The FTC’s Proposed Rule Banning Worker Noncompetes

With Republican Kevin McCarthy just installed as House Speaker after a raucous fifteen ballots, it looks as if our new 118th Congress is broken on arrival. We can look forward to fruitless partisan investigations, pointless angry “debates,” and attempts to extort the Dems by playing “chicken” with government funding and the debt ceiling. In short, we can expect from Congress a steady stream of performative politics—anything but solid governing and sensible legislation.

But does this mean our entire government is dead in the water for two years? I think not. Action by the President, the Senate and federal agencies is still possible, even likely. One of the most important actions will be finalizing the FTC’s proposed rule outlawing forced, routine noncompete agreements for workers.

The FTC has proposed such a ban in the press. But it has not yet proposed the Rule formally, for comment, in the Federal Register, the official US government repository of all pending and final Federal Rules. If the Rule becomes final, it will go a long way toward reversing a dismal trend in private employment contracting, under which many workers have become more like serfs than free agents.

Anyone can submit comments within sixty days after the proposed Rule is published in the Federal Register. What follows is a draft of my own proposed comment. I invite readers to comment on and improve it (but please be brief!). I intend to submit it formally soon after the proposed Rule is formally published for comment.

If adopted in final form as reported, the proposed Rule might be one of the most consequential products of the Biden Administration during what looks to be a dismal next two years. At least it will visibly shift the balance of power between management and labor. And it does look likely to make it to the finish line after our Democratic Senate exercises its new majority to appoint a key Democrat to the FTC.

THE DRAFT COMMENT FOLLOWS:
This is an unusual comment. No one is paying me to write it, and I’m not an aggrieved or interested party, except philosophically. I’m a retired lawyer, once licensed in California, Hawaii and Ohio, and a retired law professor of some twenty-four years. I have a Ph.D. in physics, and I spent most of my law practice and teaching career specializing in intellectual property and so-called “high-tech law.” I used to teach entire courses on antitrust and trade secrets.

The best years of my legal practice were 1982 to 1986, when I worked in the heart of California’s Silicon Valley. There Section 16600 of the California Business & Professions Code outlawed noncompete agreements except (with limitations) in the sale of a business. So no Silicon-Valley employee, as such, had to sign one.

There was never a doubt in my or my colleagues’ minds that this ban was a vital source of Silicon Valley’s creativity, “high-tech” progress, and successful entrepreneurship. It let workers—from security guards, through skilled technicians, to the most advanced Ph.D.-level “knowledge workers”—secure their best futures. They could seek better pay, better on-the-job education, improved career prospects, new-business start ups, a chance to explore their own ideas and dreams, and better and more nurturing bosses.

As otherwise powerless workers moved up their individual career ladders and sought their highest and best uses, they made the Valley an industrial legend for decades. They embodied Thomas Jefferson’s tradition of a “yeomanry” of free and independent workers. That tradition, which had begun with free farmers, culminated (during my law career) with Andy Grove, Gordon Moore, and Robert Noyce, the founders of Intel Corp. and the principal authors of our uniquely American late-twentieth-century industrial revolution, the one involving personal computers.

This is not my view alone. A well-entrenched view in California’s Silicon Valley, consistent with technological history, holds that it was able to create the personal-computer revolution, and to wrest dominance of the computer industry from the minicomputer companies then thriving along Boston’s Route 128, largely by virtue of Massachusetts’ self-defeating enforcement of noncompetes in employment agreements. See https://www.vox.com/new-money/2017/2/13/14580874/google-self-driving-noncompetes.

In a leading antitrust case, Justice Thurgood Marshall condemned horizontal restraints on competition among members of a trade association. Along the way, he penned one of the most poignant (and accurate) descriptions of the human and economic significance of our antitrust laws:

“Antitrust laws in general, and the Sherman Act in particular, are the Magna Carta of free enterprise. They are as important to the preservation of economic freedom and our free enterprise system as the Bill of Rights is to the protection of our fundamental personal freedoms. And the freedom guaranteed each and every business, no matter how small, is the freedom to compete—to assert with vigor, imagination, devotion, and ingenuity whatever economic muscle it can muster.”

United States v. Topco Assocs., Inc., 405 U.S. 596, 610 (1972) (Marshall, J.)

Like all great Justices, Marshall was addressing the case before him. But he could just as well have been writing about individual workers, rather than the trade-association member businesses that had been colluding not to compete.

After all, a “business” or a “corporation” is just an abstraction: it can only operate, only do actual work, through its live employees. What is at stake in this regulation is a horizontal restraint on competition among businesses for employees, imposed on the workers themselves, as a routine matter, at the very moment they begin their employment, and sometimes their careers. That’s a far broader and more damaging horizontal restraint on competition and our economic system than the unusual anti-competitive collusion among members of a trade association at issue in Topco. So this regulation has justification bedrock-deep in the history and purpose of our antitrust laws.

Unfortunately, like tech workers, the well-paid corporate lawyers who advance the interests of corporate bosses seldom sleep. During my near-half-century career of law practice and teaching (I joined the California State Bar in 1978), they have undercut and undermined workers’ freedom in several vital ways, mostly involving boilerplate clauses in employment contracts of adhesion.

Not only have routine, boilerplate noncompete clauses—in states unlike California that don’t outlaw them—curtailed workers’ freedom of movement and advancement. Routine “nondisparagement” clauses have curtailed their freedom of speech, far more than does the law of defamation, which restricts only public speech that is false. Routine arbitration and no-class-action clauses have curtailed, if not abolished, workers’ access to the courts of law and equity—institutions of justice that have evolved at common law, in England and America, since Magna Carta. And routine no-class-action clauses have virtually abolished a brilliant late-twentieth-century legal innovation by which workers and customers once secured collective justice for wrongs and swindles that are too small to prosecute individually but that collectively net bosses millions (and therefore enjoy a strong monetary incentive to perpetrate and perpetuate).

It’s so easy to insert yet another oppressive boilerplate clause in a contract of employment or purchase and ask a man or woman to sign it, without the expectation or opportunity for negotiation, on that very first exciting day on the job, or on the day of purchase. Yet that’s precisely what American business has done. Step by step, it has sought to deprive the supposedly free citizens who work for it (and its customers!) of the freedom to manage their own careers, to seek another job that best uses their skills, to speak freely about their work and harm done them and the public (in non-defamatory ways, while protecting trade secrets), to resort to the Anglo-American legal system when they’ve been harmed, and to resort to class actions to redress small wrongs and swindles collectively.

No wonder many workers today seem on the verge of revolution! With simple, boilerplate clauses in contracts of adhesion, corporate lawyers and the law have squeezed out of them much the freedom, agency, self-determination, and consequent personal liberty that they once enjoyed. Justice Marshall, who so well understood the analogy between our antitrust laws and Magna Carta from which we derive all our liberties, would have been appalled.

So yes, by all means, outlaw the routine use of noncompete clauses in employment agreements nationwide, while still protecting the rights of businesses to secure their trade secrets. If departing employees divulge their erstwhile employer’s trade secrets unlawfully—whether to the next employer or to any other unauthorized person—the aggrieved employer already has ample recourse under the Uniform Trade Secrets Act in force in at least 47 states, as well as to criminal sanctions under the Economic Espionage Act of 1996, as amended, 18 U.S.C. Chapter 90. With such powerful sanctions available to deter and punish improper disclosure of real trade secrets, and with the universal custom of “exit interviews” to advise departing employees what not to disclose after departure, it makes little sense to drastically restrict workers’ freedom of employment, including their ability to start new businesses. It makes more sense to trust their discretion and the strong civil and criminal disincentives and remedies of existing trade-secret law.

As for employers’ mistakes and wrongs, including medical errors in hospitals, there is good reason not to treat them as trade secrets at all. See Part III of Jay Dratler, Jr., “IP and Health Care: New Drugs Pricing and Medical Mistakes,” University of Akron Intellectual Property Journal (March 2016), available online for free at https://ideaexchange.uakron.edu/akronintellectualproperty/vol7/iss1/1/. The notion that concealing mistakes and wrongs advances the type of competition that trade-secret law is designed to sustain proves too much. And the notion that concealing mistakes and wrongs benefits society is absurd.

But protecting employees’ freedom to work from boilerplate noncompete clauses in contracts of adhesion is just the tip of the iceberg. We still have boilerplate that purports to prevent workers from speaking truthfully, without defamation, about their bosses, their work, how they’ve been wronged, and how their employers may have harmed the public. Boilerplate still purports to keep workers from accessing the common-law and statutory protection and institutions of free Anglo-Americans since Magna Carta. And boilerplate still tries to suppress class actions that might address the small swindles that rankle.

All these things make our American workers today resemble modern serfs more than the “noble, free workers” of American history and legend. So the FTC will still have plenty of work to do. (For more on this vital modern theme, focusing on citizens as customers, rather than employees, see https://jaydiatribe.blogspot.com/2017/06/lawless-life-under-corporate-governance.html).

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