule, which 
would provide that each of these practices is an unfair method of 
competition under Section 5.\232\ This Part IV sets forth a series of 
preliminary findings that provide the basis for this preliminary 
determination. The Commission's preliminary determination and each of 
these preliminary findings are subject to further consideration in 
light of the comments received and the Commission's additional 
analysis. The Commission seeks comment on all aspects of this Part 
IV.\233\
---------------------------------------------------------------------------

    \231\ For ease of reference, this Part IV employs the term ``use 
of non-compete clauses'' as a shorthand to refer to this conduct.
    \232\ See proposed Sec.  910.2(a).
    \233\ The Commission intends for this Part IV to satisfy the 
requirements in Section 22 of the FTC Act that, in an NPRM, the 
Commission issue a preliminary regulatory analysis that contains ``a 
concise statement of the need for, and the objectives of, the 
proposed rule.'' 15 U.S.C. 57b-3.
---------------------------------------------------------------------------

A. Non-Compete Clauses Are an Unfair Method of Competition Under 
Section 5

1. Non-Compete Clauses Are Unfair
    Courts have held conduct is an ``unfair method of competition'' 
under Section 5 where the conduct is facially unfair. In Atlantic 
Refining Co. v. FTC and FTC v. Texaco, Inc., the Court held 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.\234\ In Texaco, the Court held 
the conduct was an unfair method of competition even though Texaco's 
conduct was not overtly coercive, reasoning that Texaco's conduct was 
``inherently coercive'' because its ``dominant economic power was used 
in a manner which tended to foreclose competition.'' \235\ In FTC v. 
R.F. Keppel & Bro., the Court held 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.\236\ In E.I. du Pont de 
Nemours & Co. v. FTC (Ethyl), the U.S. Court of Appeals for the Second 
Circuit reaffirmed that coercive conduct is quintessentially covered by 
Section 5's prohibition of unfair methods of competition.\237\
---------------------------------------------------------------------------

    \234\ Atl. Refin. Co., 381 U.S. at 369-70; Texaco, Inc., 393 
U.S. at 228-29.
    \235\ 393 U.S. 223 at 228-29 (1968). See also Shell Oil Co. v. 
Fed. Trade Comm'n, 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.'').
    \236\ 291 U.S. 304, 313 (1934).
    \237\ 729 F.2d 128, 140 (2d Cir. 1984) (``In short, in the 
absence of proof of a violation of the antitrust laws or evidence of 
collusive, coercive, predatory, or exclusionary conduct, business 
practices are not ``unfair'' in violation of Sec.  5 unless those 
practices either have an anticompetitive purpose or cannot be 
supported by an independent legitimate reason.'').
---------------------------------------------------------------------------

    The Court has also held that, for coercive conduct to constitute 
unfair

[[Page 3500]]

method of competition, it must burden commerce. In Atlantic Refining, 
the Court determined ``a full-scale economic analysis of competitive 
effect'' was not required; due to the nature of the conduct at issue, 
the Commission merely needed to show the conduct burdened ``a not 
insubstantial portion of commerce.'' \238\
---------------------------------------------------------------------------

    \238\ 381 U.S. at 370-71. See also Texaco, Inc., 393 U.S. at 230 
(finding that the practice unfairly burdened competition for a not 
insignificant volume of commerce); R.F. Keppel & Bro., 291 U.S. at 
309 (``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.'').
---------------------------------------------------------------------------

    In the cases described above, courts condemned conduct under 
Section 5 based on the facial unfairness of the conduct. In other 
cases, however, courts have condemned restrictive or exclusionary 
conduct under Section 5 based not on the facial unfairness of the 
conduct, but on the impact of the conduct on competition. For example, 
in FTC v. Motion Picture Advertising Service Co., the Court held an 
exclusive dealing arrangement violated Section 5 where there was 
``substantial evidence'' the contracts ``unreasonably restrain 
competition.'' \239\ Similarly, in L.G. Balfour Co. v. FTC, the U.S. 
Court of Appeals for the Seventh Circuit held a firm's exclusive 
dealing contracts violated Section 5 where such contracts were ``anti-
competitive.'' \240\ As the U.S. Court of Appeals for the Sixth Circuit 
stated in Hastings Manufacturing Co. v. FTC, the Section 5 
jurisprudence has established that ``acts [that are] not in themselves 
illegal or criminal, or even immoral, may, when repeated and continued 
and their impact upon commerce is fully revealed, constitute an unfair 
method of competition within the scope of the Commission's authority to 
regulate and forbid.'' \241\
---------------------------------------------------------------------------

    \239\ 344 U.S. 392, 395-96 (1953).
    \240\ 442 F.2d 1, 14 (7th Cir. 1971).
    \241\ 153 F.2d 253, 257 (6th Cir. 1946).
---------------------------------------------------------------------------

    For the reasons described below, the Commission preliminarily finds 
the use by employers of non-compete clauses is an ``unfair'' method of 
competition under Section 5. The Commission's preliminary findings 
differ based on whether the worker is a senior executive. For workers 
who are not senior executives, the Commission preliminarily finds the 
use by employers of non-compete clauses is ``unfair'' under Section 5 
in three independent ways. First, non-compete clauses are restrictive 
conduct that negatively affects competitive conditions. Second, non-
compete clauses are exploitative and coercive at the time of 
contracting while burdening a not insignificant volume of commerce. 
Third, non-compete clauses are exploitative and coercive at the time of 
the worker's potential departure from the employer while burdening a 
not insignificant volume of commerce.
    For workers who are senior executives, the Commission preliminarily 
finds the use by employers of non-compete clauses is ``unfair'' under 
Section 5 because such non-compete clauses are restrictive conduct that 
negatively affects competitive conditions. As described below in Part 
IV.A.1.a.ii, the Commission preliminarily concludes non-compete clauses 
for senior executives may harm competition in product markets in unique 
ways. The second and third preliminary findings described above--that 
non-compete clauses are exploitative and coercive at the time of 
contracting and at the time of a worker's potential departure--do not 
apply to workers who are senior executives.\242\
---------------------------------------------------------------------------

    \242\ As described below in Part VII.B.1.a.iv, the Commission 
estimates that, when non-compete clauses are more enforceable, CEO 
earnings are reduced. This may result from the negative effects on 
competitive conditions that non-compete clauses have on labor 
markets (discussed in greater detail below in Part IV.A.1.a.i) 
rather than from exploitation or coercion.
---------------------------------------------------------------------------

    The Commission seeks comment on whether this different unfairness 
analysis should apply to other highly paid or highly skilled workers 
who are not senior executives. Furthermore, in Part VI.C below, the 
Commission seeks comment on how this category of workers--whether 
``senior executives'' or a broader category of highly paid or highly 
skilled workers--should be defined, and whether different regulatory 
standards should apply to this category of workers.
    The Commission seeks comment on its preliminary finding that non-
compete clauses are an ``unfair'' method of competition under Section 
5.
a. Non-Compete Clauses Are Restrictive Conduct That Negatively Affects 
Competitive Conditions
    First, the Commission preliminarily finds non-compete clauses are 
an ``unfair'' method of competition under Section 5 because they are 
restrictive conduct that negatively affects competitive conditions.
    As noted above, courts have condemned restrictive or exclusionary 
conduct under Section 5 based not on the facial unfairness of the 
conduct, but on the impact of the conduct on competition.\243\ Non-
compete clauses are restrictive conduct. By their express terms, non-
compete clauses restrict a worker's ability to work for a competitor of 
the employer--for example, by accepting a job with a competitor or 
starting a business that would compete against the employer. Non-
compete clauses also restrict rivals from competing against the 
employer to attract their workers. Because non-compete clauses facially 
restrain competition in the labor market, courts have long held they 
are restraints of trade and proper subjects for scrutiny under the 
antitrust laws.\244\ Furthermore, as described in detail in this NPRM, 
there is considerable empirical evidence showing non-compete clauses 
negatively affect competition in labor markets and product and service 
markets.\245\ This evidence is summarized below.
---------------------------------------------------------------------------

    \243\ See supra Part IV.A.1.
    \244\ See, e.g., Am. Tobacco Co., 221 U.S. at 181-83 (holding 
several tobacco companies violated Sections 1 and 2 of the Sherman 
Act due to the collective effect of six of the companies' practices, 
one of which was the ``constantly recurring'' use of non-compete 
clauses); Newburger, Loeb & Co., Inc., 563 F.2d at 1082 (``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.'')
    \245\ See supra Part II.B.
---------------------------------------------------------------------------

i. Non-Compete Clauses Negatively Affect Competitive Conditions in 
Labor Markets
    As described in greater detail above in Part II.B.1, non-compete 
clauses negatively affect competitive conditions in labor markets by 
obstructing the sorting of workers and employers into the strongest 
possible matches. Labor markets function by matching workers and 
employers. In a well-functioning labor market, a worker who is seeking 
a better job--more pay, better working conditions, more enjoyable work, 
or whatever the worker may be seeking--can enter the labor market by 
looking for work. Employers who have positions available compete for 
the worker's services. The worker's current employer may also compete 
with these prospective employers by seeking to retain the worker--for 
example, by offering to raise the worker's pay or promote the worker. 
Ultimately, the worker chooses the job that best meets their 
objectives. In general, the more jobs available--i.e., the more options 
the worker has--the greater the possibility the worker will find a 
strong match.
    Just as employers compete for workers in a well-functioning labor 
market,

[[Page 3501]]

workers compete for jobs. In general, the more workers who are 
available--i.e., the more options the employer has--the stronger the 
match the employer will find. Through these processes--employers 
competing for workers, workers competing for jobs, and employers and 
workers matching with one another--competition in the labor market 
leads to higher earnings for workers, greater productivity for 
employers, and better economic conditions.
    In a perfectly competitive labor market, if a job that a worker 
would prefer more--for example, because it has higher pay or is in a 
better location--were to become available, the worker could switch to 
it quickly and easily. However, this perfectly competitive labor market 
exists only in theory. In practice, labor markets substantially deviate 
from perfect competition. Non-compete clauses, in particular, impair 
competition in labor markets by restricting a worker's ability to 
change jobs. If a worker is bound by a non-compete clause, and the 
worker wants a better job, the non-compete clause will prevent the 
worker from accepting a new job within the scope of the non-compete 
clause. These will often be the most natural alternative employment 
options for a worker: jobs in the same geographic area and in the 
worker's field of expertise. The result is less competition among 
employers for the worker's services. Since the worker is prevented from 
taking these jobs, the worker may decide not to enter the labor market 
at all, or the worker may enter the labor market but take a job outside 
of their field of expertise in which they are less productive.
    Non-compete clauses affect competition in labor markets through 
their use in the aggregate. The effect of an individual worker's non-
compete clause on competition in a particular labor market may be 
marginal or may be impossible to discern statistically. However, the 
use of a large number of non-compete clauses across a labor market 
demonstrably affects the opportunities of all workers in that market. 
By making it more difficult for many workers in a labor market to 
switch to new jobs, non-compete clauses inhibit optimal matches from 
being made between employers and workers across the labor force. As a 
result, where non-compete clauses are prevalent in a market, workers 
are more likely to remain in jobs that are less optimal with respect to 
the worker's ability to maximize their productive capacity. This 
materially reduces wages for workers--not only for workers who are 
subject to non-compete clauses, but other workers in a labor market as 
well, since jobs that would otherwise be better matches for an 
unconstrained worker are filled by workers subject to non-compete 
clauses.
    The Section 5 analysis as to whether conduct negatively affects 
competitive conditions does not require a showing that the conduct 
caused actual harm.\246\ However, whether conduct causes actual harm 
can be relevant to whether it is an unfair method of competition.\247\ 
There is significant empirical evidence that non-compete clauses cause 
actual harm to competition in labor markets, and that these harms are 
substantial.
---------------------------------------------------------------------------

    \246\ See Fed. Trade Comm'n v. Sperry & Hutchinson Co., 405 U.S. 
233, 244 (1972) (explaining that ``unfair competitive practices 
[are] not limited to those likely to have anticompetitive 
consequences after the manner of the antitrust laws''); In re Coca-
Cola Co., 117 F.T.C. 795, 915 (FTC 1994) (rejecting argument that 
Section 5 violation requires showing ``anticompetitive effects'').
    \247\ See Ethyl, 729 F.2d at 138 (evidence of actual harm can be 
``a relevant factor in determining whether the challenged conduct is 
unfair'').
---------------------------------------------------------------------------

    As described above in Part II.B.1.a, the Commission estimates at 
least one in five American workers--or approximately 30 million 
workers--is bound by a non-compete clause. The proliferation of non-
compete clauses is restraining competition in labor markets to such a 
degree that it is materially impacting workers' earnings--both across 
the labor force in general, and also specifically for workers who are 
not subject to non-compete clauses. The available evidence indicates 
increased enforceability of non-compete clauses substantially reduces 
workers' earnings, on average, across the labor market generally or for 
specific types of workers.\248\ The Commission estimates the proposed 
rule, which would prohibit employers from using non-compete clauses, 
would increase workers' total earnings by $250 to $296 billion per 
year.\249\
---------------------------------------------------------------------------

    \248\ See supra Part II.B.1. While there is evidence that 
increased enforceability of non-compete clauses increases the rate 
of earnings growth for physicians, Lavetti, Simon, & White, supra 
note 53 at 1051, the Commission estimates that the proposed rule may 
increase physicians' earnings, although the study does not allow for 
a precise calculation. See infra Part VII.B.1.a.ii.
    \249\ See infra Part VII.B.1 (describing the Commission's 
assessment of the benefits of the proposed rule).
---------------------------------------------------------------------------

    In addition to the evidence showing non-compete clauses reduce 
earnings for workers across the labor force, there is also evidence 
non-compete clauses reduce earnings specifically for workers who are 
not subject to non-compete clauses.\250\ One study finds when the use 
of non-compete clauses by employers increases, that drives down wages 
for workers who do not have non-compete clauses but who work in the 
same state and industry. This study also finds this effect is stronger 
where non-compete clauses are more enforceable. This study shows the 
reduction in earnings (and also reduced labor mobility) is due to a 
reduction in the rate of the arrival of job offers.\251\ Another study 
finds similarly that changes in non-compete clause enforceability in 
one state have negative impacts on workers' earnings in bordering 
states and that the effects are nearly as large as the effects in the 
state in which enforceability changed (though the effect tapers off as 
the distance to the bordering state increases).\252\ The authors 
conclude that, since the workers across the border are not directly 
affected by the law change--because contracts that they have signed do 
not become more or less enforceable--this effect must be due to changes 
in the local labor market.\253\
---------------------------------------------------------------------------

    \250\ See supra Part II.B.1.c.
    \251\ Starr, Frake, & Agarwal, supra note 76 at 4.
    \252\ Johnson, Lavetti, & Lipsitz, supra note 63 at 51.
    \253\ Id. at 30.
---------------------------------------------------------------------------

    The Commission preliminarily concludes non-compete clauses 
negatively affect competitive conditions in labor markets regardless of 
the worker's income or job function. Whether a worker is a senior 
executive or a security guard, non-compete clauses block the worker 
from switching to a job in which they would be better paid and more 
productive--restricting that worker's opportunities as well as the 
opportunities of other workers in the relevant labor market. The 
available data do not allow the Commission to estimate earnings effects 
for every occupation. However, the evidentiary record indicates non-
compete clauses depress wages for a wide range of subgroups of workers 
across the spectrum of income and job function. The Commission 
therefore estimates the proposed rule would increase earnings for 
workers in all of the subgroups of the labor force for which sufficient 
data is available.\254\
---------------------------------------------------------------------------

    \254\ See infra Part VII.B.1.a.
---------------------------------------------------------------------------

    The Commission seeks comment on its preliminary finding that non-
compete clauses negatively affect competitive conditions in labor 
markets.
ii. Non-Compete Clauses Negatively Affect Competitive Conditions in 
Markets for Products and Services
    The adverse effects of non-compete clauses on product and service 
markets largely result from reduced labor mobility. Several studies 
show the use of non-compete clauses by employers

[[Page 3502]]

reduces labor mobility. All of these studies have found decreased rates 
of labor mobility, as measured by job separations, hiring rates, job-
to-job mobility, implicit mobility defined by job tenure, and within- 
and between-industry mobility.\255\ The Commission does not view 
reduced labor mobility from non-compete clauses--in and of itself--as 
evidence that non-compete clauses negatively affect competition in 
product and service markets. Instead, reduced labor mobility is best 
understood as the primary driver of the effects in product and service 
markets the Commission is concerned about.
---------------------------------------------------------------------------

    \255\ See supra Part II.B.2.
---------------------------------------------------------------------------

    Reduced labor mobility from non-compete clauses negatively affects 
competitive conditions in product and service markets in several 
respects. First, there is evidence non-compete clauses increase 
consumer prices and concentration in the health care sector. There is 
also evidence non-compete clauses increase industrial concentration 
more broadly. Non-compete clauses may have these effects by inhibiting 
entrepreneurial ventures (which could otherwise enhance competition in 
goods and service markets) or by foreclosing competitors' access to 
talented workers.\256\
---------------------------------------------------------------------------

    \256\ See supra Part II.B.2.a.
---------------------------------------------------------------------------

    Second, non-compete clauses foreclose the ability of competitors to 
access talent by effectively forcing future employers to buy out 
workers from their non-compete clauses if they want to hire them. Firms 
must either make inefficiently high payments to buy workers out of non-
compete clauses with a former employer, which leads to deadweight 
economic loss, or forego the payment--and, consequently, the access to 
the talent the firm seeks. Whatever choice a firm makes, its economic 
outcomes in the market are harmed, relative to a scenario in which no 
workers are bound by non-compete clauses. There is evidence of this 
mechanism in the market for CEOs.\257\
---------------------------------------------------------------------------

    \257\ See supra Part II.B.2.b.
---------------------------------------------------------------------------

    Third, the weight of the evidence indicates non-compete clauses 
have a negative impact on new business formation. New business 
formation increases competition first by bringing new ideas to market, 
and second, by forcing incumbent firms to respond to new firms' ideas 
instead of stagnating. Non-compete clauses restrain new business 
formation by preventing workers subject to non-compete clauses from 
starting their own businesses. In addition, firms are more willing to 
enter markets in which they know there are potential sources of skilled 
and experienced labor, unhampered by non-compete clauses.\258\
---------------------------------------------------------------------------

    \258\ See supra Part II.B.2.c.
---------------------------------------------------------------------------

    Fourth, the weight of the evidence indicates non-compete clauses 
decrease innovation. Innovation may directly improve economic outcomes 
by increasing product quality or decreasing prices, or may promote 
competition because successful new products and services force 
competing firms to improve their own products and services. Non-compete 
clauses affect innovation by reducing the movement of workers between 
firms, which decreases knowledge flow between firms. Non-compete 
clauses also prevent workers from starting businesses in which they can 
pursue innovative new ideas.\259\
---------------------------------------------------------------------------

    \259\ See supra Part II.B.2.d.
---------------------------------------------------------------------------

    As noted above in Part II.B.2.e, there is also evidence non-compete 
clauses increase employee training and other forms of investment. The 
Commission considers this evidence below in Part IV.B as part of its 
analysis of the justifications for non-compete clauses.
    The Commission believes non-compete clauses for senior executives 
may harm competition in product markets in unique ways, to the extent 
that senior executives may be likely to start competing businesses, be 
hired by potential entrants or competitors, or lead the development of 
innovative products and services. Non-compete clauses for senior 
executives may also block potential entrants, or raise their costs, to 
a high degree, because such workers are likely to be in high demand by 
potential entrants. As a result, prohibiting non-compete clauses for 
senior executives may have relatively greater benefits for consumers 
than prohibiting non-compete clauses for other workers. The Commission 
seeks comment on this analysis as well as whether this reasoning may 
apply to highly paid and highly skilled workers who are not senior 
executives.
    The Commission seeks comment on its preliminary finding that non-
compete clauses negatively affect competitive conditions in markets for 
products and services.
b. Non-Compete Clauses Are Exploitative and Coercive at the Time of 
Contracting
    The Commission preliminarily finds non-compete clauses for workers 
other than senior executives are exploitative and coercive because they 
take advantage of unequal bargaining power between employers and 
workers at the time the employer and worker enter into the non-compete 
clause.
    As noted above, courts have held conduct that is exploitative and 
coercive can violate Section 5 where it burdens a not insignificant 
volume of commerce.\260\ Courts have long recognized bargaining power 
between employers and workers is unequal and, as a result, workers are 
vulnerable to exploitation and coercion through the use of non-compete 
clauses at the time of contracting. Courts have expressed this concern 
since at least the early eighteenth century. In the foundational 
English case Mitchel v. Reynolds, the court cited ``the great abuses 
these voluntary restraints are liable to . . . 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.'' \261\ 
As another court stated, more recently:
---------------------------------------------------------------------------

    \260\ See supra Part IV.A.1.
    \261\ 1 P. Wms. at 190.
---------------------------------------------------------------------------

    The average, individual employee has little but his labor to sell 
or to use to make a living. He is often in urgent need of selling it 
and in no position to object to boiler plate restrictive covenants 
placed before him to sign. To him, the right to work and support his 
family is the most important right he possesses. His individual 
bargaining power is seldom equal to that of his employer. . . . Under 
pressure of need and with little opportunity for choice, he is more 
likely than the seller to make a rash, improvident promise that, for 
the sake of present gain, may tend to impair his power to earn a 
living, impoverish him, render him a public charge or deprive the 
community of his skill and training.\262\
---------------------------------------------------------------------------

    \262\ Arthur Murray Dance Studios of Cleveland v. Witter, 105 
NE2d 685, 703-04 (Ohio Ct. Com. Pl. 1952). See also Restatement 
(Second) of Contracts (1981) sec. 188 cmt. g (``Postemployment 
restraints are scrutinized with particular care 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.'').
---------------------------------------------------------------------------

    Indeed, courts have cited the imbalance of bargaining power between 
workers and employers as a central reason for imposing stricter 
scrutiny on non-compete clauses between employers and workers than on 
non-compete clauses between businesses or between the seller and buyer 
of a business.\263\
---------------------------------------------------------------------------

    \263\ See, e.g., Alexander & Alexander, Inc. v. Danahy, 488 NE2d 
22, 29 (Mass. App. Ct. 1986); Diepholz v. Rutledge, 659 NE 989, 991 
(Ill. Ct. App. 1995); Palmetto Mortuary Transp., Inc. v. Knight 
Sys., Inc., 818 SE2d 724, 731 (S.C. 2018).
---------------------------------------------------------------------------

    The imbalance of bargaining power between employers and workers 
results from several factors. Many of these

[[Page 3503]]

factors relate to the nature of the employer-worker relationship in the 
United States generally. Most workers depend on income from their jobs 
to get by--to pay their rent or mortgage, pay their bills, and keep 
food on the table. For these workers, particularly the many workers who 
live paycheck to paycheck, loss of a job or a job opportunity can 
severely damage their finances.\264\ For these reasons, the loss of a 
job or an employment opportunity is far more likely to have serious 
financial consequences for a worker than the loss of a worker or a job 
candidate would have for most employers. In addition, employers 
generally have considerable labor market power, due to factors such as 
concentration and the difficulty of searching for a job.\265\ The 
considerable labor market power of employers has significantly 
diminished the bargaining power of U.S. workers.\266\
---------------------------------------------------------------------------

    \264\ See, e.g., Jennie E. Brand, The Far-Reaching Impact of Job 
Loss and Unemployment, 41 Ann. Rev. of Socio. 359 (2015); 
CareerBuilder, Living Paycheck to Paycheck is a Way of Life for 
Majority of U.S. Workers, According to New CareerBuilder Survey 
(Aug. 24, 2017), https://press.careerbuilder.com/2017-08-24-Living-Paycheck-to-Paycheck-is-a-Way-of-Life-for-Majority-of-U-S-Workers-According-to-New-CareerBuilder-Survey (reporting that 78% of 
American workers live paycheck to paycheck); Jeff Ostrowski, 
Bankrate, Survey: Fewer than 4 in 10 Americans could pay a surprise 
$1,000 bill from savings (Jan. 11, 2021), https://www.bankrate.com/banking/savings/financial-security-january-2021/.
    \265\ Treasury Labor Market Competition Report, supra note 41 at 
i-ii.
    \266\ Id. at ii (``As this report highlights, a careful review 
of the credible academic studies places the decrease in wages at 
roughly 20 percent relative to the level in a fully competitive 
market'').
---------------------------------------------------------------------------

    Several additional factors contribute to the imbalance of 
bargaining power between employers and workers generally. These include 
the decline in union membership, which forces more workers to negotiate 
with their employers individually; \267\ increased reliance by 
employers on various forms of outsourcing, which allows employers to 
fill persistent vacancies without having to raise wages or improve 
conditions for incumbent workers; \268\ and the proliferation of no-
poaching agreements, which limit the mobility of workers and, as a 
result, their bargaining power.\269\
---------------------------------------------------------------------------

    \267\ See, e.g., Alan Krueger, Luncheon Address: Reflections on 
Dwindling Worker Bargaining Power and Monetary Policy at 272 (Aug. 
24, 2018), https://www.kansascityfed.org/Jackson%20Hole/documents/6984/Lunch_JH2018.pdf.
    \268\ Id.
    \269\ Id. at 273.
---------------------------------------------------------------------------

    While the employer-worker relationship is defined by an imbalance 
of bargaining power generally, the imbalance of bargaining power is 
particularly acute in the context of negotiating employment terms such 
as non-compete clauses, for several reasons. First, as courts have long 
recognized, employers are repeat players who are likely to have greater 
experience and skill at bargaining, in the context of negotiating 
employment terms, than individual workers.\270\ Second, and relatedly, 
workers are not likely to seek the assistance of counsel in reviewing 
employment terms,\271\ while employers are more likely to seek the 
assistance of counsel in drafting them.
---------------------------------------------------------------------------

    \270\ See, e.g., Samuel Stores, Inc. v. Abrams, 108 A. 541, 543 
(Conn. 1919).
    \271\ In one survey, only 7.9% of workers with non-compete 
clauses reported consulting a lawyer in connection with the non-
compete clause. Starr, Prescott, & Bishara, supra note 42, at 72.
---------------------------------------------------------------------------

    Third, research indicates consumers exhibit cognitive biases in the 
way they consider contractual terms,\272\ and the same may be true of 
workers. Consumers rarely read standard-form contracts.\273\ Consumers 
also tend to focus their attention on a few salient terms of the 
transaction, such as price and quantity, and tend to disregard other 
terms, particularly terms that are relatively obscure.\274\ Consumers 
are particularly likely to disregard contingent terms--terms concerning 
scenarios that may or may not come to pass--or to be unable to assess 
what the impact of those terms may be.\275\ Consumers also tend to 
disregard onerous terms or terms that involve difficult trade-offs, 
such as giving up legal rights or future opportunities.\276\ Workers 
likely display similar cognitive biases in the way they consider 
employment terms. These reasons explain why the imbalance of bargaining 
power between workers and employers is particularly high in the context 
of negotiating employment terms such as non-compete clauses.
---------------------------------------------------------------------------

    \272\ See, e.g., Arnow-Richman (2006), supra note 56 at 981; 
Russell Korobkin, Bounded Rationality, Standard Form Contracts, and 
Unconscionability, 70 U. Chi. L. Rev. 1203, 1206 (2003); Robert 
Hillman & Jeffrey Rachlinski, Standard-Form Contracting in the 
Electronic Age, 77 N.Y.U. L. Rev. 429, 450-54 (2002).
    \273\ Korobkin, supra note 272 at 1206.
    \274\ Arnow-Richman (2006), supra note 56 at 981; Hillman & 
Rachlinksi, supra note 272 at 452.
    \275\ See, e.g., Estlund, supra note 144 at 413 (2006). See also 
Fed. Trade Comm'n, Credit Practices Rule, 49 FR 7740, 7744 (Mar. 1, 
1984) (noting that consumers tend disregard contingent provisions 
and concentrate their search on factors such as interest rates and 
payment terms).
    \276\ Arnow-Richman (2006), supra note 56 at 981; Korobkin, 
supra note 272 at 1203-31.
---------------------------------------------------------------------------

    There is considerable evidence employers are exploiting this 
imbalance of bargaining power through the use of non-compete clauses. 
Non-compete clauses are typically standard-form contracts,\277\ which, 
as noted above, workers are not likely to read. The evidence shows 
workers rarely bargain over non-compete clauses \278\ and rarely seek 
the assistance of counsel in reviewing non-compete clauses.\279\ 
Furthermore, research indicates that, in states where non-compete 
clauses are unenforceable, workers are covered by non-compete clauses 
at roughly the same rate as workers in other states,\280\ suggesting 
that employers may believe workers are unaware of their legal rights, 
or that employers may be seeking to take advantage of workers' lack of 
knowledge of their legal rights. In addition, there is evidence 
employers often provide workers with non-compete clauses after they 
have accepted the job offer--in some cases, on or after their first day 
of work--when the worker's negotiating power is at its weakest, since 
the worker may have turned down other job offers or left their previous 
job.\281\
---------------------------------------------------------------------------

    \277\ Starr, Prescott, & Bishara, supra note 42 at 72 (``Taken 
together, the evidence in this section indicates that employers 
present (or employees receive) noncompete proposals as take-it-or-
leave-it propositions.'').
    \278\ Id.
    \279\ Id.
    \280\ Id. at 81.
    \281\ Marx (2011), supra note 55 at 706.
---------------------------------------------------------------------------

    Because there is a considerable imbalance of bargaining power 
between workers and employers in the context of negotiating employment 
terms, and because employers take advantage of this imbalance of 
bargaining power through the use of non-compete clauses, the Commission 
preliminarily finds non-compete clauses are exploitative and coercive 
at the time of contracting.
    As noted above, for coercive conduct to constitute unfair method of 
competition, it must also burden a not insignificant volume of 
commerce. The Commission preliminarily finds non-compete clauses burden 
a not insignificant volume of commerce due to their negative effects on 
competitive conditions in labor markets and product and service 
markets, which are described above.\282\
---------------------------------------------------------------------------

    \282\ See supra Part IV.A.1.a.i-ii.
---------------------------------------------------------------------------

    This preliminary finding does not apply to workers who are senior 
executives. Non-compete clauses for senior executives are unlikely to 
be exploitative or coercive at the time of contracting, because senior 
executives are likely to negotiate the terms of their employment and 
may often do so with the assistance of counsel. The Commission seeks 
comment on whether there are other categories of highly paid or highly 
skilled workers (i.e., other

[[Page 3504]]

than senior executives) to whom this preliminary finding should not 
apply.
    The Commission seeks comment on all aspects of its preliminary 
finding that non-compete clauses are exploitative and coercive at the 
time of contracting.
c. Non-Compete Clauses Are Exploitative and Coercive at the Time of the 
Worker's Potential Departure From the Employer
    The Commission preliminarily finds non-compete clauses for workers 
other than senior executives are exploitative and coercive at the time 
of the worker's potential departure from the employer, because they 
force a worker to either stay in a job they want to leave or choose an 
alternative that likely impacts their livelihood.
    For most workers who want to leave their jobs, the most natural 
employment options will be work in the same field and in the same 
geographic area. However, where a worker is bound by a non-compete 
clause, the worker's employment options are significantly limited. A 
worker who is subject to a non-compete clause, and who wants to leave 
their job, faces an undesirable choice that will likely affect their 
livelihood: either move out of the area; leave the workforce for a 
period of time; leave their field for period of time; pay the employer 
a sum of money to waive the non-compete clause; or violate the non-
compete clause and risk a lawsuit from the employer. By forcing a 
worker who wants to leave their job to either stay in their job or take 
an action that will likely negatively affect their livelihood, non-
compete clauses coerce workers into remaining in their current jobs. 
Courts have long expressed concern about this coercive effect of non-
compete clauses--that non-compete clauses may threaten a worker's 
livelihood if they leave their job.\283\
---------------------------------------------------------------------------

    \283\ See, e.g., Mitchel, 1 P. Wms. at 190 (citing ``the 
mischief which may arise from [non-compete clauses] . . . to the 
party, by the loss of his livelihood'').
---------------------------------------------------------------------------

    Workers have an inalienable right to quit their jobs.\284\ The 
Supreme Court has described this ``right to change employers'' as a 
critical ``defense against oppressive hours, pay, working conditions, 
or treatment.'' \285\ Strictly speaking, non-compete clauses do not 
prevent workers from quitting their jobs. However, non-compete clauses 
``burden the ability to quit, and with it the ability to demand better 
wages and working conditions and to resist oppressive conditions in the 
current job.'' \286\ Non-compete clauses burden the ability to quit by 
forcing workers to either remain in their current job or, as described 
above, take an action--such as leaving the labor force for a period of 
time or taking a job in a different field--that would likely affect 
their livelihood. For this reason, the Commission finds non-compete 
clauses are exploitative and coercive at the time of the worker's 
potential departure.
---------------------------------------------------------------------------

    \284\ Bailey v. Alabama, 219 U.S. 219, 242 (1911).
    \285\ Pollock v. Williams, 322 U.S. 4, 17-18 (1944).
    \286\ See Estlund, supra note 144 at 407.
---------------------------------------------------------------------------

    As noted above, for coercive conduct to constitute unfair method of 
competition, it must also burden a not insignificant volume of 
commerce. The Commission preliminarily finds non-compete clauses burden 
a not insignificant volume of commerce due to their negative effects on 
competitive conditions in labor markets and product and service 
markets, which are described above.\287\
---------------------------------------------------------------------------

    \287\ See supra Part IV.A.1.a.i-ii.
---------------------------------------------------------------------------

    This preliminary finding does not apply to workers who are senior 
executives. Non-compete clauses for senior executives are unlikely to 
be exploitative or coercive at the time of the executive's departure. 
Because many senior executives negotiate their non-compete clauses with 
the assistance of expert counsel, they are likely to have bargained for 
a higher wage or more generous severance package in exchange for 
agreeing to the non-compete clause.\288\ The Commission seeks comment 
on whether there are other categories of highly paid or highly skilled 
workers (i.e., other than senior executives) to whom this preliminary 
finding should not apply.
---------------------------------------------------------------------------

    \288\ See, e.g., Stewart J. Schwab & Randall S. Thomas, An 
Empirical Analysis of CEO Employment Contracts: What Do Top 
Executives Bargain For?, 63 Wash. & Lee L. Rev. 231, 256-57 (2006) 
(noting that 84% of CEO employment contracts that included both a 
non-compete clause and a severance payment have a severance payment 
that is equal to or greater than the length of the non-competition 
period).
---------------------------------------------------------------------------

    The Commission seeks comment on all aspects of its preliminary 
finding that non-compete clauses are exploitative and coercive at the 
time of the worker's potential departure from the employer.
2. Non-Compete Clauses Are a Method of Competition
    For conduct to be an ``unfair method of competition'' under Section 
5, it must be both ``unfair'' and a ``method of competition.'' In 
Ethyl, the court distinguished between a ``condition'' of a 
marketplace, such as an oligopolistic market structure, and a 
``method'' of competition, which it described as ``specific conduct 
which promotes'' an anticompetitive result.\289\ When an employer uses 
a non-compete clause, it undertakes conduct in a marketplace. This 
conduct implicates competition; indeed, it has demonstrable effects on 
competition in both labor markets and markets for products and 
services.\290\ For these reasons, the Commission preliminarily finds 
non-compete clauses are a method of competition under Section 5. The 
Commission seeks comment on this preliminary finding.
---------------------------------------------------------------------------

    \289\ 729 F.2d at 139.
    \290\ See supra Part II.B.
---------------------------------------------------------------------------

B. The Justifications for Non-Compete Clauses Do Not Alter the 
Commission's Preliminary Determination

    For the reasons described above in Part IV.A, the Commission 
preliminarily determines non-compete clauses are an unfair method of 
competition under Section 5. In this Part IV.B, the Commission 
preliminarily finds the justifications for non-compete clauses do not 
alter the Commission's preliminary determination that non-compete 
clauses are an unfair method of competition.
    The circumstances under which a business justification can overcome 
a finding that conduct is an unfair method of competition are narrow. 
In Fashion Originators' Guild of America v. FTC, the Court held that, 
in light of ``the purpose and object of this combination, its potential 
power, its tendency to monopoly, [and] the coercion it could and did 
practice upon a rival method of competition,'' the Commission did not 
err by refusing to hear evidence related to justifications, ``for the 
reasonableness of the methods pursued by the combination to accomplish 
its unlawful object is no more material than would be the 
reasonableness of the prices fixed by unlawful combination.'' \291\ In 
Atlantic Refining, the Court similarly held the Commission did not err 
by refusing to consider ``evidence of economic justification for the 
program,'' because, while the arrangements at issue ``may well provide 
Atlantic with an economical method of assuring efficient product 
distribution among its dealers . . . the Commission was clearly 
justified in refusing the participants an opportunity to offset these 
evils by a showing of economic benefit to themselves.'' \292\
---------------------------------------------------------------------------

    \291\ 312 U.S. at 467-68.
    \292\ 381 U.S. at 371.
---------------------------------------------------------------------------

    Similarly, in L.G. Balfour Co., the Commission challenged as an 
unfair method of competition the use of exclusive dealing contracts by 
a firm that manufactured and sold jewelry and other items bearing the 
insignia of fraternities and high schools. The firm argued the 
contracts were justified, in

[[Page 3505]]

part because the fraternities and schools benefitted from uniformity in 
the design and workmanship of the items. The court reasoned ``[w]hile 
it is relevant to consider the advantages of a trade practice on 
individual companies in the market, this cannot excuse an otherwise 
illegal business practice.'' \293\ The court found the exclusive 
contracts were not justified, because the fraternities and schools had 
other means for accomplishing the goal of maintaining high quality for 
their jewelry and because the firm did not establish that its 
competitors could not satisfy its customers' needs.\294\
---------------------------------------------------------------------------

    \293\ 442 F.2d at 15, citing Motion Picture Advert. Serv. Co., 
344 U.S. 392.
    \294\ Id. at 14-15.
---------------------------------------------------------------------------

    In this Part IV.B, the Commission considers the commonly cited 
business justifications for non-compete clauses but preliminarily finds 
they do not alter the Commission's preliminary determination that non-
compete clauses are an unfair method of competition, for two reasons. 
First, employers have alternatives to non-compete clauses that 
reasonably achieve the same purposes while burdening competition to a 
less significant degree. Second, the asserted benefits from these 
commonly cited justifications do not outweigh the considerable harm 
from non-compete clauses.
1. Commonly Cited Justifications for Non-Compete Clauses
    The most cited justifications for non-compete clauses are that they 
increase employers' incentive to make productive investments, including 
in worker training, client attraction, or in creating or sharing trade 
secrets with workers. According to these justifications, without non-
compete clauses, employment relationships are subject to an investment 
hold-up problem. Investment hold-up occurs where an employer--faced 
with the possibility a worker may depart after receiving some sort of 
valuable investment--opts not to make that investment in the first 
place, thereby decreasing the firm's productivity and overall social 
welfare. For example, according to these justifications, an employer 
may be more reticent to invest in trade secrets or other confidential 
information; to share this information with its workers; or to train 
its workers if it knows the worker may depart for or may establish a 
competing firm. Courts have cited these justifications when upholding 
non-compete clauses under state common law or antitrust law.\295\
---------------------------------------------------------------------------

    \295\ See, e.g., U.S. v. Addyston Pipe & Steel Co., 85 F. 271, 
281 (6th Cir. 1898); Polk Bros., Inc. v. Forest City Enters., 776 
F.2d 185, 189 (7th Cir. 1985).
---------------------------------------------------------------------------

    As described above in Part II.B.2.e, there is evidence non-compete 
clauses increase worker training and capital investment (e.g., 
investment in physical assets, such as machines). Non-compete clauses 
may increase an employer's incentive to train their workers or invest 
in capital equipment because workers bound by non-compete clauses are 
less likely to leave their jobs for competitors. The author of the 
study assessing effects on capital investment finds there are likely 
two mechanisms driving these effects. First, firms may be more likely 
to invest in capital when they train their workers because worker 
training and capital expenditure are complementary (i.e., the return on 
investment in capital equipment is greater when workers are more highly 
trained). Second, non-compete clauses reduce competition, and firms' 
returns to capital expenditure are greater when competition is lower, 
incentivizing firms to invest more in capital.\296\
---------------------------------------------------------------------------

    \296\ Jeffers, supra note 92 at 29.
---------------------------------------------------------------------------

    The Commission is not aware of any evidence of a relationship 
between the enforceability of non-compete clauses and the rate at which 
companies make other types of productive investments, such as 
investments in creating or sharing trade secrets. Similarly, the 
Commission is not aware of any evidence non-compete clauses reduce 
trade secret misappropriation or the loss of other types of 
confidential information. The Commission's understanding is there is 
little reliable empirical data on trade secret theft and firm 
investment in trade secrets in general, and no reliable data on how 
non-compete clauses affect these practices. The Commission understands 
these are difficult areas for researchers to study, due to, for 
example, the lack of a governmental registration requirement for trade 
secrets and the unwillingness of firms to disclose information about 
their practices related to trade secrets.\297\
---------------------------------------------------------------------------

    \297\ See, e.g., David S. Levine & Christopher B. Seaman, The 
DTSA at One: An Empirical Study of the First Year of Litigation 
Under the Defend Trade Secrets Act, 53 Wake Forest L. Rev. 105, 120-
22 (2018).
---------------------------------------------------------------------------

    The Commission is also not aware of any evidence that increased 
investment due to non-compete clauses leads to reduced prices for 
consumers. Indeed, the only empirical study of the effects of non-
compete clauses on consumer prices--in the health care sector--finds 
increased final goods prices as the enforceability of non-compete 
clauses increases.\298\
---------------------------------------------------------------------------

    \298\ See supra Part II.B.2.a.
---------------------------------------------------------------------------

2. Employers Have Alternatives to Non-Compete Clauses for Protecting 
Valuable Investments
    There are two reasons why the business justifications for non-
compete clauses do not alter the Commission's preliminary determination 
non-compete clauses are an unfair method of competition. The first is 
employers have alternatives to non-compete clauses for protecting 
valuable investments. These alternatives may not be as protective as 
employers would like, but they reasonably accomplish the same purposes 
as non-compete clauses while burdening competition to a less 
significant degree.
    As noted above, the most commonly cited justifications for non-
compete clauses are that they increase an employer's incentive to make 
productive investments--such as investing in trade secrets or other 
confidential information, sharing this information with its workers, or 
training its workers--because employers may be more likely to make such 
investments if they know workers are not going to depart for or 
establish a competing firm. However, non-compete clauses restrict 
considerably more activity than necessary to achieve these benefits. 
Rather than restraining a broad scope of beneficial competitive 
activity--by barring workers altogether from leaving work with the 
employer for a competitor and starting a business that would compete 
with the employer--employers have alternatives for protecting valuable 
investments that are much more narrowly tailored to limit impacts on 
competitive conditions. These alternatives restrict a considerably 
smaller scope of beneficial competitive activity than non-compete 
clauses because--while they may restrict an employee's ability to use 
or disclose certain information--they generally do not prevent workers 
from working for a competitor or starting their own business 
altogether.\299\
---------------------------------------------------------------------------

    \299\ See, e.g., MAI Basic Four, Inc. v. Basis, Inc., 880 F.2d 
286, 287-88 (10th Cir. 1989) (stating that workers subject to NDAs--
unlike workers subject to non-compete clauses--``remain free to work 
for whomever they wish, wherever they wish, and at whatever they 
wish,'' subject only to the terms that prohibit them from disclosing 
or using certain information.'').
---------------------------------------------------------------------------

a. Trade Secret Law
    Trade secret law provides employers with an alternative means of 
protecting their investments in trade secrets. Trade secret law is a 
form of intellectual property law that protects confidential

[[Page 3506]]

business information.\300\ It also serves as an alternative to the 
patent system, ``granting proprietary rights to particular 
technologies, processes, designs, or formulae that may not be able to 
satisfy the rigorous standards for patentability.'' \301\ Even where 
information meets standards for patentability, companies may choose to 
rely on trade secret law and not obtain a patent, because they wish to 
keep information out of the public domain.\302\
---------------------------------------------------------------------------

    \300\ Brian T. Yeh, Protection of Trade Secrets: Overview of 
Current Law and Legislation, Cong. Rsch. Serv. Report R43714 (April 
22, 2016) at 4.
    \301\ Id.
    \302\ Id. at 4-5.
---------------------------------------------------------------------------

    Trade secret law has developed significantly in recent decades. 
Prior to the late 1970s, trade secret law across the states was 
inconsistent, leading to significant uncertainty regarding the scope of 
trade secret protections and the appropriate remedies for 
misappropriation.\303\ Recognizing the need for more uniform laws, the 
American Bar Association approved the Uniform Trade Secrets Act 
(``UTSA'') in 1979.\304\ Forty-seven states and the District of 
Columbia have adopted the UTSA.\305\ The three states that have not 
adopted the UTSA offer protection to trade secrets under a different 
statute or under common law.\306\
---------------------------------------------------------------------------

    \303\ Uniform Trade Secrets Act With 1985 Amendments (Feb. 11, 
1986), Prefatory Note at 1.
    \304\ Id. Prefatory Note at 3.
    \305\ See Levine & Seaman, supra note 297 at 113.
    \306\ Yeh, supra note 300 at 6 n.37.
---------------------------------------------------------------------------

    The UTSA provides a civil cause of action for trade secret 
misappropriation, which refers to disclosure or use of a trade secret 
by a former employee without express or implied consent.\307\ The UTSA 
also provides for injunctive and monetary relief, including 
compensatory damages, punitive damages, and attorney's fees.\308\ In 
some states, under the ``inevitable disclosure doctrine,'' courts may 
enjoin a worker from working for a competitor of the worker's employer 
where it is inevitable the worker will disclose trade secrets in the 
performance of the worker's job duties.\309\ The inevitable disclosure 
doctrine is highly controversial. Several states have declined to adopt 
it altogether, citing the doctrine's harsh effects on worker 
mobility.\310\ Other states have required employers to meet high 
evidentiary burdens related to inevitability, irreparable harm, and bad 
faith before issuing an injunction pursuant to the doctrine.\311\
---------------------------------------------------------------------------

    \307\ UTSA, supra note 303 at sec. 1(2).
    \308\ Id. at secs. 2-4.
    \309\ See, e.g., PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th 
Cir. 1995) (affirming the district court's order enjoining an 
employee from assuming his responsibilities at a competing employer 
for six months).
    \310\ See Bayer Corp. v. Roche Molecular Sys., Inc., 72 F. Supp. 
2d 1111, 1120 (N.D. Cal. 1999); LeJeune v. Coin Acceptors, Inc., 849 
A.2d 451, 471 (Md. 2004).
    \311\ See, e.g., Eleanore R. Godfrey, Inevitable Disclosure of 
Trade Secrets: Employee Mobility v. Employer Rights, 3. J. High 
Tech. L. 161 (2004).
---------------------------------------------------------------------------

    In addition, in 2016, Congress enacted the Defend Trade Secrets Act 
of 2016 (``DTSA''), which established a civil cause of action under 
federal law for trade secret misappropriation.\312\ The DTSA brought 
the rights of trade secret owners ``into alignment with those long 
enjoyed by owners of other forms of intellectual property, including 
copyrights, patents, and trademarks.'' \313\ Similar to state laws 
modeled on the UTSA, the DTSA authorizes civil remedies for trade 
secret misappropriation, including injunctive relief, damages 
(including punitive damages), and attorney's fees.\314\ The DTSA also 
authorizes a court, in ``extraordinary circumstances,'' to issue civil 
ex parte orders for the ``seizure of property necessary to prevent the 
propagation or dissemination of the trade secret that is the subject of 
the action.'' \315\
---------------------------------------------------------------------------

    \312\ Defend Trade Secrets Act of 2016, Public Law 114-153, 130 
Stat. 376 (May 11, 2016).
    \313\ U.S. Senate, Report to Accompany S. 1890, the Defend Trade 
Secrets Act of 2016, S. Rept. 114-220 at 3.
    \314\ 18 U.S.C. 1836(b)(3).
    \315\ 18 U.S.C. 1836(b)(2).
---------------------------------------------------------------------------

    Furthermore, trade secret theft is a federal crime. The Economic 
Espionage Act of 1996 (``EEA'') makes it a federal crime to steal a 
trade secret for either (1) the benefit of a foreign entity (``economic 
espionage'') or (2) the economic benefit of anyone other than the owner 
(``theft of trade secrets'').\316\ The EEA authorizes substantial 
criminal fines and penalties for these crimes.\317\ The EEA further 
authorizes criminal or civil forfeiture, including of ``any property 
constituting, or derived from, any proceeds obtained directly or 
indirectly as a result of'' an EEA offense.\318\ The EEA also requires 
offenders to pay restitution to victims of trade secret theft.\319\
---------------------------------------------------------------------------

    \316\ 18 U.S.C. 1831 (economic espionage); 18 U.S.C. 1832 (theft 
of trade secrets).
    \317\ 18 U.S.C. 1831-1832.
    \318\ 18 U.S.C. 1834, 2323.
    \319\ 18 U.S.C. 1834, 2323.
---------------------------------------------------------------------------

    Under these laws, the term ``trade secret'' is defined expansively 
and includes a wide range of confidential information. The UTSA 
generally defines a ``trade secret'' as information that (1) derives 
independent economic value from not being generally known to other 
persons who can obtain economic value from its disclosure or use and 
(2) is the subject of reasonable efforts to maintain its secrecy.\320\ 
The DTSA and EEA use a similar definition.\321\ The Supreme Court has 
held ``some novelty'' is required for information to be a trade secret, 
because ``that which does not possess novelty is usually known.'' \322\ 
Overall, the definition of ``trade secret'' covers a wide range of 
information employers seek to protect from disclosure. As the high 
court of one state noted, ``[t]here is virtually no category of 
information that cannot, as long as the information is protected from 
disclosure to the public, constitute a trade secret.'' \323\
---------------------------------------------------------------------------

    \320\ UTSA, supra note 303 at sec. 1(4).
    \321\ 18 U.S.C. 1839(3).
    \322\ Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 476 (1974).
    \323\ U.S. West Commc'ns, Inc. v. Off. of Consumer Advoc., 498 
NW2d 711, 714 (Iowa 1993). See also Confold Pac., Inc. v. Polaris 
Indus., Inc., 433 F.3d 952 (7th Cir. 2006) (Posner, J.).
---------------------------------------------------------------------------

    The viability of trade secret law as a means for redressing trade 
secret theft is illustrated by the fact that firms regularly bring 
claims under trade secret law. A recent analysis by the legal analytics 
firm Lex Machina finds 1,382 trade secret lawsuits were filed in 
federal court in 2021.\324\ Perhaps due to the enactment of the DTSA, 
the number of cases filed increased 30% from 2015 to 2017--from 1,075 
to 1,396 cases--and has remained steady ever since.\325\ In addition, 
an analysis by the law firm Morrison Foerster finds 1,103 trade secret 
cases were filed in state courts in 2019.\326\ The number of cases 
filed in state court has held steady since 2015, when 1,161 cases were 
filed.\327\ The fact that a considerable number of trade secret 
lawsuits are filed in federal and state court--approximately 2,500 
cases per year--and the fact that this number has held steady for 
several years suggests employers view trade secret law as a viable 
means of obtaining redress for trade secret theft.
---------------------------------------------------------------------------

    \324\ Lex Machina, Infographic, Trade Secret Litigation Report 
2021, https://lexmachina.com/resources/infographic-trade-secret-report/.
    \325\ Kenneth A. Kuwayti, John R. Lanham, & Candice F. Heinze, 
Morrison Foerster, Client Alert, Happy Anniversary, DTSA: The Defend 
Trade Secrets Act at Five (May 25, 2021).
    \326\ Id.
    \327\ Id.
---------------------------------------------------------------------------

    In sum, intellectual property law already provides significant 
legal protections for an employer's trade secrets. Trade secret law may 
not be as protective as some firms might like, but overall, it provides 
employers with a viable means of protecting their investments in trade 
secrets.
b. Non-Disclosure Agreements
    Employers that seek to protect valuable investments also have the

[[Page 3507]]

ability to enter into NDAs with their workers.\328\ NDAs, which are 
also commonly known as confidentiality agreements, are contracts in 
which a party agrees not to disclose information the contract 
designates as confidential. NDAs may also prohibit workers from using 
information that is designated as confidential. If a worker violates an 
NDA, the worker may be liable for breach of contract.
---------------------------------------------------------------------------

    \328\ In this NPRM, we use the term ``NDA'' to refer to 
contractual provisions that are designed to protect trade secrets or 
other business information that has economic value. Employers may 
also seek to use NDAs to protect other kinds of information, such as 
information about discrimination, harassment, sexual assault, 
corporate wrongdoing, or information that may disparage the company 
or its executives or employees. These types of NDAs have been widely 
criticized for, among other things, their pernicious effects on 
workers. See, e.g., Rachel Arnow-Richman et al., Supporting Market 
Accountability, Workplace Equity, and Fair Competition by Reining In 
Non-Disclosure Agreements, UC-Hastings Research Paper Forthcoming at 
2-6 (January 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4022812.
---------------------------------------------------------------------------

    Employers regularly use NDAs to protect trade secrets and other 
confidential business information. Researchers estimate between 33% and 
57% of U.S. workers are subject to at least one NDA.\329\ In most 
states, NDAs are more enforceable than non-compete clauses.\330\
---------------------------------------------------------------------------

    \329\ Id.
    \330\ See Chris Montville, Reforming the Law of Proprietary 
Information, 56 Duke L.J. 1159, 1179-83 (2007).
---------------------------------------------------------------------------

    The widespread use of NDAs by firms has raised concerns that NDAs 
may inhibit innovation and worker mobility.\331\ Scholars have also 
raised concerns that overbroad NDAs can function as de facto non-
compete clauses.\332\ However, the protection of trade secrets and 
other limited confidential business information is widely recognized as 
a legitimate use of NDAs.\333\
---------------------------------------------------------------------------

    \331\ See Rex N. Alley, Business Information and Non-Disclosure 
Agreements: A Public Policy Framework, 116 Nw. L. Rev. 817, 832 
(2022).
    \332\ See, e.g., Arnow-Richman et al., supra note 328 at 5. See 
also Brown, 57 Cal. App. 5th at 319.
    \333\ See Montville, supra note 330 at 1179-83.
---------------------------------------------------------------------------

    NDAs that are unusually broad in scope may function as de facto 
non-compete clauses, hence falling within the scope of the proposed 
rule.\334\ However, appropriately tailored NDAs, which would fall 
outside the scope of the proposed rule,\335\ burden competition to a 
lesser degree than non-compete clauses. Such NDAs may prevent workers 
from disclosing or using certain information, but they generally do not 
prevent workers from working for a competitor or starting their own 
business altogether. As the U.S. Court of Appeals for the Tenth Circuit 
has stated, workers subject to NDAs--unlike workers subject to non-
compete clauses--``remain free to work for whomever they wish, wherever 
they wish, and at whatever they wish,'' subject only to the terms that 
prohibit them from disclosing or using certain information.\336\
---------------------------------------------------------------------------

    \334\ See proposed Sec.  910.1(b)(2) (describing the functional 
test for whether a contractual term is a non-compete clause) and 
infra Part V (in the section-by-section analysis for proposed Sec.  
910.1(b)).
    \335\ Id.
    \336\ MAI Basic Four, Inc., 880 F.2d at 287-88.
---------------------------------------------------------------------------

c. Other Means of Protecting Valuable Investments
    In addition to trade secret law and NDAs, employers have additional 
means of protecting valuable investments. For example, if an employer 
wants to prevent a worker from leaving right after receiving valuable 
training, the employer can sign the worker to an employment contract 
with a fixed duration. An employer can establish a term of employment 
long enough for the employer to recoup its training investment without 
restricting a worker's ability to compete with the employer after the 
worker's employment ends. Employers that wish to retain their workers 
can also pay the worker more, offer them better hours or better working 
conditions, or otherwise improve the conditions of their employment. 
These are all viable alternatives for protecting training investments, 
and other investments an employer may make, that do not restrict a 
worker's ability to work for a competitor of the employer or a rival's 
ability to compete against the worker's employer to attract the worker.
    Proponents of non-compete clauses sometimes assert that, without 
non-compete clauses, firms will be unable to protect their trade 
secrets or other valuable investments. However, there are three states 
in which non-compete clauses are generally unavailable to employers 
today: California, North Dakota, and Oklahoma. In these three states, 
employers generally cannot enforce non-compete clauses, so they must 
protect their investments using one or more of the alternatives 
described above. The experiences of these states suggest the 
alternatives described above are fundamentally viable for protecting 
valuable firm investments.
    Non-compete clauses have been void in California since 1872, in 
North Dakota since 1877, and in Oklahoma since 1890.\337\ California is 
a state where large companies have succeeded--it is home to four of the 
world's ten largest companies by market capitalization--and it also 
maintains a vibrant startup culture.\338\ Since the 1980s, California 
has become the global center of the technology sector, and technology 
firms are highly dependent on protecting trade secrets and other 
confidential information.\339\ (Indeed, researchers have posited that 
high-tech clusters in California may have been aided by increased labor 
mobility due to the unenforceability of non-compete clauses.\340\) In 
North Dakota and Oklahoma, the energy industry has thrived, and firms 
in the energy industry depend on the ability to protect trade secrets 
and other confidential information.
---------------------------------------------------------------------------

    \337\ Gilson, supra note 88 at 616 (California); Werlinger v. 
Mutual Service Casualty Ins. Co., 496 N.W.2d 26, 30 (N.D. 1993) 
(North Dakota); Brandon Kemp, Noncompetes in Oklahoma Mergers and 
Acquisitions, 88 Okla. Bar J. 128 (Jan. 21, 2017) (Oklahoma).
    \338\ Josh Dylan, What Is Market Cap In Stocks?, Nasdaq.com 
(Aug, 12, 2022); Ewing Marion Kauffman Found., State 
Entrepreneurship Rankings, https://www.realclearpublicaffairs.com/public_affairs/2019/02/25/kauffman_foundation_state_entrepreneurship_rankings.html.
    \339\ See, e.g., Gilson, supra note 88 at 594-95.
    \340\ Id.; Fallick, Fleischman, & Rebitzer, supra note 89.
---------------------------------------------------------------------------

    The economic success in these three states of industries highly 
dependent on trade secrets and other confidential information 
illustrates that companies have viable alternatives to non-compete 
clauses for protecting valuable investments. Relative to non-compete 
clauses, these alternatives are more narrowly tailored to limit impacts 
on competitive conditions.
    The Commission seeks comment on its preliminary finding that 
employers have reasonable alternatives to non-compete clauses for 
protecting their investments.
3. The Asserted Benefits From These Justifications Do Not Outweigh the 
Harms From Non-Compete Clauses
    The second reason why the commonly cited business justifications 
for non-compete clauses do not alter the Commission's preliminary 
determination that non-compete clauses are an unfair method of 
competition is that, overall, the asserted benefits from these 
justifications do not outweigh the harms from non-compete clauses.
    As described above, the Commission preliminarily finds that, for 
some workers, non-compete clauses are exploitative and coercive because 
they take advantage of unequal bargaining power between employers and 
workers at the time of contracting.\341\ The

[[Page 3508]]

Commission also preliminarily finds that, for some workers, non-compete 
clauses are exploitative and coercive at the time of the worker's 
potential departure from the employer because they force a worker to 
either stay in a job they want to leave or choose an alternative that 
likely impacts their livelihood.\342\ For these workers, for whom non-
competes are facially unfair, the justifications for non-compete 
clauses must overcome a high bar to alter the Commission's preliminary 
determination that non-compete clauses are an unfair method of 
competition.\343\
---------------------------------------------------------------------------

    \341\ See supra Part IV.A.1.b.
    \342\ See supra Part IV.A.1.c.
    \343\ See, e.g., Fashion Originators' Guild, 312 U.S. at 467-68; 
Atl. Refining Co., 381 U.S. at 371.
---------------------------------------------------------------------------

    In addition, non-compete clauses cause considerable harm to 
competition in labor markets and product and service markets. There is 
evidence non-compete clauses harm both workers and consumers. Non-
compete clauses obstruct competition in labor markets because they 
inhibit optimal matches from being made between employers and workers 
across the labor force. The available evidence indicates increased 
enforceability of non-compete clauses substantially reduces workers' 
earnings, on average, across the labor force generally and for specific 
types of workers.\344\
---------------------------------------------------------------------------

    \344\ See supra Part II.B.1.b.
---------------------------------------------------------------------------

    In addition to the evidence showing non-compete clauses reduce 
earnings for workers across the labor force, there is also evidence 
non-compete clauses reduce earnings specifically for workers who are 
not subject to non-compete clauses.\345\ These workers are harmed by 
non-compete clauses, because their wages are depressed, but they do not 
necessarily benefit from any incentives for increased training that 
non-compete clauses may provide.
---------------------------------------------------------------------------

    \345\ See supra Part II.B.1.c.
---------------------------------------------------------------------------

    Overall, these harms to workers are significant. The Commission 
estimates that the proposed rule, which would prohibit employers from 
using non-compete clauses, would increase workers' total earnings by 
$250 to $296 billion per year.\346\
---------------------------------------------------------------------------

    \346\ See infra Part VII.B.1.a.
---------------------------------------------------------------------------

    The available evidence also indicates non-compete clauses 
negatively affect competition in product and service markets. There is 
evidence non-compete clauses increase consumer prices and concentration 
in the health care sector.\347\ There is also evidence non-compete 
clauses foreclose the ability of competitors to access talent by 
effectively forcing future employers to buy out workers from their non-
compete clauses if they want to hire them.\348\ The weight of the 
evidence also indicates non-compete clauses have a negative impact on 
new business formation and innovation.\349\ These harms are 
significant. For example, with respect to consumer prices in the health 
care sector alone, the Commission estimates health spending would 
decrease by $148 billion annually due to the proposed rule.\350\
---------------------------------------------------------------------------

    \347\ See supra Part II.B.2.a.
    \348\ See supra Part II.B.2.b.
    \349\ See supra Part II.B.2.c-d.
    \350\ See infra Part VII.B.2.c.
---------------------------------------------------------------------------

    In the Commission's preliminary view, the asserted benefits from 
non-compete clauses do not outweigh these harms. In short, while there 
is considerable evidence non-compete clauses harm both workers and 
consumers, the evidence that non-compete clauses benefit workers or 
consumers is scant.
    As described above, the most common justification for non-compete 
clauses is they increase employers' incentive to make productive 
investments in, for example, trade secrets, customer lists, worker 
training, and capital investment. There is evidence non-compete clauses 
increase employee training and capital investment, as noted above.\351\ 
However, the considerable harms to workers and consumers are not 
outweighed because an employer has some marginally greater ability to 
protect trade secrets, customer lists, and other firm investments, or 
because the worker is receiving increased training, or because the firm 
has increased capital investments. If they were, workers would have 
higher earnings when non-compete clauses are more readily available to 
firms (i.e., when legal enforceability of non-compete clauses 
increases) or prices for consumers would be lower. However, the 
empirical economic literature shows workers generally have lower, not 
higher, earnings when non-compete clause enforceability increases.
---------------------------------------------------------------------------

    \351\ See supra Part II.B.2.e.
---------------------------------------------------------------------------

    Moreover, the Commission is also not aware of any evidence these 
potential benefits of non-compete clauses lead to reduced prices for 
consumers. Indeed, the only empirical study of the effects of non-
compete clauses on consumer prices--in the health care sector--finds 
increased final goods prices as the enforceability of non-compete 
clauses increases.\352\ Furthermore, the Commission is not aware of any 
evidence non-compete clauses reduce trade secret misappropriation or 
the loss of other types of confidential information. The Commission's 
understanding is there is little reliable empirical data on trade 
secret theft and firm investment in trade secrets in general, and no 
reliable data on how non-compete clauses affect these practices. The 
Commission is also not aware of evidence that, in the three states in 
which non-compete clauses are generally void, the inability to enforce 
non-compete clauses has materially harmed workers or consumers in those 
states.
---------------------------------------------------------------------------

    \352\ See supra Part II.B.2.a.
---------------------------------------------------------------------------

    As a result, the Commission preliminarily finds the asserted 
benefits from non-compete clauses do not outweigh the harms. The 
Commission seeks comment on this preliminary finding.

V. Section-by-Section Analysis

    The Commission is proposing to create a new Subchapter J in Chapter 
16 of the Code of Federal Regulations. Subchapter J would be titled 
``Rules Concerning Unfair Methods of Competition.'' Within Subchapter 
J, the Commission is proposing to create 16 CFR part 910--the Non-
Compete Clause Rule.\353\ The Commission describes each section of the 
proposed rule below.
---------------------------------------------------------------------------

    \353\ For ease of reference, this Part V refers to proposed 16 
CFR part 910 as ``the Rule.''
---------------------------------------------------------------------------

Section 910.1 Definitions

    Proposed Sec.  910.1 would contain definitions of terms that would 
be used in the Rule.
1(a) Business Entity
    Proposed Sec.  910.1(a) would define the term business entity. This 
term would be used in proposed Sec.  910.3, which would contain an 
exception for certain non-compete clauses. Under the exception, the 
Rule would not apply to a non-compete clause entered into by a person 
who is selling a business entity or otherwise disposing of all of the 
person's ownership interest in the business entity, or by a person who 
is selling all or substantially all of a business entity's operating 
assets, when the person restricted by the non-compete clause is a 
substantial owner of, or substantial member or substantial partner in, 
the business entity at the time the person enters into the non-compete 
clause. The proposed rule would also use the term business entity in 
proposed Sec.  910.1(e), which would define substantial owner, 
substantial member, or substantial partner as an owner, member, or 
partner holding at least a 25% ownership interest in a business entity.
    Proposed Sec.  910.1(a) would define the term business entity as a 
partnership, corporation, association, limited

[[Page 3509]]

liability company, or other legal entity, or a division or subsidiary 
thereof. The Commission is proposing to include divisions and 
subsidiaries in the definition because it believes the exception in 
proposed Sec.  910.3 should apply where a person is selling a division 
or subsidiary of a business entity. The primary rationale for the sale-
of-a-business exception in proposed Sec.  910.3--that the exception may 
help to protect the value of a business acquired by a buyer--would also 
apply where a person is selling a division or subsidiary of a business 
entity. Applying the sale-of-a-business exception where a person is 
selling a division or subsidiary of a business entity would also be 
consistent with many state laws that exempt non-compete clauses from 
certain requirements when they are between the seller and buyer of a 
business, including a division or subsidiary of the business.\354\
---------------------------------------------------------------------------

    \354\ See, e.g., Cal. Bus. & Prof. Code sec. 16601; Mass. Gen. 
Laws Ann. ch. 149, sec. 24L (definition of ``noncompetition 
agreement''); R.I. Gen. Laws sec. 28-59-2(8)(iii).
---------------------------------------------------------------------------

    The Commission seeks comment on proposed Sec.  910.1(a).
1(b) Non-Compete Clause
    Proposed Sec.  910.1(b)(1) would define 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. The Commission believes this is a generally accepted 
definition of the term non-compete clause.
    Proposed Sec.  910.1(b)(1) would limit the coverage of the Rule to 
non-compete clauses between employers and workers. The Rule would not 
apply to other types of non-compete clauses--for example, non-compete 
clauses between two businesses, where neither is a worker pursuant to 
the Rule's definition of ``worker.'' \355\ While such non-compete 
clauses would not be covered by the Rule, they would still be subject 
to federal antitrust law and all other applicable law.
---------------------------------------------------------------------------

    \355\ See proposed Sec.  910.1(f).
---------------------------------------------------------------------------

    Furthermore, pursuant to proposed Sec.  910.1(b)(1), the Rule would 
apply only to post-employment restraints--i.e., restrictions on what 
the worker may do after the conclusion of the worker's employment with 
the employer. The Rule would not apply to concurrent-employment 
restraints--i.e., restrictions on what the worker may do during the 
worker's employment.
    Some non-compete clauses do not use language that expressly 
prohibits a worker from competing against their employer, but instead 
effect the same restriction by requiring workers to pay damages if they 
compete against their employer. State courts generally view these 
contractual terms as non-compete clauses.\356\ These contractual terms 
would also be non-compete clauses under proposed Sec.  910.1(b)(1), 
because they prevent a worker from seeking or accepting work with a 
person or operating a business after the conclusion of the worker's 
employment with the employer (unless the damages specified in the 
contract are paid).
---------------------------------------------------------------------------

    \356\ See, e.g., Wichita Clinic, P.A. v. Louis, 185 P.3d 946, 
951 (Kan. Ct. App. 2008); Intermountain Eye & Laser Ctrs., 127 P.3d 
121, 127 (Idaho 2005); BDO Seidman v. Hirshberg, 712 NE2d 1220, 
1222-23 (N.Y. 1999).
---------------------------------------------------------------------------

    Proposed Sec.  910.1(b)(2) would clarify the definition of non-
compete clause in proposed Sec.  910.1(b)(1) by explaining that whether 
a contractual term is a non-compete clause for purposes of the Rule 
would depend on a functional test. In other words, whether a 
contractual term is a non-compete clause would depend not on what the 
term is called, but how the term functions.
    In addition to non-compete clauses, employers and workers enter 
into many other types of covenants that restrict what a worker may do 
after the worker leaves their job, including, among others, NDAs; non-
solicitation agreements; and TRAs.\357\ The definition of non-compete 
clause would generally not include these types of covenants, because 
these covenants generally do not prevent a worker from seeking or 
accepting work with a person or operating a business after the 
conclusion of the worker's employment with the employer. These other 
types of covenants may affect the way a worker competes with their 
former employer after the worker leaves their job. However, they do not 
generally prevent a worker from competing with their former employer 
altogether; and they do not generally prevent other employers from 
competing for that worker's labor. For example, if a worker leaves 
their job with their employer and goes to work for a competitor, an NDA 
the worker signed with their employer may prevent the worker from 
disclosing certain information to the competitor. However, a standard 
NDA would not prevent the worker from seeking or accepting work with 
the competitor.
---------------------------------------------------------------------------

    \357\ See supra Part II.A.
---------------------------------------------------------------------------

    The Commission is concerned, however, that some employers may seek 
to evade the requirements of the Rule by implementing restrictive 
employment covenants other than non-compete clauses that restrain such 
an unusually large scope of activity that they are de facto non-compete 
clauses. Under proposed Sec.  910.1(b)(2), such functional equivalents 
would be non-compete clauses for purposes of the Rule, whether drafted 
for purposes of evasion or not.
    Courts have taken this approach when analyzing whether a 
contractual term is a non-compete clause under state law. For example, 
in Brown v. TGS Mgmt. Co., LLC, a California state court held an NDA 
that defined confidential information ``so broadly as to prevent [the 
plaintiff] from ever working again in securities trading'' 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. The NDA in this case restrained a far broader scope of 
activity than a typical NDA. For example, it defined ``confidential 
information'' as any information that is ``usable in'' or ``relates 
to'' the securities industry. As a result, the court concluded it 
effectively prevented the worker from working in the securities 
industry after his employment ended and was therefore a de facto non-
compete clause.\358\ Similarly, in Wegmann v. London, the U.S. Court of 
Appeals for the Fifth Circuit concluded liquidated damages provisions 
in a partnership agreement were de facto non-compete clauses ``given 
the prohibitive magnitudes of liquidated damages they specify.'' \359\
---------------------------------------------------------------------------

    \358\ 57 Cal. App. 5th 303, 306, 316-319 (Cal. Ct. App. 2020).
    \359\ 648 F.2d 1072, 1073 (5th Cir. 1981).
---------------------------------------------------------------------------

    The purpose of Sec.  910.1(b)(2) is to clarify that, if an employer 
implements a restrictive covenant not called a ``non-compete clause'' 
but so unusually broad in scope it functions as such, the covenant 
would be within the definition of non-compete clause in proposed Sec.  
910.1(b)(1). Proposed Sec.  910.1(b)(2) would state that the term non-
compete clause 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 work 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 also provide two examples of 
contractual terms that may be de facto non-compete clauses. The first 
example, based on Brown v. TGS Mgmt. Co., LLC, would be a non-
disclosure agreement between an employer and a worker written so 
broadly it effectively precludes the worker from working in the same 
field

[[Page 3510]]

after the conclusion of the worker's employment with the employer. The 
second example, based on Wegmann v. London, would be a covenant between 
an employer and a worker 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 for 
training the worker.
    The Commission stresses this list of examples would be a non-
exclusive list. Restrictive employment covenants other than NDAs and 
TRAs may also constitute de facto non-compete clauses, depending on the 
facts. In addition, NDAs and TRAs may constitute de facto non-compete 
clauses under factual scenarios other than the scenarios outlined in 
these examples.
    The Commission seeks comment on proposed Sec.  910.1(b)(1) and (2). 
In addition, the Commission is concerned that workplace policies 
similar to non-compete clauses--such as a term in an employee handbook 
stating workers are prohibited from working for competitors after their 
employment ends--could potentially have negative effects similar to 
non-compete clauses if workers believe they are binding, even if they 
do not impose a contractual obligation. Therefore, the Commission also 
seeks comment on whether non-compete clause should be defined not only 
as a ``contractual term'' between an employer and a worker, but also as 
a provision in a workplace policy.\360\
---------------------------------------------------------------------------

    \360\ See, e.g., D.C. Code sec. 32-581.01(15).
---------------------------------------------------------------------------

1(c) Employer
    The Rule would apply only to non-compete clauses between employers 
and workers.\361\ Proposed Sec.  910.1(c) would define employer as a 
person, as defined in 15 U.S.C. 57b-1(a)(6), that hires or contracts 
with a worker to work for the person. 15 U.S.C. 57b-1(a)(6) defines 
person as any natural person, partnership, corporation, association, or 
other legal entity, including any person acting under color or 
authority of state law. Thus, proposed Sec.  910.1(c) would effectively 
define employer as any natural person, partnership, corporation, 
association, or other legal entity, including any person acting under 
color or authority of state law, that hires or contracts with a worker 
to work for the person.
---------------------------------------------------------------------------

    \361\ See proposed Sec.  910.1(b)(1).
---------------------------------------------------------------------------

    A person, as defined in 15 U.S.C. 57b-1(a)(6), that hires or 
contracts with a worker to work for the person would be an employer 
under proposed Sec.  910.1(c) regardless of whether the person meets 
another legal definition of employer, such as a definition in federal 
or state labor law.
    Some entities that would otherwise be employers may not be subject 
to the Rule to the extent they are exempted from coverage under the FTC 
Act. These entities include certain banks, savings and loan 
institutions, federal credit unions, common carriers, air carriers and 
foreign air carriers, and persons subject to the Packers and Stockyards 
Act of 1921,\362\ as well as an entity that is not ``organized to carry 
on business for its own profit or that of its members.'' \363\ Where an 
employer is exempt from coverage under the FTC Act, the employer would 
not be subject to the Rule.
---------------------------------------------------------------------------

    \362\ 15 U.S.C. 45(a)(2).
    \363\ 15 U.S.C. 44.
---------------------------------------------------------------------------

    Furthermore, state and local government entities--as well as some 
private entities--may not be subject to the Rule when engaging in 
action protected by the state action doctrine. States are subject to 
the antitrust laws.\364\ However, under the state action doctrine, 
federal statutes do not limit the sovereign states' autonomous 
authority over their own officers, agents, and policies in the absence 
of clear congressional intent to do so.\365\ The key question is 
whether the conduct at issue is ``compelled by direction of the state 
acting as a sovereign.'' \366\ The state action doctrine may also be 
invoked by private entities in certain limited scenarios--specifically, 
where (1) the challenged restraint is clearly articulated as and 
affirmatively expressed as state policy, and (2) the policy is actively 
supervised by the state itself.\367\ Thus, some entities that would 
otherwise be employers under proposed Sec.  910.1(c) may not be subject 
to the Rule when engaging in action protected by the state action 
doctrine. Where private entities are involved, this would likely 
require a highly fact-specific inquiry.
---------------------------------------------------------------------------

    \364\ Goldfarb v. Va. State Bar, 421 U.S. 773, 791-92 (1975).
    \365\ Parker v. Brown, 317 U.S. 341, 350-51 (1943) (construing 
the Sherman Act).
    \366\ Goldfarb, 421 U.S. at 791.
    \367\ Cal. Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 
445 U.S. 97, 105 (1980).
---------------------------------------------------------------------------

    The Commission seeks comment on proposed Sec.  910.1(c).
1(d) Employment
    The proposed rule would define the term 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(d) would define employment as work for 
an employer, as the term employer is defined in Sec.  910.1(c). This 
proposed definition would clarify that an employment relationship 
exists, for purposes of the Rule, regardless of whether an employment 
relationship exists under another law, such as a federal or state labor 
law. The Commission seeks comment on proposed Sec.  910.1(d).
1(e) Substantial Owner, Substantial Member, and Substantial Partner
    The proposed rule would use the terms substantial owner, 
substantial member, and substantial partner in proposed Sec.  910.3, 
which would exempt certain non-compete clauses from coverage under the 
Rule. This exception would only be available where the party restricted 
by the non-compete clause is a substantial owner of, or substantial 
member or substantial partner in, the business entity. Limiting the 
exception to substantial owners, substantial members, and substantial 
partners would ensure the exception is only available where the 
seller's stake in the business is large enough that a non-compete 
clause may be necessary to protect the value of the business acquired 
by the buyer.
    Proposed Sec.  910.1(e) would define substantial owner, substantial 
member, and substantial partner as an owner, member, or partner holding 
at least a 25% ownership interest in a business entity. The Commission 
is proposing a threshold of 25% ownership interest because the 
Commission believes the exception should be available where, for 
example, a few entrepreneurs sharing ownership interest in a startup 
sell their firm. In such a scenario, a non-compete clause may be 
necessary to protect the value of the business acquired by the buyer. 
For this reason, a threshold of, for example, 51% may be too high.
    However, the Commission believes the exception should not be 
available where the ownership interest in question is so small the 
transfer of ownership interest would not be necessary to protect the 
value of the business acquired by the buyer. For example, the exception 
should not be available where a worker with a small amount of company 
stock sells stock back to the company as part of a stock redemption 
agreement when the worker's employment ends. The Commission believes a 
25% threshold strikes the appropriate balance between a threshold that 
may be too high (and would exclude many scenarios in which a non-
compete clause may be necessary to protect the value of the business 
acquired by the buyer) and a threshold

[[Page 3511]]

that may be too low (and would allow the exception to apply more 
broadly than is needed to protect such an interest).
    Instead of establishing a threshold, the Rule could simply use the 
terms substantial owner, substantial member, and substantial partner in 
proposed Sec.  910.3 and leave the interpretation of those terms to 
case-by-case adjudication. However, if the Rule does not define a 
threshold, sellers of businesses may be unsure whether or not they are 
substantial owners, substantial members, and substantial partners under 
proposed Sec.  910.3. Defining a threshold would provide greater 
clarity to the public and facilitate compliance with the Rule.
    The Commission seeks comment on proposed Sec.  910.1(e).
1(f) Worker
    The Rule would apply only to non-compete clauses between employers 
and workers.\368\ Proposed Sec.  910.1(f) would define worker as a 
natural person who works, whether paid or unpaid, for an employer. 
Proposed Sec.  910.1(f) would further state the term worker includes, 
without limitation, an employee, individual classified as an 
independent contractor, extern, intern, volunteer, apprentice, or sole 
proprietor who provides a service to a client or customer.
---------------------------------------------------------------------------

    \368\ See proposed Sec.  910.1(b)(1).
---------------------------------------------------------------------------

    As this definition states, the term worker would include not only 
employees, but also individuals classified as independent contractors, 
as well as other kinds of workers. Under proposed Sec.  910.1(f), the 
term worker would include any natural person who works, whether paid or 
unpaid, for an employer, without regard to whether the worker is 
classified as an ``employee'' under the Fair Labor Standards Act (FLSA) 
or any other statute that draws a distinction between ``employees'' and 
other types of workers. Thus, gig economy workers such as rideshare 
drivers would be considered workers for purposes of proposed Sec.  
910.1(f).
    The Commission is concerned that, if the Rule were to define 
workers as ``employees'' according to, for example, the FLSA 
definition, employers may misclassify employees as independent 
contractors to evade the Rule's requirements. Furthermore, the 
Commission has no reason to believe non-compete clauses that apply to 
workers such as independent contractors or interns negatively affect 
competitive conditions to a lesser degree than non-compete clauses that 
apply to employees. Such non-compete clauses may, in fact, be more 
harmful to competition, given that these other types of workers tend to 
have shorter employment relationships. In addition, the Commission does 
not believe employers have stronger business justifications for 
applying non-compete clauses to independent contractors than they would 
to employees.
    Proposed Sec.  910.1(f) would also state the term worker does not 
include a franchisee in the context of a franchisee-franchisor 
relationship. The Commission believes that, in some cases, the 
relationship between a franchisor and franchisee may be more analogous 
to the relationship between two businesses than the relationship 
between an employer and a worker. In addition, the evidentiary record 
before the Commission relates primarily to non-compete clauses that 
arise solely out of employment. The Commission has surveyed the 
available evidence relating to non-compete clauses and is not aware of 
research on the effects of applying additional legal restrictions to 
non-compete clauses between franchisors and franchisees. Therefore, the 
Commission believes it would be appropriate to clarify that a 
franchisee--in the context of a franchisor-franchisee relationship--is 
not a worker for purposes of proposed Sec.  910.1(f).
    Proposed Sec.  910.1(f) would further clarify, however, the term 
worker includes a natural person who works for the franchisee or 
franchisor. In addition, proposed Sec.  910.1(f) would clarify non-
compete clauses between franchisors and franchisees would remain 
subject to federal antitrust law as well as all other applicable law. 
These laws include state laws that apply to non-compete clauses in the 
franchise context. The Commission is not proposing to find that non-
compete clauses between franchisors and franchisees are beneficial to 
competition.
    The Commission seeks comment on proposed Sec.  910.1(f).

Section 910.2 Unfair Methods of Competition

2(a) Unfair Methods of Competition
    Proposed Sec.  910.2(a) would state it is an unfair method of 
competition for an employer to enter into or attempt to enter into a 
non-compete clause with a worker; maintain with a worker a non-compete 
clause; or represent to a worker that the worker is subject to a non-
compete clause where the employer has no good faith basis to believe 
the worker is subject to an enforceable non-compete clause. In effect, 
proposed Sec.  910.2(a) would categorically ban employers from using 
non-compete clauses, because--as of the compliance date--employers 
would be prohibited from maintaining pre-existing non-compete clauses 
and entering into new non-compete clauses.\369\
---------------------------------------------------------------------------

    \369\ However, employers could still use non-compete clauses 
where they qualify for the exception in proposed Sec.  910.3 for 
non-compete clauses between the seller and buyer of a business.
---------------------------------------------------------------------------

    Part IV above explains the legal basis for the Commission's 
preliminary determination that the practices listed in proposed Sec.  
910.2(a) are unfair methods of competition. This section-by-section 
analysis for proposed Sec.  910.2(a) describes how each of the three 
prongs of proposed Sec.  910.2(a) would function and explains why the 
Commission is proposing a categorical ban on non-compete clauses.
How Proposed Sec.  910.2(a) Would Function
    Proposed Sec.  910.2(a) would prohibit an employer from entering 
into or attempting to enter into a non-compete clause with a worker and 
maintaining with a worker a non-compete clause. Proposed Sec.  910.2(a) 
would use both the term ``enter into'' and the term ``maintain'' to 
make clear it is an unfair method of competition for an employer to 
either (1) enter into or attempt to enter into new non-compete clauses 
as of the Rule's compliance date or (2) maintain pre-existing non-
compete clauses as of the compliance date. The Commission believes non-
compete clauses entered into before the compliance date implicate the 
concerns described above in Part IV to the same degree as non-compete 
clauses entered into as of the compliance date.\370\ As a result, the 
Commission believes it would be appropriate to require employers to 
rescind non-compete clauses entered into before the compliance date, as 
well as to refrain from entering into or attempting to enter into new 
non-compete clauses starting on the compliance date.
---------------------------------------------------------------------------

    \370\ See supra Part IV (describing the reasons for the 
Commission's preliminary determination that non-compete clauses 
between employers and workers are an unfair method of competition).
---------------------------------------------------------------------------

    Furthermore, requiring employers to rescind existing non-compete 
clauses would not impose significant compliance costs, due to the safe 
harbor in proposed Sec.  910.2(b)(3). Under this safe harbor, an 
employer could comply with the requirement to rescind existing non-
compete clauses by providing notice to the affected workers. In 
addition, proposed Sec.  910.2(b)(2)(C) would further reduce compliance 
costs by providing language that would presumptively meet this notice 
requirement.

[[Page 3512]]

    Proposed Sec.  910.2(a) would prohibit an employer from attempting 
to enter into a non-compete clause with a worker. An employer attempts 
to enter a non-compete clause with a worker where, for example, the 
employer provides the worker with the non-compete clause, but the 
worker does not sign it. The Commission is concerned that attempting to 
enter into a non-compete clause with a worker would have in terrorem 
effects because, in this situation, the worker may still believe they 
are subject to a non-compete clause even if they did not sign it. For 
example, the worker may not recall whether they signed the non-compete 
clause or may not realize they are not bound by the non-compete clause 
unless they signed it.
    Proposed Sec.  910.2(a) would also prohibit an employer from 
representing to a worker that the worker is covered by a non-compete 
clause where the employer has no good faith basis to believe the worker 
is subject to an enforceable non-compete clause. Workers often lack 
knowledge of whether employers may enforce non-compete clauses.\371\ In 
addition, the available evidence indicates that, in states where non-
compete clause are void, workers are subject to non-compete clauses at 
approximately the same rate as workers in other states, suggesting that 
employers may believe workers are unaware of their legal rights.\372\ 
Because many workers lack knowledge of whether their employer may 
enforce a non-compete clause under state law, they may also be unaware 
of any final rule issued by the Commission prohibiting employers from 
entering into or maintaining non-compete clauses. Employers may seek to 
exploit this lack of awareness by representing to workers that they are 
subject to a non-compete clause when they are not. This would likely 
have an in terrorem effect on workers, causing them to refrain from 
looking for work or taking another job, thereby furthering the adverse 
effects on competition motivating this proposed rule. As a result, the 
Commission believes it is appropriate for the Rule to prohibit 
employers from representing to workers that they are covered by a non-
compete clause.
---------------------------------------------------------------------------

    \371\ See Prescott & Starr, supra note 57 at 10-11.
    \372\ See Starr, Prescott, & Bishara, supra note 42 at 81.
---------------------------------------------------------------------------

    In addition, workers--particularly low-income workers--may lack 
resources to litigate against their employers. As a result, mere 
threats to enforce a non-compete clause may deter workers from looking 
for work with a competitor or starting their own business, which would 
result in the anticompetitive effects described above in Part IV.A.
    Under this ``representation'' prong of proposed Sec.  910.2(a), an 
employer would be prohibited from, among other things, threatening to 
enforce a non-compete clause against a worker; advising a worker that, 
due to a non-compete clause, they should not pursue a particular job 
opportunity; or simply telling the worker that the worker is covered by 
a non-compete clause. However, under proposed Sec.  910.2(a), this 
prohibition on representation would only apply where the employer has 
no good faith basis to believe the worker is subject to an enforceable 
non-compete clause. Proposed Sec.  910.2(a) includes this ``no good 
faith basis'' exception to ensure the representation prong is 
consistent with the First Amendment. The Supreme Court has held ``there 
can be no constitutional objection to the suppression of commercial 
messages that do not accurately inform the public about lawful 
activity.'' \373\ Accordingly, ``[t]he government may ban forms of 
communication more likely to deceive the public than to inform it, or 
commercial speech related to illegal activity.'' \374\ A rule that 
prohibits an employer from representing to a worker that the worker is 
subject to a non-compete clause--where the employer has no good faith 
basis to believe that the worker is subject to an enforceable non-
compete clause--would meet this test because, under such circumstances, 
an employer would be making a false claim and asserting an illegal 
restraint on worker activity. An employer would have no good faith 
basis to believe that a worker is subject to an enforceable non-compete 
clause where non-compete clauses are not enforceable in the relevant 
state or where the validity of the Rule--which would prohibit employers 
from maintaining or entering into non-compete clauses--has been 
adjudicated and upheld.
---------------------------------------------------------------------------

    \373\ Cent. Hudson Gas & Elec. v. Pub. Serv. Comm'n of N.Y., 447 
U.S. 557, 563 (1980).
    \374\ Id. at 563-64.
---------------------------------------------------------------------------

    Proposed Sec.  910.2(a) would not apply retroactively. An employer 
would not violate proposed Sec.  910.2(a) where--prior to the 
compliance date--it entered into or attempted to enter into a non-
compete clause with a worker; maintained with a worker a non-compete 
clause; or represented to a worker that the worker is subject to a non-
compete clause. Instead, proposed Sec.  910.2(a) would require 
employers to refrain from these practices starting on the compliance 
date.
Why the Commission Is Proposing a Categorical Ban on Non-Compete 
Clauses
    Except for certain non-compete clauses between the seller and buyer 
of a business,\375\ the proposed rule would categorically ban employers 
from using non-compete clauses with workers. The proposed rule would 
prohibit an employer from using a non-compete clause with any of its 
workers, without regard to the worker's earnings or job function.
---------------------------------------------------------------------------

    \375\ See proposed Sec.  910.3.
---------------------------------------------------------------------------

    The Commission is proposing a categorical ban on non-compete 
clauses because, fundamentally, non-compete clauses obstruct labor 
market competition through a similar mechanism for all workers. Non-
compete clauses block workers in a labor market from switching to jobs 
in which they would be better paid and more productive. This harms 
workers who are subject to non-compete clauses. This also harms other 
workers in the labor market, since jobs that may be better matches for 
those workers are filled by workers who are unable to leave their jobs 
due to non-compete clauses.\376\ And this harms other firms and 
potential entrants into the market, who have a more limited pool of 
workers from which to hire. Regardless of a worker's income or job 
status, non-compete clauses block workers from switching to jobs in 
which they would be better paid and more productive--restricting the 
opportunities of all workers in that labor market.
---------------------------------------------------------------------------

    \376\ See supra Part II.B.1.
---------------------------------------------------------------------------

    The available data do not allow the Commission to estimate earnings 
effects for every occupation. However, the evidentiary record indicates 
non-compete clauses depress wages for a wide range of subgroups of 
workers across the spectrum of income and job function--from hourly 
workers to highly paid, highly skilled workers such as executives. The 
Commission therefore estimates the proposed rule would increase 
earnings for workers in all of the subgroups of the labor force for 
which sufficient data is available.\377\ Excluding these workers from 
the proposed rule would deny these workers the benefits of higher 
earnings through increased competition in the market for their labor.
---------------------------------------------------------------------------

    \377\ See infra Part VII.B.1.a.
---------------------------------------------------------------------------

    The Commission recognizes there are compelling reasons for banning 
non-compete clauses that apply more strongly to lower-wage workers. 
Non-

[[Page 3513]]

compete clauses for lower-wage workers--such as sandwich shop workers, 
warehouse workers, or security guards \378\--may be more likely than 
non-compete clauses for higher-wage workers to be exploitative and 
coercive at the time of contracting and at the time of the worker's 
potential departure from the employer.\379\ In addition, the most 
commonly cited justifications for non-compete clauses appear 
particularly weak when applied to relatively lower-wage workers, to the 
extent such workers are less likely to have access to trade secrets or 
confidential information.\380\
---------------------------------------------------------------------------

    \378\ See supra Part II.A (listing illustrative examples of non-
compete clauses).
    \379\ See infra Part IV.A.1.b-c.
    \380\ See supra Part IV.B (describing the most commonly cited 
justifications for non-compete clauses).
---------------------------------------------------------------------------

    The Commission believes there are also compelling reasons for 
banning non-compete clauses that apply more strongly to highly paid or 
highly skilled workers such as senior executives. As described above, 
the weight of the available evidence indicates non-compete clauses 
negatively affect new business formation, innovation, and the ability 
of competitors to hire skilled workers.\381\ Non-compete clauses for 
highly paid or highly skilled workers such as senior executives may be 
contributing more to these harms than non-compete clauses for some 
other workers, to the extent such workers may be likely to start 
competing businesses, be hired by potential entrants or competitors, or 
develop innovative products and services. Non-compete clauses for 
highly paid or highly skilled workers such as senior executives may 
also block potential entrants, or raise their costs, to a high degree, 
because such workers are likely to be in high demand by potential 
entrants. As a result, prohibiting non-compete clauses for highly paid 
or highly skilled workers such as senior executives may have relatively 
greater benefits for consumers than prohibiting non-compete clauses for 
other workers.
---------------------------------------------------------------------------

    \381\ See supra Part II.B.2.b-d.
---------------------------------------------------------------------------

    For these reasons, the Commission preliminarily believes a 
categorical ban on non-compete clauses would best achieve the objective 
of the proposed rule, which is to remedy the adverse effects of non-
compete clauses on competition in labor markets and product and service 
markets. However, the Commission also believes several alternatives to 
a categorical ban may also accomplish the objectives of the proposed 
rule to some degree, including different standards for senior 
executives. These alternatives are described in detail in Part VI.
    The Commission seeks comment on proposed Sec.  910.2(a).
2(b) Existing Non-Compete Clauses
    Proposed Sec.  910.2(b) would clarify employers' obligations, and 
impose additional requirements, related to non-compete clauses entered 
into by the employer prior to the compliance date (``existing non-
compete clauses'').
2(b)(1) Rescission Requirement
    Proposed Sec.  910.2(b)(1) would state that, to comply with 
proposed Sec.  910.2(a)--which states it is an unfair method of 
competition for an employer to maintain with a worker a non-compete 
clause--an employer that entered into a non-compete clause with a 
worker prior to the compliance date must rescind the non-compete clause 
no later than the compliance date. The reasons why the Commission is 
proposing this rescission requirement are described above in the 
section-by-section analysis for proposed Sec.  910.2(a).
    The requirements in Sec.  910.2(b)(1)-(3) do not apply where a 
worker's obligation not to compete elapsed prior to the compliance 
date. This is because the requirements in Sec.  910.2(b)(1)-(3) derive 
from Sec.  910.2(a), which establishes it is an unfair method of 
competition to maintain with a worker a non-compete clause. An employer 
does not maintain with a worker a non-compete clause, in violation of 
the Rule, where the obligation not to compete elapsed prior to the 
compliance date. For example, if a worker left their job in 2019 and 
was subject to a two-year obligation not to compete, that obligation 
would have elapsed in 2021, and the employer would not violate the Rule 
by failing to rescind the non-compete clause.
    The Commission seeks comment on proposed Sec.  910.2(b)(1).
2(b)(2) Notice Requirement
    Proposed Sec.  910.2(b)(2) would require that the employer provide 
notice to a worker that the worker's non-compete clause has been 
rescinded. Proposed Sec.  910.2(b)(2) would have three subparagraphs 
that would impose various requirements related to the notice.
    First, proposed Sec.  910.2(b)(2)(A) would state that an employer 
that rescinds a non-compete clause pursuant to Sec.  910.2(b)(1) must 
provide notice to the worker that the worker's non-compete clause is no 
longer in effect and may not be enforced against the worker. Proposed 
Sec.  910.2(b)(2)(A) would contain a notice requirement because the 
Commission believes the available evidence indicates that many workers 
are not aware of the applicable law governing non-compete clauses or 
their rights under those laws.\382\ As a result, if the Commission were 
to issue a final Non-Compete Clause Rule, many workers who had entered 
into non-compete clauses may be unaware that, due to the Rule, their 
employer is no longer permitted to maintain the non-compete clause. As 
a result, these workers may continue to refrain from leaving their job 
to work for a competitor or start their own business. This would 
negatively affect competitive conditions in the same manner the 
Commission is concerned about.\383\ A notice requirement would help 
address this concern by ensuring workers are informed that their non-
compete clause is no longer in effect and may not be enforced against 
them.
---------------------------------------------------------------------------

    \382\ See Prescott & Starr, supra note 57 at 10-11.
    \383\ See supra Part IV.A.1.a.
---------------------------------------------------------------------------

    Proposed Sec.  910.2(b)(2)(A) would state further that the employer 
must provide the notice to the worker in an individualized 
communication. As such, an employer could not satisfy the notice 
requirement by, for example, posting a notice at the employer's 
workplace that workers' non-compete clauses are no longer in effect. 
Proposed Sec.  910.2(b)(2)(A) would also state that the employer must 
provide the notice on paper or in a digital format such as, for 
example, an email or text message. As such, a notice communicated 
orally would not meet the notice requirement. Allowing employers to 
provide the notice in a digital format would also reduce compliance 
costs for employers. Proposed Sec.  910.2(b)(2)(A) would also require 
the employer to provide the notice to the worker within 45 days of 
rescinding the non-compete clause.
    Second, proposed Sec.  910.2(b)(2)(B) would state that the employer 
must provide the notice to a worker who currently works for the 
employer. The Commission believes that most employers have contact 
information available for their current workers and can use this 
contact information to provide the notice.
    Proposed Sec.  910.2(b)(2)(B) would also state that the employer 
must provide the notice to a worker who formerly worked for the 
employer, provided that the employer has the worker's contact 
information readily available. Providing the notice to former workers 
may be even more vital than providing the notice to current workers 
because former workers may be refraining actively from competitive 
activity because they believe they are subject to

[[Page 3514]]

a non-compete clause. However, employers may not have contact 
information readily available for all former workers. Proposed Sec.  
910.2(b)(2)(B) would therefore require employers to provide the notice 
to former workers only where the employer has the worker's contact 
information readily available. The Commission believes that this 
requirement would strike the appropriate balance between providing 
notice to affected workers and minimizing compliance costs for 
employers.
    Third, proposed Sec.  910.2(b)(2)(C) would provide model language 
that would satisfy the requirement in proposed Sec.  910.2(b)(2)(A) 
that the employer ``provide notice to the worker that the worker's non-
compete clause is no longer in effect and may not be enforced against 
the worker.'' The model language is designed to communicate the 
relevant information in a simple and straightforward manner. Proposed 
Sec.  910.2(b)(2)(C) would also clarify that an employer may also use 
language that is different from the model language, provided that the 
language communicates to the worker that the worker's non-compete 
clause is no longer in effect and may not be enforced against the 
worker. Proposed Sec.  910.2(b)(2)(C) would reduce compliance costs and 
increase compliance certainty for employers by providing employers with 
model language they could use, while simultaneously providing employers 
with the flexibility to use other language that would communicate the 
required information.
    The Commission seeks comment on proposed Sec.  910.2(b)(2)(A)-(C).
2(b)(3) Safe Harbor
    Proposed Sec.  910.2(b)(3) would contain a safe harbor for 
compliance with the rescission requirement in proposed Sec.  
910.2(b)(1). Proposed Sec.  910.2(b)(3) would state that an employer 
complies with the rescission requirement described in Sec.  910.2(b)(1) 
where it provides notice to a worker pursuant to Sec.  910.2(b)(2). 
Consequently, to comply with the rescission requirement for purposes of 
the Rule, an employer could simply send a notice to a worker that is 
compliant with proposed Sec.  910.2(b)(2). An employer that does so 
would not need to take any other steps to comply with the rescission 
requirement in proposed Sec.  910.2(b)(1). The Commission believes that 
this safe harbor would strike an appropriate balance between ensuring 
that workers receive adequate notice of their rights under the Non-
Compete Clause Rule and minimizing compliance costs for employers.
    The Commission seeks comment on proposed Sec.  910.2(b)(3).

Section 910.3 Exception

    Proposed Sec.  910.3 would exempt certain non-compete clauses 
between the seller and buyer of a business from coverage under the 
Rule. Proposed Sec.  910.3 would state that the requirements of the 
Rule shall not apply to a non-compete clause that is entered into by a 
person who is selling a business entity or otherwise disposing of all 
of the person's ownership interest in the business entity, or by a 
person who is selling all or substantially all of a business entity's 
operating assets, when the person restricted by the non-compete clause 
is a substantial owner of, or substantial member or substantial partner 
in, the business entity at the time the person enters into the non-
compete clause. Proposed Sec.  910.3 would also clarify that non-
compete clauses covered by this exception would remain subject to 
federal antitrust law as well as all other applicable law.
    The exception in proposed Sec.  910.3 would apply only in a narrow 
set of circumstances. The Rule, as a whole, would only apply to non-
compete clauses between employers and workers.\384\ As a result, the 
exception in proposed Sec.  910.3 would apply only where the party 
restricted by the non-compete clause is a worker (for example, where 
the seller of a business is going to work for the acquiring business). 
Where the person restricted by the non-compete clause is not a worker, 
the Rule would not apply as an initial matter.
---------------------------------------------------------------------------

    \384\ See proposed Sec.  910.1(b).
---------------------------------------------------------------------------

    The Commission is proposing the exception in Sec.  910.3 because 
non-compete clauses between the seller and buyer of a business may be 
unique in certain respects from non-compete clauses arising solely out 
of employment. Specifically, non-compete clauses between the seller and 
buyer of a business may be distinct from non-compete clauses that arise 
solely out of employment because they may help protect the value of the 
business acquired by the buyer.
    This view is consistent with the law of the majority of the states, 
under which non-compete clauses between the seller and buyer of a 
business are treated differently from non-compete clauses arising 
solely out of employment. For example, while non-compete clauses are 
generally void in California, North Dakota, and Oklahoma, each of these 
three states exempts non-compete clauses between the seller and buyer 
of a business from this general rule.\385\ In the majority of the 47 
states that enforce non-compete clauses under some circumstances, non-
compete clauses between sellers and buyers of businesses are reviewed 
under a more lenient standard than non-compete clauses that arise 
solely out of employment.\386\ A frequently cited reason for this 
difference in treatment is that such non-compete clauses implicate an 
additional interest relative to non-compete clauses that arise solely 
out of employment: they protect the value of the business acquired by 
the buyer.\387\ If non-compete clauses between the seller and buyer of 
a business help protect the value of the business acquired by the 
buyer, restricting these types of non-compete clauses could potentially 
affect business acquisitions, including the incentives of various 
market actors to start, sell, or buy businesses.
---------------------------------------------------------------------------

    \385\ Cal. Bus. & Prof. Code sec. 16601; N.D. Cent. Code sec. 9-
08-06(1); Okla. Stat. Ann. tit. 15, secs. 218 (sale of a business) 
and 219 (dissolution of a partnership).
    \386\ See, e.g., Fla. Stat. Ann. sec. 542.335(1)(d); Hess 
Newmark Owens Wolf, Inc. v. Owens, 415 F.3d 630, 634 (7th Cir. 
2005); Jiffy Lube Int'l, Inc. v. Weiss Bros., Inc., 834 F. Supp. 
683, 691 (D.N.J. 1993).
    \387\ See, e.g., Strategix, Ltd. v. Infocrossing West, Inc., 142 
Cal. App. 4th 1068, 1072-73 (Cal. Ct. App. 4th 2006); Reed Mill & 
Lumber Co., 165 P.3d at 736; Bybee, 178 P.3d at 622.
---------------------------------------------------------------------------

    The Commission further notes that the evidentiary record described 
above in Part II.B relates primarily to non-compete clauses that arise 
solely out of employment. Unlike non-compete clauses that arise solely 
out of employment, there has been little empirical research on the 
prevalence of non-compete clauses between the seller and buyer of a 
business. The Commission is also not aware of empirical research on the 
economic effects of applying additional legal restrictions to these 
types of non-compete clauses. In part, this is because all states 
permit non-compete clauses between buyers and sellers of businesses to 
some degree, and because the laws that apply to these types of non-
compete clauses have seen fewer changes recently than the laws that 
apply to non-compete clauses that arise solely out of employment. As a 
result, there have been few natural experiments that allow researchers 
to assess how restricting these types of non-compete clauses may affect 
competition, including any effects on business acquisitions.
    For these reasons, the Commission believes it may be appropriate to 
exempt non-compete clauses between the seller

[[Page 3515]]

and buyer of a business from coverage under the Rule. Proposed Sec.  
910.3 would clarify, however, that these non-compete clauses would 
remain subject to federal antitrust law and all other applicable law, 
including state law requiring non-compete clauses to be tailored to 
protect a legitimate business interest and to be limited in duration, 
geographic area, and the scope of activity prohibited.
    Exempting non-compete clauses between the seller and buyer of a 
business from coverage under the Rule would not represent a finding 
that such non-compete clauses are beneficial to competition. It would 
simply reflect the Commission's view that it would be appropriate to 
tailor the Rule to non-compete clauses that arise solely out of 
employment--given that non-compete clauses between the seller and buyer 
of a business may implicate unique interests and have unique effects, 
and that the evidentiary record does not permit the Commission to 
assess these potential effects as thoroughly as the potential effects 
of restricting non-compete clauses that arise solely out of employment.
    The exception in proposed Sec.  910.3 would only apply where the 
seller of the business is a substantial owner of, or substantial member 
or substantial partner in, the business at the time the person enters 
into the non-compete clause. Proposed Sec.  910.1(e) would define 
substantial owner, substantial member, or substantial partner as an 
owner, member, or partner holding at least a 25% ownership interest in 
a business entity. The exception would therefore not allow non-compete 
clauses to be applied to a business's workers in connection with the 
sale of a business, where those workers are not substantial owners, 
members, or partners. The reasons for this proposed 25% threshold are 
described above in the section-by-section analysis for proposed Sec.  
910.1(e).
    The Commission seeks comment on proposed Sec.  910.3.

Section 910.4 Relation to State Laws

    The Supremacy Clause of the U.S. Constitution provides that the 
Constitution, and the laws of the United States made pursuant to the 
Constitution, ``shall be the supreme Law of the Land.'' \388\ Hence, 
federal law preempts any state law that conflicts with the exercise of 
federal power.\389\ Such conflict preemption occurs either ``where it 
is impossible for a private party to comply with both state and federal 
law'' or where state law ``stands as an obstacle to the accomplishment 
and execution of the full purposes and objectives of Congress.'' \390\ 
Congressional intent to preempt state law can be expressed in the 
statutory language itself (express preemption) or implied in the 
structure and purpose of federal law (implied preemption).\391\ Federal 
regulations ``have no less pre-emptive effect than federal statutes,'' 
\392\ and agencies themselves, implementing federal statutes, can 
expressly preempt conflicting state laws and regulations.\393\
---------------------------------------------------------------------------

    \388\ U.S. Const. art. VI, cl. 2.
    \389\ Fid. Fed. Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141, 
153 (1982) (citing roots in the Supremacy Clause); McCulloch v. Md., 
U.S. Supreme Court, 4 Wheat 159 (1819) (citing the Supremacy Clause 
and the Necessary and Proper Clause (Article I, Section 8, clause 
18)).
    \390\ Crosby v. Nat'l Foreign Trade Council, 530 U.S. 363, 372-
73 (2000).
    \391\ Cipollone v. Liggett Grp., Inc., 505 U.S. 504, 516 (1992); 
Jones v. Rath Packing Co., 430 U.S. 519, 525 (1977).
    \392\ Fid. Fed. Sav. & Loan Ass'n, 458 U.S. at 153.
    \393\ Id.; see also U.S. v. Shimer, 367 U.S. 374, 383 (1961).
---------------------------------------------------------------------------

    In some instances, a federal law may fully preempt contrary state 
laws. In others, federal law may impliedly or expressly respect the 
continuing and concurrent exercise of state power, thus setting a 
regulatory ``floor'' but not a ``ceiling.'' \394\ The Commission notes 
that ``Congress intended the federal antitrust laws to supplement, not 
displace, state antitrust remedies.'' \395\
---------------------------------------------------------------------------

    \394\ See, e.g., Oneok, Inc. v. Learjet, Inc., 575 U.S. 373, 
384-85 (2015).
    \395\ Cal. v. ARC Am. Corp., 490 U.S. 93, 102 (1989).
---------------------------------------------------------------------------

    The proposed rule would contain an express preemption provision. 
Proposed Sec.  910.4 would provide that the Rule shall supersede any 
state statute, regulation, order, or interpretation to the extent that 
such statute, regulation, order, or interpretation is inconsistent with 
the Rule.\396\ Proposed Sec.  910.4 would further provide that a state 
statute, regulation, order, or interpretation is not inconsistent with 
the provisions of the Rule if the protection such statute, regulation, 
order, or interpretation affords any worker is greater than the 
protection provided under the Rule.
---------------------------------------------------------------------------

    \396\ In this Part V, we refer to state statutes, regulations, 
orders, or interpretations as ``state laws'' for ease of reference.
---------------------------------------------------------------------------

    This preemption provision would reflect the Commission's intent 
that the Non-Compete Clause Rule establish a regulatory floor, not a 
ceiling. Under the proposed preemption provision, state laws that are 
inconsistent with the Rule would be preempted. One example would be a 
state law providing that an employer may enforce a non-compete clause 
against a worker where the non-compete clause is tailored to a 
legitimate business interest and reasonably limited in duration, 
geographic area, and scope of activity prohibited. Such a law would be 
inconsistent with proposed Sec.  910.2(a), which would state that it is 
an unfair method of competition--and therefore a violation of Section 5 
of the FTC Act--for an employer to enter into, attempt to enter into, 
or maintain a non-compete clause with a worker. Under proposed Sec.  
910.4, proposed Sec.  910.2(a) would preempt the contrary state law to 
the extent that it conflicts with proposed Sec.  910.2(a).
    However, under the second sentence of proposed Sec.  910.4, a state 
law would not conflict with the provisions of the Rule if the state law 
afforded greater protection to the worker than the protection provided 
under the Rule. For example, as noted above, proposed Sec.  910.3 would 
exempt certain non-compete clauses between the seller and buyer of a 
business from coverage under the Rule. If a state were to prohibit 
employers from entering into, attempting to enter into, or maintaining 
all non-compete clauses--including non-compete clauses between the 
seller and buyer of a business--an employer could comply with both the 
state law and the Rule by not entering into, attempting to enter into, 
or maintaining non-compete clauses between the seller and buyer of a 
business.
    The Commission seeks comment on proposed Sec.  910.4.

Section 910.5 Compliance Date

    The proposed rule would establish a separate effective date and 
compliance date. Under proposed Sec.  910.5, the proposed rule's 
effective date would be the date that is 60 days after the final rule 
is published in the Federal Register. The proposed rule's compliance 
date would be the date that is 180 days after the final rule is 
published in the Federal Register. In this NPRM, the Commission refers 
to the 180-day period between the publication of the final rule and the 
compliance date as the ``compliance period.''
    Compliance With Sec.  910.2(a). The Commission expects that 
employers would need to undertake the following two types of tasks 
during the compliance period to be prepared to comply with Sec.  
910.2(a) starting on the compliance date. First, starting on the 
compliance date, employers would be prohibited from maintaining 
existing non-compete clauses (i.e., non-compete clauses that the 
employer entered into with a worker prior to the compliance

[[Page 3516]]

date).\397\ As a result, during the compliance period, an employer 
would need to assess whether to implement replacements for existing 
non-compete clauses, such as NDAs; draft those covenants; and then 
negotiate and enter into those covenants with the relevant workers. 
Second, an employer would be prohibited from entering into new non-
compete clauses starting on the compliance date.\398\ As a result, 
during the compliance period, employers would need to, for example, 
remove any non-compete clauses from employment contracts that they 
provide to new workers. The Commission believes that 180 days--or 
approximately six months--would be enough time for employers to 
accomplish each of these two tasks.
---------------------------------------------------------------------------

    \397\ See proposed Sec.  910.2(a).
    \398\ Id.
---------------------------------------------------------------------------

    Compliance With Sec.  910.2(b)(1)-(3). To comply with Sec.  
910.2(b)(1)-(3) starting on the compliance date, an employer would be 
required to rescind, no later than the compliance date, any non-compete 
clauses that it entered into prior to the compliance date.\399\ Where 
an employer rescinds a non-compete clause, the employer would be 
required to provide notice to the worker that the worker's non-compete 
clause is no longer in effect and may not be enforced against the 
worker.\400\ This notice may be provided in a digital format, such as 
an email or text message.\401\ The Rule would require the employer to 
provide the notice to the worker within 45 days of rescinding the non-
compete clause.\402\ Employers would be required to provide the notice 
to current workers, as well as former workers where the employer has 
the former worker's contact information readily available.\403\ To 
reduce compliance costs, the Rule would provide model language that 
employers may use for the notice.\404\ However, employers would have 
the flexibility to use language other than the model language, provided 
that it communicates to the worker that the worker's non-compete clause 
is no longer in effect and may not be enforced against the worker.\405\ 
The Rule would also provide a safe harbor that would allow an employer 
to comply with the Rule's rescission requirement by providing a 
compliant notice.\406\ The Commission believes that this would 
significantly reduce compliance costs. The Commission believes that the 
180-day compliance period would provide employers with sufficient time 
to prepare to rescind existing non-compete clauses no later than the 
compliance date.
---------------------------------------------------------------------------

    \399\ See proposed Sec.  910.2(b)(1).
    \400\ See proposed Sec.  910.2(b)(2)(A)-(C).
    \401\ See proposed Sec.  910.2(b)(2)(A).
    \402\ Id.
    \403\ Id.
    \404\ See proposed Sec.  910.2(b)(2)(C).
    \405\ Id.
    \406\ See proposed Sec.  910.2(b)(3).
---------------------------------------------------------------------------

    The Commission is proposing an effective date of 60 days after 
publication of the final rule in the Federal Register because it 
expects that the final rule would likely be a major rule under the 
Congressional Review Act (CRA). Under the CRA, a ``major rule'' may not 
take effect fewer than 60 days after the rule is published in the 
Federal Register.\407\ The CRA further states that a rule is a ``major 
rule'' if it has an annual effect on the economy of $100 million or 
more.\408\ The Commission believes that the impacts of the proposed 
rule, if finalized, would be large enough that the final rule would be 
a major rule under the CRA.\409\
---------------------------------------------------------------------------

    \407\ 5 U.S.C. 801(a)(3)(A).
    \408\ 5 U.S.C. 804(2).
    \409\ See infra Part VII (analyzing the costs and benefits of 
the proposed rule).
---------------------------------------------------------------------------

    The Commission seeks comment on proposed Sec.  910.5.

VI. Alternatives to the Proposed Rule

    In this Part VI, the Commission describes alternatives to the 
proposed rule.\410\ This Part VI addresses the alternatives related to 
the rule's fundamental design. These alternatives flow from two key 
questions: (1) whether the rule should impose a categorical ban on non-
compete clauses or a rebuttable presumption of unlawfulness, and (2) 
whether the rule should apply uniformly to all workers or whether there 
should be exemptions or different standards for different categories of 
workers. The different permutations of the answers to each of these 
questions yield the different alternatives for the rule's fundamental 
design.
---------------------------------------------------------------------------

    \410\ The Commission intends for this Part VI to satisfy the 
requirements in Section 22 of the FTC Act that, in an NPRM, the 
Commission issue a preliminary regulatory analysis that shall 
contain ``a description of any reasonable alternatives to the 
proposed rule which may accomplish the stated objective of the rule 
in a manner consistent with applicable law'' and ``a preliminary 
analysis of the effectiveness of the proposed rule and each 
alternative in meeting the stated objectives of the proposed rule.'' 
15 U.S.C. 57b-3(b)(1)(B)-(C).
---------------------------------------------------------------------------

    This Part VI does not generally address alternatives related to the 
design of specific regulatory provisions. For example, proposed Sec.  
910.1(e) defines a substantial owner, substantial member, or 
substantial partner as an owner, member, or partner holding at least a 
25% ownership interest in a business entity. In a final rule, the 
Commission could set this standard at a different percentage level--for 
example, 50% or 10%. The Commission seeks comment on these types of 
granular questions not in this Part VI, but in the section-by-section 
analysis for the relevant provision in Part V above.

A. Two Key Dimensions of Alternatives

    In Part IV above, the Commission preliminarily finds that the use 
of non-compete clauses by employers is an ``unfair'' method of 
competition under Section 5. For workers who are not senior executives, 
the Commission preliminarily finds that non-compete clauses are 
``unfair'' under Section 5 in three independent ways. First, the use by 
employers of non-compete clauses is restrictive conduct that negatively 
affects competitive conditions. Second, non-compete clauses are 
exploitative and coercive at the time of contracting while burdening a 
not insignificant volume of commerce. Third, non-compete clauses are 
exploitative and coercive at the time of the worker's potential 
departure from the employer while burdening a not insignificant volume 
of commerce.\411\
---------------------------------------------------------------------------

    \411\ See supra Part IV.A.1. The Commission also preliminarily 
finds that non-compete clauses are a ``method of competition.'' See 
supra Part IV.A.2.
---------------------------------------------------------------------------

    For workers who are senior executives, the Commission preliminarily 
finds that the use by employers of non-compete clauses is ``unfair'' 
under Section 5 because such non-compete clauses are restrictive 
conduct that negatively affects competitive conditions. Indeed, as 
described above in Part IV.A.1.a.ii, the Commission preliminarily 
believes that non-compete clauses for senior executives may harm 
competition in product markets in unique ways. (The second and third 
preliminary findings described above--that non-compete clauses are 
exploitative and coercive at the time of contracting and at the time of 
a worker's potential departure--do not apply to senior executives.) In 
Part IV, the Commission seeks comment on whether this different 
unfairness analysis should also apply to highly paid or highly skilled 
workers who are not senior executives.
    The objective of the proposed rule is to remedy these adverse 
effects from the use of non-compete clauses. The proposed rule would 
seek to accomplish this objective by prohibiting an employer from 
entering into or attempting to enter into a non-compete clause with a 
worker; maintaining with a worker a non-compete clause; and, under 
certain circumstances,

[[Page 3517]]

representing to a worker that the worker is subject to a non-compete 
clause.\412\
---------------------------------------------------------------------------

    \412\ See proposed Sec.  910.2(a). For ease of reference, this 
Part VI employs the term ``use of non-compete clauses'' to refer to 
the specific conduct that the proposed rule would prohibit.
---------------------------------------------------------------------------

    The proposed rule would ban non-compete clauses categorically, with 
a limited exception for certain non-compete clauses between the seller 
and buyer of a business.\413\ In Part V, the Commission explains why it 
is proposing a categorical ban on non-compete clauses.\414\
---------------------------------------------------------------------------

    \413\ See proposed Sec.  910.3. As described in Part V (in the 
section-by-section analysis for proposed Sec.  910.1(c)), the 
proposed rule would also not apply to employers to the extent they 
are exempt under Section 5(a)(2) of the FTC Act, and the proposed 
rule may not apply under certain circumstances due to the state 
action doctrine.
    \414\ See supra Part V, in the section-by-section analysis for 
proposed Sec.  910.2(a).
---------------------------------------------------------------------------

    There are two key dimensions of alternatives related to the rule's 
fundamental design. First, instead of a categorical ban, the Commission 
could adopt a rebuttable presumption of unlawfulness. Under this 
approach, it would be presumptively unlawful for an employer to use a 
non-compete clause, but the use of a non-compete clause would be 
permitted if the employer could meet a certain evidentiary burden, 
based on a standard that would be articulated in the rule. Second, 
instead of applying to all workers uniformly, the Rule could include 
exemptions or different standards for different categories of workers. 
These exemptions or different standards could be based on a worker's 
job functions, earnings, another factor, or some combination of 
factors.
1. Categorical Ban vs. Rebuttable Presumption
    The Commission could adopt a rebuttable presumption of unlawfulness 
instead of a categorical ban. Under this approach, it would be 
presumptively unlawful for an employer to use a non-compete clause. 
However, the use of a non-compete clause would be permitted if the 
employer could meet a certain evidentiary burden, based on a standard 
that would be articulated in the rule. The rationale behind this 
approach would be that prohibiting employers from using non-compete 
clauses is an appropriate default rule in light of the adverse effects 
on competition from their use in the aggregate; however, there may be 
specific sets of facts under which their use may be justified, so it 
would be appropriate to permit employers to use them in those cases.
    Conceptually, the rebuttable presumption approach would be similar 
to ``quick look'' analysis under antitrust law. In antitrust cases, 
most restraints are analyzed under the rule of reason, which entails an 
intensive, fact-specific assessment of market power and market 
structure to determine a restraint's actual effect on competition.\415\ 
However, where ``the great likelihood of anticompetitive effects can be 
easily ascertained,'' a court may also adopt a truncated, or ``quick 
look,'' rule of reason analysis.\416\ Courts apply quick look analysis 
where, ``based upon economic learning and the experience of the market, 
it is obvious that a restraint of trade likely impairs competition.'' 
\417\ In such cases, ``the restraint is presumed unlawful and, in order 
to avoid liability, the defendant must either identify some reason the 
restraint is unlikely to harm consumers or identify some competitive 
benefit that plausibly offsets the apparent or anticipated harm.'' 
\418\ A rebuttable presumption in the Rule would mirror this approach. 
Non-compete clauses would be presumed unlawful, based on the ``economic 
learning and experience of the market'' summarized in Part IV above, 
but the use of a non-compete clause would be permitted if the employer 
could make a showing that satisfies a certain standard.
---------------------------------------------------------------------------

    \415\ See, e.g., Am. Express Co., 138 S. Ct. at 2284.
    \416\ See, e.g., Calif. Dental Ass'n v. Fed. Trade Comm'n, 526 
U.S. 756, 770 (1999).
    \417\ Polygram Holding, Inc. v. Fed. Trade Comm'n, 416 F.3d 29, 
36 (D.C. Cir. 2005).
    \418\ Id.
---------------------------------------------------------------------------

    The rebuttable presumption approach would also be similar in many 
respects to the current common law governing non-compete clauses. In 
most states, non-compete clauses are disfavored, but are permitted if 
an employer can identify a legitimate business interest and if the non-
compete clause is reasonable with respect to geographic area, duration, 
and the scope of activity prohibited.\419\ Similarly, under the 
rebuttable presumption approach, non-compete clauses would be 
presumptively unlawful but would be permitted under certain 
circumstances.
---------------------------------------------------------------------------

    \419\ See supra Part II.C.1.
---------------------------------------------------------------------------

    One important question related to the rebuttable presumption 
approach is what the test for rebutting the presumption should be. The 
Commission preliminarily believes that, if it were to adopt a 
rebuttable presumption in a final rule, it would adopt a test that is 
more restrictive than the current common-law standard. Otherwise, the 
Rule would be no more restrictive than current law, and the objective 
of the Rule--to remedy the adverse effects to competition from 
employers' use of non-compete clause--would not be achieved.
    One option would be a test derived from the quick look test. For 
example, the rule could allow an employer to rebut the presumption 
where the employer ``shows by clear and convincing evidence that the 
non-compete clause is unlikely to harm competition in labor markets or 
product or service markets, or identifies some competitive benefit that 
plausibly outweighs the apparent or anticipated harm.'' Alternatively, 
the test could focus exclusively on either of these two prongs: 
unlikeliness of harm to competition, or presence of a competitive 
benefit that plausibly outweighs the apparent or anticipated harm to 
competition. A term other than ``clear and convincing evidence,'' such 
as ``preponderance of the evidence,'' could also be used.
    Another option would be a test that piggybacks on state law. For 
example, the rule could allow an employer to rebut the presumption 
where the employer ``shows by clear and convincing evidence that a non-
compete clause is necessary to protect a legitimate business 
interest.'' This would be a higher standard than the current common law 
test because it would require an employer to show not only that it has 
a ``legitimate business interest'' under state law, but that it cannot 
protect this interest in another way--for example, through the use of 
an NDA. The test could also use the term ``reasonably necessary'' 
instead of ``necessary,'' or a term other than ``clear and convincing 
evidence, such as ``preponderance of the evidence.'' The Commission 
could also establish what ``legitimate business interests'' could 
justify a non-compete clause and which could not.
    The Commission preliminarily believes the categorical ban in the 
proposed rule would advance the proposed rule's objectives to a greater 
degree than the rebuttable presumption approach. The Commission is 
concerned that the rebuttable presumption approach could foster 
confusion among employers and workers because the question of whether 
an employer may use a non-compete clause would depend on an abstract 
legal test rather than a bright-line rule. Under a categorical ban, it 
would be clear non-compete clauses are prohibited. In contrast, under 
the rebuttable presumption approach, it may be difficult for both 
employers and workers to know whether a particular non-compete clause 
meets the abstract legal test articulated in the rule. For example, it 
may be difficult for an employer or worker to know whether a particular 
non-compete clause is

[[Page 3518]]

``unlikely to harm competition in labor markets or product or service 
markets,'' whether ``there is some competitive benefit that plausibly 
outweighs the apparent or anticipated harm,'' or whether a non-compete 
clause is ``necessary'' to protect a legitimate business interest. 
Furthermore, because only the Commission can enforce a rule issued 
under Section 6(g), the development of the law--and therefore clarity 
for employers--would be slow in coming.
    However, the rebuttable presumption could also have some advantages 
over a categorical ban. If there were to be specific factual scenarios, 
unanticipated by the Commission, in which a particular non-compete 
clause did not implicate the anticompetitive concerns the Commission is 
concerned about, the rebuttable presumption would allow the clause to 
be used.
    The Commission seeks comment on whether it should adopt a 
rebuttable presumption instead of a categorical ban and what the test 
for rebutting the presumption should be.
2. Uniform Rule vs. Differentiation
    In addition to establishing a categorical ban on non-compete 
clauses, the proposed rule would apply uniformly to all workers. 
Employers covered by the rule--i.e., employers other than those exempt 
from coverage under the FTC Act \420\--would be prohibited from using a 
non-compete clause with a worker, except in limited scenarios where the 
non-compete clause is between the seller and buyer of a business.\421\
---------------------------------------------------------------------------

    \420\ See supra Part V, in the section-by-section analysis for 
proposed Sec.  910.1(c), for additional discussion of this issue.
    \421\ See proposed Sec.  910.3.
---------------------------------------------------------------------------

    Rather than applying a rule uniformly to all workers, the 
Commission could apply different rules to different categories of 
workers based on a worker's job function, occupation, earnings, another 
factor, or some combination of factors. For example, the rule could ban 
non-compete clauses for workers generally, but could apply a rebuttable 
presumption to non-compete clauses for workers whose earnings are above 
a certain threshold (or could exempt such workers altogether).
    This Part VI uses the term ``more-lenient standards'' to refer to 
the more relaxed regulatory standards that would apply to certain 
categories of workers--such as the workers above the earnings threshold 
in the example above--under this approach. This Part VI also uses the 
term ``more-stringent standards'' to refer to the stricter standards 
that would apply to certain categories of workers, such as the workers 
below the earnings threshold in the second example above.
    As described above in Part II.C.1, the recent non-compete clause 
statutes many states have enacted have generally differentiated among 
categories of workers. Most of these states have restricted non-compete 
clauses only for workers below a threshold based on the worker's 
earnings or a similar factor, such as whether the worker is non-exempt 
under the FLSA or whether the worker is an hourly worker.\422\
---------------------------------------------------------------------------

    \422\ See supra Part II.C.1.
---------------------------------------------------------------------------

    There are three main ways a rule could differentiate among workers. 
First, a rule could apply different standards to workers based on the 
workers' job functions or occupations. For example, a rule could apply 
more-lenient standards to non-compete clauses for senior executives or 
could exempt them from coverage altogether.
    Second, a rule could apply different standards to workers based on 
some combination of job functions/occupations and a worker's earnings. 
For example, the rule could apply more-lenient standards to workers who 
qualify for the FLSA exemptions for ``executives'' and ``learned 
professionals.'' \423\ Workers qualify for these FLSA exemptions (which 
exempt the worker from minimum-wage and overtime-pay rules) if they 
earn above a certain amount and perform certain types of job 
duties.\424\ Another potential alternative could be to apply more-
lenient standards to a worker who qualifies for any FLSA 
exemption.\425\
---------------------------------------------------------------------------

    \423\ See 29 CFR 541.100; 29 CFR 541.200.
    \424\ See Dep't of Labor, Fact Sheet #17A: Exemption for 
Executive, Administrative, Professional, Computer & Outside Sales 
Employees Under the Fair Labor Standards Act (FLSA) (Sept. 2019).
    \425\ See Dep't of Labor, Handy Reference Guide to the Fair 
Labor Standards Act, entry under Exemptions, https://www.dol.gov/agencies/whd/compliance-assistance/handy-reference-guide-flsa#8.
---------------------------------------------------------------------------

    Third, like the recent state statutes described above, a rule could 
apply different standards based on the worker's earnings. An earnings 
threshold could be relatively high (as in, e.g., the State of 
Washington, where a non-compete clause is void unless the worker's 
annual earnings exceed $100,000 for employees and $250,000 for 
independent contractors); in the middle (as in, e.g., Virginia, where 
employers may not enter into, enforce, or threaten to enforce a non-
compete clause with a worker whose average weekly earnings are less 
than the Commonwealth's average weekly wage); or relatively low (as in, 
e.g., Maryland, where non-compete clauses are void where a worker earns 
equal to or less than $15 per hour or $31,200 per year).\426\ The 
Commission also believes if it were to adopt a threshold based on 
earnings, it would be appropriate to index the earnings level to 
inflation, to ensure as well as possible that the threshold continues 
to correspond to the Commission's justification for it.
---------------------------------------------------------------------------

    \426\ See supra note 149 and accompanying text.
---------------------------------------------------------------------------

    A rule could also differentiate among workers based on a different 
factor, or based on some combination of factors.
    The Commission preliminarily concludes applying the rule uniformly 
to all workers would advance the proposed rule's objectives to a 
greater degree than differentiating among workers. As described in Part 
V above, non-compete clauses obstruct labor market competition in a 
similar way for all workers, regardless of a worker's income or job 
status.\427\ Whether a labor market includes high earners or low-wage 
workers, non-compete clauses block workers in that market from 
switching to jobs in which they would be better paid and more 
productive--restricting the opportunities of all workers in that labor 
market. The Commission estimates the proposed rule would increase 
earnings for workers across the labor force, as well as for workers in 
all of the subgroups of the labor force for which sufficient data are 
available--from hourly workers to highly paid, highly skilled workers 
such as executives.\428\ Excluding these workers from the proposed rule 
would deny these workers the benefits of higher earnings through 
increased competition in the market for their labor.
---------------------------------------------------------------------------

    \427\ See supra Part V (in the section-by-section analysis for 
proposed Sec.  910.2(a)).
    \428\ See infra Part VII.B.1.a.
---------------------------------------------------------------------------

    The Commission also preliminarily concludes a rule that applies 
uniformly to all workers would better ensure workers are aware of their 
rights under the rule. For example, the Commission believes employers 
generally know whether a particular worker is exempt under the FLSA, 
but many workers may not know this themselves. Therefore, if the Rule 
were to prohibit non-compete clauses with FLSA non-exempt workers, and 
an employer were to enter into a non-compete clause with an FLSA non-
exempt worker in violation of the Rule, the worker may not know whether 
the non-compete clause is valid.
    If the Commission were to adopt a final rule differentiating among 
categories of workers, it may also adopt a severability clause 
indicating the Commission intends for the standards to

[[Page 3519]]

be severable.\429\ If a regulatory provision is severable, and one part 
of the provision is invalidated by a court, the court may allow the 
other parts of the provision to remain in effect.\430\ When analyzing 
whether a provision is severable, courts consider both (a) the agency's 
intent and (b) whether severing the invalid parts of the provision 
would impair the function of the remaining parts.\431\ Including a 
severability clause would clarify the Commission's intent that, if a 
court were to invalidate the standards for one category of workers, the 
other standards would remain in effect. The Commission also believes if 
it were to adopt a final rule differentiating between categories of 
workers, and a court were to strike down the rules for one category, 
that would not impair the function of the remaining provisions. If 
every worker falls into only one category, and one or more (but not 
all) of the standards were to be invalidated, an employer could simply 
comply with the standards that remain in effect.
---------------------------------------------------------------------------

    \429\ The Commission may adopt a severability clause even if it 
did not apply different standards to the different categories of 
workers.
    \430\ See, e.g., Davis Cnty. Solid Waste Mgmt. v. EPA, 108 F.3d 
1454, 1459 (D.C. Cir. 1997).
    \431\ Id. at 1460.
---------------------------------------------------------------------------

    The Commission seeks comment on whether it should differentiate 
between workers rather than adopting a rule that applies uniformly to 
all workers. In addition, the Commission seeks comment on what the 
specific threshold(s) should be.

B. Discrete Alternatives

    As described above, there are two key dimensions of alternatives 
related to the fundamental design of the rule. The first is whether the 
rule should impose a categorical ban on non-compete clauses or a 
rebuttable presumption of unlawfulness. The second is whether the rule 
should apply uniformly to all workers or whether there should be 
exemptions or different standards for different categories of workers, 
using one or more thresholds based on a worker's job functions, 
earnings, some other factor, or some combination of factors. The 
different permutations of the answers to each of these questions yield 
the different alternatives for the rule's fundamental design. As a 
result, the number of potential alternatives to the proposed rule is 
nearly limitless. However, for the purpose of focusing public comment, 
this Part VI.B describes four discrete alternatives to the proposed 
rule. The Commission preliminarily believes each of these alternatives 
may further the objectives of the proposed rule, to some degree.
    For each of the alternatives described below, the Commission could 
adopt a variety of different thresholds. As described above in Part 
VI.A.2, a threshold could be based on job functions, the worker's 
occupation, earnings, some other factor, or some combination of 
factors. A threshold could be set relatively high, relatively low, or 
in the middle.
1. Alternative #1: Categorical Ban Below Threshold, Rebuttable 
Presumption Above
    Under Alternative #1, the rule would categorically ban the use of 
non-compete clauses for some workers and apply a rebuttable presumption 
of unlawfulness to non-compete clauses for the other workers. For 
example, the rule could ban non-compete clauses generally, but apply a 
rebuttable presumption to workers who qualify for the FLSA exemptions 
for executives or learned professionals.\432\ Or the rule could ban 
non-compete clauses but apply a rebuttable presumption to workers who 
earn more than $100,000 per year.
---------------------------------------------------------------------------

    \432\ See supra note 423-424 and accompanying text.
---------------------------------------------------------------------------

    The Commission is not proposing this approach due to the 
preliminary concerns, described above in Parts VI.A.1 and VI.A.2, about 
the rebuttable presumption approach and about differentiating among 
categories of workers. However, the Commission seeks comment on this 
alternative.
2. Alternative #2: Categorical Ban Below Threshold, No Requirements 
Above
    Under Alternative #2, the rule would categorically ban the use of 
non-compete clauses for some workers and not apply any requirements to 
the other workers. In effect, the other workers would simply be exempt 
from coverage under the rule. This approach would be similar to the 
recent non-compete clause statutes many states have enacted.\433\ For 
example, like the recent State of Washington statute, the rule could 
prohibit the use of non-compete clauses for employees earning $100,000 
or less per year and independent contractors earning less than $250,000 
or less per year. Or, like the recent Massachusetts and Rhode Island 
statutes, the rule could prohibit the use of non-compete clauses for 
workers who are non-exempt under the FLSA.
---------------------------------------------------------------------------

    \433\ See supra note 149.
---------------------------------------------------------------------------

    The Commission is not proposing this approach due to its 
preliminary concerns, described above in Part VI.A.2, about 
differentiating among categories of workers. However, the Commission 
seeks comment on this alternative.
3. Alternative #3: Rebuttable Presumption for All Workers
    Under Alternative #3, the rule would apply a rebuttable presumption 
of unlawfulness to non-compete clauses for all workers. This approach 
would be similar to the proposed rule in that it would apply uniformly 
to all U.S. workers. However, instead of a categorical ban, the rule 
would apply a rebuttable presumption. The Commission is not proposing 
this approach due to its preliminary concerns with the rebuttable 
presumption approach, which are described above in Part VI.A.1. 
However, the Commission seeks comment on this alternative.
4. Alternative #4: Rebuttable Presumption Below Threshold, No 
Requirements Above
    Under Alternative #4, the rule would apply a rebuttable presumption 
of unlawfulness to non-compete clauses for some workers and not apply 
any requirements to the other workers. This approach would be similar 
to Alternative #2, except that, instead of categorically banning non-
compete clauses for workers below the threshold, the rule would apply a 
rebuttable presumption. The Commission is not proposing this approach 
due to the preliminary concerns, described above in Parts VI.A.1 and 
VI.A.2, about the rebuttable presumption approach and about 
differentiating among categories of workers. However, the Commission 
seeks comment on this alternative.
    The Commission seeks comment on each of these alternatives 
described in this Part VI.B, including whether the alternative would 
advance the objectives of the proposed rule to a greater or lesser 
degree than the proposed rule, and how the Commission should design the 
rule if it were to adopt the alternative.

C. Different Standards for Senior Executives

    In addition to seeking comment generally on whether the rule should 
apply uniformly to all workers or differentiate between categories of 
workers,\434\ the Commission seeks comment specifically on whether it 
should adopt different standards for non-compete clauses with senior 
executives.\435\
---------------------------------------------------------------------------

    \434\ See supra Part VI.A.2.
    \435\ The Commission could also define senior executives as a 
separate category, but apply the same standards to senior executives 
as to other workers.

---------------------------------------------------------------------------

[[Page 3520]]

    The proposed rule would categorically ban non-compete clauses for 
all workers, including senior executives. However, the Commission 
recognizes non-compete clauses for senior executives may present 
distinct concerns. As described in Part IV, the Commission 
preliminarily finds that, like non-compete clauses for other workers, 
non-compete clauses for senior executives negatively affect competitive 
conditions in labor markets.\436\ The Commission also preliminarily 
finds non-compete clauses for senior executives negatively affect 
competitive conditions in product and service markets, and they may do 
so in unique ways.\437\ However, unlike non-compete clauses for other 
workers, the Commission does not preliminarily find non-compete clauses 
for senior executives are exploitative and coercive at the time of 
contracting or at the time of the worker's potential departure.\438\
---------------------------------------------------------------------------

    \436\ See supra Part IV.A.1.a.i.
    \437\ See supra Part IV.A.1.a.ii.
    \438\ See supra Part IV.A.1.b-c.
---------------------------------------------------------------------------

    Given that non-compete clauses for senior executives may present 
distinct concerns, the Commission is interested in the public's views 
about whether different standards for senior executives would be 
appropriate. For example, the Commission could adopt a categorical ban 
on non-compete clauses for workers in general, but apply a rebuttable 
presumption of unlawfulness for senior executives or exempt senior 
executives altogether.
    The Commission seeks comment on how, if the Commission were to 
adopt different standards for senior executives, this category of 
workers should be defined. The Commission is not aware of a generally 
accepted legal definition of ``senior executive.'' This term may be 
challenging to define, given the variety of organizational structures 
used by employers. The Commission could cross-reference a definition in 
an existing federal regulation, such as the definition of ``named 
executive officer'' in Securities and Exchange Commission (SEC) 
Regulation S-K \439\ or the definition of ``executive officers'' in SEC 
Rule 3b-7; \440\ adopt a definition closely based on a definition in an 
existing federal regulation; adopt a new definition; define the 
category according to a worker's earnings; use some combination of 
these approaches; or use a different approach. The Commission seeks 
comment on what definition would draw the appropriate line--with 
respect to which workers should be covered by the different standards--
while providing sufficient clarity to employers and workers.
---------------------------------------------------------------------------

    \439\ 17 CFR 229.402(a)(3).
    \440\ 17 CFR 203.501(f).
---------------------------------------------------------------------------

    In addition, the Commission seeks comment on whether these 
different standards should also be applied to other highly paid or 
highly skilled workers who are not senior executives, including 
specifically how such a category should be defined.

D. Coverage of Non-Compete Clauses Between Franchisors and Franchisees

    The proposed rule would state the term ``worker'' does not include 
a franchisee in the context of a franchisee-franchisor 
relationship.\441\ As a result, the proposed rule would not cover non-
compete clauses between franchisors and franchisees.\442\ As described 
above in Part V, the Commission believes that, in some cases, the 
relationship between a franchisor and franchisee may be more analogous 
to the relationship between two businesses than the relationship 
between an employer and a worker. In addition, the evidentiary record 
before the Commission relates primarily to non-compete clauses that 
arise solely out of employment; the Commission has surveyed the 
available evidence relating to non-compete clauses and is not aware of 
research on the effects of applying additional legal restrictions to 
non-compete clauses between franchisors and franchisees. Therefore, the 
Commission believes it is appropriate to clarify that a franchisee--in 
the context of a franchisor-franchisee relationship--is not a 
``worker'' for purposes of proposed Sec.  910.1(f).\443\ (Proposed 
Sec.  910.1(f) would explain, however, the term ``worker'' includes a 
natural person who works for the franchisee or franchisor, and non-
compete clauses between franchisors and franchisees would remain 
subject to federal antitrust law as well as all other applicable law.)
---------------------------------------------------------------------------

    \441\ See proposed Sec.  910.1(f).
    \442\ For ease of reference, this Part VI refers to these types 
of non-compete clauses as ``franchisor/franchisee non-compete 
clauses.''
    \443\ See supra Part V (in the section-by-section analysis for 
proposed Sec.  910.1(f)).
---------------------------------------------------------------------------

    While the Commission is not currently proposing to cover 
franchisor/franchisee non-compete clauses for these reasons, the 
Commission recognizes that, in some cases, these non-compete clauses 
may present concerns under Section 5 similar to the concerns presented 
by non-compete clauses between employers and workers. Many franchise 
agreements may contain non-compete clauses.\444\ By restricting a 
franchisee's ability to start a new business, franchisor/franchisee 
non-compete clauses could potentially stifle new business formation and 
innovation, reduce the earnings of franchisees, and have other negative 
effects on competitive conditions similar to non-compete clauses 
between employers and workers. Franchisor/franchisee non-compete 
clauses could also potentially be exploitative and coercive in some 
cases, such as where there is an imbalance of bargaining power between 
the parties. While the relationship between franchisors and franchisees 
may, in some cases, be more analogous to a business-to-business 
relationship, many franchisees lack bargaining power in the context of 
their relationship with franchisors and may be susceptible to 
exploitation and coercion through the use of non-compete clauses.\445\
---------------------------------------------------------------------------

    \444\ See, e.g., Brian Callaci, Sergio Pinto, Marshall 
Steinbaum, & Matthew Walsh, Vertical Restraints and Labor Markets in 
Franchised Industries (July 6, 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4155571 (finding that, in a sample of 530 
franchising contracts, various types of vertical restraints were 
prevalent, while not specifically addressing non-compete clauses). 
The Commission has also frequently encountered non-compete clauses 
in franchise agreements. See supra Part II.D (describing consent 
orders that restricted a franchisor's ability to enforce non-compete 
clauses).
    \445\ See, e.g., Brian Callaci & Sandeep Vaheesan, Antitrust 
Remedies for Fissured Work, Cornell L. Rev. (forthcoming), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4076274 at 21-22.
---------------------------------------------------------------------------

    For these reasons, the Commission seeks comment on whether the Rule 
should cover franchisor/franchisee non-compete clauses and why. The 
Commission also seeks comment on whether, if the Rule were to cover 
franchisor/franchisee non-compete clauses, they should be categorically 
banned or subject to a rebuttable presumption of unlawfulness (and if 
the latter, what the standard for rebutting the presumption should be). 
The Commission further seeks comment on whether, if the rule were to 
cover franchisor/franchisee non-compete clauses, the rule should apply 
uniformly to all such non-compete clauses or whether certain categories 
of franchisor/franchisee non-compete clauses should be exempted or 
subject to different standards. The Commission encourages commenters to 
submit data or other evidence that could inform the Commission's 
consideration of this issue.

E. Other Alternatives

    This Part VI.E describes two alternatives the Commission believes 
would likely not further the objectives of the proposed rule. However, 
this assessment is preliminary. Based on the public comments and the 
Commission's

[[Page 3521]]

additional analysis, the Commission could potentially decide to adopt 
one or both of the alternatives described below in a final rule instead 
of, or in addition to, the proposed rule or one of the alternatives 
described above. The Commission seeks comment on each of the two 
alternatives described in this Part VI.E, as well as whether there are 
other alternatives not described in Part VI that the Commission should 
consider.
1. Disclosure Rule
    The Commission could potentially adopt disclosure requirements 
related to non-compete clauses.\446\ For example, research suggests 
many workers often do not find out about non-compete clauses until 
after they have accepted an employment offer.\447\ This concern could 
be addressed by requiring an employer to disclose to a worker, before 
making the employment offer, that the worker will be subject to a non-
compete clause. The employer could also potentially be required to 
explain the terms of the non-compete clause and how the worker would be 
affected by signing the non-compete clause.
---------------------------------------------------------------------------

    \446\ The Commission's Franchise Rule requires non-compete 
clauses to be disclosed to a franchisee. 16 CFR 436(i); 436(q).
    \447\ Marx (2011), supra note 55 at 706.
---------------------------------------------------------------------------

    While there is evidence disclosure of non-compete clauses to 
workers prior to acceptance of a job offer may increase earnings, 
increase rates of training, and increase job satisfaction for that 
worker,\448\ the Commission does not believe this alternative would 
achieve the objectives of the proposed rule. Merely ensuring workers 
are informed about non-compete clauses would not address one of the 
Commission's central concerns: that, in the aggregate, they are 
negatively affecting competitive conditions in labor markets--including 
impacts on workers who are not bound by non-compete clauses--and in 
markets for products and services. Moreover, the benefits of a 
disclosure rule may be limited due to the differential in bargaining 
power between many workers and their employers, which would hamper 
those workers' ability to negotiate for better employment terms.\449\
---------------------------------------------------------------------------

    \448\ Starr, Prescott, and Bishara, supra note 42 at 75.
    \449\ See supra Part IV.A.1.b.
---------------------------------------------------------------------------

2. Reporting Rule
    The Commission could also potentially require employers to report 
certain information to the Commission relating to their use of non-
compete clauses. For example, employers that use non-compete clauses 
could be required to submit a copy of the non-compete clause to the 
Commission. This would enable the Commission to monitor the use of non-
compete clauses. It would also potentially discourage employers from 
using non-compete clauses where they are clearly not justified under 
existing law.
    However, the Commission does not believe a reporting rule would 
achieve the objectives of the proposed rule. Merely requiring employers 
to submit their non-compete clauses to the Commission may not 
meaningfully reduce the prevalence of non-compete clauses. As a result, 
it may not remedy the extent to which non-compete clauses adversely 
affect competitive conditions in labor markets and product and service 
markets. A reporting rule would also impose significant and recurring 
compliance costs on employers.
    The Commission seeks comment on all aspects of this Part VI, 
including whether the Commission should adopt one of the alternatives 
described above, or a different alternative, instead of the proposed 
rule.

VII. Analysis of Benefits and Costs of the Proposed Rule and 
Alternatives

    The proposed rule would provide it is an unfair method of 
competition--and thus a violation of Section 5 of the FTC Act--for an 
employer to enter into or attempt to enter into a non-compete clause 
with a worker; maintain with a worker a non-compete clause; or 
represent to a worker that the worker is subject to a non-compete 
clause where the employer has no good faith basis to believe the worker 
is subject to an enforceable non-compete clause.\450\ The proposed rule 
is targeted at increasing competition in labor markets by allowing 
workers to move more freely between jobs and increasing competition in 
product markets by ensuring firms are able to hire talented workers and 
workers are able to found entrepreneurial ventures.
---------------------------------------------------------------------------

    \450\ See proposed Sec.  910.2(a).
---------------------------------------------------------------------------

    The proposed rule is intended to alleviate two primary competitive 
problems. First, non-compete clauses anticompetitively interfere in the 
functioning of labor markets without generating compensating benefits. 
Non-compete clauses prevent firms from competing for workers' services 
and increase barriers to voluntary labor mobility, obstructing the 
smooth functioning of labor markets, resulting in lower wages and 
diminished worker and firm productivity.
    The second competitive problem is non-compete clauses create 
negative spillovers in labor markets and in product and service 
markets. In labor markets, non-compete clauses negatively impact 
workers who are not themselves bound by non-compete clauses by 
preventing the opening of vacancies and thereby creating mismatches 
between labor and firms. In product and service markets, non-compete 
clauses prevent entrepreneurial growth, which negatively impacts 
consumers by reducing competition in those markets. Non-compete clauses 
also foreclose competitors' ability to access labor market talent, 
negatively affecting those competitors' ability to effectively compete 
in the marketplace. Additionally, non-compete clauses impede 
innovation, which may negatively impact technological growth rates.
    Section 22 of the FTC Act requires the Commission to issue a 
preliminary regulatory analysis when publishing a proposed rule that 
would declare a practice to be an unfair method of competition under 
Section 5 of the FTC Act.\451\ The preliminary regulatory analysis must 
contain (1) a concise description of the need for, and objectives of, 
the proposed rule; (2) a description of any reasonable alternatives to 
the proposed rule which may accomplish the stated objective of the rule 
in a manner consistent with applicable law; and (3) for the proposed 
rule, and for each of the alternatives described in the analysis, a 
preliminary analysis of the projected benefits and any adverse economic 
effects and any other effects.\452\
---------------------------------------------------------------------------

    \451\ 15 U.S.C. 57b-3.
    \452\ 15 U.S.C. 57b-3(b)(1)(A)-(C).
---------------------------------------------------------------------------

    In the preliminary analysis below, we describe the anticipated 
impacts of the rule as proposed. Where possible, we quantify the 
benefits and costs. If a benefit or cost is quantified, we indicate the 
sources of the data relied upon. If an assumption is needed, the text 
makes clear which quantities are being assumed. We measure the benefits 
and costs of the rule against a baseline in which no rule regarding 
non-compete clauses has been promulgated by the Commission. The 
Commission solicits comments from the public to improve the assumptions 
used in this preliminary analysis before promulgation of any final 
rule.
    This preliminary analysis attempts to include in its scope the 
broadest set of economic actors possible. The Commission invites 
submission of information pertaining to additional economic actors who 
would be affected by the proposed rule. Several of the benefits and 
costs described in this

[[Page 3522]]

analysis are either quantifiable, but not monetizable (especially with 
respect to separation between transfers, benefits, and costs), or not 
quantifiable at all. The Commission therefore also invites submission 
of information which could be applied to quantify or monetize estimates 
contained in the analysis.
    For some of the economic effects of non-compete clauses, 
conflicting evidence exists in the academic literature. We classify 
these effects under both benefits and costs, and discuss divergences in 
the evidence, as well as relative strengths and weaknesses of the 
evidence.
    The Commission seeks comment on all aspects of the preliminary 
analysis presented in this Part VII as well as submissions of 
additional data that could inform the Commission's analysis of the 
benefits, any adverse economic effects, and any other effects of the 
proposed rule.

A. Overview of the Effects of the Proposed Rule

    In this preliminary regulatory analysis, we have quantified and 
monetized those costs and benefits for which we are able and described 
all other costs and benefits. The Commission finds substantial benefits 
of the proposed rule: workers' earnings would likely increase by $250-
$296 billion annually (though some portion of this represents an 
economic transfer from firms to workers), new firm formation and 
competition would increase, health care prices would fall (and prices 
in other markets may fall), and innovation would increase, though 
several of these benefits overlap (e.g., increases in competition may 
fully or in part drive decreases in prices and increases in 
innovation). The Commission also finds some costs of the proposed rule: 
direct compliance and contract updating would result in $1.02 to $1.77 
billion in one-time costs, and firm investment in worker training and 
capital assets would fall.
    The nature of the estimates, however, creates substantial 
difficulty in calculating a bottom-line present value of the net 
benefit to the economy of the proposed rule. The Commission believes 
the substantial labor and product market benefits of the proposed rule 
would exceed the costs, and additionally would persist over a 
substantially longer time horizon than some of the one-time costs of 
compliance and contract updating. However, we do not present here an 
estimate of the net benefit, as it would necessarily omit major 
components of both costs and benefits. In particular, the numbers 
reported above are not comparable in order to estimate the net benefit 
of the rule: as noted, some portion of the earnings increase estimate 
represents transfers rather than benefits; several benefits and costs 
are unmonetized in this analysis; and several of the annualized 
benefits and costs (including the portion of the earnings increase 
attributable to benefit) may persist indefinitely, as compared with the 
one-time compliance and contract updating costs.

B. Estimated Benefits of the Proposed Rule

    In this Part VII.B, we describe the beneficial impacts of the 
proposed rule; provide preliminary quantitative, monetized estimates 
where possible; and describe benefits we can only assess qualitatively. 
We enumerate benefits in two broad categories (further divided into 
subcategories): benefits related to labor markets and benefits related 
to goods and service markets.
    Overall, the Commission estimates worker earnings would increase by 
$250-$296 billion annually as a result of the proposed rule. While the 
Commission believes some of this increase represents an economic 
benefit, some portion of this increase likely represents a transfer of 
income from firms to workers, or from consumers to workers if firms 
pass labor costs on to consumers. The Commission also finds, however, 
the proposed rule would increase the rate of new firm formation, the 
rate of innovation, and the extent of competition in product and 
service markets, which may lead to lower prices for consumers, though 
the sizes of these effects are not quantifiable based on the estimates 
in the economic literature (except in the case of healthcare).
1. Benefits Related to Labor Markets
    By preventing workers from changing employers or embarking upon 
entrepreneurial ventures, non-compete clauses prevent beneficial labor 
market competition in two primary ways. First, non-compete clauses 
prevent workers from leaving their job for higher-paying jobs, or from 
leveraging such an offer to increase their earnings at their current 
employer. Second, non-compete clauses reduce voluntary churn in labor 
markets. While churn is not necessarily beneficial in and of itself, 
voluntary churn allows workers (who would otherwise be bound by non-
compete clauses) and firms to sort into the best possible matches and 
opens vacancies, which allow workers who are not necessarily bound by 
non-compete clauses to find better matches. Both mechanisms exhibit, at 
least in part, as earnings losses for workers when non-compete clauses 
enforceability increases; however, the extent to which earnings gains 
associated with the proposed rule represent benefits versus transfers 
may depend on the mechanism. We describe in which cases we are and are 
not able to categorize, quantify, and monetize these estimates below.
a. Earnings
    The primary impact of the proposed rule is an increase in earnings 
or earnings growth for workers, and more efficient functioning of labor 
markets. A full analysis of this benefit would seek to quantify the 
entire range of heterogeneity in the effect of the proposed rule on 
earnings. In other words, for any given worker, the likely impact on 
that worker's earnings is based on whether that worker has a non-
compete clause, whether non-compete clauses are broadly used in their 
occupation/industry/local area, how much that worker earns, that 
worker's demographics, and much more. While some studies have sought to 
quantify heterogeneous impacts of non-compete clauses and their 
enforceability on subgroups of workers, this accounting is limited to 
fairly small sectors of the population. For this reason, we focus 
primarily on estimates of average effects across the American labor 
force, though we provide details on what heterogeneity has been 
analyzed below.
    The study containing the most direct estimate of the increase in 
workers' earnings given a prohibition on non-compete clauses finds that 
earnings would increase across the labor force by an average of 3.3-
13.9%.\453\ For several reasons, we primarily focus on the low end of 
this range: in addition to generating the most conservative estimate, 
this range represents an out-of-sample approximation and is furthermore 
based on enforceability in 2014. Since then, some states have passed 
legislation causing non-compete clauses to be more difficult to enforce 
for subsets of their workforces, therefore causing a prohibition on 
non-compete clauses today to have a slightly lesser effect than a 
prohibition would have had in 2014.\454\ Using total annual wage 
earnings in the United States for private employers in 2020 (the most 
recent year with finalized numbers) as a baseline,\455\ we estimate a 
total annual earnings

[[Page 3523]]

increase of $250.05 billion. We also report the total annual earnings 
increase that is associated with other levels of the percentage 
increase in earnings that fall within the range reported in the study 
in Table 1, in addition to 10-year discounted earnings increases using 
both 3% and 7% discount rates.
---------------------------------------------------------------------------

    \453\ Johnson, Lavetti, & Lipsitz, supra note 63 at 2.
    \454\ See supra Part II.C.1.
    \455\ National annual earnings are taken from Bureau of Labor 
Statistics, Employment and Wages Data Viewer (last visited Dec. 9, 
2022), https://data.bls.gov/cew/apps/data_views/data_views.htm#tab=Tables.

                                                     Table 1
----------------------------------------------------------------------------------------------------------------
                                                                                   Total 10-year   Total 10-year
                                                                   Total annual      earnings        earnings
               Percentage increase in earnings (%)                   earnings      increase, 3%    increase, 7%
                                                                    increase ($    discount rate   discount rate
                                                                     billion)       ($ billion)     ($ billion)
----------------------------------------------------------------------------------------------------------------
3.3.............................................................          250.05        2,132.97        1,756.24
5.0.............................................................          378.86        3,231.78        2,660.98
7.0.............................................................          530.41        4,524.49        3,725.37
9.0.............................................................          681.95        5,817.20        4,789.76
11.0............................................................          833.50        7,109.91        5,854.15
13.0............................................................          985.04        8,402.63        6,918.54
13.9............................................................        1,053.24        8,984.35        7,397.51
----------------------------------------------------------------------------------------------------------------

    Another study estimates decreased non-compete clause enforceability 
would increase earnings by approximately 1%. This study uses, as a 
control group, occupations which use non-compete clauses at a low rate: 
the estimate therefore represents the differential effect on 
occupations which use non-compete clauses at a high rate, relative to 
the control group. While the study does estimate the separate impact of 
non-compete clause enforceability for each group, there is no way to 
disentangle this effect from state-specific effects (e.g., that 
California does not typically enforce non-compete clauses, and also 
differs from other states in many ways).\456\ Since workers in 
occupations which use non-compete clauses at a low rate may also be 
affected by changes in non-compete clause enforceability, the reported 
increase in earnings likely underestimates the impact on the entire 
labor force. The change in enforceability which generates this estimate 
is a one standard deviation change, as measured using non-compete 
clause enforceability scores \457\ for all 50 states and the District 
of Columbia in 1991. Applying the 1% earnings effect estimate to each 
state (based on the scores in 2009), we calculate that each state 
moving to non-enforceability (as would be the case under the proposed 
rule) would result in an overall annual earnings increase of $295.9 
billion.\458\
---------------------------------------------------------------------------

    \456\ Starr, supra note 66 at 792-93.
    \457\ Non-compete clause enforceability scores, used for this 
estimate as well as several others, are calculated using various 
methods based on legal descriptions provided in various editions of 
``Non-Compete Clauses: A State-by-State Survey'' by Brian M. 
Malsberger.
    \458\ The total earnings increase is calculated as the sum over 
all states of:
    (e 
0.0099*(State's Enforceability Score--Lowest State Enforceability Score)
-1)*(Total Annual Wages of the State)
    This calculation assumes that all workers benefit from the 
increase in earnings, as opposed to calculating the benefits to 
those in high-use occupations versus those in low-use occupations. 
The benefit of this approach is that it yields a total predicted 
earnings increase for the economy as a whole, rather than a 
comparison between different types of workers. However, it is likely 
an overestimate for workers in low-use occupations, and an 
underestimate for those in high-use occupations.
---------------------------------------------------------------------------

    The Commission's preliminary finding is therefore the proposed rule 
would increase workers' earnings workforce-wide by $250-$296 billion 
annually. We discuss in Part VII.B.1.b the extent to which the 
Commission believes this increase represents a benefit of the proposed 
rule versus a transfer.
    Four broad classes of workers merit specific attention, as 
researchers have generated empirical estimates of the effects of non-
compete clause enforceability based specifically on those sectors. 
These classes are (a) high-tech workers; (b) physicians; (c) workers 
paid on an hourly basis; and (d) CEOs. We clarify that the effects we 
present on each of these specific classes of workers are contained 
within the broader estimates presented above: that is, the estimates 
above contain each of these classes of workers, plus the rest of the 
labor force. The specific estimates for each class of workers are 
therefore presented to indicate the range of effects observed in the 
labor market and to illustrate the scope of empirical work that has 
been performed on the topic.
i. High-Tech Workers
    One study examines the impact of non-compete clause enforceability 
on high-tech workers in Hawaii.\459\ That study includes estimates for 
the entirety of the high-tech work force, as well as for newly hired 
workers. Since the ban in Hawaii did not void previously signed non-
compete clauses, while the proposed rule would, we use the estimate for 
newly hired workers. This is because that estimate reflects the effects 
on those workers who were subject to a regime with no non-compete 
clause enforceability. Extrapolating from the estimates for Hawaii to 
the average impact on high-tech workers in each state, a prohibition 
such as the one in this proposed rule would increase earnings of high-
tech workers in the average state by 4.8%.\460\ Caution is recommended 
in interpreting this extrapolation, however, since results from one 
sector within one state may not necessarily inform outcomes that would 
occur in the rest of the country.
---------------------------------------------------------------------------

    \459\ Balasubramanian et al., supra note 68 at S349.
    \460\ The increase in earnings in each state is calculated as
    e 
(0.0441*(State's Enforceability Score-Lowest State Enforceability Score)/(Hawaii's Enforceability Score-Lowest State's Enforceability Score)
-1, where 0.0441 represents the impact of Hawaii's prohibition on 
log earnings for newly hired high-tech workers (Table 2, Panel A, 
Column 5).
---------------------------------------------------------------------------

ii. Physicians
    One study reports the effects of non-compete clause use and 
enforceability on the earnings growth of physicians.\461\
---------------------------------------------------------------------------

    \461\ Lavetti, Simon, & White, supra note 53 at 1025.
---------------------------------------------------------------------------

    Due to the limitations of the study design, the main estimate 
concerns the impact of non-compete clause use on earnings growth, 
rather than the level of earnings.\462\ However, assuming physicians 
begin at an identical level of earnings, a physician with a non-compete 
clause would have an estimated 89% earnings growth over a ten-year 
period, versus an estimated 36% for a physician without a non-compete 
clause. In other words, the physician with a non-compete clause would 
have earnings approximately

[[Page 3524]]

39% greater than the physician without.\463\
---------------------------------------------------------------------------

    \462\ In Table 4 of the study, the table which reports earnings 
effects, the authors include a ``job-match'' fixed effect, which 
rules out several alternate explanations for the authors' findings 
but leaves the authors unable to estimate the base effect of having 
a non-compete clause on earnings.
    \463\ Calculated as 1.89/1.36-1 = 39%.
---------------------------------------------------------------------------

    This estimate, however, is based solely on non-compete clause use, 
and does not consider the impact of enforceability changing. Use of 
non-compete clauses is likely determined by several characteristics of 
an employer (e.g., the value of trade secrets or client attraction, 
productivity gains associated with training, nearness of potential 
competitors), some of which may also cause changes in earnings levels 
or earnings growth. Taking the separate effect of non-compete clause 
enforceability into account, it is possible that the estimated effect 
on earnings growth would differ from the estimates reported above.
    The combined effect of enforceability and use on earnings growth 
may separately be estimated using another model in the same study.\464\ 
We note that the authors state this model presents only ``suggestive 
evidence.'' Furthermore, while this model does estimate the effect of 
non-compete clause use on physicians' earnings (in contrast to that 
reported above, which only examines earnings growth), as well as the 
interaction between use and enforceability, it does not report the 
baseline effect of non-compete clause enforceability, independent of 
use.\465\ Using those estimates, nonetheless, allows for estimation of 
the impact of simultaneously removing non-compete clause enforceability 
and non-compete clause use on earnings at various levels of experience 
(omitting the baseline effect of enforceability, which is not 
reported). For a physician with 10 years of experience in the state 
which enforces non-compete clauses most readily, the estimates suggest 
a prohibition on non-compete clauses and removing that physician's non-
compete clause would lead to a 12.7% increase in earnings, in contrast 
with the results of the model reported above.\466\ For the identical 
situation for a physician with just 1 year of experience, the increase 
in earnings would be 37.4%. We emphasize, however, that if the baseline 
effect of enforceability (which the authors are unable to estimate) is 
large, it could qualitatively change the effect on earnings of a 
simultaneous change in enforceability and use that we report.
---------------------------------------------------------------------------

    \464\ The estimates are presented in Table 6, Column 2.
    \465\ In Table 6 of the study, the authors use local market 
fixed effects: again, these fixed effects are necessary to rule out 
alternate explanations for their findings, but prevent estimation of 
the baseline impact of non-compete clause enforceability on 
earnings.
    \466\ The increase in earnings are calculated as e\B\-1, where B 
is the sum of each of the coefficients on NCA, NCA*Log Exp, Bishara 
Score*NCA, and Bishara Score*NCA*Log Exp, each multiplied by the 
relevant variable.
---------------------------------------------------------------------------

iii. Workers Paid on an Hourly Basis
    One study analyzed how Oregon's 2008 prohibition on non-compete 
clauses for hourly workers impacted their wages.\467\ The study 
estimates Oregon's prohibition increased hourly workers' earnings by 
2.3%, with twice the effect (4.6%) on workers in occupations which use 
non-compete clauses at a relatively high rate.\468\ Extrapolating from 
the estimates for Oregon to the average impact on hourly workers in 
each state, a prohibition such as the one in this proposed rule would 
increase earnings of hourly workers in the average state by 2.3%.\469\ 
Caution is recommended in interpreting this extrapolation, however, 
since results from one segment of the workforce within one state may 
not necessarily inform outcomes that would occur in the rest of the 
country.
---------------------------------------------------------------------------

    \467\ Lipsitz & Starr, supra note 46 at 143.
    \468\ Id. at Table 3, columns 3 and 4, respectively; percent 
changes are calculated as e\b\-1, where b is the relevant reported 
coefficient.
    \469\ The increase in earnings in each state is calculated as
    e 
(0.023*(State's Enforceability Score-Lowest State Enforceability Score)/(Oregon's Enforceability Score-Lowest State's Enforceability Score)
-1, where 0.023 represents the impact of Oregon's prohibition on log 
earnings for hourly workers (Table 3, Column 3).
---------------------------------------------------------------------------

iv. CEOs
    One estimate of the impact of non-compete clause enforceability 
finds that moving from full enforceability of non-compete clauses to a 
prohibition would increase earnings growth by 8.2% and the level of 
earnings by 12.7% for CEOs.\470\ Again ignoring heterogeneity and 
implementing a linear extrapolation using 2009 enforceability scores, 
the average CEO would experience a 9.4% increase in earnings due to the 
prohibition in the proposed rule.\471\
---------------------------------------------------------------------------

    \470\ Garmaise, supra note 69 at 376-425. We assume the average 
level of in-state competition for the estimate of the effect on the 
level of earnings, as reported in Table 1.
    \471\ We first calculate the difference between each state's 
score and the lowest score (which represents a full prohibition) 
after normalizing scores to a 0 to 1 scale. Then, we find the 
average of that difference (0.742) and multiply by the estimated 
change of 12.7% to arrive at 9.4%.
---------------------------------------------------------------------------

    Another study simultaneously examines the effect of use of a non-
compete clause and the enforceability thereof.\472\ This study finds 
that decreased enforceability of non-compete clauses led to lower 
earnings for CEOs when use of non-compete clauses is held constant. 
However, this study also finds that, when non-compete clause 
enforceability decreases (as it would under the proposed rule), non-
compete clause use does not stay constant; it decreases.\473\ As a 
result, the Commission believes the appropriate way to extrapolate 
based on the findings of this study is to take into account both the 
impact of non-compete clause enforceability decreasing and the effect 
of non-compete clause use decreasing.
---------------------------------------------------------------------------

    \472\ Kini, Williams, & Yin, supra note 52 at 4701.
    \473\ The study estimates that an increase in enforceability of 
1 on a 0 to 12 scale increases CEO noncompete use by 10.2 percentage 
points in their sample. Id. at 4718.
---------------------------------------------------------------------------

    When this relationship is taken into account, decreases in non-
compete clause enforceability (as would occur under the proposed rule) 
result in greater earnings for CEOs. The study estimates an increase in 
enforceability of 1 on a 0 to 12 scale increases CEO noncompete use by 
10.2 percentage points in their sample: therefore, a prohibition on 
non-compete clauses would affect CEOs' earnings via the effect the 
study attributes to enforceability alone, as well as by changing the 
use of non-compete clauses by CEOs, which has its own effect on 
earnings, according to the study.\474\
---------------------------------------------------------------------------

    \474\ Id.
---------------------------------------------------------------------------

    Assuming a baseline level of enforceability, it is possible to use 
the estimates from this study to calculate the impact on CEOs' earnings 
of simultaneously decreasing enforceability and non-compete clause use 
to zero (which would mirror the effect of the proposed rule). At the 
highest level of enforceability (9; Florida from 1997-2014), setting 
enforceability to zero and eliminating non-compete clauses from 
contracts would increase CEOs' earnings by 11.4%, based on this study. 
From a lower baseline level of enforceability (for example, 3, as in 
New York from 1992 to 2014), setting enforceability to zero and 
eliminating non-compete clauses from contracts would increase earnings 
by 14.1%.\475\
---------------------------------------------------------------------------

    \475\ The estimated impact of an increase in enforceability on 
CEOs with non-compete clauses is calculated as the effect of the sum 
of the coefficients on CEO noncompete x HQ Enforce and HQ enforce 
(i.e., 0.4% = e(0.047-0.043)-1).
---------------------------------------------------------------------------

    Based on the results of these two studies, the Commission therefore 
believes total compensation for CEOs would increase by 9.4% as a result 
of the proposed rule. This estimate is based on the first study 
discussed: while the results from the second study are qualitatively 
similar, the extent to which its results can be extrapolated are 
murkier due to the reliance on the secondary estimate of how non-
compete clause use changes with non-compete clause enforceability. 
Ultimately, this finding is in accordance with findings

[[Page 3525]]

in other segments of the labor force. Similar to typical workers, non-
compete clauses prevent employers from competing for the labor of CEOs, 
including by offering better remuneration. Therefore, CEOs, like other 
workers, are locked into jobs in ways that prevent them from taking 
advantage of positive changes in labor market conditions.
b. Discussion of Transfers Versus Benefits
    It is difficult to determine the extent to which the earnings 
effects discussed above represent transfers versus benefits. In the 
context of this analysis, transfers refer to ``monetary payments from 
one group to another that do not affect total resources available to 
society.'' \476\ In other words, transfers do not represent a net 
benefit or cost to the economy as a whole.
---------------------------------------------------------------------------

    \476\ Off. of Mgmt. & Budget, Circular A-4 (Sept. 17, 2003) at 
38.
---------------------------------------------------------------------------

    Broad increases in earnings when non-compete clauses are prohibited 
may simply represent a transfer of income from firms to workers (or, if 
firms pass labor costs on to consumers, from consumers to workers). 
There may, however, be a related benefit if the earnings increase of 
workers is related to market power or efficiency in the labor market. 
In other words, if a prohibition on non-compete clauses leads to a more 
efficient allocation of labor in the market, perhaps due to a 
rebalancing of power between workers and employers which decreases 
monopsony power, then the resulting earnings increases may represent a 
net benefit to the economy.
    Additionally, if earnings increases are due to higher quality 
matching which results from increased labor market churn, then 
increased pay reflects a benefit to the economy, since workers' higher 
pay reflects higher productivity.
    Several pieces of evidence support the idea that at least part of 
the increase in earnings represents a social benefit, rather than just 
a transfer. As described above in Part II.B.1.c, two studies have 
sought to estimate the external impact of non-compete clause use or 
enforceability: that is, the effect of use or enforceability on 
individuals other than those directly affected by use or 
enforceability.
    First, one study demonstrates when the use of non-compete clauses 
by employers increases, that decreases wages for workers who do not 
have non-compete clauses but who work in the same state and industry. 
This study also finds this effect is stronger where non-compete clauses 
are more enforceable.\477\ Since the affected workers are not bound by 
non-compete clauses themselves, the differential in earnings does not 
completely represent a transfer due to a change in bargaining power 
between a worker bound by a non-compete clause and their employer, 
though available data does not allow for an estimate of the magnitude 
of transfers versus the total increase in economic benefit.
---------------------------------------------------------------------------

    \477\ Starr, Frake, & Agarwal, supra note 76 at 961-80.
---------------------------------------------------------------------------

    A second study directly estimates the external impact of a change 
in non-compete clause enforceability.\478\ While use of non-compete 
clauses is not observed in the study, the impacts of changes in a 
state's laws are assessed on outcomes in a neighboring state. Since the 
enforceability of the contracts of workers in neighboring states are 
not affected by these law changes, the effect must represent a change 
related to the labor market, which workers in both states share. The 
estimate suggests workers in the neighboring state experience impacts 
on their earnings that are 87% as large as workers in the state in 
which enforceability changed.\479\ In other words, two workers who 
share a labor market would experience nearly the same increase in their 
earnings due to a prohibition on non-compete clauses, even if the 
prohibition only impacts one worker. While the study does not directly 
estimate the differential effects by use, the effects on workers 
unaffected by a change in enforceability may be similar to the effects 
on workers not bound by non-compete clauses.
---------------------------------------------------------------------------

    \478\ Johnson, Lavetti, & Lipsitz, supra note 63 at 26.
    \479\ Calculated as -0.181/-0.207=87%. Coefficients taken from 
id. at Table 6, Column 2.
---------------------------------------------------------------------------

    Overall, these two studies suggest there are market-level dynamics 
governing the relationship between earnings and the enforceability of 
non-compete clauses: that restrictions on the enforceability of non-
compete clauses impact competition in labor markets by alleviating 
frictions and allowing for more productive matching. Changes in 
enforceability or use of non-compete clauses affect earnings of workers 
who do not have non-compete clauses or who work in local labor markets 
near, but not in, locations which experience changes in enforceability. 
If non-compete clauses simply changed the relative bargaining power of 
workers and firms, without affecting market frictions or competition, 
then these patterns would not be observed.
    With a full accounting of all other costs and benefits, one could 
perform a ``sensitivity analysis'' to estimate how much the percentage 
of earnings increases that represent benefits, rather than transfers, 
would affect the net impact of the proposed rule. However, as 
discussed, we are unable to fully monetize, or even quantify, several 
costs and benefits associated with the proposed rule. We present, 
instead, a partial sensitivity analysis which answers the question: for 
a given level of costs, what percentage of the earnings increases would 
offset those costs? The costs may be interpreted as the overall net 
cost of the rule, excluding benefits associated with earnings 
increases: that is, the costs listed in the table are the direct 
compliance and contract updating costs, plus the nonquantifiable and 
nonmonetizable costs, minus all benefits, excluding benefits associated 
with earnings increases.
    The estimates are presented in Table 2. In order to present the 
most conservative estimates possible, we assume the earnings increase 
represents the lowest end of the range we estimate from the empirical 
literature ($250.05 billion). We discount annually at the rate of 7% 
(which is more conservative than a 3% discount rate, given that the 
costs are more front-loaded than the benefits due to the upfront 
compliance costs and costs of contract updating), and assume that 
annualized benefits and costs persist for 10 years. The first estimate, 
for zero or negative net cost, demonstrates that, if the non-earnings-
related benefits of the proposed rule outweigh the total costs of the 
proposed rule, then the costs are already offset, and no portion of the 
earnings increase must be a benefit. The next estimate for costs is the 
midpoint of the estimates presented for direct compliance and contract 
updating costs, as estimated in Part VII.C: if the costs of the 
proposed rule (excluding direct compliance and contract updating costs) 
exactly offset the benefits (excluding earnings-related benefits), then 
if 0.08% of the earnings increases are benefits, they would exactly 
offset the estimated $1.394 billion costs of direct compliance and 
contract updating (where that estimate is the midpoint of the estimated 
range). While the Commission does not have detailed or complete enough 
quantifiable and monetizable estimates to determine whether net costs 
are positive or negative, the rest of Table 2 presents estimates for 
the portion of the earnings increase which would offset net costs 
greater than $1.394 billion, should they exist.

[[Page 3526]]



                                 Table 2
------------------------------------------------------------------------
                                                           Portion of
                                                            earnings
             Net cost estimate ($ million)                increase that
                                                        offsets the cost
                                                          estimate (%)
------------------------------------------------------------------------
0 or Negative.........................................              0.00
1,394.................................................              0.08
5,000.................................................              0.28
10,000................................................              0.57
15,000................................................              0.85
20,000................................................              1.14
25,000................................................              1.42
30,000................................................              1.71
35,000................................................              1.99
40,000................................................              2.28
45,000................................................              2.56
50,000................................................              2.85
------------------------------------------------------------------------

2. Benefits Related to Product and Service Markets
    There is evidence the proposed rule would positively impact the 
markets for products and services in multiple ways. Studies show that 
new firm formation would rise under a prohibition on non-compete 
clauses, for two primary reasons: first, workers would be free to form 
spin-offs which compete with their employers, contributing to increased 
competition and growth. Second, firms are more willing to enter markets 
in which they know there are potential sources of skilled and 
experienced labor, unhampered by non-compete clauses.
    Another possible benefit of the proposed rule related to markets 
for products and services is that worker flows across employers 
contribute to knowledge sharing, resulting in increased levels of 
innovation.
    We note that, to the extent productivity increases of firms may be 
shared with workers, some of the benefits outlined in this Part VII.B.2 
may overlap with the earnings estimates outlined above in Part 
VII.B.1.a. Similarly, to the extent harms to incumbent firms (due to, 
e.g., increased competition) may negatively impact workers, those would 
also be reflected in the earnings estimates.
a. Increased Firm Formation and Competition
    Intra-industry employee spinoffs (i.e., firms formed by 
entrepreneurs who previously worked for a firm against which they now 
compete--also known as within-industry spinouts or WSOs) have been 
shown to be highly successful, on average, when compared with typical 
entrepreneurial ventures.\480\ Non-compete clauses typically reduce the 
prevalence of intra-industry spinoffs, and therefore prevent 
entrepreneurial activity that is likely to be highly successful. One 
estimate implies that a one-standard-deviation increase in non-compete 
clause enforceability decreases the rate of WSOs by 0.13 percentage 
points (against a mean of 0.4%).\481\ The proposed prohibition, by 
extrapolation, would result in an overall increase in the rate of WSOs 
by 0.56 percentage points, which would more than double the rate of 
WSOs. We note this is a linear approximation and cannot account for 
heterogeneous effects of enforceability across states, nor can it 
account for nonlinearities in the impact of enforceability (as neither 
analysis is reported in the study).
---------------------------------------------------------------------------

    \480\ For reviews of the literature, see, e.g., Steven Klepper, 
Spinoffs: A Review and Synthesis, 6 European Mgmt. Rev. 159-71 
(2009) and April Franco, Employee Entrepreneurship: Recent Research 
and Future Directions, in Handbook of Entrepreneurship Research 
(2005) 81-96.
    \481\ Starr, Balasubramanian, & Sakakibara, supra note 87 at 
561.
---------------------------------------------------------------------------

    The study also estimates the impact on the entry rate of non-WSOs 
(i.e., spinoffs into other industries), and calculates a coefficient 
statistically indistinguishable from zero (0.07 percentage point 
increase associated with a one standard deviation increase in 
enforceability).\482\
---------------------------------------------------------------------------

    \482\ Id. at 561.
---------------------------------------------------------------------------

    Another study similarly estimates the impacts of non-compete clause 
enforceability on departures of employees to found new firms, as well 
as on all new firm entry.\483\ These outcomes differ slightly from the 
ones previously reported: for employee departures to found new firms, 
the target industry of the employee spinoff is not reported (so the 
effect encompasses both within-industry and out-of-industry spinoffs). 
The latter outcome encompasses all new firm entry, not just spinoffs. 
There are pros and cons of this approach, relative to studying only 
spinoffs. On the one hand, it examines an outcome less likely to be 
directly impacted by non-compete clauses. On the other hand, if firms 
are encouraged to enter when non-compete clauses are more easily 
enforceable (due to, e.g., greater projected protection of knowledge 
assets), then this approach will likely identify effects that may 
appear only weakly when looking just at spinoffs.
---------------------------------------------------------------------------

    \483\ Jeffers (2019), supra note 92 at 1.
---------------------------------------------------------------------------

    For each outcome, the estimated effect of an increase in non-
compete clause enforceability (which is, in this study, measured by a 
collection of discrete legal changes) is negative: an increase in non-
compete clause enforceability decreases the rate at which employees 
leave to become founders of firms by 0.78 percentage points, against a 
mean in the sample of 5% (though the result is statistically 
indistinguishable from zero),\484\ and decreases the rate of new firm 
entry by 0.06 firms per million people (against a mean of 0.38) for 
firms in the knowledge sector, compared with firms in other sectors 
(for which there is no statistically significant effect). Due to the 
design of the study, the change in legal enforceability is not 
quantified, and therefore no extrapolation is possible to the country 
as a whole.
---------------------------------------------------------------------------

    \484\ The estimated effect is statistically significant at the 
10% level, and nearly doubles to 0.014, when attention is focused on 
firms which employ at least 40% of workers in the state in which 
their headquarters resides. This is important because it ensures 
that a greater portion of the workforce is subject to the local non-
compete clause policy regime: a broadly dispersed company has 
workers subject to many different legal policies surrounding non-
compete clauses, and it is therefore not surprising that the 
estimate is unable to distinguish a large impact of the policy 
changes.
---------------------------------------------------------------------------

    Three more estimates related to firm entry exist in the literature. 
One examines the differential impacts of venture capital (``VC'') 
funding on firm entry: it finds a 1% increase in VC funding increases 
business formation by 2.3% when non-compete clauses are not 
enforceable, and by 0.8% when non-compete clauses are enforceable.\485\ 
Another study examined the extent to which a legal enforceability 
increase in Michigan affected firm entry, and found that, among all 
sectors, there was no change in the entry rate of new firms (none of 
the estimated coefficients were statistically significant).\486\ Among 
high-tech firms, the increase in enforceability was associated with a 
40.3% increase in entry when compared with states that did not enforce 
non-compete clauses. However, the study also notes that, compared with 
its neighbors, or using a statistical technique to match Michigan's 
trend in firm entry (synthetic control method), the estimated effect 
was statistically indistinguishable from zero. Finally, a study 
examining the effect of an increase in enforceability in Florida found 
small firm (fewer than 50 employees) entry fell by 5.6%, while large 
firm (greater than 1,000 employees) entry increased by 8.5%. Similarly, 
employment at large businesses rose by 15.8% following the change, 
while employment at smaller businesses effectively did not change 
\.487\ The net effect was a 4.4% increase in concentration, as measured 
by a Herfindahl-Hirschman Index, due to the overall increase in the 
size of

[[Page 3527]]

firms. It is important to note that firm entry, in this study, is not 
necessarily new business formation. Indeed, the authors describe many 
business entries into Florida are existing businesses which are seeking 
to move or establish new franchises. The observed effects may therefore 
be due to relocations across state lines, which would likely not occur 
under the proposed rule.
---------------------------------------------------------------------------

    \485\ Samila & Sorenson, supra note 112 at 425-38.
    \486\ Carlino, supra note 86.
    \487\ Kang & Fleming, supra note 120 at 674.
---------------------------------------------------------------------------

    For the previously mentioned three sets of estimates, it is again 
difficult to extrapolate to a population-wide measure of impact, since 
the ``size'' of the enforceability change is not quantified.
    In Part II.B.2.c above, the Commission states the weight of the 
evidence demonstrates new firm formation would increase under the 
proposed rule; however, the Commission is unable to extrapolate from 
the studies which examine this outcome in order to quantify or monetize 
the effect.
b. Innovation
    Scholars have posited that a lack of non-compete clause 
enforceability led Silicon Valley to become a hub of technological 
innovation. One paper theorizes that, as workers freely flowed between 
knowledge firms, those workers shared ideas and generated innovations 
greater than what a fixed set of workers, not interacting with outside 
workers, could have generated.\488\ Studies have shown labor mobility 
is greater when non-compete clauses are more difficult to enforce.\489\ 
However, those same studies did not directly show innovation is aided 
by the free flow of knowledge workers.
---------------------------------------------------------------------------

    \488\ Gilson, supra note 88.
    \489\ See, e.g., Fallick, Fleischman, & Rebitzer, supra note 89 
at 472-81; Johnson, Lavetti, & Lipsitz, supra note 42.
---------------------------------------------------------------------------

    If non-compete clauses inhibit innovation by creating barriers to 
knowledge-sharing, then a prohibition on non-compete clauses, by 
alleviating those barriers, would increase innovation. Studies have 
sought to directly quantify this effect, primarily focused on patenting 
activity.
    One study examined the impact of non-compete clause enforceability 
on venture capital's relationship with innovation. The study found 
that, when non-compete clauses are enforceable, venture capital induced 
less patenting, by 6.6 percentage points.\490\ Two other studies 
directly focused on the relationship between non-compete clause 
enforceability and patenting. One, examining seven changes in non-
compete clause enforceability, finds a 26.6% decline in the value of 
patents (as measured by changes in stock prices surrounding the date a 
patent is granted) associated with increases in non-compete clause 
enforceability.\491\ The other, examining the impact of a legal change 
in enforceability in Michigan, finds an increase in non-compete clause 
enforceability leads to an increase in the number of patents per 10,000 
residents of 0.054 (against a mean of 2.20 in Michigan prior to the 
legal change).\492\ There is no clear reason for this discrepancy in 
findings. It may be due to the setting being studied: the study finding 
a 26.6% decline in patent value considers several legal changes in non-
compete clause enforceability, rather than just using one (as in the 
Michigan study) or relying on cross-sectional differences (as in the 
study of venture capital).
---------------------------------------------------------------------------

    \490\ Samila & Sorenson, supra note 112 at 432.
    \491\ He, supra note 124 at 22.
    \492\ Carlino, supra note 86 at 40.
---------------------------------------------------------------------------

    While the Commission believes the strongest evidence (due to the 
robustness of the findings across several legal changes) indicates 
innovation would likely increase under the proposed rule, as described 
above in Part II.B.2.d, the Commission is unable to extrapolate from 
the relevant studies to quantify or monetize this benefit.
c. Prices
    Several of the effects discussed above, as well as costs of the 
proposed rule on products and service markets, may possibly filter 
through to consumer prices. Prices, therefore, may act as a summary 
metric for the impacts on consumers. We note this metric is highly 
imperfect: for example, increased innovation due to the proposed rule 
could cause quality increases in products, which drives prices up. 
Consumers may be better off, even though prices increased. For this 
reason, as well as to avoid double-counting (since prices may take into 
account changes in innovation, investment, market structure, wages, and 
other outcomes), we consider evidence on prices to be corroborating 
evidence, rather than a unique cost or benefit on its own.
    One study estimates the impact of non-compete clause enforceability 
on consumer prices in the market for physician services.\493\ The study 
estimates moving from the lowest observed non-compete clause 
enforceability score to the highest would increase prices by 53.3%. 
Extrapolating to the effect of the proposed prohibition nationwide 
(using 2009 enforceability scores), and applying percentage price 
decreases to state-level physician spending,\494\ we estimate health 
spending would decrease by $148.0 billion annually. We note, again, 
this is a large (linear) extrapolation from the estimate provided in 
the study. Furthermore, this amount is partially a transfer from 
physician practices to consumers, and additionally, we reiterate this 
estimate likely encompasses some of the prior estimates (i.e., those 
regarding new firm formation or innovation), and we therefore do not 
count it as a standalone benefit of the proposed rule.
---------------------------------------------------------------------------

    \493\ Hausman & Lavetti, supra note 101 at 258.
    \494\ The latest available numbers are from 2014. See Ctrs. for 
Medicare & Medicaid Servs., National Health Expenditure Data, Health 
Expenditures by State of Provider, 1980-2014 (last visited Dec. 9, 
2022), https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsStateHealthAccountsProvider. We use physician 
and clinical spending in 2014 by state of provider.
---------------------------------------------------------------------------

    With respect to other industries, if the relationship between non-
compete clause enforceability and prices observed in healthcare markets 
holds, the Commission believes prices would decrease, product and 
service quality would increase, or both under the proposed rule. 
Insofar as such effects may be driven by increases in competition (see 
Part VII.B.2.a), it is likely output would also increase. However, the 
evidence in the economic literature is solely based on healthcare 
markets (which do comprise a large portion of spending in the United 
States, but are far from all consumer spending), and while there is 
evidence that there are relationships between non-compete clause 
enforceability and concentration, innovation, new firm formation, and 
other product market outcomes, the Commission cannot say with certainty 
similar effects would be present for other products and services.
    In many settings, it is theoretically plausible increases in worker 
earnings from restricting non-compete clauses may increase consumer 
prices by raising firms' costs (though there is countervailing 
evidence, especially in goods manufacturing).\495\ We note an absence 
of empirical evidence that this mechanism persists in practice, as well 
as countervailing forces, such as the impacts on concentration 
described above and positive impacts on innovation (see Part II.B.2.d). 
Additionally, greater wages for workers freed from non-compete clauses 
may be due to better worker-firm matching, which could simultaneously 
increase wages and increase productivity, which

[[Page 3528]]

could lead to lower prices. Finally, as described in Part II.B.2.a, 
increases in healthcare prices are not due to pass-through of greater 
labor costs.
---------------------------------------------------------------------------

    \495\ Sebastian Heise, Fatih Karahan, & Ay[scedil]eg[uuml]l 
[Scedil]ahin The Missing Inflation Puzzle: The Role of the 
Wage[hyphen]Price Pass[hyphen]Through, 54 J. Money, Credit & Banking 
7 (2022).
---------------------------------------------------------------------------

C. Estimated Costs of the Proposed Rule

    In this Part VII.C, we describe the costs associated with the 
proposed rule; provide preliminary quantitative, monetized estimates 
where possible; and describe costs we can only assess qualitatively. We 
welcome public comment regarding the scope of the costs outlined in 
this Part VII.C, especially with respect to direct compliance costs and 
the costs of updating contractual practices.
    The Commission estimates firms' direct compliance costs and the 
costs of firms updating their contractual practices would total $1.02 
to $1.77 billion. The Commission also finds worker training and firm 
investment in capital assets would likely decrease under the proposed 
rule. Finally, the Commission finds inconclusive evidence that the job 
creation rate would diminish under the proposed rule. Given the 
evidence available, the Commission is unable to monetize the estimates 
of worker training, firm investment in capital assets, and job 
creation, however.
1. Direct Compliance Costs
    In order to comply with the proposed rule, firms must remove non-
compete clauses from workers' contracts in two ways. First, to comply 
with proposed Sec.  910.2(a), which states it is an unfair method of 
competition to maintain with a worker a non-compete clause, firms would 
need to no longer include non-compete clauses in the contracts of 
incoming workers, which may include revising existing employment 
contracts. Second, to comply with proposed Sec.  910.2(b)(1) and (2), 
firms would need to rescind existing non-compete clauses no later than 
the compliance date and provide notice to workers that the worker's 
non-compete clause is no longer in effect and may not be enforced 
against the worker.
    In order to reduce compliance costs and increase compliance 
certainty, proposed Sec.  910.2(b)(3) would provide that an employer 
complies with the rescission requirement in proposed Sec.  910.2(b)(1) 
where it provides notice to a worker pursuant to Sec.  910.2(b)(2). 
Furthermore, proposed Sec.  910.2(b)(2)(C) includes model language 
which may be provided to the worker in order to inform the worker that 
their non-compete clause is no longer in effect. We estimate composing 
and sending this message in a digital format to all of a firm's workers 
and applicable former workers would take 20 minutes of a human 
resources specialist's time. According to the Bureau of Labor 
Statistics, the median wage for a human resources specialist was $29.95 
per hour in 2021.\496\ The cost of compliance for currently employed 
workers is therefore $29.95/3=$9.98 per firm. According to the U.S. 
Census Bureau's Statistics of U.S. Businesses database, in 2019 (the 
most recent year with data available), there were 6.10 million firms 
and 7.96 million establishments in the United States.\497\ We estimate 
the percentage of firms using non-compete clauses in the U.S. at 49.4%. 
This estimate is based on Colvin and Shierholz's 2017 survey of 
business establishments. Colvin and Shierholz estimate 49% of 
establishments of more than 50 employees use non-compete clauses for at 
least some of their employees, and 32% of establishments use non-
compete clauses for all of their employees.\498\
---------------------------------------------------------------------------

    \496\ See Bureau of Lab. Stats., Occupational Outlook Handbook, 
Human Resources Specialists, https://www.bls.gov/ooh/business-and-financial/human-resources-specialists.htm.
    \497\ The dataset is available at U.S. Census Bureau, 2019 SUSB 
Annual Data Tables by Establishment Industry, https://www.census.gov/data/tables/2019/econ/susb/2019-susb-annual.html 
(last visited Dec. 9, 2022).
    \498\ Alexander J.S. Colvin & Heidi Shierholz, Econ. Pol'y 
Inst., Noncompete Agreements (2019) at 1.
---------------------------------------------------------------------------

    Conservatively assuming each establishment must engage in its own 
communication (i.e., that a firm's headquarters does not have the 
ability to send a company-wide email, for example), this means the 
total direct compliance cost for rescinding existing non-compete 
clauses and providing notice is $9.98*7.96 million*0.494=$39.25 
million.
    To ensure incoming workers' contracts do not include non-compete 
clauses and they fully comply with the proposed rule, firms may employ 
in-house counsel, outside counsel, or human resource specialists 
(depending on the complexity of the relevant non-compete clause). For 
many firms, this process would likely be straightforward (i.e., simply 
not using non-compete clauses or removing one section from a 
boilerplate contract). For other firms, it may be more difficult and 
require more time. We assume that, on average, ensuring contracts for 
incoming workers do not have non-compete clauses would take the 
equivalent of one hour of a lawyer's time (valued at $61.54),\499\ 
resulting in a total cost of $61.54*7.96 million*0.494=$241.96 million. 
We acknowledge there may be substantial heterogeneity in the costs for 
individual firms; however, we believe this number is conservative. For 
firms whose costs of removing non-compete clauses for incoming workers 
is greater, the work of ensuring contracts comply with the law would 
overlap substantially with the costs of updating contractual practices, 
described in the next section.
---------------------------------------------------------------------------

    \499\ Bureau of Lab. Stats., Occupational Outlook Handbook: 
Lawyers, https://www.bls.gov/ooh/legal/lawyers.htm.
---------------------------------------------------------------------------

2. Costs of Updating Contractual Practices
    Firms may seek to update their contractual practices by expanding 
the scope of non-disclosure agreements (NDAs) or other contractual 
provisions to ensure they are expansive enough to protect trade secrets 
and other valuable investments. To do so, firms may use in-house 
counsel or outside counsel to examine and amend current contracts or 
enter into new contracts with workers.
    The Commission is not aware of empirical evidence on how much it 
costs firms to update their contractual practices when they can no 
longer use non-compete clauses. However, there is evidence indicating 
firms that use non-compete clauses are already using other types of 
restrictive employment provisions. Firms may be doing so because, among 
other things, they are uncertain whether a non-compete clause will be 
enforceable, or because they desire the additional protections NDAs and 
other types of restrictive employment provisions can offer. 
Balasubramanian et al. find that 97.5% of workers with non-compete 
clauses are also subject to a non-solicitation agreement, non-
disclosure agreement, or a non-recruitment agreement, and 74.7% of 
workers with non-compete clauses are also subject to all three other 
types of provisions.\500\ Firms that are already using multiple layers 
of protection may not need to expand the scope of existing restrictive 
employment provisions or enter into new ones.
---------------------------------------------------------------------------

    \500\ Balasubramanian, Starr, & Yamaguchi, supra note 40 at 35. 
We calculate 97.5% as (1-0.6%/24.2%), where 0.6% represents the 
proportion of workers with only a non-compete clause, and no other 
post-employment restriction, and 24.2% represents the proportion of 
workers with a non-compete clause, regardless of what other post-
employment restrictions they have.
---------------------------------------------------------------------------

    Among the approximately one half of firms that use non-compete 
clauses,\501\ we assume the average firm employs the equivalent of four 
to eight hours of a lawyer's time to update their contractual 
practices. We emphasize this is an average to underline the fact that 
there would likely be large differences in the extent to which firms 
update their contractual practices. Many firms, including those which 
use non-compete clauses only with workers who do not

[[Page 3529]]

have access to sensitive information, or those which are already using 
other types of restrictive employment provisions to protect sensitive 
information, may opt to do nothing. Other firms may employ several 
hours or multiple days of lawyers' time to arrive at a new 
contract.\502\ Our estimated range of four to eight hours represents an 
average taken across these different possibilities. For example, if 
two-thirds of firms that currently use non-compete clauses opt to make 
no changes to their contractual practices (for example, because they 
are one of the 97.5% of firms which already implement other post-
employment restrictions, or because they will rely on trade secret law 
in the future, or because they are using non-compete clauses with 
workers who do not have access to sensitive information), and one-third 
of such firms spend (on average) the equivalent of 1.5 to 3 days of an 
attorney's time, this would result in the estimate of 4-8 hours on 
average reported above.
---------------------------------------------------------------------------

    \501\ Colvin & Shierholz, supra note 498 at 1.
    \502\ These estimates are derived from outreach to employment 
attorneys active in assisting firms in writing their non-compete 
clauses.
---------------------------------------------------------------------------

    We further emphasize this estimate is an average across all 
employers that would be covered by the rule. There is likely 
substantial heterogeneity in the amount of time firms would use to 
update contractual practices; very large firms that use non-compete 
clauses extensively would likely incur greater costs.
    Under the assumption the average firm that uses a non-compete 
clause employs the equivalent of four to eight hours of a lawyer's 
time, we calculate the total expenditure on updating contractual 
practices to range from $61.54*4*49.4%*6,102,412=$742.07 million to 
$61.54*8*49.4%*6,102,412=$1.48 billion. Note that we assume decisions 
regarding protection of sensitive information and contract updating are 
made at the firm, rather than establishment, level, since sensitive 
information is likely shared across business establishments of a firm. 
The Commission seeks comment on this estimate.
3. Firm Investment
    Non-compete clauses may impact investments made by firms in 
multiple ways.\503\ First, a firm may anticipate a greater return on 
investment in a worker with a non-compete clause--since the worker is 
unable to take the skills they attain to a competitor--and may 
therefore provide greater levels of training. Second, since non-compete 
clauses increase worker training, firms may increase investment that 
complements human capital when they are able to use non-compete 
clauses. Third, non-compete clauses decrease competition, which 
increases returns on investment at the firm level, inducing additional 
investment at the firm level. This increased investment at the firm 
level does not necessarily mean, however, investment would increase at 
the market level, since decreased competition may also decrease output, 
decreasing employed capital stock and investment in that capital stock.
---------------------------------------------------------------------------

    \503\ For more discussion, see Jeffers (2019), supra note 92; 
Starr (2019), supra note 66 at 783-817.
---------------------------------------------------------------------------

    Once again, the costs described in this section may overlap with 
estimates reported in preceding sections. For example, if increased 
enforceability of non-compete clauses increases training of workers, 
and increased training results in higher wages for workers, then the 
estimate of the wage decrease when enforceability increases already 
takes into account the extent to which increased training increases 
wages. That is, if training were held constant, the earnings increase 
associated with the proposed rule would likely be even larger.
    With respect to worker training, one study finds that an increase 
in the non-compete clause enforceability index of one standard 
deviation (across states) results in an increase in the number of 
workers who reported receiving training of 14.7% for workers in 
occupations which use non-compete clauses at a high rate, relative to 
those in which non-compete clauses are used at a low rate.\504\ 
Extending this estimate to the U.S. workforce implies that, on average, 
3.1% fewer workers would receive training in a given year, as a result 
of the proposed rule.\505\
---------------------------------------------------------------------------

    \504\ Starr (2019), supra note 66 at 796. Estimates are taken 
from Table 4, Column 4.
    \505\ The total training decrease is calculated as the weighted 
average (where weights are equal to employment in 2020, the latest 
year available, taken from https://data.bls.gov/cew/apps/table_maker/v4/table_maker.htm) over all states of:
    (e 
-0.0077*(State's Enforceability Score--Lowest State Enforceability Score)
-1)
    This calculation assumes that all workers are subject to the 
decrease in training, as opposed to calculating the decrease to 
those in high-use occupations versus those in low-use occupations. 
The benefit of this approach is that it yields a total predicted 
training decrease for the economy as a whole, rather than a 
comparison between different types of workers. However, it is likely 
an overestimate for workers in low-use occupations, and an 
underestimate for those in high-use occupations. It is the same 
methodology used to calculate earnings increases in Part VII.B.1.a 
for the estimate drawn from the same study.
---------------------------------------------------------------------------

    An estimate of the impact of non-compete clause enforceability on 
firm investment in capital assets implies that an increase in 
enforceability leads to an increase in firms' net investment to asset 
ratio of 1.3 percentage points (against a mean of 3.5%). The magnitude 
of the enforceability increase which is associated with this change is 
not quantified according to the scale above, however, so it is not 
possible to extend this estimate to the population. Additionally, the 
estimate is constructed at the firm level, and it is not possible to 
extrapolate the estimate to the market level, given potential changes 
in the composition of the market associated with changes in non-compete 
clause enforceability.
    The proposed rule may also impact the extent to which trade secrets 
are shared with workers. Non-compete clauses are commonly justified as 
a means by which firms are able to protect trade secrets, which may 
allow those trade secrets to be shared more freely with workers, 
positively impacting productivity. However, to the best of our 
knowledge, there is no available evidence on this topic which would 
allow us to quantify or monetize the cost, or identify whether it 
exists in practice.
4. Job Creation Rates
    While non-compete clauses may, in theory, incentivize firms to 
create jobs by increasing the value associated with any given worker 
covered by a non-compete clause, the evidence is inconclusive. One 
estimate indicates the job creation rate at startups increased by 7.8% 
when Michigan increased non-compete clause enforceability.\506\ 
However, the job creation rate calculated in this study is the ratio of 
jobs created by startups to overall employment in the state: therefore, 
the job creation rate at startups may rise either because the number of 
jobs created by startups rose, or because employment overall fell. The 
study does not investigate which of these two factors drives the 
increase in the job creation rate at startups.
---------------------------------------------------------------------------

    \506\ Carlino, supra note 86 at 16.
---------------------------------------------------------------------------

    Another study finds that several increases in non-compete clause 
enforceability were associated with a 1.4% increase in average 
employment at new firms.\507\ However, the authors attribute the 
increase in average employment to a change in the composition of newly 
founded firms. The increases in enforceability prevented the entry of 
relatively small startups which would otherwise have existed. The 
remaining firms which entered were therefore larger on average: this 
increases the average job creation

[[Page 3530]]

rate at new firms, because the average entering firm is relatively 
larger. However, in terms of total jobs created, it means that 
increases in enforceability generate fewer total jobs, if the mechanism 
identified by the authors is correct. A similar mechanism may explain 
the results in both studies above. If that is indeed the case, then an 
increased job creation rate among startups is not a cost of the 
proposed rule. Instead, it could actually be a benefit (albeit 
unquantifiable), since non-compete clauses prevent small firms from 
existing in the first place. The Commission therefore believes that, 
with respect to job creation rates, the evidence is inconclusive: it is 
unclear whether the negative results have causes which are actually 
benign, or even positive.
---------------------------------------------------------------------------

    \507\ Starr, Balasubramanian, & Sakakibara, supra note 87 at 
561.
---------------------------------------------------------------------------

5. Litigation Costs
    The proposed rule would likely reduce litigation costs associated 
with non-compete clauses, since there would be little to no uncertainty 
that the vast majority of those clauses are prohibited. However, it is 
also possible that costs associated with trade secret claims or other 
post-employment restrictions, such as non-disclosure agreements or non-
solicitation agreements, would increase. The Commission is not aware of 
any evidence indicating the magnitude of the change in litigation costs 
associated with any of these claims, and it is therefore not clear 
whether the net impact on litigation costs would be a benefit or a cost 
of the proposed rule. The Commission seeks comment on the impact the 
rule would have on litigation costs.

D. Discussion of Alternatives

    In Part VI of this NPRM, the Commission describes several 
alternatives to the proposed rule. Here, we discuss the extent to which 
implementation of each of these alternatives would change the analysis 
of benefits and costs presented above.
    We treat Alternatives 1 and 3 first. Under Alternative 1, the rule 
would categorically ban the use of non-compete clauses for some workers 
and apply a rebuttable presumption of unlawfulness to non-compete 
clauses for other workers. For example, the rule could ban non-compete 
clauses generally, but apply the rebuttable presumption to workers who 
qualify for the FLSA exemptions for executives or learned 
professionals.\508\ Or the rule could ban non-compete clauses but apply 
the rebuttable presumption to workers who earn more than $100,000 per 
year. Under Alternative 3, non-compete clauses for all workers would be 
subject to a rebuttable presumption of illegality.
---------------------------------------------------------------------------

    \508\ See supra notes 423-424 and accompanying text.
---------------------------------------------------------------------------

    There are two primary ways in which a rebuttable presumption of 
illegality, rather than a prohibition, could affect the benefits and 
costs associated with the proposed rule. First, a rebuttable 
presumption may decrease costs associated with the proposed rule by 
allowing employers to use non-compete clauses in situations in which 
the true benefits of non-compete clauses exceed the costs. In other 
words, the non-compete clauses which survive a rebuttable presumption 
may contribute to economic efficiency to the extent a court is able to 
identify efficiency-enhancing non-compete clauses.
    Second, a rebuttable presumption could increase costs by forcing 
cases involving non-compete clauses to be litigated more frequently, 
since the line defining a permissible non-compete clause would be less 
bright. Additionally, there may be situations in which the presumption 
would likely hold (i.e., a given non-compete clause is likely 
prohibited under the presumption), but which are not fought by workers, 
fearing they might lose the case. In such cases, any costs and benefits 
associated with non-compete clauses (such as those outlined in the 
preceding sections) would accrue to the economy.
    The two impacts of a change from a prohibition to a rebuttable 
presumption would likely be more drastic for workers above the 
threshold (for whom the presumption would be rebuttable under 
Alternative 1), as compared with those additional workers for whom the 
presumption would be rebuttable under Alternative 3. For the latter set 
of workers, there are fewer plausible cases in which the presumption 
would be rebutted, since higher-paid workers typically have access to 
greater levels of sensitive information. This means there is a smaller 
efficiency gain to be had from allowing non-compete clauses which could 
plausibly rebut the presumption; however, it also means there would 
likely be fewer litigated cases since there would be fewer marginal 
non-compete clauses. Therefore, the effect of moving from the proposed 
rule to Alternative 1 is likely more substantial than the effect of 
moving from Alternative 1 to Alternative 3.
    The effects of Alternatives 2 and 4 may be analyzed similarly. 
Under Alternative 2, the rule would categorically ban the use of non-
compete clauses for some workers and not apply any requirements to 
other workers. For example, like the recent State of Washington 
statute, the rule could prohibit the use of non-compete clauses for 
employees earning $100,000 or less per year and independent contractors 
earning less than $250,000 or less per year. Or, like the recent 
Massachusetts and Rhode Island statutes, the rule could prohibit the 
use of non-compete clauses for workers who are non-exempt under the 
FLSA.\509\ Under Alternative 4, the rule would apply a rebuttable 
presumption of unlawfulness to non-compete clauses for some workers and 
not apply any requirements to other workers. Workers above the 
threshold are most likely to be those workers for whom firm investment 
and training are valuable, but they are also often uniquely positioned 
to found new firms, since they hold knowledge gained by working in 
their industry. Therefore, a large portion of the benefits associated 
with the proposed rule would be lost if workers above the threshold 
were not covered; however, a large portion of the costs would also be 
lost, since the need to restructure contracts to protect sensitive 
information would no longer be present for those workers, and firms 
would continue to train and invest in those workers in the same way 
they currently do. Additionally, the earnings effects for relatively 
lower-wage workers appear to be less, based on empirical work, though 
the legal changes analyzed were not perfectly comparable. This could 
indicate, again, there are more substantial benefits to be had from 
prohibiting non-compete clauses for workers above the threshold based 
on harms to labor markets, compared with workers below the threshold.
---------------------------------------------------------------------------

    \509\ See supra Part VI.B.2.
---------------------------------------------------------------------------

    The alternative under which the rule would use a different standard 
for senior executives, discussed in Part VI.C, would yield similar 
effects to the analyses discussed above. If a rebuttable presumption 
were applied to senior executives, if there are some non-compete 
clauses that are efficient, and if courts are able to appropriately 
identify efficient non-compete clauses, then some non-compete clauses 
would likely be used (and may survive challenges) which are indeed 
efficient. On the other hand, costs associated with legal challenges 
would likely increase due to an increased frequency of legal challenges 
associated with a less bright line. If no requirement is applied to 
senior executives, then a large portion of the benefit of the proposed 
rule, as it applies to senior executives, would be lost: benefits 
associated with increased

[[Page 3531]]

product market competition and benefits associated with increased labor 
market competition. The costs of restructuring contracts, however, 
would be lost, as well.
    Another alternative, discussed in Part VI.D, concerns whether non-
compete clauses between a franchisor and a franchisee would be covered 
by the proposed rule. As noted in Part VI.D, evidence concerning the 
impact of prohibiting non-compete clauses between franchisors and 
franchisees does not exist. The Commission is therefore unable to 
estimate the extent to which the costs and benefits which would result 
from the proposed rule covering those parties would be similar to those 
resulting from prohibiting worker non-compete clauses.

E. Other Major Effects

    There are two substantial equity concerns associated with the 
proposed rule which are not captured above. The first relates to the 
economic outcomes of women and racial and ethnic minorities. Non-
compete clauses may affect women and racial and ethnic minorities more 
negatively than other workers. For example, firms may use the monopsony 
power which results from use of non-compete clauses as a means by which 
to wage discriminate, or women (who may exhibit greater risk aversion, 
in practice \510\) may be more reluctant to start businesses when non-
compete clauses are enforceable. One estimate indicates that gender and 
racial wage gaps would close by 3.6-9.1% under a nationwide prohibition 
on non-compete clauses.\511\ Another estimate indicates the negative 
impact of non-compete clause enforceability on within-industry 
entrepreneurship is 15% greater for women than for men.\512\
---------------------------------------------------------------------------

    \510\ See, e.g., Catherine C. Eckel & Philip J. Grossman, Men, 
Women and Risk Aversion: Experimental Evidence, Handbook of 
Experimental Economics Results 1 (2008) 1061-073 and Gary Charness & 
Uri Gneezy, Strong Evidence For Gender Differences in Risk Taking, 
83 J. Econ. Behavior & Org. 50-58 (2012).
    \511\ Johnson, Lavetti, & Lipsitz, supra note 63 at 38.
    \512\ Marx (2021), supra note 118 at 8.
---------------------------------------------------------------------------

    The second equity concern related to non-compete clauses is that 
workers may not be willing to file lawsuits against deep-pocketed 
employers to challenge their non-compete clauses, even if they predict 
a high probability of success. The proposed rule would substantially 
mitigate this concern by enacting a bright-line prohibition, which the 
Commission could enforce. This would mitigate uncertainty for workers 
and would be especially helpful for relatively low-paid workers, for 
whom access to legal services may be prohibitively expensive.

VIII. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA), as amended by the Small 
Business Regulatory Enforcement Fairness Act of 1996, requires an 
agency to either provide an Initial Regulatory Flexibility Analysis 
(IRFA) with a proposed rule or certify that the proposed rule would not 
have a significant impact on a substantial number of small 
entities.\513\ The Commission does not expect the proposed rule, if 
adopted, would have a significant impact on a substantial number of 
small entities.
---------------------------------------------------------------------------

    \513\ 5 U.S.C. 603-605.
---------------------------------------------------------------------------

    Although small entities across all industrial classes--i.e., all 
North American Industry Classification System (NAICS) codes--would be 
affected, the estimated impact on each entity would be relatively 
small. The Small Business Administration (SBA) states that, as a rule 
of thumb, the impact of a proposed rule could be significant if the 
cost of the proposed rule (a) eliminates more than 10% of the 
businesses' profits; (b) exceeds 1% of the gross revenues of the 
entities in a particular sector, or (c) exceeds 5% of the labor costs 
of the entities in the sector.\514\ As calculated in Part VIII.D, the 
Commission estimates direct compliance costs and the costs of updating 
contractual practices would result in costs of $317.68 to $563.84 for 
single-establishment firms. These costs would only exceed these sample 
limits if the average profit of regulated entities is $3,177 to $5,638, 
average revenue is $31,768 to $56,384, or average labor costs are 
$6,353 to $11,276, respectively. Furthermore, while there are 
additional nonmonetizable costs associated with the proposed rule, 
there are also nonmonetizable benefits which would at least partially 
offset those costs, as explained above in Part VII.
---------------------------------------------------------------------------

    \514\ Small Bus. Admin., A Guide for Government Agencies: How to 
Comply With the Regulatory Flexibility Act (August 2017) 
(hereinafter RFA Compliance Guide) at 19.
---------------------------------------------------------------------------

    Although the Commission certifies under the RFA that the proposed 
rule would not have a significant impact on a substantial number of 
small entities, and hereby provides notice of that certification to the 
SBA, the Commission has determined it is appropriate to publish an IRFA 
in order to describe the impact of the proposed rule on small entities. 
The Commission seeks comment on all aspects of the IRFA in this Part 
VIII.

A. Reasons for the Proposed Rule

    The Commission describes the reasons for the proposed rule above in 
Part IV.

B. Statement of Objectives and Legal Basis

    The Commission describes the objectives and legal basis for the 
proposed rule above in Part IV and the legal authority for the rule 
above in Part III.

C. Description and Estimated Number of Small Entities to Which the Rule 
Would Apply

    The proposed rule would impact all small businesses, across all 
industry classes, that use non-compete clauses. The Commission does not 
expect there are classes of businesses that would face disproportionate 
impacts from the proposed rule.
    For the vast majority of industries, there is no granular data 
regarding the percentage of firms that use non-compete clauses (which 
could then be used to calculate the number of small entities in that 
industry using non-compete clauses). Due to this data limitation and 
given the relatively stable percentage of firms using non-compete 
clauses across the size distribution,\515\ we estimate the total number 
of small firms across all industries in the U.S. economy. We then 
calculate the number of firms estimated to use non-compete clauses by 
applying an estimate of the percentage of firms using non-compete 
clauses to that total. Using the size standards set by the SBA,\516\ we 
calculate that there are 5.95 million small firms and 6.24 million 
small establishments in the U.S.\517\ Assuming

[[Page 3532]]

49.4% of firms or establishments use non-compete clauses,\518\ we 
estimate 2.94 million small firms, comprising 3.08 million small 
establishments, would be affected by the proposed rule. Since our 
estimate ignores differential use of non-compete clauses across 
industries (in the absence of more detailed data), these firms span all 
industries and various sizes below the standards set in the SBA's size 
standards.
---------------------------------------------------------------------------

    \515\ See Colvin & Shierholz, supra note 498 at 5. We emphasize 
that, since smaller firms generally use non-compete clauses at a 
lower rate, based on the numbers reported in Table 1, our estimate 
of the number of affected small entities is likely larger than is 
true in practice.
    \516\ See Small Bus. Admin., Table of Size Standards, https://www.sba.gov/document/support-table-size-standards.
    \517\ We use the latest data available from the U.S. Census 
Bureau's Statistics of U.S. Businesses database, available based on 
firm revenue and firm size. U.S. Census Bureau, Statistics of U.S. 
Businesses (SUSB), https://www.census.gov/programs-surveys/susb.html 
(last visited Dec. 9, 2022). We deflate to current dollars using 
Historical Table 10.1. Off. of Mgmt. & Budget, Historical Tables, 
https://www.whitehouse.gov/omb/budget/historical-tables/ (last 
visited Dec. 9, 2022). As used in this analysis, per the U.S. Census 
Bureau, ``a firm is a business organization consisting of one or 
more domestic establishments in the same geographic area and 
industry that were specified under common ownership or control.'' On 
the other hand, ``an establishment is a single physical location at 
which business is conducted or services or industrial operations are 
performed.'' See U.S. Census Bureau, Glossary, https://www.census.gov/programs-surveys/susb/about/glossary.html.
    \518\ See Colvin & Shierholz, supra note 498 at 1.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    As calculated in Parts VIII.D.1 and VIII.D.2, the Commission 
estimates the direct compliance costs and the costs of updating 
contractual practices would total $246.16 to $492.32 for each small 
firm, plus an additional $71.52 for each establishment owned by that 
firm. A single-establishment firm, for example, would bear estimated 
costs of $317.68 to $563.84, for example.
    As described in greater detail in Part VII.C.3, the Commission also 
finds worker training and firm investment in capital assets would 
likely decrease under the proposed rule. Finally, as described in 
greater detail in Part VII.C.4, the Commission finds mixed evidence 
that the job creation rate would diminish under the proposed rule. 
Given the evidence available, the Commission is unable to monetize the 
estimates of worker training, firm investment in capital assets, and 
job creation, however.
1. Direct Compliance Costs
    In order to comply with the proposed rule, small entities must 
remove non-compete clauses from workers' contracts in two ways. First, 
to comply with proposed Sec.  910.2(a), which states it is an unfair 
method of competition to maintain with a worker a non-compete clause, 
small entities would need to no longer include non-compete clauses in 
the contracts of incoming workers, which may include revising existing 
employment contracts. Second, to comply with proposed Sec.  910.2(b)(1) 
and (2), small entities would need to rescind existing non-compete 
clauses no later than the compliance date and provide notice to workers 
that the worker's non-compete clause is no longer in effect and may not 
be enforced against the worker.
    In order to reduce compliance costs and increase compliance 
certainty, proposed Sec.  910.2(b)(3) would provide that an employer 
complies with the rescission requirement in proposed Sec.  910.2(b)(1) 
where it provides notice to a worker pursuant to Sec.  910.2(b)(2). 
Furthermore, proposed Sec.  910.2(b)(2)(C) includes model language 
which may be provided to the worker in order to inform the worker that 
their non-compete clause is no longer in effect. We estimate composing 
and sending this message in a digital format to all of a firm's workers 
and applicable former workers would take 20 minutes of a human 
resources specialist's time. According to the Bureau of Labor 
Statistics, the median wage for a human resources specialist was $29.95 
per hour in 2021.\519\ The cost of compliance for currently employed 
workers is therefore $29.95/3=$9.98 per firm. As calculated in Part 
VIII.C, we estimate there are 2.94 million small firms, comprising 3.08 
million small establishments, in the United States which use non-
compete clauses.\520\ Conservatively assuming that each establishment 
must engage in its own communication (i.e., a firm's headquarters does 
not have the ability to send a company-wide email, for example), this 
means the total direct compliance cost for workers who are already 
employed is $9.98*3.08 million=$30.74 million.
---------------------------------------------------------------------------

    \519\ See U.S. Bureau of Lab. Stats., Occupational Outlook 
Handbook, Human Resources Specialists, https://www.bls.gov/ooh/business-and-financial/human-resources-specialists.htm.
    \520\ The dataset is available at U.S. Census Bureau, 2019 SUSB 
Annual Data Tables by Establishment Industry, https://www.census.gov/data/tables/2019/econ/susb/2019-susb-annual.html, 
(last visited Dec. 9, 2022).
---------------------------------------------------------------------------

    To ensure incoming workers' contracts do not include non-compete 
clauses and they fully comply with the proposed rule, firms may employ 
in-house counsel, outside counsel, or human resource specialists 
(depending on the complexity of the relevant non-compete clause). For 
many firms, this process would likely be straightforward (i.e., simply 
not using non-compete clauses or removing one section from a 
boilerplate contract). For other firms, it may be more difficult and 
require more time. We assume that, on average, ensuring contracts for 
incoming workers do not have non-compete clauses would take the 
equivalent of one hour of a lawyer's time (valued at $61.54),\521\ 
resulting in a total cost of $61.54*3.08 million=$189.54 million. We 
acknowledge there may be substantial heterogeneity in the costs for 
individual firms; however, we believe this number is conservative. For 
firms whose costs of removing non-compete clauses for incoming workers 
is greater, the work of ensuring that contracts comply with the law 
would overlap substantially with the costs of updating contractual 
practices, described in the next section.
---------------------------------------------------------------------------

    \521\ U.S. Bureau of Lab. Stats., Occupational Outlook Handbook, 
Lawyers, https://www.bls.gov/ooh/legal/lawyers.htm.
---------------------------------------------------------------------------

    For each establishment of each firm, we estimate direct compliance 
costs would total $9.98+$61.54=$71.52.
2. Costs of Updating Contractual Practices
    Firms may seek to update their contractual practices by expanding 
the scope of non-disclosure agreements (NDAs) or other contractual 
provisions to ensure they are expansive enough to protect trade secrets 
and other valuable investments. To do so, firms may use in-house 
counsel or outside counsel to examine and amend current contracts or 
enter into new contracts with workers.
    The Commission is not aware of empirical evidence on how much it 
costs firms to update their contractual practices when they can no 
longer use non-compete clauses. However, there is evidence indicating 
firms that use non-compete clauses are already using other types of 
restrictive employment provisions. Firms may be doing so because, among 
other things, they are uncertain whether a non-compete clause will be 
enforceable, or because they desire the additional protections NDAs and 
other types of restrictive employment provisions can offer. 
Balasubramanian et al. find that 97.5% of workers with non-compete 
clauses are also subject to a non-solicitation agreement, non-
disclosure agreement, or a non-recruitment agreement, and 74.7% of 
workers with non-compete clauses are also subject to all three other 
types of provisions.\522\ Firms already using multiple layers of 
protection may not need to expand the scope of existing restrictive 
employment provisions or enter into new ones.
---------------------------------------------------------------------------

    \522\ Balasubramanian, Starr, & Yamaguchi, supra note 40 at 35. 
We calculate 97.5% as (1-0.6%/24.2%), where 0.6% represents the 
proportion of workers with only a non-compete clause, and no other 
post-employment restriction, and 24.2% represents the proportion of 
workers with a non-compete clause, regardless of what other post-
employment restrictions they have.
---------------------------------------------------------------------------

    Among the approximately one half of firms that use non-compete 
clauses,\523\ we assume the average firm employs the equivalent of four 
to eight hours of a lawyer's time to update their contractual 
practices. We emphasize this is an average to underline the likelihood 
of large differences in the extent to which firms update their 
contractual practices. Many firms, including those which use non-
compete clauses only with workers who do not have access to sensitive 
information, or those which are already using other types of 
restrictive employment provisions to protect

[[Page 3533]]

sensitive information, may opt to do nothing. Other firms may employ 
several hours or multiple days of lawyers' time to arrive at a new 
contract.\524\ Our estimated range of four to eight hours represents an 
average taken across these different possibilities. For example, if 
two-thirds of firms that currently use non-compete clauses opt to make 
no changes to their contractual practices (for example, because they 
are one of the 97.5% of firms which already implement other post-
employment restrictions, or because they will rely on trade secret law 
in the future, or because they are using non-compete clauses with 
workers who do not have access to sensitive information), and one-third 
of such firms spend (on average) the equivalent of 1.5 to 3 days of an 
attorney's time, this would result in the estimate of 4-8 hours on 
average reported above.
---------------------------------------------------------------------------

    \523\ Colvin & Shierholz, supra note 498 at 1.
    \524\ These estimates are derived from outreach to employment 
attorneys active in assisting firms in writing their non-compete 
clauses.
---------------------------------------------------------------------------

    We further emphasize this estimate is an average across all 
employers that would be covered by the rule. There is likely 
substantial heterogeneity in the amount of time firms would use to 
update contractual practices; very large firms that use non-compete 
clauses extensively would likely incur greater costs.
    Under the assumption the average firm that uses a non-compete 
clause employs the equivalent of four to eight hours of a lawyer's 
time, we calculate the total expenditure on updating contractual 
practices to range from $61.54*4*2.94 million=$723.7 million to 
$61.54*8*2.94 million=$1.45 billion. Note that we assume decisions 
regarding protection of sensitive information and contract updating are 
made at the firm, rather than establishment, level, since sensitive 
information is likely shared across business establishments of a firm. 
The Commission seeks comment on this estimate.
    For each firm, we estimate the cost of updating contractual 
practices would be $61.54*4=$246.16 to $61.54*8=$492.32.

E. Identification of Duplicative, Overlapping, or Conflicting Federal 
Rules

    The Commission is not aware of any duplicative, overlapping, or 
conflicting federal rules. As described above in Part II.C.1, the 
enforceability of a non-compete clause currently depends on state law. 
Non-compete clauses are also subject to federal antitrust law. However, 
the Commission is not aware of any federal regulations that would 
duplicate, overlap, or conflict with the proposed rule.

F. Discussion of Significant Alternatives

    In Part VI above, the Commission discusses significant alternatives 
to the proposed rule. Part VI also includes a preliminary assessment of 
whether each of the significant alternatives would accomplish the 
objectives of the proposed rule. In addition, the Commission's analysis 
of benefits and costs in Part VII includes an assessment of the 
benefits and costs of various alternatives.\525\
---------------------------------------------------------------------------

    \525\ See supra Part VII.D.
---------------------------------------------------------------------------

    The Commission is not proposing an exemption for small entities or 
different regulatory requirements for small entities. The proposed rule 
would provide it is an unfair method of competition for an employer to 
enter into or attempt to enter into a non-compete clause with a worker; 
maintain with a worker a non-compete clause; or, under certain 
circumstances, to represent to a worker that the worker is subject to a 
non-compete clause.\526\ For the reasons described above in Part IV, 
the Commission is proposing to provide these practices are an unfair 
method of competition under Section 5. Based on the available evidence, 
the Commission does not believe the analysis in Part IV above is 
fundamentally different for non-compete clauses imposed by small 
entities. For this reason, the Commission is not proposing an exemption 
for small entities or different regulatory requirements for small 
entities. The Commission seeks comment on whether it should propose a 
small entity exemption or different requirements for small entities, 
including whether non-compete clauses used by small entities are less 
likely to have the anticompetitive effects described in Part IV.A 
above, and whether employers that are small entities are less likely 
than other employers to have alternatives available for protecting 
their investments, as described in Part IV.B above.
---------------------------------------------------------------------------

    \526\ See proposed Sec.  910.2(a).
---------------------------------------------------------------------------

    The Commission is also not proposing a delayed compliance date for 
small entities. Under proposed Sec.  910.5, compliance with the 
proposed rule would be required as of the proposed compliance date, 
which would be 180 days after publication of the final rule in the 
Federal Register.\527\ In the Commission's preliminary view, this 
proposed compliance period would afford small entities a sufficient 
period of time to comply with the proposed rule.\528\ The Commission 
seeks comment on whether this is the case.
---------------------------------------------------------------------------

    \527\ See proposed Sec.  910.5.
    \528\ See supra Part V, in the section-by-section analysis for 
proposed Sec.  910.5.
---------------------------------------------------------------------------

IX. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995 (PRA),\529\ federal 
agencies must obtain approval from the Office of Management and Budget 
(OMB) for each collection of information they conduct or sponsor. The 
term ``collection of information'' includes any requirement or request 
for persons to obtain, maintain, retain, report, or publicly disclose 
information.\530\ Under the PRA, the Commission may not conduct or 
sponsor, and, notwithstanding any other provision of law, a person is 
not required to respond to, an information collection unless the 
information collection displays a valid control number assigned by 
OMB.\531\
---------------------------------------------------------------------------

    \529\ 44 U.S.C. 3501 et seq.
    \530\ 44 U.S.C. 3502(3); 5 CFR 1320.3(c).
    \531\ 44 U.S.C. 3506(c)(1)(B); 5 CFR 1320.5(a)(3).
---------------------------------------------------------------------------

    The Commission believes the proposed rule would contain a 
disclosure requirement that would constitute a collection of 
information requiring OMB approval under the PRA. Proposed Sec.  
910.2(a) would state it is an unfair method of competition for an 
employer to enter into or attempt to enter into a non-compete clause 
with a worker; maintain with a worker a non-compete clause; or, under 
certain circumstances, represent to a worker that the worker is subject 
to a non-compete clause. Proposed Sec.  910.2(b)(1) would state that, 
to comply with Sec.  910.2(a), an employer that entered into a non-
compete clause with a worker prior to the compliance date must rescind 
the non-compete clause no later than the compliance date.
    Proposed Sec.  910.2(b)(2)--the provision that would contain the 
disclosure requirement that would require OMB approval--would require 
employers to provide a notice to workers in certain circumstances. 
Specifically, proposed Sec.  910.2(b)(2)(A) would require an employer 
that rescinds a non-compete clause pursuant to Sec.  910.2(b)(1) to 
provide notice to the worker that the worker's non-compete clause is no 
longer in effect and may not be enforced against the worker. Proposed 
Sec.  910.2(b)(2)(A) would also state the employer must provide the 
notice to the worker in an individualized communication and the 
employer must provide the notice on paper or in a digital format such 
as, for example, an email or text message. Proposed Sec.  
910.2(b)(2)(B) would state the employer must provide the notice to a

[[Page 3534]]

worker who currently works for the employer. Proposed Sec.  
910.2(b)(2)(B) would also state that the employer must also provide the 
notice to a worker who formerly worked for the employer, provided the 
employer has the worker's contact information readily available. 
Finally, proposed Sec.  910.2(b)(2)(C) would provide model language 
that would satisfy the notice requirement. Proposed Sec.  
910.2(b)(2)(C) would also state that an employer may also use different 
language, provided the notice communicates to the worker that the 
worker's non-compete clause is no longer in effect and may not be 
enforced against the worker.
    The Commission estimates composing and sending this message in a 
digital format to all workers would take 20 minutes of a human 
resources specialist's time. According to the Bureau of Labor 
Statistics, the median wage for a human resources specialist in 2021 
was $29.95 per hour.\532\ The cost of compliance for currently employed 
workers is therefore $29.95/3 = $9.98 per firm. According to the U.S. 
Census Bureau's Statistics of U.S. Businesses database, in 2019 (the 
most recent year for which data are available), there were 6.10 million 
firms and 7.96 million establishments in the United States.\533\ The 
Commission estimates the percentage of firms using non-compete clauses 
in the United States at 49.4%.\534\ This yields an estimated 3,932,240 
covered establishments. Conservatively assuming that each establishment 
must engage in its own communication--i.e., a firm's headquarters does 
not have the ability to send a company-wide email, for example--this 
means covered employers would incur an estimated labor cost burden of 
1,310,747 hours to comply with this requirement (3,932,240 
establishments x 20 minutes). The Commission estimates the associated 
labor cost for notifying affected workers who are already employed is 
$9.98 x 7.96 million x 0.494 = $39,243,755.
---------------------------------------------------------------------------

    \532\ U.S. Bureau of Lab. Stats., Occupational Outlook Handbook: 
Human Resources Specialists, https://www.bls.gov/ooh/business-and-financial/human-resources-specialists.htm.
    \533\ U.S. Census Bureau, 2019 SUSB Annual Data Tables by 
Establishment Industry (February 2022), https://www.census.gov/data/tables/2019/econ/susb/2019-susb-annual.html (last visited Dec. 9, 
2022).
    \534\ See Colvin & Shierholz, supra note 498 at 4.
---------------------------------------------------------------------------

    The proposed rule would impose only de minimis capital and non-
labor costs. The Commission anticipates covered employers already have 
in place existing systems to communicate with and provide employment-
related disclosures to workers. While the proposed rule would require a 
one-time disclosure to some workers subject to a rescinded non-compete 
clause, the Commission anticipates this one-time disclosure would not 
require substantial investments in new systems or other non-labor 
costs. Moreover, many establishments are likely to provide the 
disclosure electronically, further reducing total costs.
    The Commission invites comments on: (1) Whether the proposed 
collection of information is necessary for the proper performance of 
the functions of the agency, including whether the information would 
have practical utility; (2) the accuracy of the agency's estimate of 
the burden of the proposed collection of information, including the 
validity of the methodology and assumptions used; (3) ways to enhance 
the quality, utility, and clarity of the information to be collected; 
and (4) ways to minimize the burden of these information collections on 
respondents. The Commission seeks comment on all aspects of this Part 
IX.
    Comments on the proposed reporting requirements subject to 
Paperwork Reduction Act review by OMB should additionally be submitted 
to www.reginfo.gov/public/do/PRAMain. Find this particular information 
collection by selecting ``Currently under 30-day Review--Open for 
Public Comments'' or by using the search function. The reginfo.gov web 
link is a United States Government website operated by OMB and the 
General Services Administration (GSA). Under PRA requirements, OMB's 
Office of Information and Regulatory Affairs (OIRA) reviews federal 
information collections.

X. Request for Comment

    You can file a comment online or on paper. For the Commission to 
consider your comment, we must receive it on or before March 20, 2023. 
Write ``Non-Compete Clause Rulemaking, Matter No. P201200'' on your 
comment. Your comment--including your name and your state--will be 
placed on the public record of this proceeding, including the https://www.regulations.gov website.
    Because of the public health emergency in response to the COVID-19 
outbreak and the agency's heightened security screening, postal mail 
addressed to the Commission will be subject to delay. We strongly 
encourage you to submit your comments online through the https://www.regulations.gov website. To ensure the Commission considers your 
online comment, please follow the instructions on the web-based form.
    If you file your comment on paper, write ``Non-Compete Clause 
Rulemaking, Matter No. P201200'' on your comment and on the envelope, 
and mail your comment to the following address: Federal Trade 
Commission, Office of the Secretary, 600 Pennsylvania Avenue NW, Suite 
CC-5610 (Annex C), Washington, DC 20580.
    Because your comment will be placed on the publicly accessible 
website at https://www.regulations.gov, you are solely responsible for 
making sure your comment does not include any sensitive or confidential 
information. In particular, your comment should not include any 
sensitive personal information, such as your or anyone else's Social 
Security number; date of birth; driver's license number or other state 
identification number, or foreign country equivalent; passport number; 
financial account number; or credit or debit card number. You are also 
solely responsible for making sure your comment does not include any 
sensitive health information, such as medical records or other 
individually identifiable health information. In addition, your comment 
should not include any ``trade secret or any commercial or financial 
information which . . . is privileged or confidential''--as provided by 
15 U.S.C. 46(f) and 16 CFR 4.10(a)(2)--including, in particular, 
competitively sensitive information such as costs, sales statistics, 
inventories, formulas, patterns, devices, manufacturing processes, or 
customer names.
    Comments containing material for which confidential treatment is 
requested must be filed in paper form, must be clearly labeled 
``Confidential,'' and must comply with 16 CFR 4.9(c). In particular, 
the written request for confidential treatment that accompanies the 
comment must include the factual and legal basis for the request, and 
must identify the specific portions of the comment to be withheld from 
the public record. Your comment will be kept confidential only if the 
General Counsel grants your request in accordance with the law and the 
public interest. Once your comment has been posted publicly at https://www.regulations.gov--as legally required by 16 CFR 4.9(b)--we cannot 
redact or remove your comment, unless you submit a confidentiality 
request that meets the requirements for such treatment under FTC Rule 
4.9(c) and the General Counsel grants that request.
    Visit the Commission's website, www.ftc.gov, to read this NPRM and 
the fact sheet describing it. The FTC Act and other laws the Commission 
administers permit the collection of

[[Page 3535]]

public comments to consider and use in this proceeding as appropriate. 
The Commission will consider all timely and responsive public comments 
that it receives on or before March 20, 2023. For information on the 
Commission's privacy policy, including routine uses permitted by the 
Privacy Act, see https://www.ftc.gov/site-information/privacy-policy.

XI. Communications by Outside Parties to Commissioners or Their 
Advisors

    Written communications and summaries or transcripts of oral 
communications respecting the merits of this proceeding, from any 
outside party to any Commissioner or Commissioner's advisor, will be 
placed on the public record, per 16 CFR 1.26(b)(5).

List of Subjects in 16 CFR Part 910 Antitrust

0
For the reasons set forth above, the Federal Trade Commission proposes 
to add a new subchapter J, consisting of part 910, to chapter I in 
title 16 of the Code of Federal Regulations to read as follows:

Subchapter J--Rules Concerning Unfair Methods of Competition

PART 910--NON-COMPETE CLAUSES

Sec.
910.1. Definitions.
910.2. Unfair methods of competition.
910.3. Exception.
910.4. Relation to State laws.
910.5. Compliance date.

    Authority:  15 U.S.C. 45 and 46(g).


Sec.  910.1  Definitions.

    (a) Business entity means a partnership, corporation, association, 
limited liability company, or other legal entity, or a division or 
subsidiary thereof.
    (b) Non-compete clause, as used in this part:
    (1) Means 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.
    (2) The term non-compete clause 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. For example, the following types of contractual 
terms, among others, may be de facto non-compete clauses:
    (i) A non-disclosure agreement between an employer and a worker 
that is 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.
    (ii) A contractual term between an employer and a worker 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 for training the worker.
    (c) Employer means a person, as defined in 15 U.S.C. 57b-1(a)(6), 
that hires or contracts with a worker to work for the person.
    (d) Employment means work for an employer, as the term employer is 
defined in paragraph (c) of this section.
    (e) Substantial owner, substantial member, and substantial partner 
mean an owner, member, or partner holding at least a 25 percent 
ownership interest in a business entity.
    (f) Worker means a natural person who works, whether paid or 
unpaid, for an employer. The term includes, without limitation, an 
employee, individual classified as an independent contractor, extern, 
intern, volunteer, apprentice, or sole proprietor who provides a 
service to a client or customer. The term worker does not include a 
franchisee in the context of a franchisee-franchisor relationship; 
however, the term worker includes a natural person who works for the 
franchisee or franchisor. Non-compete clauses between franchisors and 
franchisees would remain subject to Federal antitrust law as well as 
all other applicable law.


Sec.  910.2  Unfair methods of competition.

    (a) Unfair methods of competition. It is an unfair method of 
competition for an employer to enter into or attempt to enter into a 
non-compete clause with a worker; maintain with a worker a non-compete 
clause; or represent to a worker that the worker is subject to a non-
compete clause where the employer has no good faith basis to believe 
that the worker is subject to an enforceable non-compete clause.
    (b) Existing non-compete clauses.
    (1) Rescission requirement. To comply with paragraph (a) of this 
section, which states that it is an unfair method of competition for an 
employer to maintain with a worker a non-compete clause, an employer 
that entered into a non-compete clause with a worker prior to the 
compliance date must rescind the non-compete clause no later than the 
compliance date.
    (2) Notice requirement.
    (i) An employer that rescinds a non-compete clause pursuant to 
paragraph (b)(1) of this section must provide notice to the worker that 
the worker's non-compete clause is no longer in effect and may not be 
enforced against the worker. The employer must provide the notice to 
the worker in an individualized communication. The employer must 
provide the notice on paper or in a digital format such as, for 
example, an email or text message. The employer must provide the notice 
to the worker within 45 days of rescinding the non-compete clause.
    (ii) The employer must provide the notice to a worker who currently 
works for the employer. The employer must also provide the notice to a 
worker who formerly worked for the employer, provided that the employer 
has the worker's contact information readily available.
    (iii) The following model language constitutes notice to the worker 
that the worker's non-compete clause is no longer in effect and may not 
be enforced against the worker, for purposes of paragraph (b)(2)(i) of 
this section. An employer may also use different language, provided 
that the notice communicates to the worker that the worker's non-
compete clause is no longer in effect and may not be enforced against 
the worker.

Figure 1 to Paragraph (b)(2)(iii)--Model Language

BILLING CODE 6750-01-P

[[Page 3536]]

[GRAPHIC] [TIFF OMITTED] TP19JA23.000

BILLING CODE 6750-01-C
    (3) Safe harbor. An employer complies with the rescission 
requirement in paragraph (b)(1) of this section where it provides 
notice to a worker pursuant to paragraph (b)(2) of this section.


Sec.  910.3  Exception.

    The requirements of this part 910 shall not apply to a non-compete 
clause that is entered into by a person who is selling a business 
entity or otherwise disposing of all of the person's ownership interest 
in the business entity, or by a person who is selling all or 
substantially all of a business entity's operating assets, when the 
person restricted by the non-compete clause is a substantial owner of, 
or substantial member or substantial partner in, the business entity at 
the time the person enters into the non-compete clause. Non-compete 
clauses covered by this exception would remain subject to Federal 
antitrust law as well as all other applicable law.


Sec.  910.4  Relation to State laws.

    This part 910 shall supersede any State statute, regulation, order, 
or interpretation to the extent that such statute, regulation, order, 
or interpretation is inconsistent with this part 910. A State statute, 
regulation, order, or interpretation is not inconsistent with the 
provisions of this part 910 if the protection such statute, regulation, 
order, or interpretation affords any worker is greater than the 
protection provided under this part 910.


Sec.  910.5  Compliance date.

    Compliance with this part 910 is required as of [DATE 180 DAYS 
AFTER DATE OF PUBLICATION OF THE FINAL RULE].

    By direction of the Commission, Commissioner Wilson dissenting.
April J. Tabor,
Secretary.
    Note: the following statements will not appear in the Code of 
Federal Regulations.

Statement of Chair Lina M. Khan Joined by Commissioner Rebecca Kelly 
Slaughter and Commissioner Alvaro M. Bedoya

    Today the Federal Trade Commission is proposing a rule that would 
prohibit businesses from using noncompete clauses in contracts with 
workers. Noncompete clauses generally restrict a company's workers from 
working for--or launching--a competitor for a period of time even after 
they have stopped working for that company. Researchers estimate that 
about one in five American workers is bound by a noncompete clause.
    By design, noncompetes often close off a worker's most natural 
alternative employment options: jobs in the same geographic area and 
professional field. These restrictions can undermine core economic 
liberties, burdening Americans' ability to freely switch jobs.\1\
---------------------------------------------------------------------------

    \1\ Pollock v. Williams, 322 U.S. 4, 17-18 (1944) (describing 
the ``right to change employers'' as a critical ``defense against 
oppressive hours, pay, working conditions, or treatment'').

---------------------------------------------------------------------------

[[Page 3537]]

    A recent Commission action illustrates the real-life stakes: 
Prudential, a security company in Michigan, enforced noncompetes 
against its workers, including security guards earning near-minimum 
wage.\2\ These noncompetes included a $100,000 liquidated damages 
clause. On multiple occasions, Prudential sued former employees who 
left for competitors offering higher wages. In one case, Prudential 
successfully pressured a competitor to fire one of those new hires. 
Media reports document countless other instances in which Americans who 
wish to change jobs--be it to pursue a better opportunity, to escape 
harassment, or to express disagreement with new workplace policies--are 
trapped in place by noncompete clauses.
---------------------------------------------------------------------------

    \2\ Complaint, In re Prudential Security, Inc., File No. 221-
0026 (Jan. 4, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/2210026prudentialsecuritycomplaint.pdf; see Press Release, Fed. 
Trade Comm'n, FTC Cracks Down on Companies That Impose Harmful 
Noncompete Restrictions on Thousands of Workers (Jan. 4, 2023), 
https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-cracks-down-companies-impose-harmful-noncompete-restrictions-thousands-workers.
---------------------------------------------------------------------------

    Notably, the aggregate economic impact of noncompete clauses goes 
beyond any individual worker. Initiatives by several states to limit 
the use of noncompetes has given researchers the opportunity to closely 
study their effects. The Notice of Proposed Rulemaking (NPRM) published 
today carefully reviews the empirical evidence available to date and 
highlights several key findings.\3\
---------------------------------------------------------------------------

    \3\ Notice of Proposed Rulemaking for Non-Compete Clause Rule 
(``NPRM''), Part II.B (Jan. 5, 2023).
---------------------------------------------------------------------------

    First, noncompete clauses reduce competition in labor markets, 
suppressing earnings and opportunity even for workers who are not 
directly subject to a noncompete. When workers subject to noncompete 
clauses are blocked from switching to jobs in which they would be 
better paid and more productive, unconstrained workers in that market 
are simultaneously denied the opportunity to replace them. This 
collective decline in job mobility means fewer job offers and an 
overall drop in wages, as firms have less incentive to compete for 
workers by offering higher pay, better benefits, greater say over 
scheduling, or more favorable conditions. The FTC estimates that the 
proposed ban on noncompetes would increase workers' total earnings by 
close to $300 billion per year.\4\
---------------------------------------------------------------------------

    \4\ See NPRM Part VII.B.1 (describing the Commission's 
assessment of the benefits of the proposed rule).
---------------------------------------------------------------------------

    Second, the existing evidence indicates that noncompete clauses 
reduce innovation and competition in product and service markets. 
Studies show that locking workers in place reduces innovation, likely 
by decreasing the flow of information and knowledge among firms. By 
preventing workers from starting their own businesses and limiting the 
pool of talent available for startups to hire, noncompetes also limit 
entrepreneurship and new business formation. This in turn reduces 
product quality while raising prices. Indeed, existing evidence from 
the health care sector suggests that the proposed ban would decrease 
consumer prices, potentially to the tune of $150 billion a year.\5\
---------------------------------------------------------------------------

    \5\ Drawing from a study on the financial industry, Commissioner 
Wilson suggests that suspending noncompetes here caused higher 
prices and more employee misconduct. See Umit G. Gurun, Noah 
Stoffman & Scott E. Yonker, Unlocking Clients: The Importance of 
Relationships in the Financial Advisory Industry, 141 J. Fin. Econ. 
1218 (2021). Notably, under the proposed rule, firms will still have 
contractual methods to protect their client lists, unlike the firms 
observed in this study, which were prohibited from using non-
solicitation agreements in addition to noncompete clauses. 
Furthermore, the change in the financial industry may have curtailed 
beneficial entrepreneurship, since it only covered mobility of 
workers between member firms, and therefore continued to permit some 
noncompete clauses which could prevent workers from starting their 
own businesses.
---------------------------------------------------------------------------

    A recent Commission action shows how depriving new businesses of 
access to skilled workers can thwart competition. In the highly 
concentrated glass manufacturing sector, incumbent firms imposed 
noncompetes on thousands of employees. These noncompetes locked up 
highly specialized workers, tending to impede the entry and expansion 
of rivals by depriving them of access to qualified employees.\6\
---------------------------------------------------------------------------

    \6\ Complaint, In re O-I Glass, Inc., File No. 211-0182 (Jan. 4, 
2023), https://www.ftc.gov/system/files/ftc_gov/pdf/2110182o-iglasscomplaint.pdf; Complaint, In re Ardagh Group S.A., File No. 
211-0182 (Jan. 4, 2023), https://www.ftc.gov/system/files/ftc_gov/pdf/2110182ardaghcomplaint.pdf; see Press Release, Fed. Trade 
Comm'n, FTC Cracks Down on Companies That Impose Harmful Noncompete 
Restrictions on Thousands of Workers (Jan. 4, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-cracks-down-companies-impose-harmful-noncompete-restrictions-thousands-workers.
---------------------------------------------------------------------------

    The empirical evidence available to date, coupled with the 
Commission's years of work on noncompetes, forms the basis for the 
proposed rule.\7\ The proposal determines that employers' use of 
noncompetes is an unfair method of competition under Section 5 of the 
FTC Act. It recognizes that noncompetes may be unlawful in different 
contexts for different reasons; for example, employers' use of 
noncompetes to bind low-wage workers may be coercive and unfair in ways 
that the use of noncompetes to bind senior executives is not. Still, 
the proposal concludes that, in the aggregate, employers' use of 
noncompetes undermines competition across markets in ways that are 
harmful to workers and consumers and warrant a prohibition.
---------------------------------------------------------------------------

    \7\ The Commission has conducted extensive public outreach 
relating to noncompete clauses. See, e.g., Fed. Trade Comm'n, 
Hearings on Competition and Consumer Protection in the 21st Century, 
https://www.ftc.gov/enforcement-policy/hearings-competition-consumer-protection (including discussion of noncompete agreements 
during the Oct. 15-17, 2018 and June 12, 2019 hearings, and inviting 
public comment on topics including ``the use of non-competition 
agreements and the conditions under which their use may be 
inconsistent with the antitrust laws''); Fed. Trade Comm'n, Non-
Competes in the Workplace: Examining Antitrust and Consumer 
Protection Issues (Jan. 9, 2020), https://www.ftc.gov/news-events/events/2020/01/non-competes-workplace-examining-antitrust-consumer-protection-issues; Fed. Trade Comm'n, Making Competition Work: 
Promoting Competition in Labor Markets (Dec. 6-7, 2021), https://www.ftc.gov/news-events/events/2021/12/making-competition-work-promoting-competition-labor-markets; Fed. Trade Comm'n, Solicitation 
for Public Comments on Contract Terms that May Harm Competition (Aug 
5, 2021), https://www.regulations.gov/document/FTC-2021-0036-0022. 
The FTC has also focused on noncompete clauses in connection with 
its merger review work. See Press Release, Fed. Trade Comm'n, FTC 
Approves Final Order Restoring Competitive Markets for Gasoline and 
Diesel in Michigan and Ohio (Aug. 9, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/08/ftc-approves-final-order-restoring-competitive-markets-gasoline-diesel-michigan-ohio; Press 
Release, Fed. Trade Comm'n, FTC Approves Final Order Imposing Strict 
Limits on Future Mergers by Dialysis Service Provider DaVita, Inc. 
(Jan. 12, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/01/ftc-approves-final-order-imposing-strict-limits-future-mergers-dialysis-service-provider-davita-inc; Press Release, 
Fed. Trade Comm'n, FTC Approves Final Order Requiring Divestitures 
of Hundreds of Retail Gas and Diesel Fuel Stations Owned by 7-
Eleven, Inc. (Nov. 10, 2021), https://www.ftc.gov/news-events/news/press-releases/2021/11/ftc-approves-final-order-requiring-divestitures-hundreds-retail-gas-diesel-fuel-stations-owned-7.
---------------------------------------------------------------------------

    The proposed rule also draws on key lessons learned from state 
efforts to limit or ban the use of noncompetes. For example, research 
shows that some employers continue to use noncompetes even in states 
that have declared them null and void. As a result, workers in states 
where noncompetes are unenforceable are about as likely to have one in 
their contract as workers in other states.\8\ In practice this causes 
confusion and uncertainty for workers about whether they are bound by 
an enforceable noncompete, which can dissuade them from seeking or 
accepting another job. To address this, the proposed rule would both 
prohibit employers from representing to workers

[[Page 3538]]

that they are covered by a noncompete clause and require them to 
actively notify workers presently covered that these clauses are now 
void and cannot be enforced.
---------------------------------------------------------------------------

    \8\ Evan P. Starr, James J. Prescott, & Norman D. Bishara, 
Noncompete Agreements in the U.S. Labor Force, 64 J.L. & Econ. 53, 
81 (2021).
---------------------------------------------------------------------------

    Action by federal enforcers is particularly appropriate here given 
that the harms from noncompetes flow across state lines. Many labor 
markets are spread across more than one state, and product markets are 
typically multistate as well, so the use of noncompetes in one state 
can harm workers and consumers in others. Moreover, employers may seek 
to circumvent state laws restricting noncompetes through the use of 
choice-of-law provisions and forum selection clauses, so that one 
state's lenient approach to noncompetes may have spillover effects into 
other states.\9\
---------------------------------------------------------------------------

    \9\ Non-compete clauses often contain choice-of-law provisions 
designating a particular state's law for resolution of any future 
disputes. See Gillian Lester & Elizabeth Ryan, Choice of Law and 
Employee Restrictive Covenants: An American Perspective, 31 Comp. 
Lab. & Pol'y J. 389, 396-402 (2010). Some non-compete clauses 
include forum selection clauses, which specify the court and 
location where any dispute will be heard. Id. at 402-04. When 
contracting with workers in states with relatively stringent non-
compete laws, companies may include choice-of-law and forum-
selection provisions that designate jurisdictions with less 
stringent non-compete laws. The default rule under conflict-of-laws 
principles is that the court honors the parties' choice of law, 
meaning that the burden is on the worker to argue that the law of a 
different forum should apply. Id. at 394.
---------------------------------------------------------------------------

    The Federal Trade Commission is particularly well suited to this 
task. Congress designed the FTC to be an expert administrative agency 
that could enforce the prohibition against unfair methods of 
competition through rulemaking as well as through case-by-case 
adjudication. Although the Commission has primarily pursued antitrust 
enforcement through adjudication, rulemaking can deliver several 
benefits--including greater legal clarity and predictability, greater 
administrability and efficiency of enforcement, and greater public 
participation and airing of a maximally broad range of viewpoints and 
criticisms.\10\
---------------------------------------------------------------------------

    \10\ See, e.g., Rohit Chopra & Lina Khan, The Case for ``Unfair 
Methods of Competition'' Rulemaking, 87 U. Chi. L. Rev. 357 (2020); 
Nat'l Petroleum Refiners Ass'n v. FTC, 482 F.2d 672, 683 (D.C. Cir. 
1973) (noting that ``utilizing rule-making procedures opens up the 
process of agency policy innovation to a broad range of criticism, 
advice and data that is ordinarily less likely to be forthcoming in 
adjudication'').
---------------------------------------------------------------------------

    Several factors seem to make noncompetes especially ripe for 
enforcement through rulemaking rather than adjudication, including the 
magnitude and scope of the apparent harms. Private litigation in this 
area may also be limited, given that there is no private right of 
action under Section 5 of the FTC Act--and that arbitration clauses and 
class action waivers in employment contracts often can functionally 
preclude lawsuits by workers.
    Moreover, the FTC has notable expertise in this area. The 
Commission began deepening its work on noncompetes under Chairman 
Joseph Simons four years ago. Since then, the agency has held multiple 
workshops and sought and received public comments on three separate 
occasions. Our staff have closely studied the available economic 
research and reviewed hundreds of comments from employers, advocates, 
trade associations, members of Congress, state and local officials, 
unions, and workers.
    In her dissent, Commissioner Wilson questions the Commission's 
authority to engage in ``unfair methods of competition'' 
rulemaking.\11\ But the rulemaking authority we are exercising today is 
firmly rooted in the text and structure of the FTC Act and supported 
both by judicial precedent interpreting the scope of the law as well as 
further statutory language from the 1970s.\12\ Commissioner Wilson also 
suggests that the Commission's authority for the NPRM will be 
challenged under the major questions doctrine, which the Supreme Court 
recently applied in West Virginia v. EPA. Here, however, the FTC is 
operating under clear statutory authority. Identifying and addressing 
unfair methods of competition is central to the mandate that Congress 
gave the Commission in the text of our authorizing statute. Indeed, a 
greater threat to the ``vesting of federal legislative power in 
Congress'' would be for this Commission to repudiate or ignore 
Congress's clear direction to the Commission to consider rules to 
address unfair methods of competition.\13\
---------------------------------------------------------------------------

    \11\ Commissioner Wilson argues that our enforcement actions are 
in direct tension with a Seventh Circuit decision, Snap-On Tools 
Corp. v. FTC, 321 F.2d 825 (7th Cir. 1963). Snap-On Tools is 
distinguishable on several fronts, including the fact that it 
concerned noncompetes used in the business-to-business context, not 
those used by an employer to restrict its workers. Additionally, 
while the majority stated that it is ``not prepared to say that [the 
termination restriction] is a per se violation of the antitrust 
laws,'' id. at 837, the Commission did not argue for a per se rule 
and so the issue was not litigated. Id. at 830-31; id. at 839 
(Hastings, C.J., dissenting). Notably, the question before the 
Seventh Circuit was not whether the noncompete clause itself 
constituted an unfair method of competition. The Commission had held 
that the termination restriction provision was unlawful because it 
was used as an enforcement mechanism to ensure compliance with the 
other provisions. Id. at 836-37. Thus, once the court found that the 
other restrictive provisions in the agreement were lawful, it also 
held that the clause restricting competition upon termination did 
not violate the FTC Act. Id. at 837.
    \12\ The plain text of the FTC Act clearly authorizes the 
Commission to issue rules. Specifically, Section 6(g) enables the 
agency to ``make rules and regulations for the purpose of carrying 
out the provisions'' of the law. Several other provisions support 
the conclusion that Section 6(g) confers substantive rulemaking 
authority. For instance, Section 18 explicitly preserves ``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.'' The 
D.C. Circuit endorsed this plain reading of 6(g) in Petroleum 
Refiners, 482 F.2d at 698, when it considered and rejected an 
argument that Section 6(g) only authorized the FTC to promulgate 
procedural or interpretive rules. Petroleum Refiners is the only 
case that directly addresses the FTC's Section 6(g) rulemaking 
authority. This holding--that the FTC may ``promulgate rules 
defining the meaning of the statutory standards of the illegality 
[the agency was] empowered to prevent,'' id. at 698--represents the 
current state of the law.
    \13\ West Virginia v. EPA, 142 S. Ct. 2587, 2617 (2022) 
(Gorsuch, J., concurring).
---------------------------------------------------------------------------

    This proposal is the first step in the FTC's rulemaking process. It 
identifies several potential alternative rules, including those that 
would cover only a subset of workers or that would apply different 
legal standards to different categories of workers. Receiving input 
from a broad set of market participants, including those who have 
experienced firsthand the effects of noncompete clauses, will be 
critical to our efforts. I urge members of the public to review our 
proposal and submit comments.
    A few topics are especially worthy of close consideration. First, 
should the rule apply different standards to noncompetes that cover 
senior executives or other highly paid workers? As the NPRM notes, 
these workers may be less vulnerable to coercion, but restraining them 
through noncompetes may still harm competition--for example, by making 
it harder and more expensive for potential entrants to recruit 
individuals for leadership positions. I am keen for input on this 
question, including on how any such category of workers should be 
defined and what standards should be applied. For example, if the 
Commission were to adopt a ``rebuttable presumption'' of illegality for 
noncompetes affecting these workers, what showing should be required to 
overcome the presumption?
    Second, should the rule cover noncompetes between franchisors and 
franchisees? The current proposal does not cover noncompetes used by 
franchisors to restrict franchisees, but we recognize that in some 
cases they may raise concerns that are analogous to those raised by 
noncompetes between employers and workers. We welcome the public's 
views on this topic, as well as data or other evidence that could 
inform our consideration of this issue.
    Third, what tools other than noncompetes might employers use to

[[Page 3539]]

protect valuable investments, and how sufficient are these 
alternatives? The proposal identifies several potential mechanisms that 
employers may use--including trade secrets law and confidentiality 
agreements--and we preliminarily find that these alternatives 
reasonably achieve the goal of protecting investments without unduly 
burdening competition. We welcome feedback on the Commission's 
preliminary analysis of this issue.
    I am deeply grateful to staff in the Office of Policy Planning, the 
Bureau of Competition, the Bureau of Economics, and the Office of 
General Counsel for their careful and thorough work on this proposal. I 
am also grateful to the many scholars, advocates, and journalists whose 
work in recent years has shed light on the proliferation of noncompetes 
and the resulting harms that can manifest.
    While the NPRM is just the first step toward a final rule, it marks 
the Commission's commitment to exercising the full set of tools and 
authorities that Congress gave us and to ensuring that our work is 
protecting all Americans. I look forward to working closely with my 
colleagues to continue this critical effort.

Statement of Commissioner Slaughter Joined by Commissioner Alvaro M. 
Bedoya

    One of the great privileges of working at the Federal Trade 
Commission is the opportunity--and responsibility--we have to help real 
people in their everyday lives. We offer that help not only when we 
challenge massive mergers but also when we tackle the myriad smaller 
ways in which people are denied agency and autonomy. When we fight 
fraud, manipulative business opportunities, anticompetitive schemes, 
and bogus fees, we help restore meaningful choice and dignity to 
consumers and workers. These principles are the bedrock of a democratic 
society, but too often they are denied to Americans who are not rich 
and powerful. Addressing the scourge of noncompete clauses that 
restrict the job mobility of workers advances our mission by ensuring 
that workers have the chance to compete to earn a fair wage and family-
supporting benefits.
    I am therefore pleased to support the Commission's Notice of 
Proposed Rulemaking (``NPRM'') on the Noncompete Clause Rule under 
Sections 5 and 6(g) of the Federal Trade Commission Act. I am grateful 
to the cross-agency team who worked on this NPRM and thank them for 
their hard work and collaborative drafting process.
    I also want to thank the civil-society organizations and academics 
who filed a petition with the FTC in 2019 calling for a rulemaking to 
address noncompetes in employment contracts.\1\ This petition increased 
the awareness of and knowledge about the issue not only within the 
agency but also with the public more broadly. That heightened focus was 
on display in the FTC's noncompete workshop in January 2020.\2\ As I 
did at that workshop, I again thank the labor community for engaging 
with the competition community to tackle the pocketbook issues that sit 
at the intersection of labor and antitrust law and that have profound 
effects on workers.\3\ Several years of activity by the Commission 
related to noncompete clauses in employment contracts have culminated 
in this NPRM, which is another milestone in our effort to more 
thoroughly incorporate labor competition and effects on workers into 
our antitrust law analyses.
---------------------------------------------------------------------------

    \1\ Open Markets Inst. et al., Petition for Rulemaking to 
Prohibit Worker Non-Compete Clauses (March 20, 2019), https://static1.squarespace.com/static/5e449c8c3ef68d752f3e70dc/t/5eaa04862ff52116d1dd04c1/1588200595775/Petition-for-Rulemaking-to-Prohibit-Worker-Non-Compete-Clauses.pdf.
    \2\ Fed. Trade Comm'n, Non-Competes in the Workplace: Examining 
Antitrust and Consumer Protection Issues, https://www.ftc.gov/news-events/events/2020/01/non-compete clauses-workplace-examining-
antitrust-consumer-protection-issues.
    \3\ Remarks of FTC Commissioner Rebecca Kelly Slaughter, New 
Decade, New Resolve to Protect and Promote Competitive Markets for 
Workers, FTC Workshop on Non-Compete Clauses in the Workplace (Jan. 
9, 2020), https://www.ftc.gov/system/files/documents/public_statements/1561475/slaughter_-_noncompete_clauses_workshop_remarks_1-9-20.pdf.
---------------------------------------------------------------------------

    I write separately to emphasize two points. First, noncompete 
clauses, and the restrictions they place on workers regarding their 
future employment or business creation, are deeply troubling. Based on 
the research discussed in the NPRM, they have serious ramifications for 
individual workers and labor competition broadly, as well as for 
consumers. Although sometimes referred to as noncompete ``agreements,'' 
they rarely represent actual agreements. Instead, they are often 
imposed on workers with no ability to bargain as a condition of 
employment. Even when noncompetes have been ruled unenforceable by 
courts or outlawed by legislation, firms continue to use them, as was 
alleged in a recent case the FTC settled over noncompetes imposed on 
minimum wage-earning security guards.\4\
---------------------------------------------------------------------------

    \4\ In the Matter of Prudential Security, Inc., a corporation; 
Prudential Command Inc., a corporation; Greg Wier, a natural person; 
and Matthew Keywell, FTC Matter/File Number 2210026 (January 4, 
2023), Complaint ] 22, https://www.ftc.gov/legal-library/browse/cases-proceedings/2210026-prudential-security-et-al-matter; 
Statement of Chair Lina M. Khan Joined by Commissioner Rebecca Kelly 
Slaughter and Commissioner Alvaro M. Bedoya In the Matters of 
Prudential Security, O-I Glass Inc., and Ardagh Group S.A, January 
4, 2023, https://www.ftc.gov/legal-library/browse/cases-proceedings/public-statements/statement-chair-lina-m-khan-joined-commissioners-slaughter-bedoya-matters-prudential-security-o-i.
---------------------------------------------------------------------------

    Workers restrained by noncompetes are unable to pursue certain job 
opportunities and are therefore deprived of higher wages and more 
favorable working conditions and benefits. Similarly, businesses that 
need to hire workers are inhibited from attracting and hiring 
noncompete-restrained workers through better working conditions, pay, 
and benefits.\5\ Even more alarming is the evidence that shows 
noncompetes reduce earnings for workers not individually bound by 
them.\6\ Studies also show reduced entrepreneurship, new-business 
formation, or both when workers are inhibited by noncompetes.\7\ 
Finally, American consumers can suffer from noncompete clauses through 
paying higher prices for lower-quality goods and services.\8\ For all 
these reasons, it is clear that it is more than appropriate for the FTC 
to use our rulemaking authority under Sections 5 and 6(g) to address 
noncompete clauses in employment contracts.
---------------------------------------------------------------------------

    \5\ Notice of Proposed Rulemaking, Non-Compete Clause Rule, Part 
II.B.1.
    \6\ See Matthew S. Johnson, Kurt Lavetti, & Michael Lipsitz, The 
Labor Market Effects of Legal Restrictions on Worker Mobility 2 
(2020), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3455381; 
Evan Starr, Justin Frake, & Rajshree Agarwal, Mobility Constraint 
Externalities, 30 Org. Sci. 961, 6 (2019).
    \7\ See Sampsa Samila & Olav Sorenson, Noncompete Covenants: 
Incentives to Innovate or Impediments to Growth, 57 Mgmt. Sci. 425, 
432 (2011); Jessica Jeffers, The Impact of Restricting Labor 
Mobility on Corporate Investment and Entrepreneurship 22 (2019), 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3040393; Evan 
Starr, Natarajan Balasubramanian, & Mariko Sakakibara, Screening 
Spinouts? How Noncompete Enforceability Affects the Creation, 
Growth, and Survival of New Firms, 64 Mgmt. Sci. 552, 561 (2018).
    \8\ See Naomi Hausman & Kurt Lavetti, Physician Practice 
Organization and Negotiated Prices: Evidence from State Law Changes, 
13 a.m. Econ. J. Applied Econ. 258, 284 (2021); Michael Lipsitz & 
Mark Tremblay, Noncompete Agreements and the Welfare of Consumers 6 
(2021), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3975864.
---------------------------------------------------------------------------

    Second, I strongly encourage the public to share their lived 
experiences and perspectives with the Commission. I have heard 
personally about how noncompete clauses can strike fear into workers 
and make them anxious about their livelihoods. These stories come from 
a variety of different industries and

[[Page 3540]]

professions, from fast-food workers to family physicians.\9\ Public 
input from individuals who are or who have been bound by noncompetes 
and from firms that use them is a critically important step in the 
rulemaking process, and it will help the Commission weigh the proposed 
broad ban on noncompete clauses as well as the alternative approaches 
discussed in the NPRM. I look forward to working with my fellow 
Commissioners to achieve a just outcome that promotes fair competition.
---------------------------------------------------------------------------

    \9\ See People of the State of Ill. v. Jimmy John's Enters., 
LLC, No. 2016-CH-07746 (Cook County Cir. Ct. filed June 8, 2016); 
See also 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).
---------------------------------------------------------------------------

Dissenting Statement of Commissioner Christine S. Wilson

    Today, the Commission announced a notice of proposed rulemaking 
(``NPRM'') for a Non-Compete Clause Rule. ``The proposed rule would 
provide that it is an unfair method of competition--and therefore a 
violation of Section 5--for an employer to enter into or attempt to 
enter into a non-compete clause with a worker; [or to] maintain with a 
worker a non-compete clause . . .'' \1\ For the many reasons described 
below, on the current record, I do not support initiating the proposed 
rulemaking and consequently dissent.
---------------------------------------------------------------------------

    \1\ Notice of Proposed Rulemaking for Non-Compete Clause Rule 
(``NPRM'') Part I (Jan. 5, 2023).
---------------------------------------------------------------------------

    The proposed Non-Compete Clause Rule represents a radical departure 
from hundreds of years of legal precedent that employs a fact-specific 
inquiry into whether a non-compete clause is unreasonable in duration 
and scope, given the business justification for the restriction. The 
Commission undertakes this radical departure despite what appears at 
this time to be a lack of clear evidence to support the proposed rule. 
What little enforcement experience the agency has with employee non-
compete provisions is very recent (within the last week) and fails to 
demonstrate harm to consumers and competition. Lacking enforcement 
experience, the Commission turns to academic literature--but the 
current record shows that studies in this area are scant, contain mixed 
results, and provide insufficient support for the scope of the proposed 
rule. And one study illustrates clearly, in the financial services 
sector, the negative unintended consequences of suspending non-compete 
provisions, including higher fees and broker misconduct. The suspension 
of non-competes across all industry sectors in the U.S. undoubtedly 
will impose a much larger raft of unintended consequences.
    Setting aside the substance of the rule, the Commission's 
competition rulemaking authority itself certainly will be challenged. 
The NPRM is vulnerable to meritorious challenges that (1) the 
Commission lacks authority to engage in ``unfair methods of 
competition'' rulemaking, (2) the major questions doctrine addressed in 
West Virginia v. EPA applies, and the Commission lacks clear 
Congressional authorization to undertake this initiative; and (3) 
assuming the agency does possess the authority to engage in this 
rulemaking, it is an impermissible delegation of legislative authority 
under the non-delegation doctrine, particularly because the Commission 
has replaced the consumer welfare standard with one of multiple goals. 
In short, today's proposed rule will lead to protracted litigation in 
which the Commission is unlikely to prevail.
    The NPRM invites public comment on both a sweeping ban on non-
competes and various alternatives pursuant to the Administrative 
Procedure Act, not the Magnuson-Moss Act. Stakeholders should note that 
this solicitation for public comment is likely the only opportunity 
they will have to provide input not just on the proposed ban, but also 
on the proposed alternatives. For this reason, I encourage all 
interested parties to respond fully to all parts of the NPRM's 
solicitation of public comments.

Non-Compete Clauses Merit Fact-Specific Inquiry

    Based on the current record, non-compete clauses constitute an 
inappropriate subject for rulemaking. The competitive effects of a non-
compete agreement depend heavily on the context of the agreement, 
including the business justification that prompted its adoption. But 
don't take my word for it--the need for fact-specific inquiry aligns 
with hundreds of years of precedent. When assessing the legality of 
challenged non-compete agreements, state and federal courts (and 
English courts before them) have examined the duration and scope of 
non-compete clauses, as well as the asserted business justifications, 
to determine whether non-compete clauses are unreasonable and therefore 
unenforceable.\2\
---------------------------------------------------------------------------

    \2\ See, e.g., United States v. Addyston Pipe & Steel Co., 85 F. 
271, 281 (6th Cir. 1898) (Taft, J.), aff'd in relevant part, 175 
U.S. 211 (1899); Mitchel v. Reynolds, 1 P. Wms. 181 (1711).
---------------------------------------------------------------------------

    The NPRM itself acknowledges, at least implicitly, the relevance of 
the circumstances surrounding adoption of non-compete clauses. For 
example, the NPRM proposes an exception to the ban on non-compete 
clauses for provisions associated with the sale of a business, 
acknowledging that these non-compete clauses help protect the value of 
the business acquired by the buyer.\3\ Recognizing that senior 
executives typically negotiate many facets of their employment 
agreements, the NPRM distinguishes situations in which senior 
executives are subject to non-compete provisions.\4\ And to stave off 
potential legal challenges, the NPRM proposes more carefully tailored 
alternatives to a sweeping ban on non-compete clauses that instead 
would vary by employee category.
---------------------------------------------------------------------------

    \3\ NPRM Part V, Section 910.3.
    \4\ Accordingly, the Commission seeks comments on whether senior 
executives should be treated differently from the proposed ban on 
non-compete clauses. See NPRM Parts IV.A.1.b, IV.A.1.c. In a similar 
vein, recent consent agreements issued for public comment that 
prohibit the use of non-compete agreements in the glass container 
industry do not prohibit non-compete clauses for senior executives 
and employees involved in research and development. See O-I Glass, 
Inc., File No. 211-0182, https://www.ftc.gov/system/files/ftc_gov/pdf/2110182o-iglassdraftorderappxa.pdf (Jan. 4, 2023) (Decision and 
Order Appendix A); Ardagh Glass Group S.A., File No. 211-0182, 
https://www.ftc.gov/system/files/ftc_gov/pdf/2110182ardaghdraftorderappxa.pdf (Jan. 4, 2023) (Decision and Order 
Appendix A); Christine S. Wilson, Comm'r, Fed. Trade Comm'n, 
Dissenting Statement regarding In the Matter of O-I Glass, Inc. and 
In the Matter of Ardagh Group S.A. (Jan. 4, 2023), https://www.ftc.gov/legal-library/browse/cases-proceedings/public-statements/dissenting-statement-commissioner-christine-s-wilson-regarding-matters-o-i-glass-inc-ardagh-group-sa.
---------------------------------------------------------------------------

    Despite the importance of context and the need for fact-specific 
inquiries, the Commission instead applies the approach of the newly 
issued Section 5 Policy Statement \5\ to propose a near-complete ban on 
the use of non-compete clauses. Pursuant to this approach, the 
Commission invokes nefarious-sounding adjectives--here, ``exploitive 
and coercive''--and replaces the evaluation of actual or likely 
competitive effects with an unsubstantiated conclusion about the 
``tendency'' for the conduct to generate negative consequences by 
``affecting consumers, workers or other market participants.'' \6\
---------------------------------------------------------------------------

    \5\ Fed. Trade Comm'n, Policy Statement Regarding the Scope of 
Unfair Methods of Competition Under Section 5 of the Federal Trade 
Commission Act (Nov. 10, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/p221202sec5enforcementpolicystatement_002.pdf.
    \6\ Id. at 9.
---------------------------------------------------------------------------

    Using the approach of the Section 5 Policy Statement that enables 
the majority summarily to condemn conduct it finds distasteful, the 
Commission today proposes a rule that prohibits conduct 47 states have 
chosen

[[Page 3541]]

to allow.\7\ Similarly, the Commission's proposed rule bans conduct 
that courts have found to be legal,\8\ a concern the Commission 
dismisses with a claim that the Section 5 prohibition on ``unfair 
methods of competition'' extends beyond the antitrust laws. But the 
majority's conclusions and today's proposed rule forbid conduct 
previously found lawful under Section 5 of the FTC Act. Specifically, 
applying FTC Act Section 5, the Seventh Circuit found that 
``[r]estrictive [non-compete] clauses . . . are legal unless they are 
unreasonable as to time or geographic scope[.]'' \9\ In other words, 
the Seventh Circuit found that a fact-specific inquiry is required 
under Section 5.
---------------------------------------------------------------------------

    \7\ NPRM Part II.C.1. Further, the NPRM explains ``[s]tates have 
been particularly active in restricting non-compete clauses in 
recent years.'' Id. The Commission's rulemaking will end states' 
varying approaches to address non-compete agreements. The 
Commission's preemption of states' approaches is premature to the 
extent that the Commission admits that it does not know where to 
draw lines regarding the treatment of non-compete provisions (i.e., 
the Commission seeks comments on alternatives to the proposed ban 
based on earnings levels, job classifications, or presumptions). The 
Commission ignores the advice of Justice Brandeis and instead 
proposes to end states' experimentation to determine the optimal 
treatment of non-compete clauses. See New State Ice Co. v. Liebmann, 
285 U.S. 262, 311 (1932) (``To stay experimentation in things social 
and economic is a grave responsibility. Denial of the right to 
experiment may be fraught with serious consequences to the nation. 
It is one of the happy incidents of the federal system that a single 
courageous state may, if its citizens choose, serve as a laboratory; 
and try novel social and economic experiments without risk to the 
rest of the country.'').
    \8\ See United States v. Empire Gas Corp., 537 F.2d 296, 307-08 
(8th Cir. 1976); Lektro-Vend Corp. v. Vendo Co., 660 F.2d 255, 267 
(7th Cir. 1981); Newburger, Loeb & Co., Inc. v. Gross, 563 F.2d 
1057, 1081-83 (2d Cir. 1977); Bradford v. New York Times Co., 501 
F.2d 51, 57-59 (2d Cir. 1974).
    \9\ Snap-On Tools Corp. v. Fed. Trade Comm'n, 321 F.2d 825, 837 
(7th Cir. 1963).
---------------------------------------------------------------------------

    The NPRM announced today conflicts not only with the Seventh 
Circuit's holding, but also with several hundred years of precedent. 
With all due respect to the majority, I am dubious that three unelected 
technocrats \10\ have somehow hit upon the right way to think about 
non-competes, and that all the preceding legal minds to examine this 
issue have gotten it wrong. The current rulemaking record does not 
convince me otherwise.
---------------------------------------------------------------------------

    \10\ This characterization is not an insult, but a fact. I, too, 
am an unelected technocrat.
---------------------------------------------------------------------------

I. Non-Compete Agreements--the First Application of the Section 5 
Policy Statement

    The proposed Non-Compete Clause Rule ``would provide that it is an 
unfair method of competition--and therefore a violation of Section 5--
for an employer to enter into or attempt to enter into a non-compete 
clause with a worker; [or] to maintain with a worker a non-compete 
clause . . .'' \11\ The proposed ban on non-compete clauses is based 
only on alleged violations of Section 5 of the FTC Act; it is not 
premised on the illegality of non-compete clauses under the Sherman or 
Clayton Acts.
---------------------------------------------------------------------------

    \11\ NPRM Part I.
---------------------------------------------------------------------------

    When the Commission issued the Policy Statement Regarding the Scope 
of Unfair Methods of Competition Under Section 5 of the Federal Trade 
Commission Act (``Policy Statement'') in November 2022, I warned that 
the approach described by the Policy Statement would enable the 
Commission majority to condemn conduct it disfavors, even when that 
conduct repeatedly has been found lawful.\12\ I predicted that the 
approach to Section 5 enforcement contained in the Policy Statement 
would facilitate expansive enforcement, often without requiring 
evidence of anticompetitive effects. And I cautioned that subjects of 
investigations would not be able to defend their conduct because 
procompetitive justifications would not be credited. The Non-Compete 
Clause Rule NPRM provides a graphic illustration of these concerns.
---------------------------------------------------------------------------

    \12\ See Christine S. Wilson, Comm'r, Fed. Trade Comm'n, 
Dissenting Statement Regarding the ``Policy Statement Regarding the 
Scope of Unfair Methods of Competition Under Section 5 of the 
Federal Trade Commission Act'' (Nov. 10, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyWilsonDissentStmt.pdf.
---------------------------------------------------------------------------

A. The NPRM's Determination That Non-Compete Clauses Are Unfair
    The NPRM states that there are 3 independent ways for classifying 
non-compete clauses as an ``unfair'' method of competition.\13\ In 
November, I objected to the enforcement approach described in the 
Section 5 Policy Statement--specifically, permitting the Commission 
majority to condemn conduct merely by selecting and assigning to 
disfavored conduct one or more adjectives from a nefarious-sounding 
list.\14\ Here, two of the three explanations the Commission provides 
for concluding that non-compete clauses are unfair rely on invocation 
of the adjectives ``exploitive and coercive.'' \15\ The third 
explanation for the illegality of non-compete clauses demonstrates how 
little evidence the majority requires to conclude that conduct causes 
harm.
---------------------------------------------------------------------------

    \13\ NPRM Part IV.A.1.
    \14\ See Wilson, supra note 12.
    \15\ The Policy Statement claimed that determinations of 
unfairness would be based on a sliding scale. Here, the NPRM 
identifies independent ways to determine that non-compete clauses 
are unfair; no sliding scale is applied.
---------------------------------------------------------------------------

    According to the NPRM, ``non-compete clauses are exploitive and 
coercive at the time of contracting.'' \16\ The NPRM explains that the 
``clauses for workers other than senior executives are exploitive and 
coercive because they take advantage of unequal bargaining power[.]'' 
\17\ The business community will be surprised to learn that ``unequal 
bargaining power'' can lead to a conclusion that any negotiated outcome 
may be condemned as ``exploitive and coercive,'' which then can be 
parlayed into a finding that the conduct violates Section 5. Indeed, 
this assertion is particularly troubling not merely because it presages 
an approach that is literally limitless, but also because the imbalance 
of bargaining power, as in this setting, arises wholly apart from any 
conduct by the business.\18\ The reader may note that the NPRM cites 
legal decisions to support the assignment of adjectives. Yet, a careful 
reading of the courts' discussions of the imbalance of bargaining power 
between employers and employees reveals that while the imbalance may 
provide a reason to scrutinize non-compete clauses, it is not used to 
condemn or invalidate them.\19\ Remarkably, in each case cited in 
footnote 253 of the NPRM, the court found the non-compete clauses to be 
enforceable.
---------------------------------------------------------------------------

    \16\ NPRM Part IV.A.1.b The NPRM explains that this conclusion 
does not apply to senior executives and also seeks comment on 
whether there is a broader category of highly paid or highly skilled 
employees for whom the conclusion is inappropriate. Id.
    \17\ Id.
    \18\ According to the NPRM, unequal bargaining power arises 
because employees depend on job income to pay bills, job searches 
entail significant transaction costs, the prevalence of unions has 
declined, employers outsource firm functions, employers have more 
experience negotiating because they have multiple employees, 
employees typically do not hire lawyers to negotiate agreements, and 
employees may not focus on the terms of their contracts. Id.
    \19\ See Alexander & Alexander, Inc. v. Danahy, 488 NE2d 22, 29 
(Mass. App. Ct. 1986) (finding injunction to enforce non-compete 
agreement proper); Diepholz v. Rutledge, 659 NE 989, 991 (Ill. Ct. 
App. 1995) (finding non-compete agreement enforceable, but also 
finding no violation of terms of non-compete agreement); Palmetto 
Mortuary Transp., Inc. v. Knight Sys., Inc., 818 SE2d 724, 731 (S.C. 
2018) (finding non-compete agreement enforceable).
---------------------------------------------------------------------------

    Next, the NPRM finds that ``non-compete clauses are exploitive and 
coercive at the time of the worker's potential departure from the 
employer[.]'' \20\ The NPRM reaches this conclusion regardless of 
whether the clauses are enforced. This conclusion is

[[Page 3542]]

contrary to legal precedent, which requires enforcement of non-compete 
provisions before finding harm.\21\
---------------------------------------------------------------------------

    \20\ NPRM Part IV.A.1.c. Again, the NPRM explains that this 
conclusion does not apply to senior executives and also invites 
comments on whether there is a broader category of highly paid or 
highly skilled employees for whom the conclusion is inappropriate. 
Id.
    \21\ See, e.g., O'Regan v. Arbitration Forums, Inc., 121 F.3d 
1060, 1065-66 (7th Cir. 1997) (``to apply antitrust laws to 
restrictive employment covenants, there must be some attempted 
enforcement of an arguably overbroad portion of the covenant in 
order for there to be a federal antitrust violation.''); Lektro-Vend 
Corp. v. Vendo Co., 660 F.2d 255, 267 (7th Cir.1981) (``a section 1 
violation requires proof that the defendant knowingly enforced the 
arguably overbroad section of the ancillary noncompetition 
covenant'').
---------------------------------------------------------------------------

    Finally, the NPRM finds that ``non-compete clauses are restrictive 
conduct that negatively affects competitive conditions.'' \22\ Although 
this basis for concluding that non-compete provisions are unfair does 
not rely solely on the selection of an adjective, here, the NPRM 
demonstrates how little evidence the majority requires before finding 
that conduct is unfair pursuant to the Section 5 Policy Statement.
---------------------------------------------------------------------------

    \22\ NPRM Part IV.A.1.a.
---------------------------------------------------------------------------

    Until yesterday, the Commission had announced no cases (and 
therefore had no experience and no evidence) to conclude that non-
compete clauses harm competition in labor markets. In fact, the only 
litigated FTC case challenging a non-compete clause found that a non-
compete provision covering franchise dealers did not violate Section 5 
of the FTC Act.\23\ Notably, the NPRM omits any reference to this case. 
The Commission has accepted settlements regarding non-compete clauses 
in contracts between businesses,\24\ but the majority itself has 
distinguished those cases from non-compete clauses in labor 
contracts.\25\ And in those B2B cases, the non-compete clauses were 
associated with the sale of a business, a situation that falls within 
the narrow exception to the ban provided in the proposed Non-Compete 
Clause Rule.
---------------------------------------------------------------------------

    \23\ See Snap-On Tools Corp. v. Fed. Trade Comm'n, 321 F.2d at 
837.
    \24\ See ARKO Corp., FTC File No. 211-0187, https://www.ftc.gov/system/files/ftc_gov/pdf/2110087C4773ArkoExpressComplaint.pdf (Aug. 
5, 2022); DTE Energy Co., FTC File No. 191-0068, https://www.ftc.gov/system/files/documents/cases/191_0068_c-4691_dte-enbridge_complaint.pdf. (Dec. 13, 2019).
    \25\ See Lina M. Khan, Chair, Fed. Trade Comm'n, Joined by 
Rebecca Kelly Slaughter and Alvaro M. Bedoya, Comm'rs, Fed. Trade 
Comm'n, Statement regarding In the Matter of ARKO Corp./Express 
Stop, https://www.ftc.gov/system/files/ftc_gov/pdf/2110187GPMExpressKhanStatement.pdf (June 10, 2022) (distinguishing 
non-compete clauses in labor contracts and effects on workers from 
non-compete clause in merger agreement where both parties remain in 
market).
---------------------------------------------------------------------------

    Just yesterday, though, the Commission rushed out the announcement 
of three consent agreements that resolve allegations that non-compete 
provisions constitute an unfair method of competition.\26\ The first 
consent involves security guard services, and the other two involve the 
manufacturing of glass containers. These consents undoubtedly were 
designed to support assertions that the FTC now has experience with 
non-compete agreements in employee contracts. But even a cursory read 
of the complaints reveals the diaphanous nature of this ``experience.''
---------------------------------------------------------------------------

    \26\ On December 28, 2022, the Commission voted to accept for 
public comment three consent agreements involving non-compete 
agreements. For two of those matters, the Commission vote occurred 
less than a week after the Commission received the papers. See 
Ardagh Glass Group S.A., File No. 211-0182, https://www.ftc.gov/system/files/ftc_gov/pdf/2110182ardaghacco.pdf (Jan. 4, 2023) 
(Agreement Containing Consent Order (signatures dated Dec. 21, 
2022)).
---------------------------------------------------------------------------

    Remarkably, none of these cases provides evidence showing the 
anticompetitive effects of non-compete clauses beyond the conclusory 
allegations in the complaints. The complaints in the glass container 
industry assert that non-compete provisions may prevent entry or 
expansion by competitors, but contain no allegations regarding firms 
that have tried unsuccessfully to obtain personnel with industry-
specific skills and experience.\27\ Regarding the effects on employees, 
the complaints make no allegations that the non-compete clauses were 
enforced by respondents \28\ and the Analysis to Aid Public Comment 
accompanying the consent agreements points only to studies not tied to 
the glass container industry. These cases provide no evidence that the 
non-compete provisions limited competition for employees with industry-
specific expertise, thereby lowering wages or impacting job quality. 
Similarly, in the case against Prudential Security, Inc.,\29\ the 
complaint alleges that individual former employees were limited in 
their ability to work for other firms in the security guard 
industry,\30\ but contain no allegations that the firm's non-compete 
provisions had market effects on wages or effects in a properly defined 
market for security guard services.
---------------------------------------------------------------------------

    \27\ See O-I Glass, Inc., File No. 211-0182, https://www.ftc.gov/system/files/ftc_gov/pdf/2110182o-iglasscomplaint.pdf 
(Jan. 4, 2023) (complaint ]] 6, 8); Ardagh Glass Group S.A., File 
No. 211-0182, https://www.ftc.gov/system/files/ftc_gov/pdf/2110182ardaghcomplaint.pdf (Jan. 4, 2023) (complaint ]] 6, 8).
    \28\ See Wilson, Dissenting Statement regarding In the Matter of 
O-I Glass, Inc. and In the Matter of Ardagh Glass Group S.A., supra 
note 4.
    \29\ Prudential Security, Inc., File No. 221-0026, https://www.ftc.gov/system/files/ftc_gov/pdf/2210026prudentialsecuritycomplaint.pdf (Dec. 28, 2022) (consent 
agreement accepted for public comment).
    \30\ Id. (complaint at ]] 23, 25).
---------------------------------------------------------------------------

    The NPRM also asserts FTC experience with non-compete provisions by 
pointing to Commission merger consent agreements that restrict the use 
of non-compete agreements. The complaints in those cases did not allege 
harm from non-compete clauses and the provisions in the consent 
agreements were included to ensure that the buyers of divestiture 
assets could obtain employees familiar with the assets and necessary 
for the success of the divestitures at issue.
    Finally, the NPRM claims Commission experience with non-compete 
agreements to support the Non-Compete Clause Rule from a Commission 
workshop in January 2020.\31\ But the NPRM fails to reflect the variety 
of views expressed during that workshop, including testimony that the 
economic literature is ``[s]till far from reaching a scientific 
standard for concluding [that non-compete agreements] are bad for 
overall welfare . . . Also [we] don't yet fully understand the 
distribution of effects on workers . . . Welfare tradeoffs are likely 
context-specific, and may be heterogeneous.'' \32\
---------------------------------------------------------------------------

    \31\ Fed. Trade Comm'n, Non-Competes in the Workplace: Examining 
Antitrust and Consumer Protection Issues, https://www.ftc.gov/news-events/events/2020/01/non-compete-clauses-workplace-examining-
antitrust-consumer-protection-issues.
    \32\ Kurt Lavetti, Economic Welfare Aspects of Non-Compete 
Agreements, Remarks at the Fed. Trade Comm'n Workshop on Non-Compete 
Clauses in the Workplace (Jan. 9, 2020), https://www.ftc.gov/system/files/documents/public_events/1556256/non-compete=workshop-slides.pdf.
---------------------------------------------------------------------------

    Indeed, the NPRM ignores that testimony and instead focuses on 
economic literature that purportedly demonstrates that non-compete 
clauses are unfair because they negatively affect competitive 
conditions. But an objective review of that literature reveals a mixed 
bag. For example, the first study described in the NPRM \33\ finds that 
``decreasing non-compete clause enforceability from the approximate 
enforceability level of the fifth-strictest state to that of the fifth-
most-lax state would increase workers' earnings by 3-4%.'' Yet, this 
study also finds that these effects vary strongly across different 
groups of individuals. For example, the authors find that 
``enforceability has little to no effect on earnings for non-college 
educated workers'' and instead find that enforceability primarily 
impacts college-educated workers. Similarly, it finds that strict non-
compete clause enforceability has very different effects for different 
demographic groups: it has little to no effect on men, and much

[[Page 3543]]

larger effects on women and Black men and women. The NPRM interprets 
these differential effects as facts in favor of the Non-Compete Clause 
Rule, as it would diminish race and gender wage gaps, but there is no 
corresponding discussion of the Rule's effect on the wage gap based on 
education. An alternative interpretation of these findings is that the 
scientific literature is still muddled as to who is helped and who is 
harmed by non-compete clauses, and that it would be better for the 
Commission to tailor a rule to those settings where a scientific 
consensus exists.
---------------------------------------------------------------------------

    \33\ Matthew S. Johnson, Kurt Lavetti, & Michael Lipsitz, The 
Labor Market Effects of Legal Restrictions on Worker Mobility 2, 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3455381 (2020).
---------------------------------------------------------------------------

    Similarly, the NPRM often bases its conclusions about the effects 
of non-compete clauses on limited support. For example, the NPRM 
contends that increased enforceability of non-compete clauses increases 
consumer prices. Yet, under the current record, this conclusion is 
based on only one study in healthcare markets and another study that 
considers the relationship between non-compete clauses and 
concentration.\34\ The NPRM does not provide a basis to conclude that 
findings with respect to the market for physicians and healthcare are 
generalizable, instead acknowledging that no comparable evidence exists 
for other markets.\35\ Also, the study that considers the effects of 
non-compete clauses on concentration does not draw conclusions about 
prices; the NPRM's conclusion that non-compete provisions lead to 
higher prices requires assumptions about a relationship between 
concentration and prices. Moreover, the NPRM omits studies showing that 
reducing the enforceability of non-compete restrictions leads to higher 
prices for consumers. A study by Gurun, Stoffman, and Yonker finds that 
an agreement not to enforce post-employment restrictions among 
financial advisory firms that were members of the Broker Protocol led 
brokers to depart their firms, and consumers to follow their brokers, 
at high rates. The study found, however, that clients of firms in the 
Broker Protocol paid higher fees and experienced higher levels of 
broker misconduct.\36\ In other words, suspending non-competes resulted 
in higher prices and a decrease in the quality of service provided. 
These unintended consequences illustrate the inevitably far-reaching 
and unintended consequences that today's NPRM will visit upon 
employees, employers, competition, and the economy.
---------------------------------------------------------------------------

    \34\ NPRM Part II.B.2.a.
    \35\ NPRM Part VII.B.2.c.
    \36\ Umit G. Gurun, Noah Stoffman, & Scott E. Yonker, Unlocking 
Clients: The Importance of Relationships in the Financial Advisory 
Industry, 141 J. Fin. Econ. 1218 (2021).
---------------------------------------------------------------------------

B. The NPRM's Treatment of Business Justifications
    The NPRM explains that ``the additional incentive to invest (in 
assets like physical capital, human capital, or customer attraction, or 
in the sharing of trade secrets and confidential commercial 
information) is the primary justification for use of non-compete 
clauses.'' \37\
---------------------------------------------------------------------------

    \37\ NPRM Part II.B.2.e.
---------------------------------------------------------------------------

    It acknowledges that ``there is evidence that non-compete clauses 
increase employee training and other forms of investment,'' \38\ and 
describes two studies demonstrating that increased non-compete clause 
enforceability increased firm-provided training and investment.\39\ It 
also describes studies that examine non-compete clause use and 
investment.\40\ Despite the studies, the NPRM concludes, ``the evidence 
that non-compete clauses benefit workers or consumers is scant.'' \41\ 
In other words, the NPRM treats asymmetrically the evidence of harms 
(mixed evidence given great credence) and benefits (robust evidence 
given no credence). These early examples of cherry-picking evidence 
that conforms to the narrative provide little confidence in the 
integrity of the rulemaking process or the ultimate outcome.
---------------------------------------------------------------------------

    \38\ Id.
    \39\ Evan Starr, Consider This: Training, Wages, and the 
Enforceability of Non-Compete Clauses, 72 I.L.R. Rev. 783, 799 
(2019) (moving from mean non-compete enforceability to no non-
compete clause enforceability would decrease the number of workers 
receiving training by 14.7% in occupations that use non-compete 
clauses at a high rate); Jessica Jeffers, The Impact of Restricting 
Labor Mobility on Corporate Investment and Entrepreneurship 22 
(2019), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3040393 
(knowledge-intensive firms invest 32% less in capital equipment 
following decreases in the enforceability of non-compete clauses).
    \40\ Matthew S. Johnson & Michael Lipsitz, Why Are Low-Wage 
Workers Signing Noncompete Agreements?, 57 J. Hum. Res. 689, 700 
(2022) (finding firms that use non-compete clauses in hair salon 
industry train employees at 11% higher rate and increase investment 
in particular customer-attraction device by 11%); Evan P. Starr, 
James J. Prescott, & Norman D. Bishara, Noncompete Agreements in the 
U.S. Labor Force, 64 J.L. & Econ. 53, 53 (2021) (finding no 
statistically significant impact on training and trade secrets from 
use of non-compete clauses, but unable to examine other types of 
investments).
    \41\ NPRM Part IV.B.3.
---------------------------------------------------------------------------

    Implicitly, though, the NPRM credits some business justifications 
for non-compete provisions. It excludes from the ban those non-compete 
clauses associated with the sale of a business, implicitly 
acknowledging that these non-compete clauses are necessary to protect 
the goodwill of the transferred business. Also, the NPRM likely credits 
business justifications when it seeks comment on whether senior 
executives should be covered by the rule. Nonetheless, on its face, the 
NPRM expressly discounts business justifications and makes no effort to 
distinguish and determine circumstances where investment incentives are 
important.
    The NPRM also discounts procompetitive business justifications by 
asserting that trade secret law, non-disclosure agreements, and other 
mechanisms can be used to protect firm investments. While the NPRM 
explains that these mechanisms may protect investments, the existing 
record provides no evidence that these mechanisms are effective 
substitutes for non-compete agreements.\42\ The NPRM cites no instances 
where these mechanisms have been used effectively in lieu of non-
compete clauses, even though natural experiments exist and could be 
studied (e.g., when states have changed the enforceability of non-
compete clauses). ``[M]erely identifying alternative mechanisms to 
solve a potential employee investment problem does not provide . . . 
guidance as to which mechanism achieves the objective at the lowest 
social cost.'' \43\ Moreover, the NPRM's observation that firms 
successfully operate in states where non-compete clauses are not 
enforceable is unpersuasive; the NPRM offers no meaningful cross-state 
comparisons and the observation does not show that firms and 
competition are equally or even more successful in those states than in 
states where non-compete clauses are permissible.
---------------------------------------------------------------------------

    \42\ There is a limited literature regarding the efficacy of 
trade secret protection and non-disclosure agreements. See Jie Gong 
& I.P.L. Png, Trade Secrets Law and Inventory Efficiency: Empirical 
Evidence from U.S. Manufacturing, https://ssrn.com/abstract=2102304 
(July 8, 2012) (investigating effects of operational know-how 
information spillovers under various levels of enforcement of trade 
secret law).
    \43\ Camila Ringeling, Joshua D. Wright, et. al, Noncompete 
Clauses Used in Employment Contracts, Comment of the Global 
Antitrust Institute 6 (Feb. 7, 2020), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3534374.
---------------------------------------------------------------------------

II. The Proposed Non-Compete Clause Rule Will Trigger Numerous and 
Likely Successful Legal Challenges Regarding the Commission's Authority 
To Issue the Rule

    This section describes the numerous, and meritorious, legal 
challenges that undoubtedly will be launched against the Non-Compete 
Clause Rule. Defending these challenges will entail lengthy litigation 
that will consume

[[Page 3544]]

substantial staff resources. I anticipate that the Rule will not 
withstand these challenges, so the Commission majority essentially is 
directing staff to embark on a demanding and futile effort. In the face 
of finite and scarce resources, this NPRM is hardly the best use of FTC 
bandwidth.
    There are numerous paths for opponents to challenge the 
Commission's authority to promulgate the Non-Compete Clause Rule. 
First, I question whether the FTC Act provides authority for 
competition rulemaking. The NPRM states that the Commission proposes 
the Non-Compete Clause Rule pursuant to Sections 5 and 6(g) of the FTC 
Act. Section 6(g) of the FTC Act authorizes the Commission to ``make 
rules and regulations for the purpose of carrying out the provisions of 
the subchapter'' where Section 6(g) otherwise provides that the 
Commission may ``from time to time classify corporations.'' \44\ 
Section 6(g) was believed to provide authority only for the Commission 
to adopt the Commission's procedural rules. For decades, consistent 
with the statements in the FTC Act's legislative history, Commission 
leadership testified before Congress that the Commission lacked 
substantive competition rulemaking authority.\45\
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 46(g). Section 6 of the FTC Act provides
    Sec.  46. Additional powers of Commission
    The Commission shall also have power . . .
    (g) Classification of corporations; regulations
    From time to time classify corporations and (except as provided 
in section 57a(a)(2) of this title) to make rules and regulations 
for the purpose of carrying out the provisions of this subchapter.
    \45\ See Nat'l Petroleum Ref'rs Ass'n v. FTC, 482 F.2d 672, 696 
nn. 38, 39 (D.C. Cir. 1973). See also Noah Joshua Phillips, Against 
Antitrust Regulation, American Enterprise Institute Report 3, 
https://www.aei.org/research-products/report/against-antitrust-regulation/ (Oct. 13, 2022) (``[T]he Conference Committee 
[considering legislation that created the Federal Trade Commission] 
was between two bills, neither of which contemplated substantive 
rulemaking. . . . The legislative history does not demonstrate 
congressional intent to give the FTC substantive rulemaking power: 
The House considered and rejected it, the Senate never proposed it, 
and neither the Conference Committee's report nor the final debates 
mentioned it.''); 51 Cong. Rec. 12916 (1914), reprinted in The 
Legislative History of the Federal Antitrust Laws and Related 
Statutes 4368 (Earl W. Kintner ed., 1982) statement of Sen. Cummins) 
(``[I]f we were to attempt to go further in this act and to give the 
commission the authority to prescribe a code of rules governing the 
conduct of the business men of this country for the future, we would 
clash with the principle that we can not confer upon the commission 
in that respect legislative authority; but we have not made any such 
attempt as that, and no one proposes any attempt of that sort.''); 
id. at 14932, reprinted in The Legislative History of the Federal 
Antitrust Laws and Related Statutes 4732 (Earl W. Kintner ed., 1982) 
(statement of Rep. Covington) (``The Federal trade commission will 
have no power to prescribe the methods of competition to be used in 
the future. In issuing orders it will not be exercising power of a 
legislative nature . . . The function of the Federal trade 
commission will be to determine whether an existing method of 
competition is unfair, and, it is finds it to be unfair, to order 
the discontinuance of its use. In doing this it will exercise power 
of a judicial nature.''); id. at 13317, reprinted in The Legislative 
History of the Federal Antitrust Laws and Related Statutes 4675 
(Earl W. Kintner ed., 1982) (statement of Sen Walsh) (``We are not 
going to give to the trade commission the general power to regulate 
and prescribe rules under which the business of this country shall 
in the future be conducted; we propose simply to give it the power 
to denounce as unlawful a particular practice that is pursued by 
that business.'').
---------------------------------------------------------------------------

    Ignoring this history, the Commission embarked on a substantive 
rulemaking binge in the 1960s and 1970s.\46\ The vast majority of these 
substantive rules pertained to consumer protection issues. Only one 
substantive rule was grounded solely in competition; \47\ that rule was 
not enforced and subsequently was withdrawn.\48\ Another substantive 
rule was grounded in both competition and consumer protection 
principles, and prompted a federal court challenge. There, the D.C. 
Circuit in 1973 held in National Petroleum Refiners \49\ that the FTC 
did have the power to promulgate substantive rules.
---------------------------------------------------------------------------

    \46\ See Timothy J. Muris & Howard Beales, III, The Limits of 
Unfairness Under the Federal Trade Commission Act 13 (1991).
    \47\ FTC Men's and Boy's Tailored Clothing Rule, 16 CFR 412 
(1968).
    \48\ Notice of Rule Repeal, 59 FR 8527 (1994).
    \49\ Nat'l Petroleum Ref'rs Ass'n v. FTC, 482 F.2d 672 (D.C. 
Cir. 1973).
---------------------------------------------------------------------------

    Two years later, however, Congress enacted the Magnuson-Moss 
Act,\50\ which required substantive consumer protection rules to be 
promulgated with heightened procedural safeguards under a new Section 
18 of the FTC Act. Notably, the Magnuson-Moss Act expressly excluded 
rulemaking for unfair methods of competition from Section 18. FTC 
Chairman Miles Kirkpatrick (1970-73) explained that it was not clear 
whether Congress in the Magnuson-Moss Act sought to clarify existing 
rulemaking authority or to grant substantive rulemaking authority to 
the FTC for the first time.\51\ If the latter, then the FTC only has 
substantive consumer protection rulemaking power, and lacks the 
authority to engage in substantive competition rulemaking. This 
uncertainty about the language of the statute will be a starting point 
for challenges of the Non-Compete Clause Rule.
---------------------------------------------------------------------------

    \50\ Magnuson-Moss Warranty--Federal Trade Commission 
Improvement Act, Public Law 93-637, 88 Stat. 2183 (1975).
    \51\ See Miles W. Kirkpatrick, FTC Rulemaking in Historical 
Perspective 48 Antitrust L.J. 1561, 1561 (1979) (``One of the most 
important aspects of the Magnuson-Moss Act was its granting, or 
confirmation, depending upon your reading of the law at that time, 
of the FTC's rulemaking powers.'').
---------------------------------------------------------------------------

    Second, the Commission's authority for the Rule likely will be 
challenged under the major questions doctrine, which the Supreme Court 
recently applied in West Virginia v. EPA.\52\ Under the major questions 
doctrine, ``where a statute . . . confers authority upon an 
administrative agency,'' a court asks ``whether Congress in fact meant 
to confer the power the agency has asserted.'' \53\ The Supreme Court 
explained in West Virginia v. EPA that an agency's exercise of 
statutory authority involved a major question where 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.'' \54\
---------------------------------------------------------------------------

    \52\ West Virginia v. EPA, 142 S. Ct. 2587 (2022).
    \53\ Id. at 2608.
    \54\ Id.
---------------------------------------------------------------------------

    Challengers will ask a court to determine whether today's NPRM 
constitutes a major question. Using Justice Gorsuch's concurrence as a 
guide, agency action will trigger the application of the major 
questions doctrine if the agency claims, among other things, the power 
to (1) resolve a matter of great political significance, (2) regulate a 
significant portion of the American economy, or (3) intrude in an area 
that is the particular domain of state law.\55\ First, the regulation 
of non-compete clauses is a question of political significance; 
Congress has considered and rejected bills significantly limiting or 
banning non-competes on numerous occasions,\56\ a strong indication 
that the Commission is trying to ``work around'' the legislative 
process to resolve a question of political significance.\57\ Second, 
the Rule proposes to regulate a significant portion of the American 
economy through a ban on non-competes. According to the NPRM, the 
``Commission estimates that approximately one in five American 
workers--or approximately 30 million workers--is bound by a non-compete 
clause.\58\ Thus, the Non-Compete Clause Rule indisputably will negate 
millions of private contractual agreements and impact employer/employee 
relationships in a wide variety of

[[Page 3545]]

industries across the United States. Third, regulation of non-compete 
agreements has been the particular domain of state law. As the NPRM 
explains, 47 states permit non-competes in some capacity, while three 
states have chosen to prohibit them entirely, and state legislatures 
have been active in this area recently.\59\
---------------------------------------------------------------------------

    \55\ Id. at 2600-01 (Gorsuch, J. concurring).
    \56\ Russell Beck, A Brief History of Noncompete Regulation, 
Fair Competition Law (Oct. 11, 2021), https://faircompetitionlaw.com/2021/10/11/a-brief-history-of-noncompete-regulation/.
    \57\ West Virginia v. EPA, 142 S.Ct. at 2600 (Gorsuch, J. 
concurring).
    \58\ NPRM Part II.B.1.a.
    \59\ Id. Part II.C.1.
---------------------------------------------------------------------------

    If a court were to conclude that the Non-Compete Clause Rule is a 
major question, the FTC would be required to identify clear 
Congressional authorization to impose a regulation banning non-compete 
clauses. Yet, as discussed above, that clear authorization is 
unavailable. The language in Section 6(b) is far from clear, and 
largely discusses the Commission's classification of corporations. I do 
not believe that Congress gave the FTC authority to enact substantive 
rules related to any provision of the FTC Act using this ``oblique'' 
and unclear language. In addition, the decision by Congress to omit 
unfair methods of competition rulemaking in the Magnuson-Moss Act, 
which immediately followed the decision in National Petroleum Refiners, 
is additional evidence that Congress has not clearly authorized the FTC 
to make competition rules that may have significant political or 
economic consequences. Moreover, Congress did not remove the known 
ambiguity when it enacted the FTC Improvements Act of 1980.\60\
---------------------------------------------------------------------------

    \60\ See H.R. Rep. No. 96-917, 96th Cong., 2d sess. 29-30 
(1980), reprinted in The Legislative History of the Federal 
Antitrust Laws and Related Statutes 5862 (Earl W. Kintner ed., 1982) 
(conference report on FTC Improvements Act of 1980 explaining that 
when adopting a restriction on standards and certification 
rulemaking brought as an unfair or deceptive act or practice, 
conferees were not taking a position on the Commission's authority 
to issue a trade regulation rule defining `unfair methods of 
competition' pursuant to section 6(g). ``The substitute leaves 
unaffected whatever authority the Commission might have under any 
other provision of the FTC Act to issue rules with respect to 
`unfair methods of competition.' '').
---------------------------------------------------------------------------

    Third, the authority for the Non-Compete Clause Rule may be 
challenged under the non-delegation doctrine. The doctrine is based on 
the principle that Congress cannot delegate its legislative power to 
another branch of government, including independent agencies.\61\
---------------------------------------------------------------------------

    \61\ Five Supreme Court justices have expressed interest in 
reconsidering the Court's prior thinking on the doctrine, which 
increases the risk that a challenge may be successful. See Gundy v. 
United States, 139 S. Ct. 2116, 2131 (2019) (Alito, J. concurring) 
(stating with respect to the nondelegation doctrine that ``[i]f a 
majority of this Court were willing to reconsider the approach we 
have taken for the past 84 years, I would support that effort''); 
id. at 2131 (Gorsuch, J., dissenting, joined by Chief Justice 
Roberts and Justice Thomas) (expressing desire to ``revisit'' the 
Court's approach to the nondelegation doctrine); Paul v. United 
States, 140 S. Ct. 342, 342 (2019) (statement of Kavanaugh, J, 
respecting the denial of certiorari); Amy Coney Barrett, Suspension 
and Delegation, 99 Cornell L. Rev. 251, 318 (2014).
---------------------------------------------------------------------------

    Since the 1920s, the Supreme Court has found that Congress has not 
made an improper delegation of legislative power so long as Congress 
has set out ``an intelligible principle to which the person or body 
authorized to fix [rules] is directed to conform.'' \62\ Applying this 
principle in Schechter Poultry,\63\ the Supreme Court approved 
Congressional authorization for the FTC to prohibit unfair methods of 
competition, relying on the Commission's administrative enforcement 
proceedings where the Commission acts as ``a quasi judicial body'' and 
that ``[p]rovision was made for formal complaint, for notice and 
hearing, for appropriate findings of fact supported by adequate 
evidence, and for judicial review . . .'' \64\ The Court simultaneously 
found that provisions of the National Industrial Recovery Act to issue 
``codes of fair competition'' were improper delegations of legislative 
power, distinguishing the impermissibly broad fair competition codes 
from the FTC Act's approach to address unfair methods of competition 
that are ``determined in particular instances, upon evidence, in light 
of particular competitive conditions[.]'' \65\
---------------------------------------------------------------------------

    \62\ J.W. Hampton, Jr., & Co. v. United States, 276 U.S. 394, 
409 (1928).
    \63\ A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 
495 (1935).
    \64\ Id. at 533.
    \65\ Id.
---------------------------------------------------------------------------

    Notably, the Commission's proposed ban on non-compete clauses 
abandons the Commission's procedures that led the Supreme Court in 
Schechter Poultry to find that the Commission's enforcement of ``unfair 
methods of competition'' does not constitute an improper delegation of 
legislative power. In addition, to the extent that the Commission's 
Section 5 Policy Statement (which provides the basis for determining 
that non-compete clauses are an unfair method of competition) abandons 
the consumer welfare standard to pursue multiple goals, including 
protecting labor, the Commission's action more closely resembles the 
National Industrial Recovery Act codes that also sought to implement 
multiple goals under the guise of codes of fair competition.

III. Comments Are Encouraged

    The NPRM invites public comment on many issues. I strongly 
encourage the submission of comments from all interested stakeholders. 
After all, unlike rulemaking for consumer protection rules under the 
Magnuson-Moss process, this is likely the only opportunity for public 
input before the Commission issues a final rule. For this reason, it is 
important for commenters to address the proposed alternatives to the 
near-complete ban on non-compete provisions. To the extent that the 
NPRM proposes alternatives to the current proposed rule, if the 
Commission were subsequently to adopt one of the alternatives, which 
would be a logical outgrowth of the current proposed rulemaking,\66\ 
there would be no further opportunity for public comment. Moreover, the 
Commission believes that if it were to adopt alternatives that 
differentiate among categories of workers, the various rule provisions 
would be severable if a court were to invalidate one provision. 
Consequently, it is important for the public to address each of the 
alternatives proposed in the NPRM because the comment period on the 
proposed rule is the only opportunity for public input on those 
alternatives.
---------------------------------------------------------------------------

    \66\ See Owner-Operator Indep. Drivers Ass'n v. Fed. Motor 
Carrier Safety Admin., 494 F.3d 188, 210 (D.C. Cir. 2007); see also 
Agape Church, Inc. v. FCC, 738 F.3d 397, 412 (2013) (holding that 
FCC ``sunset'' rule was a logical outgrowth when proposed rule gave 
public notice that a viewability rule was in danger of being phased 
out, i.e., a sunset provision).
---------------------------------------------------------------------------

    In addition to the issues for which the NPRM invites comments, I 
encourage stakeholders to address the following points:
     The NPRM references some academic studies regarding non-
competes. What other academic literature addresses the issues in the 
NPRM, including the procompetitive justifications for non-compete 
provisions?
     The NPRM describes papers that exploit natural experiments 
to estimate the effects of enforcing non-compete clauses. While this 
approach ensures that the estimates are internally valid, it reflects 
the causal effects of non-compete agreements only in the contexts 
within which they are estimated. What should the Commission consider to 
understand whether and when these estimates are externally valid? How 
can the Commission know that the estimates calculated from the contexts 
of the literature are representative of the contexts outside of the 
literature?
     The NPRM draws conclusions based on ``the weight of the 
literature,'' but the literature on the effects of non-compete 
agreements is limited, contains mixed results, and is sometimes 
industry-specific. Which conclusions in the NPRM are supported by the 
weight

[[Page 3546]]

of the literature? Which conclusions in the NPRM contradict the weight 
of the literature? Which conclusions in the NPRM require additional 
evidence before they can be considered substantiated?
     Where the evidence provided in the NPRM is limited, is the 
evidence sufficient to support either the proposed ban on non-compete 
clauses or the proffered alternative approaches to the proposed ban?
     What are the benefits and drawbacks of the currently 
proposed ban compared to the proposed alternative rule that would find 
a presumption of unlawfulness, including the role of procompetitive 
justifications in rebutting a presumption?

[FR Doc. 2023-00414 Filed 1-18-23; 8:45 am]
BILLING CODE 6750-01-P