Federal Register, Volume 89 Issue 89 (Tuesday, May 7, 2024)

[Federal Register Volume 89, Number 89 (Tuesday, May 7, 2024)]
[Rules and Regulations]
[Pages 38342-38506]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-09171]

[[Page 38341]]

Vol. 89

Tuesday,

No. 89

May 7, 2024

Part III

Federal Trade Commission

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16 CFR Parts 910 and 912

Non-Compete Clause Rule; Final Rule

Federal Register / Vol. 89 , No. 89 / Tuesday, May 7, 2024 / Rules
and Regulations

[[Page 38342]]

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FEDERAL TRADE COMMISSION

16 CFR Parts 910 and 912

RIN 3084-AB74

Non-Compete Clause Rule

AGENCY: Federal Trade Commission.

ACTION: Final rule.

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SUMMARY: Pursuant to the Federal Trade Commission Act (``FTC Act''),
the Federal Trade Commission (``Commission'') is issuing the Non-
Compete Clause Rule (``the final rule''). The final rule provides that
it is an unfair method of competition for persons to, among other
things, enter into non-compete clauses (``non-competes'') with workers
on or after the final rule's effective date. With respect to existing
non-competes--i.e., non-competes entered into before the effective
date--the final rule adopts a different approach for senior executives
than for other workers. For senior executives, existing non-competes
can remain in force, while existing non-competes with other workers are
not enforceable after the effective date.

DATES: The final rule is effective September 4, 2024.

FOR FURTHER INFORMATION CONTACT: Benjamin Cady or Karuna Patel, Office
of Policy Planning, 202-326-2939 (Cady), 202-326-2510 (Patel), Federal
Trade Commission, 600 Pennsylvania Avenue NW, Mail Stop CC-6316,
Washington, DC 20580.

SUPPLEMENTARY INFORMATION:

I. Background

A. Summary of the Final Rule's Provisions

The Commission proposed the Non-Compete Clause Rule on January 19,
2023 pursuant to sections 5 and 6(g) of the FTC Act.\1\ Based on the
Commission's expertise and after careful review and consideration of
the entire rulemaking record--including empirical research on how non-
competes affect competition and over 26,000 public comments--the
Commission adopts this final rule addressing non-competes.
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\1\ Non-Compete Clause Rule, NPRM, 88 FR 3482 (Jan. 19, 2023)
(hereinafter ``NPRM'').
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The final rule provides that it is an unfair method of
competition--and therefore a violation of section 5--for employers to,
inter alia, enter into non-compete clauses with workers on or after the
final rule's effective date.\2\ The Commission thus adopts a
comprehensive ban on new non-competes with all workers.
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\2\ Sec. 910.2(a)(1)(i) and Sec. 910.2(a)(2)(i).
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With respect to existing non-competes, i.e., non-competes entered
into before the final rule's effective date, the Commission adopts a
different approach for senior executives \3\ than for other workers.
Existing non-competes with senior executives can remain in force; the
final rule does not cover such agreements.\4\ The final rule allows
existing non-competes with senior executives to remain in force because
this subset of workers is less likely to be subject to the kind of
acute, ongoing harms currently being suffered by other workers subject
to existing non-competes and because commenters raised credible
concerns about the practical impacts of extinguishing existing non-
competes for senior executives. For workers who are not senior
executives, existing non-competes are no longer enforceable after the
final rule's effective date.\5\ Employers must provide such workers
with existing non-competes notice that they are no longer
enforceable.\6\ To facilitate compliance and minimize burden, the final
rule includes model language that satisfies this notice requirement.\7\
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\3\ See Sec. 910.1 (defining ``senior executive'').
\4\ See Part IV.C.3.
\5\ Sec. 910.2(a)(1)(ii).
\6\ Sec. 910.2(b)(1).
\7\ Sec. 910.2(b)(4).
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The final rule contains separate provisions defining unfair methods
of competition for the two subcategories of workers. Specifically, the
final rule provides that, with respect to a worker other than a senior
executive, it is an unfair method of competition for a person to enter
into or attempt to enter into a non-compete clause; to enforce or
attempt to enforce a non-compete clause; or to represent that the
worker is subject to a non-compete clause.\8\ The Commission describes
the basis for its finding that these practices are unfair methods of
competition in Parts IV.B.1 through IV.B.3.
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\8\ Sec. 910.2(a)(1).
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The final rule provides that, with respect to a senior executive,
it is an unfair method of competition for a person to enter into or
attempt to enter into a non-compete clause; to enforce or attempt to
enforce a non-compete clause entered into after the effective date; or
to represent that the senior executive is subject to a non-compete
clause, where the non-compete clause was entered into after the
effective date.\9\ The Commission describes the basis for its finding
that these practices are unfair methods of competition in Part IV.C.2.
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\9\ Sec. 910.2(a)(2).
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The final rule defines ``non-compete clause'' as ``a term or
condition of employment that prohibits a worker from, penalizes a
worker for, or functions to prevent a worker from (1) seeking or
accepting work in the United States with a different person where such
work would begin after the conclusion of the employment that includes
the term or condition; or (2) operating a business in the United States
after the conclusion of the employment that includes the term or
condition.'' \10\ The final rule further provides that, for purposes of
the final rule, ``term or condition of employment'' includes, but is
not limited to, a contractual term or workplace policy, whether written
or oral.\11\ The final rule further defines ``employment'' as ``work
for a person.'' \12\
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\10\ Sec. 910.1.
\11\ Id.
\12\ Id.
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The final rule defines ``worker'' as ``a natural person who works
or who previously worked, whether paid or unpaid, without regard to the
worker's title or the worker's status under any other State or Federal
laws, including, but not limited to, whether the worker is an employee,
independent contractor, extern, intern, volunteer, apprentice, or a
sole proprietor who provides a service to a person.'' \13\ The
definition further states that the term ``worker'' includes a natural
person who works for a franchisee or franchisor, but does not include a
franchisee in the context of a franchisee-franchisor relationship.\14\
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\13\ Id.
\14\ Id.
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The final rule does not apply to non-competes entered into by a
person pursuant to a bona fide sale of a business entity.\15\ In
addition, the final rule does not apply where a cause of action related
to a non-compete accrued prior to the effective date.\16\ The final
rule further provides that it is not an unfair method of competition to
enforce or attempt to enforce a non-compete or to make representations
about a non-compete where a person has a good-faith basis to believe
that the final rule is inapplicable.\17\
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\15\ Sec. 910.3(a).
\16\ Sec. 910.3(b).
\17\ Sec. 910.3(c); see also Part V.C.
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The final rule does not limit or affect enforcement of State laws
that restrict non-competes where the State laws do not conflict with
the final rule, but it preempts State laws that conflict with the final
rule.\18\ Furthermore, the final

[[Page 38343]]

rule includes a severability clause clarifying the Commission's intent
that, if a reviewing court were to hold any part of any provision or
application of the final rule invalid or unenforceable--including, for
example, an aspect of the terms or conditions defined as non-competes,
one or more of the particular restrictions on non-competes, or the
standards for or application to one or more category of workers--the
remainder of the final rule shall remain in effect.\19\ The final rule
has an effective date of September 4, 2024.\20\
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\18\ Sec. 910.4.
\19\ Sec. 910.5.
\20\ Sec. 910.6.
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B. Context for the Rulemaking

1. Growing Concerns Regarding the Harmful Effects of Non-Competes
The purpose of this rulemaking is to address conduct that harms
fair competition. Concern about non-competes dates back centuries, and
the evidence of harms has increased substantially in recent years.
However, the existing case-by-case and State-by-State approaches to
non-competes have proven insufficient to address the tendency of non-
competes to harm competitive conditions in labor, product, and service
markets.
The ability of employers \21\ to enforce non-competes has always
been restricted, based on public policy concerns that courts have
recognized for centuries. For example, in Mitchel v. Reynolds (1711),
an English case that provided the foundation for American common law on
non-competes,\22\ the court noted that workers were vulnerable to
exploitation through non-competes and that non-competes threatened a
worker's ability to practice a trade and earn a living.\23\ These
concerns have persisted. Today, non-competes between employers and
workers are generally subject to greater scrutiny under State common
law than other employment terms ``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.'' \24\ For these reasons, State courts often characterize
non-competes as ``disfavored.'' \25\
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\21\ For ease of reference, the Commission uses the term
``employer'' in this Supplementary Information to refer to a person
for whom a worker works. The text of part 910 does not use the term
``employer.''
\22\ Harlan Blake, Employee Agreements Not to Compete, 73 Harv.
L. Rev. 625, 629-31 (1960).
\23\ The Mitchel court expressed concern that non-competes
threaten ``the loss of [the worker's] livelihood, and the
subsistence of his family.'' Mitchel v. Reynolds, 1 P. Wms. 181, 190
(Q.B. 1711). The court likewise emphasized ``the great abuses these
voluntary restraints'' are subject 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.'' Id.
\24\ Restatement (Second) of Contracts sec. 188, cmt. g (1981).
\25\ 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).
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Furthermore, as ``contract[s] . . . in restraint of trade,'' \26\
non-competes have always been subject to our nation's antitrust
laws.\27\ As early as 1911, in the formative 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 ``constantly recurring'' use of non-competes, among
other practices.\28\
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\26\ 15 U.S.C. 1.
\27\ See, e.g., 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).
\28\ 221 U.S. 106, 181-83 (1911).
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Concerns about non-competes have increased substantially in recent
years in light of empirical research showing that they tend to harm
competitive conditions in labor, product, and service markets. Changes
in State laws governing non-competes \29\ in recent decades have
allowed researchers to better isolate the effects of non-competes,
giving rise to a body of empirical research documenting these harms.
This research has shown that the use of non-competes by employers tends
to negatively affect competition in labor markets, suppressing earnings
for workers across the labor force--including even workers not subject
to non-competes.\30\ This research has also shown that non-competes
tend to negatively affect competition in product and service markets,
suppressing new business formation and innovation.\31\
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\29\ See NPRM at 3494 (describing recent legislative activity at
the State level).
\30\ See Parts IV.B.3.a and IV.C.2.c.ii.
\31\ See Parts IV.B.3.b and IV.C.2.c.i.
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Alongside this large body of empirical work, news reports revealed
that employers subject even middle-income and low-wage workers to non-
competes on a widespread basis.\32\ Workers came forward to recount
how--by blocking them from taking a better job or starting their own
business, and subjecting them to threats and litigation from their
employers--non-competes derailed their careers, destroyed their
finances, and upended their lives.\33\
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\32\ See, e.g., Dave Jamieson, Jimmy John's Makes Low-Wage
Workers Sign `Oppressive' Noncompete Agreements, HuffPost, Oct. 13,
2014, https://www.huffpost.com/entry/jimmy-johns-non-compete_n_5978180; Spencer Woodman, Exclusive: Amazon Makes Even
Temporary Warehouse Workers Sign 18-Month Non-Competes, The Verge,
Mar. 26, 2015, https://www.theverge.com/2015/3/26/8280309/amazon-warehouse-jobs-exclusive-noncompete-contracts.
\33\ See, e.g., Conor Dougherty, How Noncompete Clauses Keep
Workers Locked In, N.Y. Times, May 13, 2017, https://www.nytimes.com/2017/05/13/business/noncompete-clauses.html; Lauren
Weber, The Noncompete Clause Gets a Closer Look, Wall St. J., Jul.
21, 2021, https://www.wsj.com/articles/the-noncompete-clause-gets-a-closer-look-11626872430.
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Yet despite the mounting empirical and qualitative evidence
confirming these harms and the efforts of many States to ban them, non-
competes remain prevalent in the U.S. economy. Based on the available
evidence, the Commission estimates that approximately one in five
American workers--or approximately 30 million workers--is subject to a
non-compete.\34\ The evidence also indicates that employers frequently
use non-competes even when they are unenforceable under State law.\35\
This suggests that employers may believe workers are unaware of their
legal rights; that employers may be seeking to take advantage of
workers' lack of knowledge of their legal rights; or that workers are
unable to enforce their rights through case-by-case litigation.\36\ In
addition, the ability of States to regulate non-competes effectively is
constrained by employers' use of choice-of-law provisions, significant
variation in how courts apply choice-of-law rules in disputes over non-
competes, and the increasingly interstate nature of work. As the public
comments attest, this patchwork of laws and legal uncertainty has
become extremely burdensome for both employers and workers.\37\
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\34\ See Part I.B.2. As described therein, this is likely a
conservative estimate.
\35\ See Part IV.B.2.b.i.
\36\ See id.
\37\ See Part IX.C.2.
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As concern about the harmful effects of non-competes increased, the
Commission began exploring the potential for Federal rulemaking on non-
competes. In 2018 and 2019, the Commission held several hearings on
twenty-first century competition and consumer protection issues,
including ``the use of non-competition agreements

[[Page 38344]]

and the conditions under which their use may be inconsistent with the
antitrust laws.'' \38\ In January 2020, the Commission held a public
workshop on non-competes. The speakers and panelists who participated
in the workshop--and the hundreds of public comments the Commission
received in response to the workshop--addressed a wide range of issues,
including statutory and judicial treatment of non-competes; the
economic literature regarding the effects of non-competes; and whether
the Commission should initiate a Federal rulemaking on non-
competes.\39\ The Commission also sought public comment on non-competes
as part of an August 2021 solicitation for public comment on contract
terms that may harm competition and a December 2021 public workshop on
competition in labor markets.\40\ The Commission has also addressed
non-competes in connection with its merger review work.\41\
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\38\ Hearings on Competition and Consumer Protection in the 21st
Century, Notice, 83 FR 38307, 38309 (Aug. 6, 2018).
\39\ FTC, 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.
\40\ FTC, Solicitation for Public Comments on Contract Terms
that May Harm Competition (Aug 5, 2021), https://www.regulations.gov/document/FTC-2021-0036-0022; FTC, Making
Competition Work: Promoting Competition in Labor Markets (Dec. 6-7,
2021), https://www.regulations.gov/docket/FTC-2021-0057/comments.
\41\ See NPRM at 3498-99.
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In 2021, the Commission initiated investigations into the use of
non-competes. In 2023, the Commission secured final consent orders
settling charges that certain firms engaged in an unfair method of
competition in violation of section 5 because their use of non-competes
tended to impede rivals' access to the restricted employees' labor,
harming workers, consumers, and competitive conditions.\42\
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\42\ FTC, Press Release, FTC Approves Final Orders Requiring Two
Glass Container Manufacturers to Drop Noncompete Restrictions That
They Imposed on Workers (Feb. 23, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/02/ftc-approves-final-orders-requiring-two-glass-container-manufacturers-drop-noncompete-restrictions; FTC, Press Release, FTC Approves Final Order Requiring
Anchor Glass Container Corp. to Drop Noncompete Restrictions That It
Imposed on Workers (June 2, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/06/ftc-approves-final-order-requiring-anchor-glass-container-corp-drop-noncompete-restrictions-it.
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The Commission also secured a final consent order settling charges
that another firm violated section 5 by using non-competes with its
employees.\43\ The Commission's complaint alleged the firm's imposition
of non-competes took advantage of the unequal bargaining power between
the firm and its employees, including 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.\44\
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\43\ FTC, Press Release, FTC Approves Final Order Requiring
Michigan-Based Security Companies to Drop Noncompete Restrictions
That They Imposed on Workers (Mar. 8, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/03/ftc-approves-final-order-requiring-michigan-based-security-companies-drop-noncompete-restrictions.
\44\ FTC, Analysis of Agreement Containing Consent Order to Aid
Public Comment, In re Prudential Sec., Inc. et al. at 1 (Jan. 4,
2023).
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Based on the feedback obtained from years of extensive public
outreach and fact-gathering, in January 2023, the Commission published
a notice of proposed rulemaking (NPRM) concerning non-competes.\45\ The
proposed rule would have categorically banned employers from using non-
competes with all workers and required rescission of all existing non-
competes.\46\
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\45\ NPRM, supra note 1.
\46\ Id. at 3482-83.
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In response to the NPRM, the Commission received over 26,000 public
comments.\47\ The comments reflected a diverse cross-section of the
U.S. The Commission received comments from employers and workers in a
wide range of industries and from every State; \48\ from small, medium,
and large businesses; and from workers with wide-ranging income
levels.\49\ The Commission also received comments from representatives
of different industries through trade and professional groups as well
as from academics and researchers. Federal, State, and local
governmental representatives also submitted public comments.
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\47\ The public comments are available online. See
Regulations.gov, Non-Compete Clause Rule (NPRM), FTC-2023-0007,
https://www.regulations.gov/docket/FTC-2023-0007/comments. The
Commission cannot quantify the number of individuals or entities
represented by the comments. The number of comments undercounts the
number of individuals or entities represented by the comments
because many comments, including comments from different types of
organizations, jointly represent the opinions or interests of many.
\48\ This reflects information provided by commenters.
Commenters self-identify their State and are not required to include
geographic information.
\49\ Though most commenters identifying as workers did not
provide information regarding their income or compensation levels,
many provided information about their particular jobs or industries
from which the Commission was able to infer a broad range of income
levels based on occupational data from the Bureau of Labor
Statistics (``BLS''). BLS wage data for each year can be found at
Occupational Employment and Wage Statistics, Tables Created by BLS,
https://www.bls.gov/oes/tables.htm (hereinafter ``BLS Occupational
Employment and Wage Statistics''). The Commission used data from the
May 2022 National XLS table, generally for private ownership.
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Among these comments, over 25,000 expressed support for the
Commission's proposal to categorically ban non-competes. Among the
public commenters were thousands of workers who described how non-
competes prevented them from taking a better job or starting a
competing business, as well as numerous small businesses who struggled
to hire talented workers. Commenters stated that non-competes have
suppressed their wages, harmed working conditions, negatively affected
their quality of life, reduced the quality of the product or service
their company provided, prevented their business from growing and
thriving, and created a climate of fear that deters competitive
activity. The following examples are illustrative of the comments the
Commission received: \50\
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\50\ To be clear, the Commission does not rely on any particular
individual comment submission for its findings, but rather provides
here (and throughout this final rule) examples of comments that were
illustrative of themes that spanned many comments. The Commission's
findings are based on consideration of the totality of the evidence,
including its review of the empirical literature, its review of the
full comment record, and its expertise in identifying practices that
harm competition.

I currently work in sales for an asphalt company in
Michigan. The company had me sign a two year non-compete agreement
to not work for any other asphalt company within 50 miles if I
decide to resign. After two years with the company I have been
disheartened at how poorly customers are being treated and how often
product quality is sub-par. I would love to start my own business
because I see this as an opportunity to provide a better service at
a lower cost. However, the non-compete agreement stands in the way
even though there are no trade secrets and too many customers in
this market.\51\
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\51\ Individual commenter, FTC-2023-0007-2215. Comment excerpts
have been cleaned up for grammar, spelling, and punctuation.
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[I] signed a non-compete clause for power-washing out
of duress. My boss said that if I didn't sign before the end of the
week, not to come in the next week. . . . I'd like to start my own
business but I would have to find another job and wait 5 years. All
I know is power-washing and these business owners all want me to
sign a non-compete clause. It's one big circle of wealthy business
owners keeping the little man down. Essentially, non-compete clauses
limit an employee's opportunity to excel in whatever skill or trade
they're familiar with. In the land of the free, we should be free to
start a business not limited by greedy business owners.\52\
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\52\ Individual commenter, FTC-2023-0007-12689.
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In October 2020, I started working as a bartender at a
company called [REDACTED] for $10 an hour. On my first day, I

[[Page 38345]]

unknowingly signed a 2-year non-compete, slipped between other
paperwork while my boss rushed me, and downplayed its importance. .
. . At [REDACTED], I was sexually harassed and emotionally abused. I
needed money, so I searched for a new job while remaining at
[REDACTED] for one year. I was eventually offered a bartending job
at a family-owned bar with better wages, conditions, and
opportunities. Upon resigning, I was threatened with a non-compete I
didn't know existed. Still, I couldn't take it anymore, so believing
it was an unenforceable scare tactic, I took the new job, thinking
our legal system wouldn't allow a massive company with over 20
locations to sue a young entry-level worker with no degree. In
December 2021, I was sued for $30,000 in ``considerable and
irreparable damages'' for violating the non-compete. . . .\53\
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\53\ Individual commenter, FTC-2023-0007-8852.
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I am a physician in a rural underserved area of
Appalachia. . . . ``[N]on-compete'' clauses have become ubiquitous
in the healthcare industry. With hospital systems merging, providers
with aggressive non compete clauses must abandon the community that
they serve if they chose to leave their employer. . . . Healthcare
providers feel trapped in their current employment situation,
leading to significant burnout that can shorten their career
longevity. Many are forced to retire early or take a prolonged pause
in their career when they have no other recourse to combat their
employer.\54\
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\54\ Individual commenter, FTC-2023-0007-0026.
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I am a practicing physician who signed an employment
contract containing a noncompete agreement in 2012, entering into
this agreement with an organization that no longer exists. My
original employer merged with, and was made subsidiary to, a new
organization that is run under religious principles in conflict with
my own. . . . I would have never signed such an agreement with my
new employer, yet I am bound to this organization under threat of
legal coercion. To be clear, the forced compromise of my religious
principles does direct harm to me. My only recourse to this coercion
is to give up medical practice anywhere covered by my current
medical license, which is injurious to the patients in my care, and
to myself.\55\
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\55\ Individual commenter, FTC-2023-0007-9671.
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I am the owner of a small-midsize freight brokerage,
and non-competes of large brokerages have time and time again
constrained talent from my business. Countless employees of [a] mega
brokerage . . . have left and applied for our company and we must
turn them away. These are skilled brokers that are serving the
market and their clients well due to THEIR skillsets. . . . These
non-competes affect not just me but the clients they work with as
these skilled brokers are forced out of the entire logistics market
for an entire year and possibly a lifetime when they pick up a new
career in a different field because of these aggressive non-
competes. . . .\56\
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\56\ Individual commenter, FTC-2023-0007-6142.
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I was laid off from my company in 2008 due to the
economy, not to any fault of my own. However, when I was offered a
job at another company, my former company threatened them and my
offer was rescinded. I was unable to find gainful employment for
months, despite opportunities in my field, and had to utilize
unemployment when I otherwise would not have needed it. To find
work, I ultimately had to switch fields, start part time somewhere,
and just continue to work my way up. All of this because I was laid
off to no fault of my own.\57\
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\57\ Individual commenter, FTC-2023-0007-15497.
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I was terminated by a large hospital organization
suddenly with a thriving, full Pediatric practice. . . . My lawyer
and I believe the non-compete does not apply in my circumstances and
that the noncompete is overly broad, restrictive and harmful to the
public (my patients). I started seeing my patients mostly
gratuitously in their homes so they would not go without the care
they wanted and needed . . . The judge awarded the order and I was
told I cannot talk to patients on the phone, text patients, zoom
visits or provide any pediatric care within my non-compete area.
Patients are angry and panicked. I'm worried every day about my
patients and how I can continue to care for them. . . . Patients
have a right to choose and keep their doctor. The trust built
between a patient and his doctor is crucial to keeping a patient
healthy. It's not a relationship that can or should be replaced. . .
. Patients should always come first and that is not happening.\58\
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\58\ Individual commenter, FTC-2023-0007-14956.
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When I first graduated veterinary school I signed a
noncompete clause that was for 7 years. I tried to negotiate it to a
more reasonable time period but the employer wouldn't budge. There
weren't many job openings for new graduates at the time and I had
student loans to pay back so I signed it. . . . I moved back home to
a small town and took a job that required a 10-radial-mile, 2-year
noncompete (this is currently considered ``reasonable/standard'' in
my industry). Unfortunately since it's a rural area the 10 miles
blocked me out of the locations of all other veterinary clinics in
the county and I had to commute an hour each way to work in the next
metropolitan area. This put a lot of stress on my family since I
have young children. Some days I didn't even get to see them when
they were awake.\59\
---------------------------------------------------------------------------

\59\ Individual commenter, FTC-2023-0007-0922.
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I work for a large electronic health records company .
. . that is known for hiring staff right out of college, myself
included. I was impressed with their starting salary and well-
advertised benefits, so I was quick to accept their offer. After
accepting their offer, I was surprised to receive a contract
outlining a strict non-compete agreement . . . I feel disappointed
that this information was not made apparent to me prior to my
acceptance of the position, and now I feel stuck in a job that I've
quickly discovered is not a good long-term fit for me. I am certain
that many other recent graduates often find themselves in a similar
position--they accept shiny offers from a workplace, not knowing
whether the company and position will be the right fit for them, and
find themselves trapped by such contracts as mine.\60\
---------------------------------------------------------------------------

\60\ Individual commenter, FTC-2023-0007-10729.
---------------------------------------------------------------------------

Non competes are awful. I am being sued right now for
going into business on my own in Boston, Massachusetts, by my former
employer who says I signed a non-compete in 2003, 20 years ago. . .
. I am fighting them in court. Hopefully I will prevail. . . . [The]
corporation I worked for is a billion-dollar corporation. And they
just keep trying scare tactics to make me back down. They went as
far as trying to get a preliminary injunction ordered against me.
And the judge refused but I still have to spend $1,000 an hour to
defend myself.\61\
---------------------------------------------------------------------------

\61\ Individual commenter, FTC-2023-0007-10871.
---------------------------------------------------------------------------

I have been working in the field of multi-media in the
DC/Baltimore region since the early 2000s. . . . I was 26 when I
first became employed, and at that time a requirement was that I
sign a non-compete agreement. . . . This means I can't be an
entrepreneur- which kills any opportunities for me to grow something
of my own- which could potentially provide jobs for others in the
future. So what this non-compete does is basically enables
businesses to be small monopolies. I could literally have a new
lease on my career if non competes were abolished. As of now, when I
think of working someplace else I have to consider changing careers
altogether.\62\
---------------------------------------------------------------------------

\62\ Individual commenter, FTC-2023-0007-10968.
---------------------------------------------------------------------------

A former employer had me sign a non-compete when I
started employment at an internship in college. It was a part-time
position of 20 hours of work as an electrical engineer, while I
finished university. After university, I worked for this employer
another 4 years full time, but then found a better job in another
state. It was not a competitor, but a customer of my former
employer. My former employer waited till the day after my 4-week
notice to tell me that I had signed a non-compete agreement and that
it [barred] me from working for any competitor, customer or any
potential customer up to 5 years after leaving the company with no
geographic limitations. This was effectively the entire semi-
conductor industry and put my entire career at risk.\63\
---------------------------------------------------------------------------

\63\ Individual commenter, FTC-2023-0007-16347.
---------------------------------------------------------------------------

Non-competes serve little more purpose than to codify
and entrench inefficiencies. I have seen this firsthand in the
context of a sophisticated management consulting environment where
company owners provided ever less support in terms of contributing
to projects or even to sales of new business while still feeling
secure through agreements that substantially limited anyone from
working in the relevant industry for two years on a global basis
after leaving. . . . The reality is that there are innumerable
retention mechanisms (such as good working conditions, compensation,
culture, management, growth trajectory and/or strategy) that can
contribute to loyal employees without the need for non-competes.\64\
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\64\ Individual commenter, FTC-2023-0007-3963.

The Commission has undertaken careful review of the public comments

[[Page 38346]]

and the entirety of the rulemaking record. Based on this record and the
Commission's experience and expertise in competition matters, the
Commission issues this final rule pursuant to its authority under
sections 5 and 6(g) of the FTC Act.
2. Prevalence of Non-Competes
Based on its own data analysis, studies published by economists,
and the comment record, the Commission finds that non-competes are in
widespread use throughout the economy and pervasive across industries
and demographic groups, albeit with some differences in the magnitude
of the prevalence based on industries and demographics. The Commission
estimates that approximately one in five American workers--or
approximately 30 million workers--is subject to a non-compete.\65\
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\65\ This is likely a conservative estimate. Surveys of workers
likely underreport the share of workers subject to non-competes,
since many workers may not know they are subject to a non-compete.
See, e.g., Alexander J.S. Colvin & Heidi Shierholz, Econ. Policy
Inst., Noncompete Agreements, Report (Dec. 10, 2019) at 3.
---------------------------------------------------------------------------

As described in Part II.F, the inquiry as to whether conduct is an
unfair method of competition under section 5 focuses on the nature and
tendency of the conduct, not whether or to what degree the conduct
caused actual harm.\66\ Although a finding that non-competes are
prevalent is not necessary to support the Commission's determination
that the use of non-competes by employers is an unfair method of
competition, the Commission finds that non-competes are prevalent and
in widespread use throughout the economy, which is why researchers have
observed such significant negative actual effects from non-competes on
competitive conditions in labor markets and markets for products and
services.\67\
---------------------------------------------------------------------------

\66\ See infra note 288 and accompanying text.
\67\ See Parts IV.A through IV.C (describing this evidence).
---------------------------------------------------------------------------

A 2014 survey of workers finds that 18% of respondents work under a
non-compete and 38% of respondents have worked under one at some point
in their lives.\68\ This study has the broadest and likely the most
representative coverage of the U.S. labor force among the prevalence
studies discussed here.\69\ This study reports robust results
contradicting the prior assumptions of some that non-competes were, in
most cases, bespoke agreements with sophisticated and highly-paid
workers. It finds that, among workers without a bachelor's degree, 14%
of respondents reported working under a non-compete at the time
surveyed and 35% reported having worked under one at some point in
their lives.\70\ For workers earning less than $40,000 per year, 13% of
respondents were working under a non-compete and 33% worked under one
at some point in their lives.\71\ Furthermore, this survey finds that
53% of workers covered by non-competes are hourly workers.\72\ The
survey suggests that a large share of workers subject to non-competes
are relatively low-earning workers. In addition, a survey from the
Federal Reserve Board of Governors found that 11.4% of workers have
non-competes, including workers with relatively low earnings and low
levels of education. The survey finds some degree of geographic
heterogeneity, though it finds that large numbers of workers in all
regions of the country have non-competes (including 7.0% of workers in
States which broadly do not enforce non-competes).\73\
---------------------------------------------------------------------------

\68\ Evan P. Starr, J.J. Prescott, & Norman D. Bishara,
Noncompete Agreements in the US Labor Force, 64 J. L. & Econ. 53, 53
(2021).
\69\ The final survey sample of 11,505 responses represented
individuals from nearly every demographic in the labor force. Id. at
58.
\70\ Id. at 63.
\71\ Id.
\72\ Michael Lipsitz & Evan Starr, Low-Wage Workers and the
Enforceability of Noncompete Agreements, 68 Mgmt. Sci. 143, 144
(2022) (analyzing data from the Starr, Prescott, & Bishara survey).
\73\ Tyler Boesch, Jacob Lockwood, Ryan Nunn, & Mike Zabek, New
Data on Non-Compete Contracts and What They Mean for Workers (2023),
https://www.minneapolisfed.org/article/2023/new-data-on-non-compete-contracts-and-what-they-mean-for-workers.
---------------------------------------------------------------------------

Furthermore, a survey of workers conducted in 2017 estimates that
24.2% of workers are subject to a non-compete.\74\ This survey also
finds that non-competes are often used together with other restrictive
employment agreements, including non-disclosure agreements (``NDAs'')
and non-recruitment and non-solicitation agreements.\75\ A
methodological limitation of this 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. While weighting based on demographics
helps, it does not fully mitigate this concern.
---------------------------------------------------------------------------

\74\ Natarajan Balasubramanian, Evan Starr, & Shotaro Yamaguchi,
Employment Restrictions on Resource Transferability and Value
Appropriation from Employees (Jan. 18, 2024), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3814403.
\75\ Id. at 11 (reporting that if a worker has a non-compete,
there is a 70%-75% chance that all three restrictive covenants are
present).
---------------------------------------------------------------------------

Additionally, a 2017 survey of business establishments with 50 or
more employees estimates that 49% of such establishments use non-
competes for at least some of their employees, and 32% of such
establishments use non-competes for all of their employees.\76\
---------------------------------------------------------------------------

\76\ Colvin & Shierholz, supra note 65 at 1.
---------------------------------------------------------------------------

Other estimates of non-compete use cover subsets of the U.S. labor
force. One 2022 study is based on National Longitudinal Survey of Youth
(NLSY) data.\77\ The NLSY is an often-used labor survey conducted by
the Bureau of Labor Statistics (``BLS'') that consists of a nationally
representative sample of 8,984 men and women born from 1980-84 and
living in the U.S. at the time of the initial survey in 1997; it is a
subset of the workforce by age of worker.\78\ The 2022 study using NLSY
data reports prevalence of non-competes to be 18%, in line with the
number estimated based on the 2014 survey of workers directed solely at
calculating the prevalence of non-competes.\79\
---------------------------------------------------------------------------

\77\ Donna S. Rothstein & Evan Starr, Noncompete Agreements,
Bargaining, and Wages: Evidence from the National Longitudinal
Survey of Youth 1997, June 2022 Mthly. Lab. Rev. (2022).
\78\ BLS, NLSY97 Data Overview, https://www.bls.gov/nls/nlsy97.htm.
\79\ Rothstein & Starr, supra note 77 at 1.
---------------------------------------------------------------------------

Non-competes are pervasive across occupations. For example, a
survey of independent hair salon owners finds that 30% of hair stylists
worked under a non-compete in 2015.\80\ A survey of electrical and
electronic engineers finds that 43% of respondents signed a non-
compete.\81\ A different study finds that 45% of physicians worked
under a non-compete in 2007.\82\ One study published in 2021 finds that
62% of CEOs worked under a non-compete between 1992 and 2014.\83\
Another, published in 2023, supports that finding and reflects an
upward trend in the use of non-competes among executives--specifically,
the proportion of executives working under a non-compete rose from
``57% in the early 1990s to 67% in the mid-2010s.'' \84\ The 2014
survey reports industry-specific rates ranging from 9% in the
Agriculture and Hunting category to 32% in the

[[Page 38347]]

Information category.\85\ The Balasubramaian et al. survey reports
industry-specific rates ranging from 12% in the Arts, Entertainment,
and Recreation category to 30% in the Professional, Scientific, and
Technical category.\86\ The same survey also reports occupation-
specific rates ranging from 8% in the Community and Social Services
category to 32% in the Computer and Mathematical category.\87\
---------------------------------------------------------------------------

\80\ Matthew S. Johnson & Michael Lipsitz, Why Are Low-Wage
Workers Signing Noncompete Agreements?, 57 J. Hum. Res. 689, 700
(2022).
\81\ Matt Marx, The Firm Strikes Back: Non-Compete Agreements
and the Mobility of Technical Professionals, 76 a.m. Socio. Rev.
695, 702 (2011). Calculated as 92.60% who signed a non-compete of
the 46.80% who were asked to sign a non-compete.
\82\ 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).
\83\ Omesh Kini, Ryan Williams, & Sirui Yin, CEO Noncompete
Agreements, Job Risk, and Compensation, 34 Rev. Fin. Stud. 4701,
4707 (2021).
\84\ Liyan Shi, Optimal Regulation of Noncompete Contracts, 91
Econometrica 425, 447 (2023).
\85\ Starr, Prescott, & Bishara, supra note 68 at 67.
\86\ Balasubramanian et al., supra note 74 at 47.
\87\ Id.
---------------------------------------------------------------------------

In addition, commenters presented survey data on the prevalence of
non-competes in various occupations and industries. The Commission does
not rely on these surveys to support its finding that non-competes are
in widespread use throughout the economy. Because the Commission lacked
access to a detailed description of the methodology for these surveys
(unlike for the surveys described previously), the Commission cannot
evaluate how credible their research designs are. However, they
generally confirm the Commission's finding that non-competes are in
widespread use throughout the economy and pervasive across industries
and demographic groups.
For example, commenters reported that 33% of practitioners in the
applied behavioral analysis field reported being subject to a non-
compete,\88\ along with 68% of cardiologists,\89\ 42% of colorectal
surgeons,\90\ 72% of members of the American Association of Hip and
Knee Surgeons,\91\ and 31% of wireless telecommunications retail
workers.\92\ Other commenters cited a 2019 study finding that 29% of
businesses where the average wage is below $13 per hour use non-
competes for all their workers.\93\
---------------------------------------------------------------------------

\88\ Kristopher J. Brown, Stephen R. Flora, & Mary K. Brown,
Noncompete Clauses in Applied Behavior Analysis: A Prevalence and
Practice Impact Survey, 13 Behavioral Analysis Practice 924 (2020)
(survey of 610 workers).
\89\ Comment of Am. Coll. of Cardiology, FTC-2023-0007-18077, at
2. The comment did not provide a citation to the survey or the
underlying data, including the number of respondents or the time
period.
\90\ William C. Cirocco. Restrictive Covenants in Physician
Contracts: An American Society of Colon and Rectal Surgeons' Survey,
54 Diseases of the Colon and Rectum 482 (2011). The survey examined
157 colorectal surgeons who had completed their residency in the
prior decade.
\91\ Comment of Am. Ass'n of Hip and Knee Surgeons, FTC-2023-
0007-21076, at 4. The comment said the internal poll was conducted
in early 2023, but the comment did not provide a citation to the
survey or the underlying data, including the number of respondents.
\92\ Comm. Workers of Am. and Nat'l Employment L. Project,
Broken Network: Workers Expose Harms of Wireless Telecom Carriers'
Outsourcing to `Authorized Retailers' (Feb. 2023), https://cwa-union.org/sites/default/files/2023-02/20230206_BrokenNetwork.pdf, at
12. The survey had 204 respondents.
\93\ Colvin & Shierholz, supra note 65 at 13.
---------------------------------------------------------------------------

Several trade organizations included information in their comments
about the percentage of their members that use non-competes for at
least some of their workers, based on surveys of their membership. For
the National Association of Wholesaler-Distributors, this figure was
80%; \94\ for the Independent Lubricant Manufacturing Association, 69%;
\95\ for the Michigan Chamber of Commerce, 73%; \96\ for the Gas and
Welding Distributors Association, 80%; \97\ and for the National
Association of Manufacturers, 70%.\98\ One industry organization said
its survey found that 57% of respondents require workers earning over
$150,000 to sign non-competes.\99\ A survey by the Authors Guild finds
that 19.2% of respondents reported that non-competes prevented them
from publishing a similar or competing book.\100\ The HR Policy
Association stated that 75% of respondents indicated they use non-
competes for less than 10% of their workers, and nearly one third
indicated they use non-competes for less than 1% of their workers.\101\
The association stated that its survey covered 3 million workers and
argued that its survey finding less usage of non-competes was more
representative than studies cited in the NPRM.\102\ However, the
commenter did not provide the data underlying its claims. The Retail
Industry Leaders Association stated that a recent survey of its members
indicated that, among members that use non-competes, the majority do so
with less than 1% of their workforce and an additional quarter use non-
competes with less than 10% of their workforce.\103\ Additionally, a
commenter referenced a survey of small business owners finding that 48%
use non-competes for their own business.\104\
---------------------------------------------------------------------------

\94\ Comment of Nat'l Assoc. of Wholesaler-Distribs., FTC-2023-
0007-19347, at 2. The comment did not provide a citation to the
survey or the underlying data, including the number of respondents.
\95\ Comment of Indep. Lubricant Mfrs. Ass'n, FTC-2023-0007-
19445, at 3. The comment did not provide a citation to the survey or
the underlying data, including the number of respondents.
\96\ Calculated as 77%*95% (assuming that the 95% reported in
their comment applies to the 77% who reported using restrictive
covenants). Comment of Mich. Chamber of Com., FTC-2023-0007-20855.
The comment did not provide a citation to the survey or the
underlying data, including the number of respondents.
\97\ Comment of Gas and Welding Distribs. Ass'n, FTC-2023-0007-
20934, at 2-3. The comment did not provide a citation to the survey
or the underlying data. The comment said the survey took place after
the NPRM was proposed and had 161 respondents.
\98\ Comment of Nat'l Ass'n of Mfrs., FTC-2023-0007-20939, at 2
(citing Nat'l Ass'n of Mfrs., Noncompete Survey Data Report, https://www.nam.org/wp-content/uploads/2023/03/Noncompete_Survey_Data_Report.pdf). The survey had 150 respondents.
\99\ Comment of Soc. for Hum. Res. Mgmt., FTC-2023-0007-20903,
at 5 n.2. The comment did not provide a citation to the survey or
the underlying data, including the number of respondents.
\100\ Comment of The Authors Guild, FTC-2023-0007-20854, at 7.
The comment did not provide a citation to the survey or the
underlying data, but said it had 630 respondents.
\101\ Comment of HR Policy Ass'n, FTC-2023-0007-20998, at 8.
\102\ Id.
\103\ Comment of Retail Indus. Leaders Ass'n, FTC-2023-0007-
20989, at 6. The comment did not provide a citation to the survey or
the underlying data, including the number of respondents or the time
period.
\104\ Comment of Sm. Bus. Majority, FTC-2023-0007-21093 (citing
Small Business Majority, Opinion Poll: Small Business Owners Support
Banning Non-Compete Agreements (Apr. 13, 2013), https://smallbusinessmajority.org/sites/default/files/research-reports/2023-non-compete-poll-report.pdf).
---------------------------------------------------------------------------

Several commenters misrepresented the Commission's finding related
to prevalence as based on ``a single study from 2021'' (Starr,
Prescott, and Bishara, 2021), which relied on survey data from 2014.
The Commission's finding is not based on a single study. The NLSY study
reaches similar conclusions about the prevalence of non-competes across
the economy,\105\ and the occupation-specific studies indicate that
non-competes are pervasive in various occupations.\106\ Furthermore,
despite its methodological limitations, the data submitted by
commenters generally comport with the estimates reported in the
academic literature. One commenter stated the respondents to the Starr,
Prescott, and Bishara survey were not necessarily representative of the
population. The Commission believes that the weighting of the data
sufficiently addresses this concern.
---------------------------------------------------------------------------

\105\ See Rothstein & Starr, supra note 77 and accompanying
text.
\106\ See supra notes 80-87 and accompanying text.
---------------------------------------------------------------------------

Another commenter argued that individuals may misunderstand
contracts that they have signed, leading them to mistakenly believe
they are bound by a non-compete. The Commission does not find this to
be a plausible explanation for the high numbers of workers, businesses,
and trade associations that report that non-competes are prevalent.
The Commission appreciates the additional estimates provided by
commenters. The comments broadly corroborate the Commission's finding
that non-competes are used across the workforce, with some
heterogeneity in the magnitude of the prevalence. The

[[Page 38348]]

Commission finds that this heterogeneity is insufficient to warrant
industry-specific exclusions from coverage under the final rule in part
because employers' use of non-competes is prevalent across labor
markets and for the reasons discussed in Part V.D regarding requests
for exclusions.

II. Legal Authority

A. The History of the Commission and Section 5 of the FTC Act

The FTC Act was enacted in 1914.\107\ Section 5 of that Act
``declared'' that ``unfair methods of competition in commerce'' are
``unlawful,'' and it ``empowered and directed'' the Commission ``to
prevent'' entities subject to its jurisdiction from ``using'' such
methods.\108\ Congress removed certain enumerated industries,
activities, or entities--such as banks \109\--from the Commission's
jurisdiction but otherwise envisioned a Commission whose purview would
cover commerce across the national economy.
---------------------------------------------------------------------------

\107\ Federal Trade Commission Act of 1914, Public Law 63-203,
38 Stat. 717, 719 (hereinafter ``FTC Act of 1914'').
\108\ FTC Act of 1914, 38 Stat. at 719. Section 5 is codified as
amended at 15 U.S.C. 45. Congress later amended the term ``in
commerce'' to ``in or affecting commerce.'' The Supreme Court has
explained that this amended phrase makes section 5 of the FTC Act
``coextensive with the constitutional power of Congress under the
Commerce Clause.'' United States v. Am. Bldg. Maintenance Indus.,
422 U.S. 271, 277 n.6 (1975). For simplicity, this statement of
basis and purpose often refers to ``unfair methods of competition''
without the commerce requirement, but the Commission acknowledges
that it has power to prevent only such methods that are in or affect
commerce as that term is defined in the Act. See 15 U.S.C. 44.
\109\ See 15 U.S.C. 45(a)(2).
---------------------------------------------------------------------------

The term ```unfair methods of competition' . . . was an expression
new in the law'' when it first appeared in the FTC Act.\110\ Congress
purposely introduced this phrase to distinguish the Commission's
authority from the definition of ``unfair competition'' at common law.
Because the ``meaning which the common law had given to [`unfair
competition'] was . . . too narrow,'' Congress adopted ``the broader
and more flexible phrase `unfair methods of competition.' '' \111\
Using this new phrase also made clear that Congress designed section 5
to extend beyond the reach of other antitrust laws--most notably, the
Sherman Act--whose text did not include the term ``unfair methods of
competition.'' \112\ In particular, Congress wanted the Commission to
apply a standard that would reach conduct not captured by other
antitrust laws and the rule of reason, which courts applied when
interpreting the Sherman Act, making it ``impossible to predict with
any certainty'' whether courts would condemn the many ``practices that
seriously interfere with competition.'' \113\ Allowing the Commission
to prevent unfair methods of competition would also help the Commission
achieve a core purpose of the Act: to stop ``trade restraints in their
incipiency'' before they grew into violations of other antitrust
laws.\114\
---------------------------------------------------------------------------

\110\ A.L.A. Schechter Poultry Corp. v. United States, 295 U.S.
495, 532 (1935).
\111\ See FTC v. R. F. Keppel & Bro., Inc., 291 U.S. 304, 310-11
(1934); see also Schechter Poultry, 295 U.S. at 532.
\112\ See E.I. du Pont de Nemours v. FTC (Ethyl), 729 F.2d 128,
136 (2d Cir. 1984) (``Congress' aim was to protect society against
oppressive anti-competitive conduct and thus assure that the conduct
prohibited by the Sherman and Clayton Acts would be supplemented as
necessary and any interstices filled.'').
\113\ S. Rep. No. 62-1326, at 14 (1913) (hereinafter ``Cummins
Report''). After analyzing a series of Supreme Court decisions
interpreting the Sherman Act--e.g., Standard Oil Co. of New Jersey
v. United States, 221 U.S. 1, 60 (1911)--the Senate committee feared
that the rule of reason meant that ``in each instance it [would be]
for the court to determine whether the established restraint of
trade is a due restraint or an undue restraint'' and that this made
it ``imperative to enact additional legislation.'' Cummins Report at
11-12.
\114\ FTC v. Brown Shoe Co., 384 U.S. 316, 322 (1966); see also
FTC v. Motion Picture Advert. Serv. Co., 344 U.S. 392, 394-95
(1953).
---------------------------------------------------------------------------

By design, the new phrase ``unfair methods of competition'' did
``not `admit of precise definition.' '' \115\ Congress intentionally
gave the Commission flexibility to adapt to changing
circumstances.\116\ The Supreme Court has affirmed the more inclusive
scope of section 5 on numerous occasions \117\ and has affirmed the
Commission's power under the Act to condemn coercive and otherwise
unfair practices that have a tendency to stifle or impair
competition.\118\ Federal appellate courts have likewise consistently
held that the Commission's authority under section 5 extends beyond
``the letter'' of other antitrust laws.\119\
---------------------------------------------------------------------------

\115\ R.F. Keppel & Bro., 291 U.S. at 312.
\116\ Id. at 311 n.2.
\117\ See, e.g., id. at 311; A.L.A. Schechter Poultry Corp. v.
United States, 295 U.S. 495, 532 (1935); Brown Shoe Co., 384 U.S. at
320-22.
\118\ FTC v. Texaco, 393 U.S. 223, 225-26 (1968) (citing Atl.
Refin. Co. v. FTC, 381 U.S. 357, 376 (1965)).
\119\ Spiegel, Inc. v. FTC, 540 F.2d 287, 292 (7th Cir. 1976)
(quoting FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 244 (1972));
cf., Chuck's Feed & Seed Co. v. Ralston Purina Co., 810 F.2d 1289,
1292-93 (4th Cir. 1987).
---------------------------------------------------------------------------

Congress further expanded the Commission's jurisdiction over time.
Congress extended the Commission's authority in 1938 by adding the
further prohibition on ``unfair or deceptive acts or practices.'' \120\
And in 1975, Congress amended the phrase ``in commerce'' in section 5
to ``in or affecting commerce,'' a change that was ``specifically
designed to expand the Commission's jurisdiction . . . to make it
coextensive with the constitutional power of Congress under the
Commerce Clause.'' \121\
---------------------------------------------------------------------------

\120\ Federal Trade Commission Act, Public Law 447, 75th Cong.,
3d Sess. (March 21, 1938) c. 49; 52 Stat. 111 (1938).
\121\ United States v. Am. Bldg. Maintenance Indus., 422 U.S.
271, 277 n.6 (1975). As noted, the Commission's authority does not
reach certain enumerated industries or activities--a list that has
also grown over time. See 15 U.S.C. 45(a)(2); see also Part II.E.1.
Some of these industries are statutorily prohibited from engaging in
unfair or deceptive practices or unfair methods of competition under
different laws overseen by other agencies. See, e.g., 49 U.S.C.
41712(a) (allowing the Secretary of Transportation to ``decide
whether an air carrier, foreign air carrier, or ticket agent'' has
engaged in such conduct).
---------------------------------------------------------------------------

Congress gave careful thought to the structure of the FTC as an
independent agency entrusted with this considerable responsibility. The
Commission would consist of five members, no more than three of whom
could be part of the same political party, who would serve for terms of
seven years.\122\ The Commission would draw on trained expert staff to
develop the body of law regarding what constitutes unfair methods of
competition (and, later, unfair and deceptive practices),\123\ both
through acting as ``a quasi judicial body'' \124\ that determines
whether conduct is an unfair method of competition in adjudications and
through authority to promulgate legislative rules delineating conduct
that constitutes an unfair method of competition. Recognizing that the
Commission is an expert agency in making such determinations about
anticompetitive conduct, courts reviewing Commission determinations as
to what practices constitute an unfair method of competition have given
the Commission's decisions ``great weight.'' \125\
---------------------------------------------------------------------------

\122\ 15 U.S.C. 41.
\123\ Id. (anticipating that the Commission would ``build up a
comprehensive body of information for the use and advantage of the
Government and the business world''); id. at 11,092 (``[W]e want
trained experts; we want precedents; we want a body of
administrative law built up.'').
\124\ A.L.A. Schechter Poultry Corp. v. United States, 295 U.S.
495, 533 (1935).
\125\ FTC v. Cement Inst., 333 U.S. 683, 720 (1948); Atl. Ref.
Co. v. FTC, 381 U.S. 357, 368 (1965); FTC v. Texaco, 393 U.S. 223,
226 (1968); Official Airline Guides, Inc. v. FTC, 630 F.2d 920, 927
(2d. Cir. 1980) (quoting Cement Inst., 333 U.S. at 720); see also
FTC v. Motion Picture Advert. Serv. Co., 344 U.S. 392, 396 (1953);
FTC v. Ind. Fed'n of Dentists, 476 U.S. 447, 454 (1986).
---------------------------------------------------------------------------

The FTC Act today reflects a careful balance from Congress.
Congress has directed the Commission to proceed

[[Page 38349]]

against a broader range of anticompetitive conduct than other antitrust
laws like the Sherman and Clayton Acts can reach. On the other hand,
Congress has never established a private right of action under section
5,\126\ nor has it authorized the Commission to recover civil penalties
or other monetary relief from parties who engage in unfair methods of
competition.\127\ Instead, the Commission may either pursue an
adjudication under section 5(b) or seek an injunction in Federal court
under section 13(b) against a party that has engaged in an unfair
method of competition.\128\ As explained below, it may also promulgate
rules prohibiting unfair methods of competition. The Commission cannot
obtain civil penalties or other monetary relief against parties for
using an unfair method of competition, although it can obtain civil
penalties in court if a party is ordered to cease and desist from a
violation and fails to do so.\129\
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\126\ See, e.g., Holloway v. Bristol-Myers Corp., 485 F.2d 986,
988-89 (D.C. Cir. 1973); Liu v. Amerco, 677 F.3d 489, 492 (1st Cir.
2012).
\127\ Congress has authorized the FTC to seek civil monetary
remedies against parties who engage in unfair or deceptive acts or
practices under some circumstances. See 15 U.S.C. 45(m); 15 U.S.C.
57b.
\128\ See 15 U.S.C. 45(b); 15 U.S.C. 53(b).
\129\ See 15 U.S.C. 45(l).
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B. The Commission's Authority To Promulgate the Rule

Alongside section 5, Congress adopted section 6(g) of the Act, in
which it authorized the Commission to ``make rules and regulations for
the purpose of carrying out the provisions of'' the FTC Act, which
include the Act's prohibition of unfair methods of competition.\130\
The plain text of section 5 and section 6(g), taken together, empower
the Commission to promulgate rules for the purpose of preventing unfair
methods of competition. That includes legislative rules defining
certain conduct as an unfair method of competition.
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\130\ 15 U.S.C. 46(g).
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The Commission has exercised its authority under section 6(g) to
promulgate legislative rules on many occasions stretching back more
than half a century. Between 1963 and 1978,\131\ the Commission relied
on section 6(g) to promulgate the following rules: (1) a rule declaring
it an unfair method of competition (``UMC'') and an unfair or deceptive
act or practice (``UDAP'') to mislead consumers about the size of
sleeping bags by representing that the ``cut size'' represents the
finished size; \132\ (2) a rule declaring it a UMC and UDAP to use the
word ``automatic'' or similar words to describe household electric
sewing machines; \133\ (3) a rule declaring it a UMC and UDAP to
misrepresent nonprismatic instruments as prismatic; \134\ (4) a rule
declaring it a UMC and UDAP to advertise or market dry cell batteries
as ``leakproof;'' \135\ (5) a rule declaring it a UMC and UDAP to
misrepresent the ``cut size'' as the finished size of tablecloths and
similar products; \136\ (6) a rule declaring it a UMC and UDAP to
misrepresent that belts are made of leather if they are made of other
materials; \137\ (7) a rule declaring it a UMC and UDAP to represent
used lubricating oil as new; \138\ (8) a rule declaring it a UDAP to
fail to disclose certain health warnings in cigarette advertising and
on cigarette packaging (``Cigarette Rule''); \139\ (9) a rule declaring
it a UMC and UDAP to fail to disclose certain features of light bulbs
on packaging; \140\ (10) a rule declaring it a UMC and UDAP to
misrepresent the actual size of the viewable picture area on a TV;
\141\ (11) a rule declaring a presumption of a violation of section
2(d) and (e) of the amended Clayton Act for certain advertising and
promotional practices in the men's and boy's clothing industry; \142\
(12) a rule declaring it a UMC and UDAP to fail to make certain
disclosures about the handling of glass fiber products and contact with
certain products containing glass fiber; \143\ (13) a rule declaring it
a UMC and UDAP to make certain misrepresentations about transistors in
radios; \144\ (14) a rule declaring it a UDAP to fail to disclose
certain effects about inhaling certain aerosol sprays; \145\ (15) a
rule declaring it a UMC and UDAP to misrepresent the length or size of
extension ladders; \146\ (16) a rule declaring it a UDAP to make
certain misrepresentations, or fail to disclose certain information,
about games of chance; \147\ (17) a rule declaring it a UMC and UDAP to
mail unsolicited credit cards; \148\ (18) a rule declaring it a UMC and
UDAP to fail to disclose the minimum octane number on gasoline pumps
(``Octane Rule''); \149\ (19) a rule declaring it a UMC and UDAP to
sell finished articles of clothing without a permanent tag or label
disclosing care and maintenance

[[Page 38350]]

instructions; \150\ (20) a rule declaring a UMC and UDAP for a grocery
store to offer products for sale at a stated price if those products
will not be readily available to consumers (``Unavailability Rule'');
\151\ (21) a rule declaring it a UMC and UDAP for a seller to fail to
make certain disclosures in connection with a negative option plan
(``Negative Options Rule''); \152\ (22) a rule declaring it a UDAP for
door-to-door sellers to fail to furnish certain information to buyers;
\153\ (23) a rule declaring it a UMC and UDAP to fail to make certain
disclosures about sound power amplification for home entertainment
products; \154\ (24) a rule declaring it a UDAP for sellers failing to
include certain contract provisions preserving claims and defenses in
consumer credit contracts (``Holder Rule''); \155\ (25) a rule
declaring it a UMC or UDAP to solicit mail order merchandise from a
buyer unless the seller can ship the merchandise within 30 days (``Mail
Order Rule''); \156\ and (26) a rule declaring it a UDAP for a
franchisor to fail to furnish a franchisee with certain
information.\157\
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\131\ As explained in more detail later in this Part, Congress
added section 18 to the FTC Act in 1975, and that section provides
the process the Commission must go through to promulgate rules
defining unfair or deceptive acts or practices. See Magnuson-Moss
Warranty--Federal Trade Commission Improvement Act, Public Law 93-
637, 88 Stat. 2183 (Jan. 4, 1975) (hereinafter ``Magnuson-Moss
Act''); 15 U.S.C. 57a. Congress provided, however, that ``[a]ny
proposed rule under section 6(g) . . . with respect to which
presentation of data, views, and arguments was substantially
completed before'' section 18 was enacted ``may be promulgated in
the same manner and with the same validity as such rule could have
been promulgated had'' section 18 ``not been enacted.'' 88 Stat.
2198; 15 U.S.C. 57a note. This list therefore includes a handful of
rules promulgated under section 6(g) but after 1975 because those
rules were substantially completed before section 18's enactment.
\132\ Advertising and Labeling as to Size of Sleeping Bags, 28
FR 10900 (Oct. 11, 1963), repealed by 60 FR 65528 (Dec. 20, 1995).
\133\ Misuse of ``Automatic'' or Terms of Similar Import as
Descriptive of Household Electric Sewing Machines, 30 FR 8900 (Jul.
15, 1965), repealed by 55 FR 23900 (June 13, 1990).
\134\ Deception as to Nonprismatic and Partially Prismatic
Instruments Being Prismatic Binoculars, 29 FR 7316 (Jun. 5, 1964),
repealed by 60 FR 65529 (Dec. 20, 1995).
\135\ Deceptive Use of ``Leakproof,'' ``Guaranteed Leakproof,''
etc., as Descriptive of Dry Cell Batteries, 29 FR 6535 (May 20,
1964), repealed by 62 FR 61225 (Nov. 17, 1997).
\136\ Deceptive Advertising and Labeling as to Size of
Tablecloths and Related Products, 29 FR 11261 (Aug. 5, 1964),
repealed by 60 FR 65530 (Dec. 20, 1995).
\137\ Misbranding and Deception as to Leather Content of Waist
Belts, 29 FR 8166 (Jun. 27, 1964), repealed by 61 FR 25560 (May 22,
1996).
\138\ Deceptive Advertising and Labeling of Previously Used
Lubricating Oil, 29 FR 11650 (Aug. 14, 1964), repealed by 61 FR
55095 (Oct. 24, 1996).
\139\ Unfair or Deceptive Advertising and Labeling of Cigarettes
in Relation to the Health Hazards of Smoking, 29 FR 8324 (July 2,
1964), repealed by 30 FR 9485 (July 29, 1965). As explained in more
detail herein, Congress superseded this rule with legislation.
\140\ Incandescent Lamp (Light Bulb) Industry, 35 FR 11784 (Jul.
23, 1970), repealed by 61 FR 33308 (Jun. 27, 1996).
\141\ Deceptive Advertising as to Sizes of Viewable Pictures
Shown by Television Receiving Sets, 31 FR 3342 (Mar. 3, 1966),
repealed by 83 FR 50484 (Oct. 9, 2018).
\142\ Discriminatory Practices in Men's and Boys' Tailored
Clothing Industry, 32 FR 15584 (Nov. 9, 1967), repealed by 59 FR
8527 (Feb. 23, 1994).
\143\ Failure to Disclose that Skin Irritation May Result from
Washing or Handling Glass Fiber Curtains and Draperies and Glass
Fiber Curtain and Drapery Fabrics, 32 FR 11023 (Jul. 28, 1967),
repealed by 60 FR 65532 (Dec. 20, 1995).
\144\ Deception as to Transistor Count of Radio Receiving Sets,
Including Transceivers, 33 FR 8446 (Jun. 7, 1968), repealed by 55 FR
25090 (Jun. 20, 1990).
\145\ Failure to Disclose the Lethal Effects of Inhaling Quick-
Freeze Aerosol Spray Products Used for Frosting Cocktail Glasses, 34
FR 2417 (Feb. 20, 1969), repealed by 60 FR 66071 (Dec. 21, 1995).
\146\ Deceptive Advertising and Labeling as to Length of
Extension Ladders, 34 FR 929 (Jan. 22, 1969), repealed by 60 FR
65533 (Dec. 20, 1995).
\147\ Games of Chance in the Food Retailing and Gasoline
Industries, 34 FR 13302 (Aug. 16, 1969), repealed by 61 FR 68143
(Dec. 27, 1996).
\148\ Unsolicited Mailing of Credit Cards, 35 FR 4614 (Mar. 17,
1970), repealed by 36 FR 45 (Jan. 5, 1971). This rule was rescinded
in response to an amendment to the Truth in Lending Act that
prohibited similar conduct. See Public Law 91-508, 84 Stat. 1126
(1970).
\149\ Posting of Minimum Octane Numbers on Gasoline Dispensing
Pumps, 36 FR 23871 (Dec. 16, 1971), repealed by 43 FR 43022 (Sept.
22, 1978). This rule was superseded by the Petroleum Marketing
Practices Act, Public Law 95-297, 92 Stat. 333 (June 19, 1978). A
similar regulation was promulgated under that law at 16 CFR part
306.
\150\ Care Labeling of Textile Wearing Apparel, 36 FR 23883
(Dec. 16, 1971).
\151\ Retail Food Store Advertising and Marketing Practices, 36
FR 8777 (May 13, 1971).
\152\ Use of Negative Option Plans by Sellers in Commerce, 38 FR
4896 (Feb. 22, 1973).
\153\ Cooling-off Period for Door-to-Door Sales, 37 FR 22934
(Oct. 26, 1972).
\154\ Power Output Claims for Amplifiers Used in Home
Entertainment Products, 39 FR 15387 (May 3, 1974).
\155\ Preservation of Consumers' Claims and Defenses, 40 FR
53506 (Nov. 18, 1975).
\156\ Mail Order Merchandise, 40 FR 49492 (Oct. 22, 1975)
(regulatory text), 40 FR 51582 (Nov. 5, 1975) (statement of basis
and purpose). The Mail Order Rule has since been updated to become
the Mail, internet, or Telephone Order Merchandise Rule, or MITOR.
See 79 FR 55619 (Sept. 17, 2014). The updates to the rule were based
on the Commission's authority to regulate unfair or deceptive acts
or practices.
\157\ Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures, 43 FR 59614 (Dec. 21,
1978).
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Some of these rules attracted significant attention. For instance,
the Commission began the rulemaking process to require warnings on
cigarette packages just one week after the Surgeon General's ``landmark
report'' that determined smoking is a health hazard,\158\ and that rule
was front-page news.\159\ Following a lobbying campaign by the tobacco
industry,\160\ Congress supplanted the Commission's regulation with the
Cigarette Labeling and Advertising Act but did not disturb the
Commission's rulemaking authority.\161\ The Unavailability Rule was
likewise front-page news upon its release in 1971, and Congress left it
intact.\162\
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\158\ Teresa Moran Schwartz & Alice Saker Hrdy, FTC Rulemaking:
Three Bold Initiatives and Their Legal Impact, 2-3 (Sept. 22, 2004).
\159\ U.S. to Require Health Warning for Cigarettes, N.Y. Times
(June 25, 1964) at 1, 15 (tobacco industry indicating plans to
immediately challenge the Commission's authority to issue the
regulation), https://www.nytimes.com/1964/06/25/archives/us-to-require-health-warning-for-cigarettes-trade-commission-orders.html.
\160\ Tobacco Inst., Tobacco--A Vital U.S. Industry (1965),
https://acsc.lib.udel.edu/exhibits/show/legislation/cigarette-labeling.
\161\ Public Law 89-92, 79 Stat. 282 (July 27, 1965); see 15
U.S.C. 1331 et seq.
\162\ FTC Bars Grocery Ads for Unavailable Specials, N.Y. Times
(May 13, 1971) at 1, https://www.nytimes.com/1971/05/13/archives/f-t-c-bars-grocery-ads-for-unavailable-specials-bars-grocery; 16 CFR
424.1 and 424.2. The rule was amended after its enactment in 1971 to
add an exception and defenses but otherwise remains intact as
promulgated. Amendment to Trade Regulation Rule Concerning Retail
Food Store Advertising and Marketing Practices, 54 FR 35456-08 (Aug.
28, 1989); see also Retail Food Store Advertising and Marketing
Practices Rule, 79 FR 70053-01 (Nov. 25, 2014).
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In National Petroleum Refiners Association v. FTC (``Petroleum
Refiners''), the D.C. Circuit expressly upheld the Octane Rule as a
proper exercise of the Commission's power under section 6(g) to make
rules regulating both unfair methods of competition and unfair or
deceptive acts or practices.\163\ After construing ``the words of the
statute creating the Commission and delineating its powers,'' the court
held ``that under the terms of its governing statute . . . and under
Section 6(g) . . . the Federal Trade Commission is authorized to
promulgate rules defining the meaning of the statutory standards of the
illegality the Commission is empowered to prevent.'' \164\ That
interpretation was also ``reinforced by the construction courts have
given similar provisions in the authorizing statutes of other
administrative agencies.'' \165\ The Seventh Circuit later agreed with
the D.C. Circuit's decision and ``incorporate[d] [it] by reference''
when rejecting a challenge to the Mail Order Rule.\166\
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\163\ Nat'l Petroleum Refiners Ass'n v. FTC, 482 F.2d 672 (D.C.
Cir. 1973).
\164\ Nat'l Petroleum Refiners, 482 F.2d at 674, 698; see also
Am. Fin. Servs. Ass'n v. FTC, 767 F.2d 957, 967 (D.C. Cir. 1985)
(concluding, after extensive review of the legislative history
related to the FTC's rulemaking authority originating in 1914 and
extending through amendments to the FTC Act in 1980, that ``Congress
has not at any time withdrawn the broad discretionary authority
originally granted the Commission in 1914 to define unfair practices
on a flexible, incremental basis.'').
\165\ Nat'l Petroleum Refiners, 482 F.2d at 678.
\166\ United States v. JS & A Grp., Inc., 716 F.2d 451, 454 (7th
Cir. 1983).
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Following such rulemakings and the D.C. Circuit's confirmation of
the Commission's rulemaking power in Petroleum Refiners, Congress in
1975 enacted a new section 18 of the FTC Act. This new section
introduced special procedures, beyond those required under the
Administrative Procedure Act, for promulgating rules for unfair or
deceptive acts or practices, and it eliminated the Commission's
authority to issue such rules under section 6(g).\167\ But Congress
pointedly chose not to restrict the Commission's authority to
promulgate rules regulating unfair methods of competition under section
6(g). That choice was deliberate. While considering this legislation,
Congress knew that the Commission had promulgated rules regulating
unfair methods of competition and that the D.C. Circuit in Petroleum
Refiners had confirmed the Commission's authority to do so.\168\ And
Congress expressly considered--but rejected--an amendment to the FTC
Act under which ``[t]he FTC would have been prohibited from prescribing
rules with respect to unfair competitive practices.'' \169\
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\167\ Magnuson-Moss Act, 88 Stat. 2183; see 15 U.S.C. 57a.
\168\ S. Rep. No. 93-151, at 32 (1973).
\169\ H.R. Conf. Rep. No. 93-1606, at 30 (1974).
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Instead, the enacted section 18 confirmed the Commission's
authority to make rules under section 6(g). The law expressly preserved
``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.'' \170\
Congress also made clear that Section 18 ``shall not affect the
validity of any rule which was promulgated under section 6(g).'' \171\
And it provided that ``[a]ny proposed rule under section 6(g)'' with
certain components that were ``substantially completed before'' section
18's enactment ``may be promulgated in the same manner and with the
same validity as such rule could have been promulgated had this section
not been enacted.'' \172\ Among the substantially completed rules at
the time was the Mail Order Rule, which proposed to define--and upon
promulgation did define--certain conduct as both an unfair method of
competition and an unfair or deceptive act or practice.\173\ The 1975
legislation thus expressly permitted the Commission to promulgate a
rule under section 6(g) that defined an unfair method of competition
and evinces Congress's

[[Page 38351]]

intent to leave in place the Commission's authority to promulgate such
rules under section 6(g). As the Seventh Circuit later put it,
``Congress . . . considered the controversy surrounding the
Commission's substantive rulemaking power under Section 6(g) to have
been settled by the Octane Rating case.'' \174\
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\170\ 15 U.S.C. 57a(a)(2).
\171\ Magnuson-Moss Act, 88 Stat. 2183.
\172\ Magnuson-Moss Act, 88 Stat. 2183.
\173\ See Undelivered Mail Order Merchandise and Services, 36 FR
19092 (Sept. 28, 1971) (initial NPRM); 39 FR 9201 (Mar. 8, 1974)
(amended NPRM); 40 FR 49492 (Oct. 22, 1975) (final regulatory text).
\174\ United States v. JS & A Grp., 716 F.2d 451, 454 (7th Cir.
1983).
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Congress again confirmed the Commission's authority to promulgate
rules regulating unfair methods of competition under section 6(g) when
it enacted section 22 of the FTC Act as part of the Federal Trade
Commission Improvements Act of 1980.\175\ Section 22 imposes certain
procedural requirements the Commission must follow when it promulgates
any ``rule.'' Section 22(a) defines ``rule'' as ``any rule promulgated
by the Commission under section 6 or section 18'' while excluding from
that definition ``interpretive rules, rules involving Commission
management or personnel, general statements of policy, or rules
relating to Commission organization, procedure, or practice.'' \176\
Thus, by its terms, section 22(a) demonstrates the 1980 Congress's
understanding that the Commission maintained authority to promulgate
rules under section 6 that are not merely ``interpretive rules, rules
involving Commission management or personnel, general statements of
policy, or rules relating to Commission organization, procedure, or
practice.'' \177\ Section 22 envisions rules that will have the force
of law as legislative rules and defines ``rule'' based on whether it
may ``have an annual effect on the national economy of $100,000,000 or
more,'' ``cause a substantial change in the cost or price of goods or
services,'' or ``have a significant impact upon'' persons and
consumers.\178\ Section 22(b) of the Act similarly contemplates
authority to make legislative rules by imposing regulatory analysis
obligations on any rules that the Commission promulgates under section
6.\179\ The specific obligations in section 22(b), such as the
requirement for the Commission to conduct a cost-benefit analysis,
assume that section 6(g) authorizes substantive and economically
significant rules.
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\175\ Public Law 96-252, 94 Stat. 374 (1980).
\176\ Id.; see 15 U.S.C. 57b-3(a)(1).
\177\ 15 U.S.C. 57b-3(a)(1).
\178\ Id.
\179\ 15 U.S.C. 57b-3(b).
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Both the 1975 and 1980 amendments to the FTC Act thus indicate that
Congress understood the Commission possessed rulemaking power under
section 6(g) and chose to leave that authority in place.\180\ As the
Supreme Court has observed, ``[t]he long time failure of Congress to
alter'' a statutory provision, like section 6(g) here, ``after it had
been judicially construed, and the enactment by Congress of legislation
which implicitly recognizes the judicial construction as effective, is
persuasive of legislative recognition that the judicial construction is
the correct one.'' \181\ That is especially true when, as here, ``the
matter has been fully brought to the attention of the public and the
Congress, the latter has not seen fit to change the statute.'' \182\
Were there any doubt that the 1914 Congress granted the Commission the
authority to make rules under section 6(g) to prevent unfair methods of
competition, the Congresses of 1975 and 1980 eliminated such doubt by
ratifying the D.C. Circuit's decision holding that the Commission has
such authority.
---------------------------------------------------------------------------

\180\ Congress has also amended section 6 since the D.C. Circuit
decided Petroleum Refiners, but it left section 6(g) untouched. See
Public Law 109-455, 120 Stat. 3372 (2006).
\181\ Apex Hosiery Co. v. Leader, 310 U.S. 469, 488 (1940).
\182\ Id. at 489.
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C. Comments and Responses Regarding the Commission's Legal Authority

The Commission received many comments supporting, discussing, or
questioning its authority to promulgate the final rule. Numerous
commenters supported that the Commission has such authority, including,
among others, legal scholars and businesses.\183\ In addition, hundreds
of small businesses--hailing from 45 States and the District of
Columbia--joined a comment by the Small Business Majority supporting
the final rule.\184\
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\183\ See, e.g., Comment of Lev Menand et al., FTC-2023-0007-
20871; Comment of Peter Shane et al., FTC-2023-0007-21024; Comment
of Yelp, FTC-2023-0007-20974; Comment of Veeva Systems, FTC-2023-
0007-18078.
\184\ Comment of Sm. Bus. Majority, FTC-2023-0007-21022.
---------------------------------------------------------------------------

Commenters questioning the Commission's authority typically
advanced one of three arguments. First, some commenters claimed the FTC
Act does not grant the Commission authority to promulgate the rule.
Second, some commenters contended that the validity of non-competes is
a major question that Congress has not given the Commission the
authority to address. And third, some commenters argued that Congress
had impermissibly delegated to the Commission authority to promulgate
nationwide rules governing methods of competition. A smaller number of
comments asserted other, miscellaneous reasons the Commission allegedly
lacked authority to promulgate the rule. The Commission has considered
these comments and disagrees for the reasons explained below.
1. The Commission's Authority Under the FTC Act
The Commission received numerous comments claiming that it lacks
authority under the FTC Act to promulgate rules prohibiting unfair
methods of competition. The Commission disagrees. Congress expressly
granted the Commission authority to promulgate such rules in the
original FTC Act of 1914, Congress enacted legislation in 1975
expressly preserving that authority,\185\ and it imposed requirements
in 1980 that presumed that authority.
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\185\ Some commenters argued that the 1975 Magnuson-Moss Act,
which created additional procedures the Commission must use to
promulgate rules regulating unfair or deceptive acts or practices,
implies that the Commission entirely lacks authority to promulgate
rules regulating unfair methods of competition. The Commission
disagrees with these comments and notes the effect of the 1975
legislation, which preserved the Commission's existing rulemaking
authority.
---------------------------------------------------------------------------

The Commission is not persuaded by commenters' arguments in
opposition to its authority. For instance, some commenters argued that
Congress's choice to exclude certain industries from the Commission's
jurisdiction indicates that Congress did not intend to give the
Commission power to pass rules that affect commerce across the national
economy.\186\ But Congress expressly ``empowered and directed'' the
Commission to prevent unfair methods of competition throughout the
economy,\187\ in any activities ``in or affecting commerce,'' subject
only to limited exceptions. The final rule will apply only to the
extent that the Commission has jurisdiction under the FTC Act. The Act
does not limit the Commission's authority to pursue, for example,
industry-specific rulemaking. Where Congress wished to limit the scope
of the Commission's authority over particular entities or activities,
it did so expressly, demonstrating its intent to give the Commission
broad enforcement authority over activities in or affecting commerce
outside the scope of the enumerated exceptions.\188\ That section 22 of
the FTC Act requires the Commission to perform a regulatory analysis
for amendments to rules based on, inter alia, ``their annual effect on
the

[[Page 38352]]

national economy'' confirms the same.\189\
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\186\ E.g., Comment of Fed'n of Am. Hosps., FTC-2023-0007-21034.
\187\ 15 U.S.C. 45(a)(2).
\188\ 15 U.S.C. 45(a)(2), (3).
\189\ 15 U.S.C. 57b-3 (outlining requirements of the
Commission's rulemaking process for new rules and amendments); see
also Part II.E (discussing the Commission's jurisdiction).
---------------------------------------------------------------------------

Other commenters argued that the Commission is relying on vague or
ancillary provisions for its authority and invoked the familiar refrain
that Congress ``does not . . . hide elephants in mouseholes.'' \190\
None of the provisions on which the Commission is relying are either
vague or ancillary. As explained earlier, preventing unfair methods of
competition is at the core of the Commission's mandate, the plain text
of the Act gives the Commission rulemaking authority to carry out that
mandate, and the Commission has exercised this rulemaking authority
before.\191\ The D.C. Circuit and Seventh Circuits have upheld that
exercise of authority, and Congress preserved this authority in
subsequent amendments to the Act following the D.C. Circuit's
decision.\192\
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\190\ Whitman v. Am. Trucking Ass'ns, 531 U.S. 457, 468 (2001);
see, e.g., Comment of La. And 12 Other States, FTC-2023-0007-21094.
\191\ See Part II.B (discussing the Commission's history of
using section 6(g) to promulgate rules).
\192\ Id.
---------------------------------------------------------------------------

Additional commenters cited select legislative history from the
1914 FTC Act to suggest the Commission lacks authority to promulgate
rules regulating competition.\193\ ``[T]here is no reason to resort to
legislative history'' when, as here, the text of the statute speaks
plainly.\194\ Even if that were not the case, however, the legislative
history does not unambiguously compel a different conclusion. Faced
with similar arguments to those raised by commenters here, in National
Petroleum Refiners, the D.C. Circuit conducted an exhaustive review of
the 1914 FTC Act and concluded ``the legislative history of section 5
and Section 6(g) is ambiguous'' and ``certainly does not compel the
conclusion that the Commission was not meant to exercise the power to
make substantive rules with binding effect[.]'' \195\ As the D.C.
Circuit explained, even individual statements by some Congresspeople
that might suggest otherwise,\196\ when properly contextualized, ``can
be read to support substantive rule-making of the kind asserted by
the'' Commission.\197\
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\193\ E.g., Comment of Nat'l Ass'n of Mfrs., FTC-2023-0007-
20939; Comment of La. And 12 Other States, FTC-2023-0007-21094.
\194\ United States v. Gonzales, 520 U.S. 1, 6 (1997).
\195\ Nat'l Petroleum Refiners Ass'n v. FTC, 482 F.2d 672, 686
(D.C. Cir. 1973).
\196\ Id. at 704; see also, e.g., Comment from La. and 12 Other
States, FTC-2023-0007-21094 (identifying statements and failed bills
that, the commenters say, show the Commission was not intended to
possess rulemaking authority).
\197\ Nat'l Petroleum Refiners, 482 F.2d at 709.
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Statements from the enactment of the 1975 Magnuson Moss Act, which
added section 18 to the FTC Act, confirm the Commission's authority to
promulgate rules under section 6(g). That legislative history reveals
Congress in 1975 made a considered decision to reject an effort to
overturn the D.C. Circuit's interpretation of the FTC Act and instead
confirmed that section 6(g) authorizes the Commission to promulgate
legislative rules concerning unfair methods of competition.\198\ More
importantly, these sorts of individual statements cannot trump the
plain text of the Act that Congress passed,\199\ which gave the
Commission the authority ``to make rules and regulations for the
purpose of carrying out the provisions'' of the FTC Act. Indeed, even
if the legislative history were to be selectively read to cut against
the Commission's authority, the Commission would still conclude that
section 6(g) confers authority to promulgate this final rule because
the plain text of the statute (including both the original 1914 Act and
subsequent enacted amendments to the FTC Act) unambiguously confers
that authority.
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\198\ For example, while the Senate was considering amendments
to the FTC Act, Senator Hart read excerpts of Nat'l Petroleum
Refiners into the record. See 120 Cong. Rec. 40712 (Dec. 18, 1974).
These short excerpts included the court acknowledging that it was
considering whether the Commission ``is empowered to promulgate
substantive rules'' that would ``give greater specificity and
clarity to the broad standard of illegality--`unfair methods of
competition' . . .--which the agency is empowered to prevent.'' Id.
(quoting Nat'l Petroleum Refiners, 482 F.2d at 673). Senator Hart
then explained that the ``procedural requirements . . . respecting
FTC rulemaking'' in the bill under consideration ``are limited to
unfair or deceptive acts or practices rules.'' Id. ``These
provisions and limitations,'' he explained, ``are not intended to
affect the Commission's authority to prescribe and enforce rules
respecting unfair methods of competition.'' Id. ``Rules respecting
unfair methods of competition,'' Senator Hart said, ``should
continue to be prescribed in accordance with'' the APA. Id.; see
also Comment of Lev Menand et al., FTC-2023-0007-20871 at 3-6
(recounting legislative history that preceded the 1975 amendments to
the FTC Act).
\199\ See Barnhart v. Sigmon Coal Co., 534 U.S. 438, 457 (2002)
(``Floor statements from two Senators [who were sponsors of the
bill] cannot amend the clear and unambiguous language of a
statute.'').
---------------------------------------------------------------------------

In short, neither the legislative history of the FTC Act, nor any
of the other arguments commenters raised about the Commission's
rulemaking authority overcome the plain meaning of the Act or
Congress's ratification of the Commission's power to make rules
preventing unfair methods of competition, as discussed in Part
II.B.\200\
---------------------------------------------------------------------------

\200\ This includes arguments about the legislative intent,
structure, or post-enactment history of the 1914 FTC Act.
---------------------------------------------------------------------------

The Commission acknowledges that individual members of the
Commission have, at times, disclaimed the Commission's authority to
promulgate rules regulating unfair methods of competition.\201\ The
statement of an individual Commissioner does not reflect the views of
or bind ``[t]he Commission itself,'' which has concluded--just as it
did when it issued such rules in the past--that it does possess such
authority.\202\ In any event, the Commission has reviewed these
statements, along with the many comments it received, and does not
believe any of the arguments raised in support of that position
overcome the plain meaning of the FTC Act provisions.
---------------------------------------------------------------------------

\201\ See, e.g., Nat'l Petroleum Refiners, 482 F.2d at 695-96 &
n. 32, 38-39; NPRM at 3544 (dissenting statement of Commissioner
Wilson).
\202\ Nat'l Petroleum Refiners, 482 F.2d at 694; see also 16 CFR
4.14(c) (``Commission action'' requires ``the affirmative
concurrence of a majority of the participating Commissioners'').
---------------------------------------------------------------------------

2. Major Questions Doctrine
Many commenters assert that the Commission lacks the authority to
adopt the final rule based on the major questions doctrine. That
doctrine, as the Supreme Court recently explained in West Virginia v.
EPA, ``teaches that there are extraordinary cases . . . in which 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.'' \203\ In such cases, ``something more than a merely
plausible textual basis for the agency action is necessary. The agency
instead must point to clear congressional authorization for the power
it claims.'' \204\ Having considered the factors that the Supreme Court
has used to identify major questions, the Commission concludes that the
final rule does not implicate the major questions doctrine. And even if
that doctrine did apply, the Commission concludes that Congress
provided clear authorization for the Commission to promulgate this
rule.\205\
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\203\ W. Va. v. EPA, 597 U.S. 697, 721 (2022) (cleaned up).
\204\ Id. at 723 (cleaned up).
\205\ The Commission notes that some commenters either
implicitly or explicitly focused on the Commission's rulemaking
authority, as opposed to the Commission's authority to define non-
competes as an unfair method of competition, as a major question.
The Commission has already addressed the source of its rulemaking
authority, see Part II.B. But to be clear, the Commission concludes
that neither its rulemaking authority under section 6(g) nor its
authority to use that power to define non-competes as an unfair
method of competition implicates the major questions doctrine, and
that even assuming either did, Congress has provided express
statutory authority for both.

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[[Page 38353]]

The agency authority underlying this final rule rests on firm
historical footing. There is nothing novel about the Commission's
assertion of authority to promulgate legislative rules under section
6(g).\206\ As explained in Part II.B, the Commission has used this
authority for more than 60 years to promulgate many rules defining
unfair methods of competition and/or unfair or deceptive acts or
practices.\207\ The Commission's use of this power sometimes garnered
significant attention, such as when it made national news by requiring
cigarette warnings in the immediate wake of the Surgeon General's
groundbreaking report on the health effects of smoking.\208\ And the
Commission's rulemaking authority was long ago ``addressed''--and
affirmed--``by a court.'' \209\ Moreover, after that high-profile
rulemaking and judicial affirmation, Congress considered--and twice
reaffirmed--the Commission's authority to issue legislative rules
defining unfair methods of competition under section 6(g).\210\ Indeed,
even when Congress decided to displace the FTC's Cigarette Rule with
legislation, it left the Commission's rulemaking authority in
place.\211\ Likewise, when Congress added procedural steps the
Commission must take when promulgating rules concerning unfair or
deceptive acts or practices, it expressly allowed the Commission to
complete certain ongoing rulemakings, including one that relied on
section 6(g) to define an unfair method of competition.\212\ This is
not a situation where Congress ``conspicuously and repeatedly''
declined to grant the agency the claimed power.\213\
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\206\ W. Va. v. EPA, 597 U.S. at 725.
\207\ See Part II.B (discussing the Commission's history of
promulgating rules under section 6(g)).
\208\ See Part II.B (discussing Cigarette Rule and Holder Rule);
see also ``U.S. to Require Health Warning for Cigarettes,'' N.Y.
Times (June 25, 1964) at 1, 15 (tobacco industry indicating plans to
immediately challenge the Commission's authority to issue the
regulation).
\209\ W. Va. v. EPA, 597 U.S. at 725; see Part II.B (discussing
decisions from the D.C. Circuit and Seventh Circuit affirming the
Commission's rulemaking power under section 6(g)).
\210\ See Part II.B (discussing the history and content of
sections 18 and 22 of the FTC Act).
\211\ See Federal Cigarette Labeling and Advertising Act, Public
Law 89-92, 79 Stat. 282 (July 27, 1965).
\212\ 15 U.S.C. 57a(a)(2); see Part II.B (discussing the Mail
Order Rule).
\213\ W. Va. v. EPA, 597 U.S. at 724.
---------------------------------------------------------------------------

Nor does the substance of the rule represent any departure from the
Commission's past practices. Since its establishment in 1914, the
Commission has had the authority to determine whether given practices
constitute unfair methods of competition. Rather than trying to define
all the many and varied practices that are unfair, Congress empowered
the Commission to respond to changing market conditions and to bring
specialized expertise to bear when making unfairness
determinations.\214\ As noted in Part I.B, the Commission has
previously secured consent orders premised on the use of non-competes
being an unfair method of competition,\215\ and there is little
question that the Commission has the authority to determine that non-
competes are unfair methods of competition through adjudication.\216\
Indeed, one commenter who asserted the rule would violate the major
questions doctrine expressly agreed that the Commission could determine
that a specific non-compete is an unfair method of competition through
case-by-case adjudication.\217\ The Commission is making the same kind
of determination here through rulemaking rather than adjudication.\218\
And because the rulemaking process allows all interested parties a
chance to weigh in, this process ``may actually be fairer to parties
than total reliance on case-by-case adjudication.'' \219\ This is thus
not a situation where the agency's action would fundamentally change
the nature of the regulatory scheme. Determining whether a practice is
an ``unfair method of competition'' under section 5 has been a core
task of the Commission for more than a century--and, indeed, goes to
the heart of its mandate.
---------------------------------------------------------------------------

\214\ See, e.g., FTC v. R.F. Keppel & Bro., 291 U.S. 304, 311
n.2, 314 (1934).
\215\ In those orders, the party agreed, inter alia, to cease
and desist from enforcing or attempting to enforce existing non-
competes and from entering into or attempting to enter into new
ones, and also agreed to provide notice to affected employees that
they are no longer subject to a non-compete. See Part I.B n.42-44
(citing recent Commission investigations and consent orders
involving non-competes).
\216\ To the extent that any commenters argued the Commission
lacked authority over the entire subject matter of non-compete
agreements, the Commission did not see any compelling explanation
that an agreement not to compete falls outside the meaning of a
``method of competition.''
\217\ Comment of Int'l Ctr. For L. & Econs., FTC-2023-0007-
20753, at 75-76.
\218\ Nat'l Petroleum Refiners Ass'n v. FTC, 482 F.2d 672 at 685
(D.C. Cir. 1973) (recognizing that the Commission may ``choose[ ]to
elaborate'' section 5's ``comprehensive statutory standards through
rule-making or through case-by-case adjudication'').
\219\ Id. at 681; see generally Part IX.C.2 (discussing the
value of rulemaking).
---------------------------------------------------------------------------

Additionally, non-competes have already been the subject of FTC
scrutiny and enforcement actions, so subjecting them to rulemaking is a
more incremental--and thus less significant--step than it would be for
an agency to wade into an area not currently subject to its enforcement
authority. And the present rulemaking is consistent with both
Congress's intent for the Commission and the Commission's prior
practice. Congress ``empowered and directed'' the Commission ``to
prevent persons, partnerships, or corporations'' within the
Commission's jurisdiction ``from using unfair methods of competition in
or affecting commerce.'' \220\ Following that directive, the Commission
has previously used its section 6(g) authority to promulgate rules that
reach industries across the economy. For example, the Mail Order Rule
placed restrictions on any sale conducted by mail,\221\ and the
Negative Option Rule requires certain disclosures for some negative
option plans. These rules--promulgated nearly 50 or more years ago--
applied across the industries within the FTC's jurisdiction, yet no
court has held that they exceeded the Commission's authority.\222\
Indeed, the Seventh Circuit upheld the Mail Order Rule as a valid
exercise of that authority.\223\
---------------------------------------------------------------------------

\220\ 15 U.S.C. 45(a)(2).
\221\ Mail Order Merchandise, 40 FR 49492 (Oct. 22, 1975); see
16 CFR part 435.
\222\ See Part II.B (listing rules promulgated by the FTC
exercising authority under sections 5 and 6(g)).
\223\ United States v. JS & A Grp., 716 F.2d 451, 454 (7th Cir.
1983).
---------------------------------------------------------------------------

Congress itself recognized that the Commission's authority will
sometimes affect firms across the economy. Indeed, addressing unfair
methods of competition and unfair and deceptive practices across
industries (other than the industries, activities, or entities Congress
expressly exempted) is the core of the Commission's mandate--and the
Commission has long pursued that mandate through both rulemaking \224\
and adjudication.\225\ Congress imposed

[[Page 38354]]

certain requirements in section 22 on any amendment to a Commission
rule promulgated under section 6 (or section 18) that would have
certain substantial effects on the national economy, the price of goods
or services, or regulated entities and consumers.\226\ Congress thus
anticipated--and intended--that the Commission's rulemaking power
carried the potential to affect the economy in considerable ways, and
Congress already considered and specified the necessary steps and
checks to ensure the Commission's exercise of that power is
appropriate. For all these reasons, the final rule does not involve a
``major question'' as the Supreme Court has used that term.
---------------------------------------------------------------------------

\224\ See Part II.B.
\225\ The Commission's adjudicatory power, like its rulemaking
power, stretches across the national economy. For instance, the
Commission has found companies in a variety of industries
participated in price-fixing conspiracies that violated section 5
and ordered them to cease and desist from such practices following
an adjudication. See, e.g., Eugene Dietzgen Co. v. FTC, 142 F.2d 321
(7th Cir. 1944) (scientific instruments); U.S. Maltsters Ass'n v.
FTC, 152 F.2d 161 (7th Cir. 1945) (malt manufacturers); Keasbey &
Mattison Co. v. FTC, 159 F.2d 940 (6th Cir. 1947) (asbestos
insulation); Allied Paper Mills v. FTC, 168 F.2d 600 (7th Cir. 1948)
(book paper manufacturers); Bond Crown & Cork. Co. v. FTC, 176 F.2d
974 (4th Cir. 1949) (bottle cap manufacturers). Price-fixing is just
one example. The Commission's adjudicatory power also supported a
cease-and-desist order concerning a food manufacturer's resale
practices more than 100 years ago. FTC v. Beech-Nut Packing, 257
U.S. 441 (1922). And it supported a cease-and-desist order within
the past few years enjoining a pharmaceutical company from entering
into reverse payment settlement schemes. Impax Labs., Inc. v. FTC,
994 F.3d 484 (5th Cir. 2021). In the century between, the Commission
has found section 5 violations based on false advertising, monopoly
maintenance, exclusive dealing, and more in diverse sectors
throughout the country.
\226\ 15 U.S.C. 57b-3; see also Part II.B.
---------------------------------------------------------------------------

Even if the final rule does present a major question, the final
rule passes muster because the FTC Act provides clear authorization for
the Commission's action. In cases involving major questions, courts
expect Congress to ``speak clearly'' if it wishes to assign the
disputed power.\227\ Congress did so when it ``declared unlawful'' in
the FTC Act ``[u]nfair methods of competition'' and empowered the
Commission ``to make rules and regulations for the purpose of carrying
out the provisions of th[e] Act.'' \228\ Congress ``[i]n large
measure'' left ``the task of defining `unfair methods of competition' .
. . to the Commission.'' \229\ That is precisely what the Commission
has done here, for the reasons elaborated in Part IV. Finally, there is
no doubt that the Commission has expertise in the field (competition)
it is regulating here.\230\ For these reasons, even if the final rule
involves a major question, Congress has clearly delegated to the
Commission the authority to address that question.
---------------------------------------------------------------------------

\227\ W. Va. v. EPA, 597 U.S. 697, 716, 723 (2002).
\228\ FTC Act of 1914, 38 Stat. at 721-22; see 15 U.S.C. 45(a),
46(g); see also Part II.A (discussing the Commission's rulemaking
authority).
\229\ FTC v. Texaco, Inc., 393 U.S. 223, 225 (1968).
\230\ Cf. W. Va. v. EPA, 597 U.S. at 729 (noting the Court's
view that the EPA had traditionally lacked the expertise needed to
develop the rule at issue); Ala. Ass'n of Realtors v. HHS, 594 U.S.
758, at 764-65 (2021) (questioning the link between the Center for
Disease Control and an eviction moratorium); see also Part II.A
(discussing Congress's creation of the Commission as an expert
body); Parts IV.B and IV.C (discussing the rationale for the rule
and explaining the negative effects non-competes have on
competition). The Commission also notes that through, inter alia,
the roundtables and enforcement actions described in Part I.B, and
through this rulemaking process, it has acquired expertise on non-
competes specifically. The Commission further notes that non-
competes are, inherently, a method of competition.
---------------------------------------------------------------------------

3. Non-Delegation Doctrine
Some commenters also objected that Congress violated the non-
delegation doctrine by empowering the Commission to promulgate rules
regulating unfair methods of competition. The Commission disagrees. The
non-delegation doctrine provides that ``Congress generally cannot
delegate its legislative power to another Branch.'' \231\ But the
Constitution does not ``prevent Congress from obtaining the assistance
of its coordinate Branches.'' \232\ ``So long as Congress shall lay
down by legislative act an intelligible principle to which the person
or body authorized to [exercise the delegated authority] is directed to
conform, such legislative action is not a forbidden delegation of
legislative power.'' \233\ Applying this rule, the Supreme Court has
``over and over upheld even very broad delegations'' including those
directing agencies ``to regulate in `the public interest,' . . . to set
`fair and equitable' prices and `just and reasonable' rates,'' and ``to
issue whatever air quality standards are `requisite to protect the
public health.' '' \234\ ``The Supreme Court has'' also ``explained
that the general policy and boundaries of a delegation `need not be
tested in isolation' '' and ``[i]nstead, the statutory language may
derive content from the `purpose of the Act, its factual background and
the statutory context in which they appear.' '' \235\
---------------------------------------------------------------------------

\231\ Mistretta v. United States, 488 U.S. 361, 372 (1989).
\232\ Id.
\233\ Id. (alteration in original).
\234\ Gundy v. United States, 139 S. Ct. 2116, 2121 (2019)
(citing Nat'l Broadcasting Co. v. United States, 319 U.S. 190, 216
(1943); N.Y. Cent. Secs. Corp. v. United States, 287 U.S. 12, 24
(1932); Yakus v. United States, 321 U.S. 414, 422 (1944); Fed. Power
Comm'n v. Hope Natural Gas Co., 320 U.S. 591 (1944); and Whitman v.
Am. Trucking Ass'ns, 531 U.S. 457, 472 (2001)).
\235\ TOMAC, Taxpayers of Mich. Against Casinos v. Norton, 433
F.3d 852, 866 (D.C. Cir. 2006) (quoting Am. Power & Light Co. v.
SEC, 329 U.S. 90, 104 (1946)).
---------------------------------------------------------------------------

Here, Congress ``declared unlawful'' any ``unfair methods of
competition in or affecting commerce'' and ``empowered and directed''
the Commission ``to prevent'' entities within its jurisdiction ``from
using unfair methods of competition.'' \236\ Congress also instructed
the Commission to ``make rules and regulations for the purpose of
carrying out the provisions'' of the FTC Act.\237\ Congress's stated
purpose and policy in section 5 provides the Commission with an
intelligible principle to guide its section 6(g) rulemaking
authority.\238\
---------------------------------------------------------------------------

\236\ 15 U.S.C. 45(a)(1)-(2).
\237\ 15 U.S.C. 46(g).
\238\ As the D.C. Circuit noted in Nat'l Petroleum Refiners
Ass'n v. FTC, ``the Supreme Court has ruled that the powers
specified in Section 6 do not stand isolated from the Commission's
enforcement and law applying role laid out in Section 5.'' 482 F.2d
672, 677 (D.C. Cir. 1973) (citing United States v. Morton Salt Co.,
338 U.S. 632 (1950)).
---------------------------------------------------------------------------

Were there any doubt, the Supreme Court has laid it to rest in
A.L.A. Schechter Poultry Corp. v. United States.\239\ Schechter Poultry
marked one of two occasions ``in this country's history'' that the
Supreme Court ``found a delegation excessive,'' and ``in each case . .
. Congress had failed to articulate any policy or standard to confine
discretion.'' \240\ The Court offered the FTC Act, however, as a
counterexample of proper Congressional delegation. The Court recognized
that the phrase ``unfair methods of competition'' in the FTC Act was
``an expression new in the law'' without ``precise definition,'' but
that Congress had empowered the Commission to ``determine[ ] in
particular instances, upon evidence, in the light of particular
competitive conditions and of what is found to be a specific and
substantial public interest'' whether a method of competition is
unfair.\241\ The FTC Act stood in contrast, the Court explained, to the
National Industrial Recovery Act (``NIRA''), which the Court held
included an unconstitutional delegation.\242\
---------------------------------------------------------------------------

\239\ A.L.A. Schechter Poultry Corp. v. United States, 295 U.S.
495 (1935).
\240\ Gundy, 588 U.S. at 2129 (internal quotation omitted); cf.
also Panama Refin. Co. v. Ryan, 293 U.S. 388 (1935) (finding
impermissible delegation).
\241\ Schechter Poultry, 295 U.S. at 532-33.
\242\ Id. at 529-42.
---------------------------------------------------------------------------

The Commission recognizes that Schechter Poultry approved of the
FTC Act's adjudicatory process for determining unfair methods of
competition without commenting on the Act's rulemaking provision. But
the ``unfair method of competition'' authority the Court approvingly
cited in Schechter Poultry is the same intelligible principle the
Commission is applying in this rulemaking. And just as the adjudication
process provides for a ``formal complaint, for notice and hearing, for
appropriate findings of fact supported by adequate evidence, and for
judicial review,'' \243\ the APA rulemaking process provides for a
public notice of proposed rulemaking, the opportunity to ``submi[t] . .
. written data, views, or arguments,'' agency consideration of those
comments, and judicial review.\244\ If Congress may permissibly
delegate the

[[Page 38355]]

authority to determine through adjudication whether a given practice is
an unfair method of competition, it may also permit the Commission to
do the same through rulemaking.\245\
---------------------------------------------------------------------------

\243\ Id. at 533.
\244\ 5 U.S.C. 553, 702.
\245\ Nat'l Petroleum Refiners Ass'n v. FTC, 482 F.2d 672, 685
(D.C. Cir. 1973); cf. SEC v. Chenery Corp., 332 U.S. 194, 202-03
(1947) (``Some principles must await their own development, while
others must be adjusted to meet particular, unforeseeable
situations. In performing its important functions in these respects,
therefore, an administrative agency must be equipped to act either
by general rule or by individual order. To insist upon one form of
action to the exclusion of the other is to exalt form over
necessity.'').
---------------------------------------------------------------------------

For these reasons, the Commission concludes that its authority to
promulgate rules regulating unfair methods of competition is not an
impermissible delegation of legislative authority.
4. Other Challenges to the Commission's Authority
Finally, a handful of comments raised other, miscellaneous
arguments contending that the Commission lacks authority to promulgate
the rule. The Commission has reviewed and considered these comments and
concludes they do not undercut the Commission's authority to promulgate
the final rule.
The Commission received several comments about the Commerce Clause.
That clause allows Congress ``to regulate Commerce with foreign
Nations, and among the several States, and with the Indian tribes.''
\246\ Consistent with that clause, the FTC Act empowers the Commission
to prevent unfair methods of competition ``in or affecting commerce,''
which the Act also defines consistently with the Constitution.\247\ One
commenter wrote to support the rule and emphasized that non-competes
restrict the free flow of interstate commerce. Others argued that the
proposed rule would violate the Commerce Clause by regulating local
commerce. The Commission has considered these comments and concludes
that it may promulgate the final rule consistent with the Commerce
Clause. The final rule extends to the full extent of the FTC's
jurisdiction, which in turn extends no further than the Commerce Clause
permits. As the Supreme Court has explained, the phrase ``in or
affecting commerce'' in section 5 of the FTC Act is ``coextensive with
the constitutional power of Congress under the Commerce Clause.'' \248\
In this final rule, the Commission finds the use of non-competes by
employers substantially affects commerce as that term is defined in the
FTC Act. The final rule is therefore a lawful exercise of Congress's
delegated power.\249\
---------------------------------------------------------------------------

\246\ U.S. Const. art. I, sec. 8, cl. 3.
\247\ 15 U.S.C. 44, 45(a)(1).
\248\ United States v. Am. Bldg. Maintenance Indus., 422 U.S.
271, 277, n.6 (1975).
\249\ See Nat'l Fed'n of Indep. Bus. v. Sebelius, 567 U.S. 519,
549 (2012) (``Congress's power'' under the Commerce Clause ``is not
limited to regulation of an activity that by itself substantially
affects interstate commerce, but also extends to activities that do
so only when aggregated with similar activities of others.''); see
also Part I.B.2 (discussing prevalence of non-competes) and Part
IX.C.2 (addressing the need for a nationwide regulation prohibiting
non-competes).
---------------------------------------------------------------------------

Relatedly, one commenter objected that the rule would violate the
Tenth Amendment, which provides that ``[t]he powers not delegated to
the United States by the Constitution, nor prohibited by it to the
States, are reserved to the States respectively, or to the people.''
\250\ But as just explained, the Constitution grants Congress the power
to regulate interstate commerce, and pursuant to that power Congress
granted the Commission authority to prevent unfair methods of
competition in or affecting commerce. The Commission is not intruding
on any power reserved to the States.
---------------------------------------------------------------------------

\250\ U.S. Const. amend. X.
---------------------------------------------------------------------------

Some commenters objected that the rule infringes on the right to
contract. One of these commenters acknowledged that the Constitution's
Contracts Clause does not apply to the Federal government.\251\
Regardless, even assuming the Constitution protects a right to contract
that can be asserted against a Federal regulation, that right sounds in
substantive due process, and the Commission must offer only a rational
basis for the rule.\252\ As relevant here, the final rule advances the
Commission's congressional mandate to prevent unfair methods of
competition and will promote competition and further innovation among
its many benefits.\253\ There is a rational relationship between
regulating non-competes and these legitimate government purposes.
---------------------------------------------------------------------------

\251\ See U.S. Const. art. I, sec. 10, cl. 1.
\252\ See, e.g., L & H Sanitation, Inc. v. Lake City Sanitation,
Inc., 769 F.2d 517, 522 (8th Cir. 1985).
\253\ See Parts IV.B and IV.C, Part X.F.6.
---------------------------------------------------------------------------

One commenter argued that the proposed rule was unconstitutionally
vague. This commenter's objection focused on the proposed provision
governing de facto non-competes. The Commission is not adopting that
proposed language in the final rule. Instead, the Commission has
clarified the scope of its definition of non-compete clause. Whether a
specific clause falls within the scope of the final rule will
necessarily depend on the precise language of the agreement at issue,
but the text of the final rule provides regulated parties with
sufficient notice of what the law demands to satisfy any due process
vagueness concerns.

D. Compliance With the Administrative Procedure Act (``APA'')

Some commenters also contended that the Commission has not complied
with the Administrative Procedure Act (``APA'').\254\ At a high level,
the APA requires prior public notice, an opportunity to comment, and
consideration of those comments before an agency can promulgate a
legislative rule.\255\ The Commission has engaged in that process,
which has led to this final rule and the accompanying explanation. Some
comments failed to recognize the NPRM was a preliminary step that did
not fossilize the Commission's consideration of arguments or weighing
of evidence. Moreover, the APA ``limits causes of action under the APA
to final agency action.'' \256\ It is this final rule, not the NPRM,
that constitutes final agency action. Before adopting this final rule,
the Commission reviewed and considered all comments received. In many
instances, the Commission has made changes relative to the proposed
rule to address concerns that commenters raised. In all cases, however,
the Commission has complied with the APA.
---------------------------------------------------------------------------

\254\ This includes, for example, a commenter who argued that
the NPRM was not the product of reasoned decision-making, asserting
that the Commission had failed to consider key aspects of the rule
or misconstrued evidence; commenters who argued that the rule was
arbitrary and capricious for failing to consider less restrictive
alternatives; commenters who argued that the NPRM failed to consider
State policy or that the Commission would be acting arbitrarily by
not passing a uniform rule; and commenters who argued that the
Commission had failed to consider reliance interests. The Commission
has addressed the concerns underlying these comments in other parts
of this statement of basis and purpose.
\255\ 5 U.S.C. 553; see also Elec. Priv. Info. Ctr. v. DHS, 653
F.3d 1, 5 (D.C. Cir. 2011) (APA ``generally require[s] an agency to
publish notice of a proposed rule in the Federal Register and to
solicit and consider public comments upon its proposal.'').
\256\ Trudeau v. FTC, 456 F.3d 178, 188-89 (D.C. Cir. 2006)
(internal quotation marks omitted); see 5 U.S.C. 704.
---------------------------------------------------------------------------

E. The Commission's Jurisdiction Under the FTC Act

The Commission's jurisdiction derives from the FTC Act. Employers
that are outside the Commission's jurisdiction under the FTC Act are
not subject to the final rule. The Commission clarifies in the
definition of person in Sec. 910.1, that the rule applies only to
those within the Commission's jurisdiction. Some commenters sought a
more detailed accounting of the

[[Page 38356]]

Commission's jurisdiction under the FTC Act. The Commission addresses
those comments in this section. Comments seeking an exclusion for
entities within the Commission's jurisdiction are addressed in Parts
V.D.3 and V.D.4.
1. Generally
Certain entities that would otherwise be subject to the final rule
may fall outside the FTC's jurisdiction under the FTC Act. The FTC Act
exempts certain entities or activities from the Commission's
enforcement jurisdiction, which otherwise applies to ``persons,
partnerships, or corporations.'' \257\ For example, the Act exempts
``banks'' and ``persons, partnerships, or corporations insofar as they
are subject to the Packers and Stockyards Act.'' \258\ And the Act
excludes from its definition of ``corporation'' any entity that is not
``organized to carry on business for its own profit or that of its
members.'' \259\ The NPRM explained that, where an employer is exempt
from coverage under the FTC Act, the employer would not be subject to
the rule.\260\ The NPRM also explained State and local government
entities--as well as some private entities--may not be subject to the
rule when engaging in activity protected by the State action
doctrine.\261\ Some commenters stated that the Commission should
restate, clarify, interpret, or limit the reach of its authority under
the FTC Act in the rule.
---------------------------------------------------------------------------

\257\ 15 U.S.C. 45(a)(2); see also FTC v. AT&T Mobility LLC, 883
F.3d 848, 853-56 (9th Cir. 2018) (en banc).
\258\ 15 U.S.C. 45(a)(2).
\259\ 15 U.S.C. 44.
\260\ NPRM at 3510.
\261\ Id. (citing Parker v. Brown, 317 U.S. 341, 350-51 (1943)).
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In response, the Commission explains that the final rule extends to
covered persons that are within the Commission's jurisdiction. The
Commission does not believe restating or further specifying each
jurisdictional limit in the final rule's text is necessary; the FTC Act
defines the limits of the Commission's jurisdiction and those limits
govern this rule. Moreover, the Commission cannot here provide guidance
that applies to every fact and circumstance. Whether an entity falls
under the Commission's jurisdiction can be a fact-specific
determination. An attempt by the Commission to capture all potential
interpretations of the laws governing exclusions from the FTC Act may
create confusion rather than clarity. In response to commenters who
asked the Commission to affirm that the final rule does not bind
agencies that regulate firms outside the Commission's jurisdiction
under the FTC Act, the Commission affirms that the Commission applies
the final rule only to entities that are covered by the FTC Act.\262\
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\262\ For example, a few community bank commenters expressed
concern that because the Federal Deposit Insurance Corporation
(``FDIC'') can enforce the FTC Act against banks, the rule could be
applied by the FDIC to banks. The FTC Act is the Commission's
organic statute, and interpretive authority of the FTC Act rests
with the Commission. Whether other agencies enforce section 5 or
apply the rule to entities under their own jurisdiction is a
question for those agencies. At the same time, as discussed in this
Part II.E.1, the Commission applies and enforces the rule only to
the extent of its jurisdiction.
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A State government agency commenter suggested that the Commission
explicitly exempt State and local governments from the rule. The
commenter pointed to conflicts-of-interest policies used by some State
agencies to preclude former employees from working on related projects
or jobs in the private sector, which the commenter stated do not
implicate the policy concerns the FTC seeks to address in the rule. The
commenter also noted the complexity of when the Commission's
jurisdiction might extend to State and local governments. The
Commission clarifies in the definition of ``person'' in Sec. 910.1
that the final rule applies only to a legal entity within the
Commission's jurisdiction. The Commission also explains in Part III.E
that the definition of ``person'' is coextensive with the Commission's
authority to issue civil investigative demands. Nothing in this rule
changes the extent of the Commission's jurisdiction over State and
local governments. The Commission declines to specify all circumstances
under which a governmental entity or quasi-governmental entity would or
would not be subject to the Commission's jurisdiction and, thus, this
final rule. In any event, with respect to the government ethics
policies referenced by the commenter, to the extent the commenter is
referring to traditional ``cooling off'' policies that preclude former
government employees from working on discrete, specific projects that
fell within the scope of their former official governmental position to
address ethical concerns, such policies would not meet the definition
of ``non-compete clause'' in Sec. 910.1 because they do not prohibit,
penalize or function to prevent a worker from switching jobs or
starting a new business.
2. Jurisdiction Over Entities Claiming Nonprofit Status Under the FTC
Act or the Internal Revenue Code
Commenters from the healthcare industry argued that the Commission
should restate, clarify, interpret, or limit the reach of its authority
under the FTC Act specifically for the healthcare industry. They
pointed to the prevalence of healthcare organizations registered under
section 501(c) of the Internal Revenue Code claiming tax-exempt status
as nonprofits. Commenters contended that these organizations are
categorically outside the Commission's authority under the FTC Act. In
fact, under existing law, these organizations are not categorically
beyond the Commission's jurisdiction. To dispel this misunderstanding,
the Commission summarizes the existing law pertaining to its
jurisdiction over non-profits.
a. Comments Received
Business and trade industry commenters from the healthcare
industry, including, for example, hospitals, physician practices, and
surgery centers, focused on whether the Commission has jurisdiction
over nonprofit organizations registered under section 501(c)(3) of the
Internal Revenue Code in light of the FTC Act's definition of
``corporation.'' Section 501(c)(3) exempts from taxation certain
religious, charitable, scientific, educational, and other corporations,
``no part of the net earnings of which inure[] to the benefit of any
private shareholder or individual.'' \263\ An entity is a
``corporation'' under the FTC Act only if it is ``organized to carry on
business for its own profit or that of its members.'' \264\ Several
industry commenters argued the Commission does not have jurisdiction
over entities that claim tax-exempt status as nonprofits because they
are, by definition, not ``organized to carry on business for [their]
own profit or that of [their] members.'' The Commission presumes that
commenters self-identifying as or referring to ``nonprofits,'' ``not-
for-profits,'' or other similar terms without further explanation are
referencing entities claiming tax-exempt status under section 501(c)(3)
or other provisions of the Internal Revenue Code. Some commenters
contended that, to avoid confusion, the rule should state it does

[[Page 38357]]

not apply to entities claiming tax-exempt status as non-profits. At
least one commenter stated that the Commission should clarify whether
and how the rule would apply to healthcare entities claiming tax-exempt
status as nonprofits and then reopen the comment period. One commenter
sought clarification on how ownership interest in a for-profit entity
or joint venture with a for-profit partner by an entity that claims
tax-exempt status as a nonprofit would affect the rule's applicability.
---------------------------------------------------------------------------

\263\ 26 U.S.C. 501(c)(3). Other, less frequently invoked
paragraphs of section 501(c) also identify corporations and
organizations that qualify for tax-exempt status. The distinctions
between these entities and those claiming tax-exempt status under
501(c)(3) are analyzed under the same standard.
\264\ 15 U.S.C. 44.
---------------------------------------------------------------------------

b. The Final Rule
The final rule applies to the full scope of the Commission's
jurisdiction. Many of the comments about nonprofits erroneously assume
that the FTC's jurisdiction does not capture any entity claiming tax-
exempt status as a nonprofit. Given these comments, the Commission
summarizes Commission precedent and judicial decisions construing the
scope of the Commission's jurisdiction as it relates to entities that
claim tax-exempt status as nonprofits and to other entities that may or
may not be organized to carry on business for their own profit or the
profit of their members.
Congress empowered the Commission to ``prevent persons,
partnerships, or corporations'' from engaging in unfair methods of
competition.\265\ To fall within the definition of ``corporation''
under the FTC Act, an entity must be ``organized to carry on business
for its own profit or that of its members.'' \266\ These FTC Act
provisions, taken together, have been interpreted in Commission
precedent \267\ and judicial decisions \268\ to mean that the
Commission lacks jurisdiction to prevent section 5 violations by a
corporation not organized to carry on business for its own profit or
that of its members.
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\265\ 15 U.S.C. 45(a)(2). The Commission focuses on coverage as
``corporations'' in this section.
\266\ 15 U.S.C. 44.
\267\ In the Matter of Coll. Football Ass'n, 117 F.T.C. 971,
992-999 (1990).
\268\ California Dental Ass'n v. FTC, 526 U.S. 756, 766 (1999);
Cmty. Blood Bank of Kansas City Area, Inc. v. FTC, 405 F.2d 1011,
1016 (8th Cir. 1969); FTC v. Univ. Health, Inc., 938 F.2d 1206, 1214
(11th Cir. 1991).
---------------------------------------------------------------------------

The Commission stresses, however, that both judicial decisions and
Commission precedent recognize that not all entities claiming tax-
exempt status as nonprofits fall outside the Commission's jurisdiction.
As the Eighth Circuit has explained, ``Congress took pains in drafting
Sec. 4 [15 U.S.C. 44] to authorize the Commission to regulate so-
called nonprofit corporations, associations and all other entities if
they are in fact profit-making enterprises.'' \269\ The Commission
applies a two-part test to determine whether a corporation is organized
for profit and thus within the Commission's jurisdiction. As the
Commission has explained, ``[t]he not-for profit jurisdictional
exemption under Section 4 requires both that there be an adequate nexus
between an organization's activities and its alleged public purposes
and that its net proceeds be properly devoted to recognized public,
rather than private, interests.'' \270\ Alternatively stated, the
Commission looks to both ``the source of the income, i.e., to whether
the corporation is organized for and actually engaged in business for
only charitable purposes, and to the destination of the income, i.e.,
to whether either the corporation or its members derive a profit.''
\271\ This test reflects the Eighth Circuit's analysis in Community
Blood Bank of Kansas City Area, Inc. v. FTC and ``the analogous body of
federal law which governs treatment of not-for-profit organizations
under the Internal Revenue Code.'' \272\ Under this test, a
corporation's ``tax-exempt status is certainly one factor to be
considered,'' but that status ``does not obviate the relevance of
further inquiry into a [corporation's] operations and goals.'' \273\
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\269\ Blood Bank, 405 F.2d at 1018; see also, e.g., FTC v. Nat'l
Comm'n on Egg Nutrition, 517 F.2d 485, 488 (7th Cir. 1975).
\270\ Coll. Football Ass'n, 117 F.T.C. at 998.
\271\ Id. at 994 (internal quotation and citation omitted).
\272\ Id. at 994.
\273\ In the Matter of the Am. Med. Assoc., 94 F.T.C. 701, 1979
WL 199033, at *221 (FTC Oct. 12, 1979).
---------------------------------------------------------------------------

Merely claiming tax-exempt status in tax filings is not
dispositive. At the same time, if the Internal Revenue Service
(``IRS'') concludes that an entity does not qualify for tax-exempt
status, such a finding would be meaningful to the Commission's analysis
of whether the same entity is a corporation under the FTC Act.
Administrative proceedings and judicial decisions involving the
Commission or the IRS \274\ have identified numerous private benefits
that, if offered, could render an entity a corporation organized for
its own profit or that of its members under the FTC Act, bringing it
within the Commission's jurisdiction. For instance, the Commission has
exercised jurisdiction in a section 5 enforcement action over a
physician-hospital organization because the organization engaged in
business on behalf of for-profit physician members.\275\ That
organization, which consisted of over 100 private physicians and one
non-profit hospital, claimed tax-exempt status as a nonprofit.\276\
Similarly, the Commission has exercised jurisdiction over an
independent physician association claiming tax-exempt status as a
nonprofit. The association consisted of private, independent physicians
and private, small group practices.\277\ That association was organized
for the pecuniary benefit of its for-profit members because it
``contract[ed] with payers, on behalf of its [for-profit] physician
members, for the provision of physician services for a fee.'' \278\
Under IRS precedent in the context of purportedly tax-exempt nonprofit
hospitals and other related entities that partner with for-profit
entities, where the purportedly nonprofit entity ``has ceded effective
control'' to a for-profit partner, ``conferring impermissible private
benefit,'' the entity loses tax-exempt status.\279\ The IRS has also
rejected claims of nonprofit tax-exempt status for entities that pay
unreasonable compensation, including percentage-based compensation, to
founders, board members, their families, or other insiders.\280\
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\274\ The Commission offers examples of decisions from the IRS
and Tax Court as examples that the Commission may deem persuasive.
Although ``[r]ulings of the Internal Revenue Services are not
binding upon the Commission,'' the Commission has recognized that
``a determination by another Federal agency that a respondent is or
is not organized and operated exclusively for eleemosynary purposes
should not be disregarded.'' Am. Med. Assoc., 1979 WL 199033 at
*221.
\275\ In the Matter of Preferred Health Servs., Inc., FTC No.
41-0099, 2005 WL 593181, at *1 (Mar. 2, 2005).
\276\ Id. at *1.
\277\ In the Matter of Boulder Valley Individual Prac. Assoc.,
149 F.T.C. 1147, 2010 WL 9434809, at *2 (Apr. 2, 2010).
\278\ Boulder Valley, 2010 WL 9434809, at *2. The Commission has
similarly exercised jurisdiction where an entity claiming nonprofit
tax-exempt status provides pecuniary benefit to for-profit entities
or individuals. See, e.g., In the Matter of Mem'l Hermann Health
Network Providers, 137 F.T.C. 90, 92 (2004); Preferred Health, 2005
WL 593181, at *1-*2; Advoc. Health Partners, F.T.C. No. 31-0021,
2007 WL 643035, at *3-*4 (Feb. 7, 2007); Conn. Chiropractic Ass'n,
F.T.C. No. 71-0074, 2008 WL 625339, at *2 (Mar. 5, 2008); Am. Med.
Ass'n v. FTC, 638 F.2d 443 (2d Cir. 1980), aff'd, 455 U.S. 676
(1982).
\279\ Redlands Surgical Servs. v. Comm'r, 242 F.3d 904, 904-05
(9th Cir. 2001); see also St. David's Health Care Sys. v. United
States, 349 F.3d 232, 239 (5th Cir. 2003).
\280\ See Fam. Tr. of Mass., Inc. v. United States, 892 F. Supp.
2d 149, 155-156 (D.D.C. 2012); I.R.S. G.C.M. 39,674 (Oct. 23, 1987);
Bubbling Well Church of Universal Love, Inc. v. Comm'r, No. 5717-
79X, 1980 WL 4453 (T.C. June 9, 1980) (``[E]xcessive payments made
purportedly as compensation constitute benefit inurement in
contravention of section 501(c)(3).'').
---------------------------------------------------------------------------

These examples are illustrative. As has been the case for decades,
under Commission precedent and judicial

[[Page 38358]]

decisions construing the scope of the Commission's jurisdiction, any
entity satisfying the two-prong test falls within the Commission's
jurisdiction. Such entities would thus be bound by the final rule.\281\
---------------------------------------------------------------------------

\281\ The Commission cannot predict precisely how many entities
claiming nonprofit tax-exempt status may be subject to the final
rule. The Commission finds that the benefits of the final rule
justify implementing it no matter how many nonprofit entities
claiming tax-exempt status it ultimately reaches--including under
the unlikely assumption that it does not reach any of them.
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F. The Legal Standard for Unfair Methods of Competition Under Section 5

In section 5 of the FTC Act, ``unfair methods of competition in or
affecting commerce'' are ``declared unlawful.'' \282\ In enacting
section 5, Congress intentionally did not mirror either the common law
or the text or judicial interpretations of the Sherman Act, but instead
adopted this new term.\283\ As the Supreme Court has confirmed, this
different term reflects a distinct standard.\284\ Under section 5, the
Commission assesses two elements: (1) whether the conduct is a method
of competition, as opposed to a condition of the marketplace, and (2)
whether it is unfair, meaning that it goes beyond competition on the
merits. The latter inquiry has two components: (a) whether the conduct
has indicia of unfairness and (b) whether the conduct tends to
negatively affect competitive conditions. These two components are
weighed according to a sliding scale.
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\282\ 15 U.S.C. 45(a)(1).
\283\ The Clayton Antitrust Act (38 Stat. 730, ch. 323, Pub. L.
63-212, Oct. 15, 1914) was signed into law weeks after the FTC Act
of 1914, 38 Stat. 717.
\284\ See FTC v. Ind. Fed'n of Dentists, 476 U.S. 447, 454
(1986); FTC v. Sperry & Hutchinson, 405 U.S. 233, 243-44 (1972); FTC
v. Brown Shoe Co., 384 U.S. 316, 321 (1966); FTC v. Motion Picture
Advert. Serv., 344 U.S. 392, 394-95 (1953); FTC v. R.F. Keppel &
Bro., 291 U.S. 304, 309-10 (1934). While some commenters argued the
Commission should apply the rule of reason in this rule, as outlined
in Parts II.A, II.B, II.C, and II.F, neither the text of section 5,
the Supreme Court and other courts' interpretation of section 5, nor
the legislative history support the conclusion that the Commission
should apply the rule of reason to determine whether conduct
violates section 5 as an unfair method of competition. The
Commission outlines the legal standard for finding certain uses of
non-competes to be unfair methods of competition in the final rule
in this Part II.F.
---------------------------------------------------------------------------

Indicia of unfairness include the extent to which the conduct may
be coercive, exploitative, collusive, abusive, deceptive, predatory, or
involve the use of economic power of a similar nature.\285\ Indicia of
unfairness may also be present if the conduct is otherwise restrictive
or exclusionary, depending on the circumstances, such as the nature of
the commercial setting and the current and potential future effects of
the conduct.\286\ Notably, section 5 does not limit indicia of
unfairness to conduct that benefits one or more firms and necessarily
disadvantages others. Instead, restrictive and exclusionary conduct may
also be unlawful where it benefits specific firms while tending to
negatively affect competitive conditions.\287\
---------------------------------------------------------------------------

\285\ See e.g., Sperry & Hutchinson Co., 405 U.S. at 243
(holding section 5 reaches conduct shown to exploit consumers,
citing R.F. Keppel & Bro., 291 U.S. at 313); Atl. Refin. Co. v. FTC,
381 U.S. 357, 369 (1965) (holding that the ``utilization of economic
power in one market to curtail competition in another . . . .
bolstered by actual threats and coercive practices'' was an unfair
method of competition); FTC v. Texaco, 393 U.S. 223, 228-29 (1968)
(finding that use of ``dominant economic power . . . in a manner
which tended to foreclose competition'' is an unfair method of
competition); E.I. du Pont de Nemours v. FTC (Ethyl), 729 F.2d 128,
137, 140 (2d Cir. 1984) (finding that unfair methods of competition
includes practices that are ``collusive, coercive, predatory,
restrictive or deceitful'' as well as ``exclusionary'').
\286\ See, e.g., Motion Picture Advert. Serv. Co., 344 U.S. at
395-96; Luria Bros. & Co. v. FTC, 389 F.2d 847, 860-61 (3d Cir.
1968). As the Supreme Court has made clear, the inquiry into the
nature of the commercial setting does not, however, require market
definition or proof of market power. See, e.g., Atl. Refin. Co., 381
U.S. at 371 (finding it ``unnecessary to embark upon a full scale
economic analysis of competitive effect''). 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. FTC, Policy Statement
Regarding the Scope of Unfair Methods of Competition Under Section 5
of the Federal Trade Commission Act (Nov. 10, 2022) (hereinafter
``FTC Policy Statement''). The FTC Policy Statement cites a number
of cases explaining that section 5 does not require market
definition or proof of market power. Id. at 10.
\287\ See, e.g., Brown Shoe Co., 384 U.S. at 320 (``Thus the
question . . . is whether the Federal Trade Commission can declare
it to be an unfair practice for Brown, the second largest
manufacturer of shoes in the Nation, to pay a valuable consideration
to hundreds of retail shoe purchasers in order to secure a
contractual promise from them that they will deal primarily with
Brown and will not purchase conflicting lines of shoes from Brown's
competitors. We hold that the Commission has power to find, on the
record here, such an anticompetitive practice unfair . . . .'')
---------------------------------------------------------------------------

The second prong, whether conduct tends to negatively affect
competitive conditions, focuses on the nature and tendency of the
conduct. It does not turn on whether the conduct directly caused actual
harm in the specific instance at issue and therefore does not require a
detailed economic analysis or current anticompetitive effects.\288\
Instead, the inquiry examines whether the conduct has a tendency to
negatively affect competitive conditions, including by raising prices,
reducing output, limiting choice, lowering quality, reducing
innovation, impairing or excluding other market participants, reducing
the likelihood of potential or nascent competition, reducing labor
mobility, suppressing worker compensation or degrading working
conditions for workers. These concerns may arise when the conduct is
examined in the aggregate along with the conduct of others engaging in
the same or similar conduct.\289\ Section 5 does not require a separate
showing of market power or market definition.\290\ Nor does section 5
import the rule-of-reason analysis applied under other antitrust laws,
including in some Sherman Act cases.\291\
---------------------------------------------------------------------------

\288\ Atl. Refin. Co., 381 U.S. at 371 (It is ``unnecessary to
embark upon a full scale economic analysis of competitive
effect.''); Texaco, 393 U.S. at 230 (``It is enough that the
Commission found that the practice in question unfairly burdened
competition for a not insignificant volume of commerce.''); Union
Circulation Co. v. FTC, 241 F.2d 652, 657 (2d Cir. 1957) (``The
agreements should be struck down if their reasonable tendency, as
distinguished from actual past effect, is to injure or obstruct
competition. Under the Federal Trade Commission Act, industry
agreements and practices have been enjoined without an actual
showing of injury to competition . . . .''). See also Sperry &
Hutchinson Co., 405 U.S. at 244 (``[U]nfair competitive practices
[are] not limited to those likely to have anticompetitive
consequences after the manner of the antitrust laws.''); Ethyl, 729
F.2d at 138 (finding that evidence of actual harm is not required);
In re Coca-Cola Co., 117 F.T.C. 795, 915 n.25 (1994) (rejecting
argument that section 5 violation requires showing of
``anticompetitive effects'').
\289\ Motion Picture Advert. Serv. Co., 344 U.S. at 395; Union
Circulation Co., 241 F.2d at 658 (``The tendency of the `no-
switching' agreements is to discourage labor mobility, and thereby
the magazine-selling industry may well become static in its
composition to the obvious advantage of the large, well-established
signatory agencies and to the disadvantage of infant
organizations.'').
\290\ Atl. Refin. Co., 381 U.S. at 371; Texaco, 393 U.S. at 230;
L.G. Balfour Co. v. FTC, 442 F.2d 1, 19-20 (7th Cir. 1971) (no proof
of foreclosure of a relevant market necessary in an exclusive
dealing contract case under section 5 (citing Brown Shoe)).
\291\ See Part II.A.
---------------------------------------------------------------------------

The Commission weighs the two elements--indicia of unfairness and
tendency to negatively affect competitive conditions--on a sliding
scale. Where the indicia of unfairness are clear, conduct may be an
unfair method of competition with only a limited showing of a tendency
to negatively affect competitive conditions.\292\ For example, conduct
that is coercive and exploitative evinces facial unfairness and weighs
heavily as clear indicia of unfairness.\293\ Where indicia of
unfairness are less clear, conduct may still violate section 5 where it
tends to negatively affect

[[Page 38359]]

competitive conditions, but a stronger showing of such tendency is
required.
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\292\ See, e.g., Ethyl, 729 F.2d at 137-39; FTC Policy
Statement, supra note 286, at 9.
\293\ See e.g., Sperry & Hutchinson Co., 405 U.S. at 243; Ethyl,
729 F.2d at 139, 140 (finding that unfair methods of competition
include practices that are ``collusive, coercive, predatory,
restrictive, or deceitful'' as well as ``exclusionary''); FTC Policy
Statement, supra note 286, at 7, 9.
---------------------------------------------------------------------------

In many cases the Commission (and courts) have held conduct to
constitute an unfair method of competition by pointing to clear indicia
of unfairness, including coercive or exploitative conduct, without
conducting a detailed economic analysis of its effects. In Atlantic
Refining Co. v. FTC and FTC v. Texaco, Inc., the Supreme Court held
that 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.\294\ The Court determined
in Atlantic Refining that ``a full-scale economic analysis of
competitive effect'' was not required and the Commission needed only to
show that the conduct burdened ``a not insubstantial portion of
commerce.'' \295\ The Court reiterated this standard in Texaco holding
that, even though the impact was less harmful than the conduct in
Atlantic Refining, ``the anticompetitive tendencies of [the challenged]
system are clear, and . . . the Commission was properly fulfilling the
task that Congress assigned it in halting this practice in its
incipiency.'' \296\ As the Court observed, ``[t]he Commission is not
required to show that a practice it condemns has totally eliminated
competition.'' \297\ In FTC v. R.F. Keppel & Brother, Inc., the Supreme
Court held that 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.\298\ The Court considered the
extent of the practice and concluded ``[the practice] is successful in
diverting trade from competitors'' without engaging in a full-scale
economic analysis.\299\
---------------------------------------------------------------------------

\294\ Atl. Refin. Co., 381 U.S. at 369-70; Texaco, 393 U.S. at
228-29.
\295\ Atl. Refin. Co., 381 U.S. at 371. See also Texaco, 393
U.S. at 230 (finding that the practice unfairly burdened competition
for a not insignificant volume of commerce); FTC v. R.F. Keppel &
Bro., 291 U.S. 304, 309 (1934) (``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.'').
\296\ Texaco, 393 U.S. at 230 (further noting that ``[i]t is
enough that the Commission found that the practice in question
unfairly burdened competition for a not insignificant volume of
commerce.'').
\297\ Id. at 230. See also Shell Oil Co. v. FTC, 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.'').
\298\ 291 U.S. 304, 313.
\299\ 291 U.S. at 308-09.
---------------------------------------------------------------------------

In other cases, the Commission (and courts) have held exclusionary
or restrictive conduct was an unfair method of competition based on
evidence of the conduct's tendency to negatively affect competitive
conditions without focusing on the indicia of unfairness, including
whether the conduct is coercive or exploitative. But an evidentiary
showing or detailed economic analysis that such conduct generated
actual anticompetitive effects or would do so in the future still was
not required. For example, in Union Circulation Company v. FTC, the
Second Circuit held the Commission established an unfair method of
competition where a group of door-to-door subscription solicitation
agencies agreed not to hire workers who were previously employed by
another signatory agency.\300\ The court looked to whether the
``reasonably foreseeable effect'' of the agencies' conduct would be to
``impair or diminish competition between existing [competitors]'' or
prevent potential new rivals.\301\ In finding the conduct was an unfair
method of competition, the court concluded that ``[t]he tendency of the
. . . agreements is to discourage labor mobility, and thereby the
magazine-selling industry may well become static in its composition to
the obvious advantage of the large, well established signatory agencies
and to the disadvantage of infant organizations.'' \302\ In FTC v.
Brown Shoe Co., the Supreme Court held that an exclusive dealing
arrangement under which the Brown Shoe Company offered shoe retailers
``a valuable consideration . . . to secure a contractual promise from
them that they will deal primarily with Brown and will not purchase
conflicting lines of shoes from Brown's competitors'' violated section
5 consistent with the Commission's authority ``to arrest trade
restraints in their incipiency.'' \303\ Of course, evidence of actual
adverse effects on competition meets the requirement to show a tendency
to negatively affect competitive conditions. For example, in FTC v.
Motion Picture Advertising Service Co., the Supreme Court held that an
exclusive dealing arrangement violated section 5 where there was
``substantial evidence'' that the contracts ``unreasonably restrain
competition.'' \304\
---------------------------------------------------------------------------

\300\ 241 F.2d 652, 655 (2d Cir. 1957).
\301\ Id. at 658. Notably, the court also considered facially
coercive conduct by which the door-to-door subscription agencies
coerced magazine publishers into not doing business with one of
their competitors because the competitor hired their former workers.
Id. at 655-56. The court upheld the Commission's order concluding
this conduct was an unfair method of competition under section 5.
The court did not conduct any related economic analysis and simply
concluded that the ``illegal scheme of coercion . . . is clearly
unjustified.'' Id.
\302\ Id. at 658; see also Nichols v. Spencer Intern. Press,
Inc., 371 F.2d 332, 334 (7th Cir. 1967) (``Granting that the
antitrust laws were not enacted for the purpose of preserving
freedom in the labor market, nor of regulating employment practices
as such, nevertheless it seems clear that agreements among supposed
competitors not to employ each other's employees not only restrict
freedom to enter into employment relationships, but may also,
depending upon the circumstances, impair full and free competition
in the supply of a service or commodity to the public.'')
\303\ FTC v. Brown Shoe Co., 384 U.S. 316, 320, 322 (1966).
\304\ FTC v. Motion Picture Advert. Serv. Co., 344 U.S. 392,
395-96 (1953); see also L.G. Balfour Co. v. FTC, 442 F.2d 1, 14 (7th
Cir. 1971) (holding that a firm's exclusive dealing contracts
violated section 5 where such contracts were `anti-competitive' '').
---------------------------------------------------------------------------

Respondents in unfair method of competition cases sometimes assert
purported justifications as an affirmative defense. Some courts have
declined to consider justifications altogether. However, where
defendants raise justifications as an affirmative defense, the
Commission and courts have consistently held that pecuniary benefit to
the party responsible for the conduct in question is not cognizable as
a justification.\305\ Additionally, to the extent justifications are
asserted, they must be legally cognizable,\306\ non-pretextual,\307\
and any restriction used to bring about the benefit must be narrowly
tailored to limit any adverse impact on competitive conditions.\308\
---------------------------------------------------------------------------

\305\ Atl. Refin. Co. v. FTC, 381 U.S. 357, 371 (1965)
(considering that defendant's distribution contracts at issue ``may
well provide Atlantic with an economical method of assuring
efficient product distribution among its dealers'' and holding that
the ``Commission was clearly justified in refusing the participants
an opportunity to offset these evils by a showing of economic
benefit to themselves''); FTC v. Texaco, 393 U.S. 223, 230 (1968)
(following the same reasoning as Atlantic Refining and finding that
the ``anticompetitive tendencies of such system [were] clear'');
Balfour, 442 F.2d at 15 (while relevant to consider the advantages
of a trade practice on individual companies, this cannot excuse an
otherwise illegal business practice). For provisions of the
antitrust laws where courts have not accepted justifications as part
of the legal analysis, the Commission will similarly not accept
justifications when these claims are pursued through section 5.
\306\ See, e.g., FTC v. Ind. Fed. Dentists, 476 U.S. 447, 463
(1986); Fashion Originators' Guild of Am. v. FTC, 312 U.S. 457, 468
(1941); FTC v. Superior Ct. Trial Lawyers Ass'n, 493 U.S. 411, 423-
24 (1990).
\307\ See, e.g., Ind. Fed'n of Dentists, 476 U.S. at 464. See
also United States v. Microsoft Corp., 253 F.3d 35, 62-64, 72, 74,
76-77 (D.C. Cir. 2001); Eastman Kodak Co. v. Image Technical Tech.
Svcs, 504 U.S. 541, 472, 484-85 (1992); Aspen Skiing Co. v. Aspen
Highlands Skiing Corp., 472 U.S. 585, 608-10 (1985).
\308\ NCAA v. Alston, 594 U.S. 69, 100-101 (2021); Polygram
Holding, Inc. v. FTC, 416 F.3d 29, 38 (D.C. Cir. 2005); 2000
Collaboration Guidelines, sec. 3.36b. See also Union Circulation Co.
v. FTC, 241 F.2d 652, 658 (2d Cir. 1957) (``The agreements here went
beyond what was necessary to curtail and eliminate fraudulent
practices.'').

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[[Page 38360]]

III. Section 910.1: Definitions

Section 910.1 sets forth definitions of several terms used in the
final rule.

A. Definition of ``Business Entity''

The Commission adopts the definition of ``business entity'' as
proposed.
1. Proposed Definition
The Commission proposed to define ``business entity'' as ``a
partnership, corporation, association, limited liability company, or
other legal entity, or a division or subsidiary thereof.'' \309\ The
term ``business entity'' was used in two places: (1) in proposed Sec.
910.3, which contained an exception for certain non-competes entered
into in the context of a sale of a business by a substantial owner of,
or substantial member or substantial partner in, the business
entity,\310\ and (2) in proposed Sec. 910.1(e), which defined
``substantial owner, substantial member, or substantial partner'' as an
owner, member, or partner holding at least a 25% ownership interest in
a business entity.
---------------------------------------------------------------------------

\309\ NPRM, proposed Sec. 910.1(a).
\310\ Id. at 3508.
---------------------------------------------------------------------------

The Commission explained in the NPRM that it proposed including
divisions and subsidiaries in the definition of ``business entity'' to
apply the sale-of-a-business exception where a person is selling a
division or subsidiary of a business entity.\311\ The Commission stated
the primary rationale for the sale-of-business exception--to help
protect the value of a business acquired by a buyer--also applies where
a person is selling a division or subsidiary of a business entity.\312\
---------------------------------------------------------------------------

\311\ Id. at 3509.
\312\ Id.
---------------------------------------------------------------------------

2. Comments Received
Two commenters specifically addressed the definition of business
entity. One commenter suggested a new definition using a functional
test that the commenter asserted would prevent employers from
structuring their businesses as several smaller legal entities in order
to fall within the sale-of-a-business exception. Another commenter also
suggested that the definition be amended to explicitly include
``general partnerships'' and trusts.
3. The Final Rule
The Commission adopts the definition of ``business entity'' as
proposed. The Commission declines to adopt a functional test for the
definition of ``business entity.'' As described in greater detail in
Part V.A, the sale-of-a-business exception in the final rule does not
contain a 25% ownership threshold, so employers will not have an
incentive to structure their businesses as several smaller legal
entities in order to fall within the sale-of-a-business exception. The
Commission also believes replacing the current bright-line definition
of ``business entity'' with a functional test would make it more
difficult for workers and employers to know whether a given non-compete
is enforceable in the context of the sale of a business. The Commission
concludes adding the terms ``general partnerships'' and ``trusts'' to
the definition is unnecessary, because the phrase ``other legal
entity'' already includes those entity types.

B. Definition of ``Employment''

The Commission proposed to define ``employment'' as ``work for an
employer, as the term employer is defined in Sec. 910.1(c).'' \313\
That provision defined ``employer'' as ``a person, as defined in 15
U.S.C. 57b-1(a)(6) [section 20 of the FTC Act], that hires or contracts
with a worker to work for the person.'' \314\ Section 20 defines
``person'' as ``any natural person, partnership, corporation,
association, or other legal entity, including any person acting under
color or authority of State law.'' The Commission intended the proposed
definition of ``employer'' to clarify that an employment relationship
exists, for purposes of the final rule, regardless of whether an
employment relationship exists under another law, such as a Federal or
State labor law.\315\ The final rule clarifies the definitions to
better reflect that intent.
---------------------------------------------------------------------------

\313\ Id., proposed Sec. 910.1(d).
\314\ Id., proposed Sec. 910.1(c).
\315\ Id. at 3510.
---------------------------------------------------------------------------

While commenters generally did not address the proposed definition
of ``employment,'' many commenters expressed concern that the proposed
definition of ``employer'' would exclude workers hired by one entity to
work for another, such as workers hired through a staffing agency. To
avoid excluding such workers, and consistent with the Commission's
intent to cover workers irrespective of whether they are classified as
in an ``employer-employee'' relationship under other State and Federal
laws, the final rule defines ``employment'' as ``work for a person''
and makes corresponding changes to the definition of ``employer,''
described in Part III.C. This definition of ``employment'' better
clarifies that an employment relationship exists, for purposes of the
final rule, regardless of whether an employment relationship exists
under another law, such as a Federal or State labor law.

C. Proposed Definition of ``Employer''

The Commission proposed to define employer as a ``person, as
defined in 15 U.S.C. 57b-1(a)(6) [section 20 of the FTC Act], that
hires or contracts with a worker to work for the person.'' \316\
Section 20 defines ``person'' as ``any natural person, partnership,
corporation, association, or other legal entity, including any person
acting under color or authority of State law.'' \317\ The Commission
clarified in the NPRM that a person meeting the definition of an
employer under proposed Sec. 910.1(c) would be an employer regardless
of whether the person meets another legal definition of employer, such
as a definition in Federal or State labor law.\318\ In response to
concerns raised by commenters, the final rule does not adopt a
definition of ``employer.''
---------------------------------------------------------------------------

\316\ Id., proposed Sec. 910.1(c).
\317\ 15 U.S.C. 57b-1(a)(6).
\318\ NPRM at 3510.
---------------------------------------------------------------------------

1. Comments Received
Several commenters expressed support for the proposed definition of
``employer.'' A few commenters suggested changes to the definition of
``employer'' to maximize the final rule's coverage and close potential
loopholes. Worker and employer advocates noted the proposed definition
appeared to exclude certain persons who are commonly understood to be a
worker's employer because it assumed that a worker's employer is the
same legal entity that hired or contracted with the worker. These
commenters contended the proposed definition would not cover
arrangements such as when a worker is employed through a contractual
relationship with a professional employer organization or staffing
agency; under a short-term ``loan-out arrangement,'' during which a
worker hired by one employer may work for another employer; under
contract with a parent, subsidiary, or affiliate of the business who
hired them; or by persons or entities who share common control over the
worker's work. A few of these commenters also stated that the proposed
definition creates a loophole allowing evasion of the rule through
third-party hiring. Most commenters that addressed this issue suggested
listing one or more such arrangements in the definition of ``employer''
to

[[Page 38361]]

ensure these kinds of arrangements are covered.
One worker advocacy group argued the term ``hires or contracts'' in
the proposed definition of ``employer'' is in tension with the
Commission's stated intent to broadly cover all workers, including
externs, interns, and volunteers. This commenter suggested the
definition of ``employer'' incorporate language from the Fair Labor
Standards Act (``FLSA'') definition of ``employ,'' which includes to
``suffer or permit to work.'' \319\ The commenter suggested this
language because of its breadth, noting the language originated in
State laws designed to reach businesses that use third parties to
illegally hire and supervise children.
---------------------------------------------------------------------------

\319\ 29 U.S.C. 203(g).
---------------------------------------------------------------------------

One industry trade organization argued that, to minimize
inconsistencies with the FLSA, the Commission should incorporate the
FLSA's definition of ``employer.''
2. Final Rule
After considering the comments, the Commission has revised the
definitions of ``non-compete clause'' and ``worker'' as described in
Parts III.D and III.G. These revisions make the definition of
``employer'' unnecessary, so the Commission is not finalizing a
definition of ``employer.''
These revisions clarify that the final rule covers all workers
regardless of whether they work for the same person that hired or
contracted with them to work. As explained in Part III.D, in the
definition of ``non-compete clause,'' the Commission has revised the
phrase ``contractual term between an employer and a worker'' to read
``term or condition of employment'' and has revised the phrase ``after
the conclusion of the worker's employment with the employer'' to read
``after the conclusion of the employment that includes the term or
condition.'' Furthermore, as explained in Part III.G, in the definition
of ``worker,'' the Commission has revised the phrase ``a natural person
who works, whether paid or unpaid, for an employer'' to read ``a
natural person who works or who previously worked, whether paid or
unpaid.''
The Commission is adopting this more general language, rather than
listing the exact kinds of contractual arrangements and entities (e.g.,
staffing agencies, affiliates, joint employers, etc.) to avoid
unnecessary or confusing terminology, evasion of the final rule through
complex employment relationships, and the need to specify myriad fact-
specific scenarios. The language is designed to capture indirect
employment relationships as a general matter without regard to the
label used.

D. Definition of ``Non-Compete Clause''

Based on the comments received, the Commission adopts a slightly
modified definition of ``non-compete clause'' in Sec. 910.1. Section
910.1 defines a ``non-compete clause'' as a term or condition of
employment that prohibits a worker from, penalizes a worker for, or
functions to prevent a worker from (A) seeking or accepting work in the
United States with a different person where such work would begin after
the conclusion of the employment that includes the term or condition;
or (B) operating a business in the United States after the conclusion
of the employment that includes the term or condition. Section 910.1
further provides that, for purposes of the final rule, ``term or
condition of employment ``includes, but is not limited to, a
contractual term or workplace policy, whether written or oral.''
Similar to the proposed rule, the final rule applies to terms and
conditions that expressly prohibit a worker from seeking or accepting
other work or starting a business after their employment ends, as well
as agreements that penalize or effectively prevent a worker from doing
the same.
1. Proposed Definition
The Commission's proposed definition of ``non-compete clause''
consisted of proposed Sec. 910.1(b)(1) and (b)(2). Proposed Sec.
910.1(b)(1) would have defined ``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(b)(2) would have provided that the
definition in proposed Sec. 910.1(b)(1) 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.''
The Commission explained that the proposed definition of non-
compete clause would be limited to non-competes between employers and
workers and would not apply to other types of non-competes, for
example, non-competes between two businesses.\320\ The Commission
further explained the definition would be limited to post-employment
restraints (i.e., restrictions on what the worker may do after the
conclusion of the worker's employment) and would not apply to
concurrent-employment restraints (i.e., restrictions on what the worker
may do during the worker's employment).\321\
---------------------------------------------------------------------------

\320\ NPRM at 3509.
\321\ Id.
---------------------------------------------------------------------------

In the NPRM, the Commission noted that, rather than expressly
prohibiting a worker from competing against their employer, some non-
competes require workers to pay damages if they compete against their
employer. The Commission explained that courts generally view these
contractual terms as non-competes and that proposed Sec. 910.1(b)(1)
encompassed them.\322\
---------------------------------------------------------------------------

\322\ Id.
---------------------------------------------------------------------------

The Commission also expressed concern that workplace policies--for
example, a term in an employee handbook stating that workers are
prohibited from working for certain types of firms or in certain fields
after their employment ends--could have the same effects as a
contractual non-compete even if they are not enforceable, because
workers may believe they are bound by the policy. The Commission sought
comment on whether the term ``non-compete clause'' should expressly
include a provision in a workplace policy.\323\
---------------------------------------------------------------------------

\323\ Id. at 3510.
---------------------------------------------------------------------------

The Commission stated that proposed Sec. 910.1(b)(1) was a
generally accepted definition of non-compete clause that covers both
express non-competes and terms purporting to bind a worker that have
the same functional effect as non-competes.\324\ The Commission stated
that the definition would generally not apply to other types of
restrictive employment agreements that do not altogether prevent a
worker from seeking or accepting other work or starting a business
after their employment ends and do not generally prevent other
employers from competing for that worker's labor.\325\ At the same
time, the Commission expressed concern about unusually restrictive
employment agreements that, while not formally triggered by seeking or
accepting other work or starting a business after their employment
ends, nevertheless restrain such an unusually large scope of activity
that they have the same functional effect as non-competes.\326\ The
Commission noted judicial opinions finding some such

[[Page 38362]]

restrictive employment agreements to be de facto non-competes.\327\
---------------------------------------------------------------------------

\324\ Id. at 3509.
\325\ Id.
\326\ Id.
\327\ Wegmann v. London, 648 F.2d 1072, 1073 (5th Cir. 1981)
(holding that liquidated damages provisions in a partnership
agreement were de facto non-compete clauses ``given the prohibitive
magnitudes of liquidated damages they specify''); Brown v. TGS Mgmt.
Co., LLC, 57 Cal. App. 5th 303, 306, 319 (Cal. Ct. App. 2020)
(holding that an NDA that defined ``confidential information'' ``so
broadly as to prevent [the plaintiff] in perpetuity from doing any
work in the securities field'' 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).
---------------------------------------------------------------------------

Proposed Sec. 910.1(b)(2) accordingly sought to clarify that the
definition in proposed Sec. 910.1(b)(1) includes contractual terms
that are de facto non-competes because they have 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. It then provided two illustrative, non-
exhaustive examples of contractual terms that may be such functional
non-competes: (1) an NDA between an employer and a worker 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; and (2) a training-repayment agreement (``TRAP'') 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 to train the worker.\328\
---------------------------------------------------------------------------

\328\ NPRM, proposed Sec. 910.1(b)(2).
---------------------------------------------------------------------------

2. Coverage of the Definition
a. Comments Received
Most of the comments on the definition of ``non-compete clause''
addressed whether, and under what circumstances, the rule should apply
to functional non-competes.\329\ Many commenters that generally
supported the NPRM agreed the definition of non-compete clause should
cover other restrictive employment agreements when they function as
non-competes. These commenters argued that, when restraints on labor
mobility are banned, companies switch to functionally equivalent
restraints. Some commenters asked the Commission to adopt a broader
definition of functional non-competes or to expand the rule to ban
additional types of restrictive employment agreements altogether. A few
commenters asked the Commission to broaden proposed Sec. 910.1(b)(1)
and (2) by replacing the terms ``prevent'' and ``prohibit'' with
``restrains'' and ``limits.''
---------------------------------------------------------------------------

\329\ While the NPRM generally used the term ``de facto non-
competes,'' the final rule uses the term ``functional non-
competes.'' The Commission believes this term more clearly conveys
that certain terms are considered non-competes under the final rule
where they function to prevent workers from seeking or accepting
other work or starting a business after their employment ends.
---------------------------------------------------------------------------

In contrast, many commenters who generally opposed the NPRM stated
that proposed Sec. 910.1(b)(2) was overinclusive. Many such commenters
also asserted the definition was vague and could lead to confusion and
significant litigation. Several comments suggested clarifications, such
as including additional examples of functional non-competes; creating
safe harbors for certain restrictive employment covenants; replacing
proposed Sec. 910.1(b)(2) with a standard based on antitrust law's
``quick look'' test; \330\ or revising the provision to focus on the
``primary purpose'' of a restrictive employment covenant. Several
commenters argued the Commission failed to cite evidence that
functional non-competes are anti-competitive. Other commenters
expressed concern that prohibiting functional non-competes would
undermine the rule's intent to permit less restrictive alternatives to
non-competes.
---------------------------------------------------------------------------

\330\ See, e.g., Cal. Dental Ass'n v. FTC, 526 U.S. 756, 770-71
(1999).
---------------------------------------------------------------------------

At least one commenter argued that proposed Sec. 910.1(b)(2)
should be removed because it was redundant, as the proposed definition
of non-compete clause in proposed Sec. 910.1(b)(1) already captured
any term that prevents an employee from seeking alternative employment,
without regard to how the term is labeled. Some commenters who
generally supported the NPRM also expressed concern that ambiguity in
proposed Sec. 910.1(b)(2) could enable employers to intimidate workers
by suggesting that restrictive employment agreements used to evade a
final rule are not non-competes under the functional test. Other
commenters who generally supported the rule asked for greater
specificity in proposed Sec. 910.1(b)(2) to prevent adverse judicial
interpretations that could undermine the effectiveness of the rule.
Many commenters addressed issues specific to other types of
restrictive employment agreements, including NDAs (also sometimes
referred to as confidentiality agreements), TRAPs, non-solicitation
agreements, and garden leave and severance agreements.
With respect to NDAs, some commenters stated that the Commission
rightly identified overbroad NDAs as a potential method of evasion of
the rule and supported the Commission's recognition of overbroad NDAs
as functional non-competes. In contrast, some commenters contended that
by covering functional non-competes, the proposed rule would limit
their ability to use NDAs. Some commenters argued that providing that
overbroad NDAs may be functional non-competes would be inconsistent
with the proposed rule's separate preliminary finding that NDAs are
less restrictive alternatives to non-competes. Similarly, some
commenters contended that a functional test may frustrate employers'
ability to use NDAs to protect legitimate trade secrets or to enjoin a
former worker employed with a competitor under the Defend Trade Secrets
Act of 2016, in part because they would be concerned about potential
legal liability. Some commenters contended that the example of an
overbroad NDA in proposed Sec. 910.1(b)(2) would discourage the use of
NDAs, including the use of narrowly tailored NDAs, and undermine
confidence in their enforceability. Some commenters stated that
reference to cases, including Brown v. TGS Management Co.\331\ and
similar cases, represent outliers that are likely to cause more
confusion than clarity.
---------------------------------------------------------------------------

\331\ See supra note 327 and accompanying text.
---------------------------------------------------------------------------

Other commenters addressed the proposed definition's application to
TRAPs, which are agreements in which the worker agrees to pay the
employer for purported training expenses if the worker leaves their job
before a certain date. Several commenters asked the Commission to ban
all forms of TRAPs. These commenters argued that employers are
increasingly adopting TRAPs and that abusive TRAPs are pervasive
throughout the economy. Some commenters asserted millions of workers
are likely bound by TRAPs. Commenters stated TRAPs may impose penalties
that are disproportionate to the value of training workers received or
require the worker to pay alleged training expenses for on-the-job
training. Some commenters contended TRAPs may be even more harmful than
non-competes, because while non-competes prohibit or prevent workers
from seeking or accepting other work or starting a business after they
leave their job, TRAPs can prevent workers from leaving their job for
any reason.
Some commenters expressed concern that the example in proposed
Sec. 910.1(b)(2)(ii) of a TRAP that was a functional non-compete was
too narrow, and that the Commission should not imply that TRAPs with
penalties that are reasonably related to an employer's training
expenses cannot be functional

[[Page 38363]]

non-competes. One commenter asked the Commission to adopt the standard
for TRAPs in the Uniform Restrictive Employment Agreement Act.\332\
Another commenter suggested that the Commission ban TRAPs below an
income threshold of $75,000. Another commenter asked the Commission to
clarify that costs that are inherent in any employer-employee
relationship--such as time spent by a supervisor training a new
employee how to perform routine business procedures typical for their
position or role--should not be considered costs that are ``reasonably
related to the costs'' of training.
---------------------------------------------------------------------------

\332\ See ULC, Uniform Restrictive Employment Agreement Act
(2021), sec. 14.
---------------------------------------------------------------------------

At least one commenter urged the Commission to treat as functional
non-competes other employment terms similar to TRAPs such as equipment
loans, where employers provide employees with a loan to purchase
equipment that the worker needs in order to perform their job, and
damages provisions containing open-ended costs related to the
employee's departure--including hiring and training replacements or
vague harms such as reputational damages, loss of good will or lost
profits. In contrast, some commenters argued that TRAPs should be
excluded from coverage under proposed Sec. 910.1(b)(2) because they
are not unfair or anti-competitive.
Regarding non-solicitation agreements--which prohibit a worker from
soliciting former clients or customers of the employer--a few
commenters expressed concern that overbroad non-solicitation agreements
may be permitted because they were not listed in the regulatory text
for proposed Sec. 910.1(b)(2) as examples of functional non-competes
(although the Commission described them in the preamble to the proposed
rule as restrictive employment agreements that may fall within the
definition of non-compete clause if they restrain such an unusually
large scope of activity that they are de facto non-compete
clauses).\333\ These commenters asked the Commission to revise proposed
Sec. 910.1(b)(2) to expressly cover non-solicitation agreements that
prohibit workers from doing business with prospective or actual
customers to an extent that would effectively preclude them from
continuing to work in the same field or that prevent a worker from
doing business with their former employer's client where the client
solicits the worker directly. Other commenters, however, expressed
concern that the proposed rule could undermine employers' confidence in
the enforceability of non-solicitation agreements and asked that the
final rule clarify that non-solicitation agreements are generally not
prohibited, or exclude them altogether.
---------------------------------------------------------------------------

\333\ NPRM at 3509.
---------------------------------------------------------------------------

Some comments addressed no-hire clauses, which bar former workers
from hiring their former colleagues. One employment lawyer stated that
these are less restrictive than non-compete clauses. Other commenters
stated that no-hire clauses can still limit careers or make it hard for
new businesses to find staff. Some commenters expressed concerns with
no-business or non-dealing clauses, which bar former workers from doing
business with former clients or customers even if the clients or
customers sought them out. These commenters stated such agreements
limit the options of clients and customers.
Many commenters raised questions about forfeiture-for-competition
clauses, which they stated are often a component of deferred
compensation arrangements for executives. Commenters stated that
deferred compensation plans often include forfeiture clauses, or
contingencies on receiving the promised compensation, to incentivize
their recipients to act in ways that benefit the employer. These
commenters stated that agreements not to compete for a period of time
after employment ends are a common feature of forfeiture clauses. Some
commenters stated that such forfeiture-for-competition clauses are non-
competes and have the same negative effects as non-competes because
they are contingent on competition--they require workers to give up
bonus pay or other post-employment benefits if they work for a
competing employer or start a competing business, and they keep other
employers from being able to hire those workers. Other commenters
stated forfeiture-for-competition clauses are a common and important
component of deferred compensation arrangements for highly compensated
employees and senior executives.\334\ Other commenters argued the
clauses allow workers to choose between receiving the deferred
compensation and forfeiting it if they choose to work for a competitor,
and thus they are not non-competes. Other commenters urged the
Commission to either clarify that forfeiture-for-competition clauses
are not non-competes or to carve them out explicitly.
---------------------------------------------------------------------------

\334\ Commenters also provided purported business justifications
for forfeiture-for-competition clauses, which are addressed in Part
IV.D.2.
---------------------------------------------------------------------------

Many commenters also addressed the application of the rule to
garden leave agreements. In using the term ``garden leave,'' commenters
seemed to be referring to a number of different types of agreements.
Some commenters referred to garden leave agreements as those in which,
before a worker left their job, they remained employed and received
full pay for a specified period of time but their access to co-workers
and company facilities was restricted. In contrast, other commenters
considered ``garden leave'' an arrangement to make payments to a worker
after their employment concluded. Commenters used different terminology
to refer to these kinds of agreements, including severance pay, partial
pay, and full pay akin to administrative leave, in exchange for an
agreement not to compete. Some commenters argued it is coercive for a
worker to sign a non-compete in exchange for severance pay and argued
garden leave arrangements are non-competes because they limit a
worker's options to work for a competitor. Some commenters asked the
Commission to adopt a durational limit for garden leave. At least one
commenter also urged the Commission to clarify that an employer cannot
unilaterally terminate garden leave.
Other commenters requested clarification that garden leave was not
a non-compete on the basis that garden leave does not create a legal
obligation on the part of the worker to refrain from competing. Some
commenters requested a specific exclusion for garden-leave
arrangements. They argued that by forcing employers to pay workers,
garden leave would reduce the overuse of non-competes. One talent
industry commenter argued that the rule should expressly allow for
``fee tails,'' which require talent agents to pay a portion of future
commissions to former employers.
b. The Final Rule
After considering the comments, the Commission has slightly
modified the definition of non-compete clause to clarify its scope. In
the final rule, Sec. 910.1 defines ``non-compete clause'' as a term or
condition of employment that either ``prohibits'' a worker from,
``penalizes'' a worker for, or ``functions to prevent'' a worker from
(A) seeking or accepting work in the United States with a different
person where such work would begin after the conclusion of the
employment that includes the term or condition; or (B) operating a
business in the United States after the conclusion of the employment
that includes the term or condition.

[[Page 38364]]

Pursuant to the term ``prohibits,'' the definition applies to terms
and conditions that expressly prohibit a worker from seeking or
accepting other work or starting a business after their employment
ends. Examples of such agreements would be a contractual term between a
national sandwich shop chain and its workers stating that, for two
years after the worker leaves their job, they cannot work for another
sandwich shop within three miles of any of the chain's locations,\335\
or a contractual term between a steelmaker and one of its executives
prohibiting the executive from working for any competing business
anywhere in the world for one year after the end of the executive's
employment.\336\ The vast majority of existing agreements covered by
the final rule fall into this category of agreements that expressly
prohibit a worker from seeking or accepting other work or starting a
business after their employment ends.
---------------------------------------------------------------------------

\335\ This example is based on the agreements described in
Jamieson, supra note 32. The company agreed to remove the non-
competes 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), https://ag.ny.gov/press-release/2016/ag-schneiderman-announces-settlement-jimmy-johns-stop-including-non-compete.
\336\ This example is based on AK Steel Corp. v. ArcelorMittal
USA, LLC, 55 NE3d 1152, 1156 (Ohio Ct. App. 2016).
---------------------------------------------------------------------------

Pursuant to the term ``penalizes,'' the definition also applies to
terms and conditions that require a worker to pay a penalty for seeking
or accepting other work or starting a business after their employment
ends. One example of such a term is a term providing that, for two
years after the worker's employment ends, the worker may not engage in
any business within a certain geographic area that competes with the
employer unless the worker pays the employer liquidated damages of
$50,000.\337\ Because such an agreement penalizes the worker for
seeking or accepting other work or for starting a business after the
worker leaves their job, it would be a non-compete clause under Sec.
910.1. Indeed, where an agreement restricts who a worker can work for
or their ability to start a business after they leave their job, State
courts generally characterize the agreement as a non-compete,
regardless of whether the agreement contains an express prohibition or
requires the worker to pay liquidated damages.\338\
---------------------------------------------------------------------------

\337\ This example is based on Press-A-Dent, Inc. v. Weigel, 849
NE2d 661, 668-70 (Ind. Ct. App. 2006) (holding that the agreement
was an unlawful non-compete).
\338\ See, e.g., Wichita Clinic, P.A. v. Louis, 185 P.3d 946,
951 (Kan. Ct. App. 2008); Grayhawk Homes, Inc. v. Addison, 845 SE2d
356 (Ga. Ct. App. 2020); Salewski v. Pilchuck Veterinary Hosp.,
Inc., 359 P.3d 884 (Wash. Ct. App. 2015).
---------------------------------------------------------------------------

Another example of a term that ``penalizes'' a worker, under Sec.
910.1, is an agreement that extinguishes a person's obligation to
provide promised compensation or to pay benefits as a result of a
worker seeking or accepting other work or starting a business after
they leave their job. One example of such an agreement is a forfeiture-
for-competition clause, which, similar to the agreement with liquidated
damages described previously, imposes adverse financial consequences on
a former employee as a result of the termination of an employment
relationship, expressly conditioned on the employee seeking or
accepting other work or starting a business after their employment
ends. An additional example of a term that ``penalizes'' a worker under
Sec. 910.1 is a severance arrangement in which the worker is paid only
if they refrain from competing. The Commission also notes that a
payment to a prospective competitor to stay out of the market may also
violate the antitrust laws even if it is not a non-compete under this
rule.\339\
---------------------------------------------------------------------------

\339\ See., e.g., Palmer v. BRG of Ga., Inc., 498 U.S. 46, 49-50
(1990) (``[A]greements between competitors to allocate territories
to minimize competition are illegal'' (citing United States v. Topco
Assocs., Inc., 405 U.S. 596 (1972)); FTC v. Actavis, Inc., 570 U.S.
136, 154 (2013) (``payment in return for staying out of the market''
may violate the antitrust laws).
---------------------------------------------------------------------------

The common thread that makes each of these types of agreements non-
compete clauses, whether they ``prohibit'' or ``penalize'' a worker, is
that on their face, they are triggered where a worker seeks to work for
another person or start a business after they leave their job--i.e.,
they prohibit or penalize post-employment work for another employer or
business. As elaborated in Part IV, such non-competes are inherently
restrictive and exclusionary conduct, and they tend to negatively
affect competitive conditions in both labor and product and service
markets by restricting the mobility of workers and preventing
competitors from gaining access to those workers.
Pursuant to the term ``functions to prevent,'' the definition of
non-compete clause also applies to terms and conditions that restrain
such a large scope of activity that they function to prevent a worker
from seeking or accepting other work or starting a new business after
their employment ends, although they are not expressly triggered by
these specific undertakings. This prong of the definition does not
categorically prohibit other types of restrictive employment
agreements, for example, NDAs, TRAPs, and non-solicitation agreements.
These types of agreements do not by their terms prohibit a worker from
or penalize a worker for seeking or accepting other work or starting a
business after they leave their job, and in many instances may not have
that functional effect, either. However, the term ``functions to
prevent'' clarifies that, if an employer adopts a term or condition
that is so broad or onerous that it has the same functional effect as a
term or condition prohibiting or penalizing a worker from seeking or
accepting other work or starting a business after their employment
ends, such a term is a non-compete clause under the final rule.
In response to the comments alleging that covering ``de facto'' or
``functional'' non-competes is overinclusive or vague, the Commission
notes that the definition's three prongs--``prohibit,'' ``penalize,''
and ``function to prevent''--are consistent with the current legal
landscape governing whether a particular agreement is a non-compete. In
addition to generally accepted definitions of non-competes encompassing
the ``prohibits'' prong of the definition, terms that ``penalize''
workers for seeking or accepting other work or starting a business
after they leave their job (for example, by requiring them to pay
liquidated damages) are typically considered non-competes under State
law.\340\ And the ``functions to prevent'' prong of the definition is
likewise consistent with legal decisions holding that restrictive
employment agreements other than non-competes may be analyzed under the
State law test applicable to non-competes where they function similarly
to non-competes.\341\ As the First Circuit stated in a recent opinion,
``[O]verly broad nondisclosure agreements, while not specifically
prohibiting an employee from entering into competition with the former
employer, raise the same policy concerns about restraining competition
as noncompete clauses where, as here, they have the effect of
preventing the defendant from competing with the plaintiff.'' \342\ The
fact that whether a given restrictive covenant rises to the level of
being a functional non-compete will turn on the facts and circumstances

[[Page 38365]]

of particular covenants and the surrounding market context does not
render this aspect of the final rule overinclusive or vague. Such
covenants would be subject to case-by-case adjudication for whether
they constitute an unfair method of competition even in the absence of
the final rule.
---------------------------------------------------------------------------

\340\ See supra note 338 and accompanying text.
\341\ See, e.g., Brown v. TGS Mgmt. Co., LLC, 57 Cal. App. 5th
303, 306, 316-19 (Cal. Ct. App. 2020); Wegmann v. London, 648 F.2d
1072, 1073 (5th Cir. 1981); TLS Mgmt. & Mktg. Servs. v. Rodriguez-
Toledo, 966 F.3d 46, 59-60 (1st Cir. 2020).
\342\ TLS Mgmt. & Mktg. Servs., 966 F.3d at 57.
---------------------------------------------------------------------------

In response to the comments alleging the Commission failed to cite
evidence that functional non-competes harm competition, the Commission
disagrees. This final rule is based on a robust evidentiary record that
includes significant empirical evidence and thousands of public
comments, as well as the Commission's longstanding expertise in
evaluating competition issues. Based on this record, the Commission
finds that non-competes are restrictive and exclusionary conduct that
tends to negatively affect competitive conditions in labor markets and
markets for products and services.\343\ In addition, the Commission
finds that, with respect to workers other than senior executives, non-
competes are exploitative and coercive.\344\ The Commission finds that
the functional equivalents of non-competes--because they prevent
workers from engaging in the same types of activity--are likewise
restrictive and exclusionary conduct that tends to negatively affect
competitive conditions in a similar way. In response to the commenters
who expressed concern that prohibiting functional non-competes would
undermine the rule's intent to permit reasonable substitutes, the
Commission stresses that, as described throughout this Part III.D, the
``functions to prevent'' prong of the definition of non-compete clause
captures only agreements that function to prevent a worker from seeking
or accepting other work or starting a business after they leave their
job--not appropriately tailored NDAs or TRAPs that do not have that
functional effect.
---------------------------------------------------------------------------

\343\ See Parts IV.B and IV.C.
\344\ See Part IV.B.2.b.
---------------------------------------------------------------------------

While many commenters requested the Commission state expressly in
the final rule whether various specific restrictive employment
agreements satisfy the definition of non-compete clause, the Commission
declines to adopt a definition that attempts to capture or carve out
every edge case. Rather, the final rule focuses on providing a clear,
understandable, and generally applicable definition of non-compete
clause that reflects the need for case-by-case consideration of whether
certain restrictive covenants rise to the level of being functional
non-competes--which is fully consonant with the legal landscape
employers generally face today. The Commission nevertheless here
responds to comments regarding the restrictive clauses that commenters
contended should be expressly addressed in the final rule.
As noted in this Part III.D, restrictive employment agreements
other than non-competes--such as NDAs, non-solicitation agreements, and
TRAPs--do not by their terms or necessarily in their effect prevent a
worker from seeking or accepting work with a person or operating a
business after the worker leaves their job. For example, a garden-
variety NDA in which the worker agrees not to disclose certain
confidential information to a competitor would not prevent a worker
from seeking work with a competitor or from accepting such work after
the worker leaves their job. Put another way, an NDA would not be a
non-compete under Sec. 910.1 where the NDA's prohibitions on
disclosure do not apply to information that (1) arises from the
worker's general training, knowledge, skill or experience, gained on
the job or otherwise; or (2) is readily ascertainable to other
employers or the general public.\345\
---------------------------------------------------------------------------

\345\ This example is based on sec. 9 of the Uniform Restrictive
Employment Agreement Act, supra note 332.
---------------------------------------------------------------------------

However, NDAs may be non-competes under the ``functions to
prevent'' prong of the definition where they span such a large scope of
information that they function to prevent workers from seeking or
accepting other work or starting a business after they leave their job.
Examples of such an agreement may include an NDA that bars a worker
from disclosing, in a future job, any information that is ``usable in''
or ``relates to'' the industry in which they work.\346\ Such an
agreement would effectively prevent the worker from working for another
employer in that industry. A second example would be an NDA that bars a
worker from disclosing any information or knowledge the worker may
obtain during their employment whatsoever, including publicly available
information.\347\ These agreements are so broadly written that, for
practical purposes, they function to prevent a worker from working for
another employer in the same field and are therefore non-competes under
Sec. 910.1.
---------------------------------------------------------------------------

\346\ This example is based on Brown v. TGS Mgmt., 57 Cal. App.
5th at 316-19 (``Collectively, these overly restrictive provisions
[in the NDA at issue] operate as a de facto noncompete provision;
they plainly bar Brown in perpetuity from doing any work in the
securities field.'').
\347\ This example is based on TLS Mgmt. & Mktg. Servs., 966
F.3d at 57 (holding that the NDA was unenforceable).
---------------------------------------------------------------------------

Under the final rule's definition of non-compete clause, the same
inquiry applies to non-solicitation agreements. Non-solicitation
agreements are generally not non-compete clauses under the final rule
because, while they restrict who a worker may contact after they leave
their job, they do not by their terms or necessarily in their effect
prevent a worker from seeking or accepting other work or starting a
business. However, non-solicitation agreements can satisfy the
definition of non-compete clause in Sec. 910.1 where they function to
prevent a worker from seeking or accepting other work or starting a
business after their employment ends. Whether a non-solicitation
agreement--or a no-hire agreement or a no-business agreement, both of
which were referenced by commenters, as discussed previously--meets
this threshold is a fact-specific inquiry. The Commission further notes
that--like all the restrictive employment agreements described in this
Part III.D--non-solicitation agreements, no-hire, and no-business
agreements are subject to section 5's prohibition of unfair methods of
competition, irrespective of whether they are covered by the final
rule.
Depending on the facts and circumstances, a TRAP can also function
to prevent a worker from working for another firm or starting a
business. For example, one commenter cited a TRAP that required entry-
level workers at an IT staffing agency who were earning minimum wage or
nothing at all during their training periods to pay over $20,000 if
they failed to complete a certain number of billable hours.\348\ The
commenter also cited a TRAP requiring nurses to work for three years or
else repay all they have earned, plus paying the company's ``future
profits,'' attorney's fees, and arbitration costs.\349\ These types of
TRAPs may be functional non-competes because when faced with
significant out-of-pocket costs for leaving their employment--dependent
on the context of the facts and circumstances--workers may be forced to
remain in their current jobs, effectively prevented from seeking or
accepting other work or starting a business.
---------------------------------------------------------------------------

\348\ Comment of Jonathan F. Harris, Dali[eacute]
Jim[eacute]nez, & Jonathan Glater, FTC-2023-0007-20873 at 4.
\349\ Id. at 6-7.
---------------------------------------------------------------------------

In response to the comments, the Commission declines at this time
to either categorically prohibit all TRAPs related to leaving
employment, or to exempt such provisions altogether. The Commission
agrees with comments raising substantial concerns about the

[[Page 38366]]

potential effects of such agreements on competitive conditions. As
noted in the summary of the comments, commenters cited TRAPs that
impose penalties disproportionate to the value of training workers
received and/or that claimed training expenses for on-the-job training.
However, the evidentiary record before the Commission principally
relates to non-competes, meaning on the present record the Commission
cannot ascertain whether there are any legitimate uses of TRAPs that do
not tend to negatively affect competitive conditions. When TRAPs
function to prevent a worker from seeking or accepting other work or
starting a business after the employment associated with the TRAP, they
are non-competes under Sec. 910.1.
The Commission notes that clauses requiring repayment of a bonus
when a worker leaves their job would not be non-competes under Sec.
910.1 where they do not penalize or function to prevent a worker from
seeking or accepting work with a person or operating a business after
the worker leaves their job. For example, a provision requiring the
repayment of a bonus if the worker leaves before a certain period of
time would not be a non-compete under Sec. 910.1 where the repayment
amount is no more than the bonus that was received, and the agreement
is not tied to who the worker can work for, or their ability to start a
business, after they leave their job. Similarly, a term or condition
under which a worker loses accrued sick leave when their employment
ends would not function to prevent a worker from seeking or accepting
work with a person or operating a business after the worker leaves
their job.
With respect to garden leave agreements, as noted previously,
commenters used the term ``garden leave'' to refer to a wide variety of
agreements. The Commission declines to opine on how the definition of
non-compete clause in Sec. 910.1 would apply in every potential
factual scenario. However, the Commission notes that an agreement
whereby the worker is still employed and receiving the same total
annual compensation and benefits on a pro rata basis would not be a
non-compete clause under the definition,\350\ because such an agreement
is not a post-employment restriction. Instead, the worker continues to
be employed, even though the worker's job duties or access to
colleagues or the workplace may be significantly or entirely curtailed.
Furthermore, where a worker does not meet a condition to earn a
particular aspect of their expected compensation, like a prerequisite
for a bonus, the Commission would still consider the arrangement
``garden leave'' that is not a non-compete clause under this final rule
even if the employer did not pay the bonus or other expected
compensation. Similarly, a severance agreement that imposes no
restrictions on where the worker may work following the employment
associated with the severance agreement is not a non-compete clause
under Sec. 910.1, because it does not impose a post-employment
restriction.
---------------------------------------------------------------------------

\350\ The term and practice of ``garden leave'' appears to have
a British origin and is recognized by the Government of the United
Kingdom. See Gov.UK, Handing in your notice, https://www.gov.uk/handing-in-your-notice/gardening-leave (``Your employer may ask you
not to come into work, or to work at home or another location during
your notice period. This is called `gardening leave'.'').
---------------------------------------------------------------------------

The Commission declines a commenter's request to replace the term
``prevent'' with ``restrains'' or ``limits.'' Commenters generally did
not express concern about the term ``prevent'' and the Commission is
concerned that different language could greatly expand the scope of the
definition and reduce its clarity.
The Commission also declines to adopt alternative de facto tests
raised by commenters, such as a version of the ``quick look'' test. As
described in Part II.F, the legal standard under section 5 of the FTC
Act is distinct from that of the Sherman Act. The Commission also
declines to adopt a test that would consider the primary purpose of a
restrictive employment agreement. The Commission believes that it can
be difficult to establish an employer's subjective ``purpose'' in
entering into an agreement. In addition, such a test could allow
extremely overbroad agreements that dramatically restrict a worker's
ability to compete against the employer--and have the negative effects
described in Parts IV.B and IV.C--as long as the employer entered into
the agreement without the subjective intent to restrict competition.
The Commission agrees with the commenter who stated that proposed
Sec. 910.1(b)(2) was redundant because proposed Sec. 910.1(b)(1) was
already a functional definition. In the final rule, the Commission has
revised the text of the definition of non-compete clause to address
confusion among commenters about whether proposed Sec. 910.1(b)(2)
clarified the definition or extended it.
In response to the commenters requesting that the Commission
clarify the circumstances under which the definition would apply to
various other types of restrictive employment agreements, the
Commission declines at this time to enumerate every circumstance that
may arise. As noted, a restrictive employment covenant may be a non-
compete clause under Sec. 910.1 if it expressly prohibits a worker
from, or penalizes a worker for, seeking or accepting other work or
starting a business, or if it does not do so expressly but is so broad
or onerous in scope that it functionally has the same effect of
preventing a worker from doing the same.
3. International Application of the Rule
a. Comments Received
The Commission received several comments expressing concern about
whether the final rule would apply to non-competes that restrict work
outside the U.S. In response, the final rule's definition of non-
compete clause clarifies that it applies only to work in the U.S. or
operating a business in the U.S.
Some commenters raised concerns about the cross-border movement of
workers. A research center commenter asserted there is a global
shortage of science and technology workers and stated that the final
rule's adoption could exacerbate the U.S. shortage by allowing other
countries to more easily poach U.S. workers. An academic commenter
argued that banning non-competes might deter foreign investors from
sending workers to the U.S. if the final rule would invalidate their
non-competes.
Some commenters argued that legal systems in the People's Republic
of China or other jurisdictions provide insufficient protection for
U.S. companies' trade secrets, confidential information, or patent
rights, and contended employers need non-competes as ex ante
protection. These commenters generally say that trade secrets
litigation is more challenging in some jurisdictions outside the U.S.,
for example because of less extensive discovery processes, less
frequent use of preliminary injunctions, insufficient remedies, and a
lower propensity to prosecute criminal intellectual property cases. An
academic commenter argued that some courts may have fewer protections
for confidential information compared to the U.S., so a suit concerning
only a non-compete is less likely to reveal trade secrets through the
course of litigation and thus more effectively prevent technologies
from leaking to other governments and protecting U.S. national security
interests. However, the comments provided limited evidence on non-
competes and trade secret protection outside the U.S., and collectively
only

[[Page 38367]]

discussed evidence from a few jurisdictions. One commenter noted that
legal information and data from some jurisdictions may not be fully
accurate because not all court decisions are public.
Two commenters highlighted the domestic semiconductor industry and
the CHIPS Act of 2022, arguing the Chinese government seeks to acquire
IP related to semiconductors and semiconductor experts with relevant
knowledge and information. Those comments expressed concern that a ban
on non-competes would damage the semiconductor industry, which relies
on skilled workers and trade secrets, by weakening trade secrets
protection and disincentivizing investment. Another commenter argued
the proposed rule would undermine export controls designed to prevent
foreign countries from acquiring U.S. technology and knowledge by
allowing workers to move to foreign competitors. One commenter argued
the proposed rule conflicts with an October 2022 Bureau of Industry and
Security (``BIS'') export control rulemaking, stating that the
rulemaking limits worker mobility in certain industries from the U.S.
to the People's Republic of China. Another commenter suggested the
proposed rule would violate the World Trade Organization's Agreement on
Trade-Related Aspects of Intellectual Property Rights (TRIPS), which
requires that persons ``shall have the possibility of preventing
information lawfully within their control from being disclosed to,
acquired by, or used by others without their consent . . . .'' \351\
Finally, one commenter argued that by making it more difficult for
businesses to protect against international theft of their intellectual
property, the rule is at odds with the purposes of the Protecting
American Intellectual Property Act of 2022.\352\
---------------------------------------------------------------------------

\351\ Agreement on Trade-Related Aspects of Intellectual
Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the
World Trade Organization, Annex 1C, sec. 7, art. 39, para. 2, 33
I.L.M. 81 (as amended Jan. 23, 2017).
\352\ 50 U.S.C. 1709.
---------------------------------------------------------------------------

Some of these commenters made recommendations for the final rule. A
law firm suggested that the final rule prevent evasion by barring
employers from selecting the law of non-U.S. jurisdictions to govern
employment contracts with U.S.-based workers. A trade association
requested that the final rule cover only agreements subject to the law
of a U.S. State. An academic commenter suggested revisions to the text
of the proposed rule to ensure the final rule applies only within the
U.S. The commenter also recommended stating that a non-compete
restricting work outside the U.S. is not a per se unfair method of
competition and providing guidance on how employers should evaluate
international non-competes, using factors such as the business
justification for the non-compete and the impact on the worker. The
commenter recommended applying the law of the jurisdiction where the
worker seeks to be employed.
b. The Final Rule
In response to commenters' concerns, in this final rule the
Commission adopts changes to the definition of ``non-compete clause''
that expressly limit the definition of non-compete to terms or
conditions that prevent workers from seeking or accepting work in the
U.S. or operating a business in the U.S. The final rule does not apply
to non-competes if they restrict only work outside the U.S. or starting
a business outside the U.S.
This revision clarifies for stakeholders the scope of the final
rule and confirms it does not prohibit employers from using non-
competes that restrict work outside the U.S., in compliance with those
jurisdictions' own laws. The Commission understands that, as a
commenter noted, some companies operating or competing globally already
draft non-competes that comply with the laws of multiple jurisdictions
and, thus, amending their non-competes to reflect this application of
the final rule would not pose a significant challenge for those
entities.
The Commission's revision clarifying the final rule's application
to work or starting a business only in the U.S. also addresses the
concerns from some commenters about key U.S. workers and technology
flowing overseas, because the final rule does not ban non-competes that
restrict workers from working or starting a business outside the U.S.
It also clarifies that the final rule would not invalidate non-competes
entered into by foreign companies with foreign workers unless they
restrict a worker's ability to work or start a business inside the U.S.
Other questions about the final rule's application to cross-border or
non-U.S. employment are also addressed by the Foreign Trade Antitrust
Improvements Act, codified at 15 U.S.C. 45(a)(3).
The Commission agrees with the academic commenter that, for non-
competes that apply outside the U.S., the law of the relevant
jurisdiction should govern any issue other than restricting work or
starting a business in the U.S. However, the Commission declines to
adopt a balancing test for non-competes restricting a worker's ability
to work or start a business outside the U.S., as a bright-line rule
that applies only to work or starting a business in the U.S. is more
administrable. In addition, the Commission declines to add language in
the final rule stating that it does not apply to overseas employers or
to non-competes not subject to U.S. State law. The final rule may apply
to overseas employers if the non-compete purports to restrict work or
starting a business in the U.S. and the reviewing court applies U.S.
law.
The empirical evidence cited in the NPRM focused on the U.S.,
primarily consisting of studies based on the effects of changes in
State laws in the U.S. The comments provided limited evidence on non-
competes and trade secret protection outside the U.S., leaving many
issues and most jurisdictions unaddressed. The Commission also notes,
as one commenter did, that legal information and data from some
jurisdictions may not be fully accurate because not all court decisions
are public. On the current record, the Commission cannot reach
conclusions on whether other jurisdictions have sufficient alternatives
to non-competes, the scope of any potential risk, and many of the other
issues raised. As a result, the Commission limits application of the
final rule to work in the U.S., where the Commission has ample evidence
on non-competes' negative effects.
One commenter argued the rule conflicts with BIS's October 2022
export control rulemaking, which restricts the ability of U.S. persons
to support development or production at certain semiconductor
facilities in the People's Republic of China without a license from
BIS.\353\ While the revision addresses the commenter's underlying
concern about protection of sensitive technology from other governments
by not banning non-competes that restrict the movement of workers to
and in other jurisdictions, neither the NPRM nor the final rule is
inconsistent with the BIS rule. The final rule will not affect BIS's
ability to grant or decline to grant a license. With respect to the
commenter that suggested the rule would violate TRIPS, the Commission
has found that U.S. law provides alternative means of protecting trade
secrets,\354\ and TRIPS does not require enforcement of non-competes.
---------------------------------------------------------------------------

\353\ Implementation of Additional Export Controls: Certain
Advanced Computing and Semiconductor Manufacturing Items;
Supercomputer and Semiconductor End Use; Entity List Modification,
Interim Final Rule, 87 FR 62186 (Oct. 13, 2022).
\354\ See Part IV.D.2.
---------------------------------------------------------------------------

With respect to the commenter that stated that the final rule
should include

[[Page 38368]]

a choice-of-law provision to prevent evasion, there is an existing body
of law in the U.S. governing choice of law and conflict of law issues.
Accordingly, the Commission declines to add any provisions concerning
choice of law or conflict of law to the final rule. Rather, such
questions are left to the relevant jurisdiction, whether that is a U.S.
State, the Federal government, or another jurisdiction, as determined
by applicable law.
4. Other Issues Relating to the Definition
a. Comments Received
While most commenters focused on the proposed definition's
application to functional non-competes or international application,
some commenters addressed other issues relating to the proposed
definition. Several commenters stated that the definition should cover
workplace policies or handbooks, to minimize confusion and make clear
that employers are prohibited from including non-competes in workplace
policies or handbooks, even if such clauses are unenforceable because
they are not formal binding contracts. Some commenters stated that such
policies or handbooks can affect a worker's decision to leave their job
to work with a competitor or start their own businesses. Others stated
the same about oral agreements. One commenter stated that the
definition should not cover workplace policies because they apply only
during, not after, employment.
A few commenters said the Commission should state explicitly in the
definition of ``non-compete clause'' that restrictions on concurrent
employment, such as prohibitions on ``moonlighting'' with competitors,
are excluded. Other commenters urged the Commission to expand the
definition to include restraints on concurrent employment because
workers often need to take additional jobs during economic downturns,
and low-wage workers generally need to take on additional jobs.
An organized labor commenter argued that no-raid agreements, which
the commenter described as agreements between labor organizations not
to attempt to organize workers already under representation by another
union, should be exempted from the definition. An industry trade
organization asked the Commission to clarify whether the definition
would apply to non-competes in agreements between motor carriers and
brokers in the trucking industry. In addition, a few commenters stated
that proposed Sec. 910.1(b)(1) was too broad or potentially ambiguous
without pointing to any specific features of the definition.
b. The Final Rule
To address the concerns raised by commenters about workplace
policies and handbooks, the definition of non-compete clause in Sec.
910.1 uses the phrase ``a term or condition of employment'' instead of
``contractual term.'' The definition further clarifies that term or
condition of employment includes ``a contractual term or workplace
policy, whether written or oral.'' The Commission finds that employers
have used restrictions in handbooks, workplace policies, or other
vehicles that are not formal written contracts to successfully prevent
workers from seeking or accepting other employment or starting a new
business. The Commission finds, consistent with the views expressed by
commenters, that such restrictions in handbooks, workplace policies, or
other such vehicles have the same tendency to negatively affect
competitive conditions as a formal binding contract term. To provide
that such conduct is covered by the definition of non-compete clause,
this language clarifies that the definition of non-compete clause is
not limited to clauses in written, legally enforceable contracts and
applies to all forms a non-compete might take, including workplace
policies or handbooks and informal contracts. Given the comments
expressing concern about oral representations, the Commission clarifies
in the definition of non-compete clause that clauses that purport to
bind a worker are covered, whether written or oral, and provides in
Sec. 910.2(a)(1) and (2) that it is an unfair method of competition to
make representations that a worker is subject to a non-compete.
(However, as explained in Part V.C, such representations are not
prohibited where the person has a good-faith basis to believe that the
final rule is inapplicable.)
The Commission declines to extend the reach of the final rule to
restraints on concurrent employment. Although several commenters raised
this issue, the evidentiary record before the Commission at this time
principally relates to post-employment restraints, not concurrent-
employment restraints. The fact that the Commission is not covering
concurrent-employment restraints in this final rule does not represent
a finding or determination as to whether these terms are beneficial or
harmful to competition. The Commission relatedly clarifies that fixed-
duration employment contracts, i.e., contracts between employers and
workers whereby a worker agrees to remain employed with an employer for
a fixed term and the employer agrees to employ the worker for that
period, are not non-compete clauses under the final rule because they
do not restrain post-employment conduct.
While the final rule does not extend to restraints on concurrent
employment, the Commission has made a technical edit to the definition
of non-compete to clarify how it relates to seeking and accepting
employment. Proposed Sec. 910.1(b) defined non-compete clause as a
contractual term that ``prevents the worker from seeking or accepting
employment with a person . . . after the conclusion of the worker's
employment with the employer.'' Because, as a technical matter, non-
competes can also prevent workers from seeking or accepting future
employment with another person before their work for their previous
employer has concluded, the Commission has clarified the relevant
language to read ``that prevents a worker from seeking or accepting
work in the United States with a different person where such work would
begin after the conclusion of the employment that includes the term or
condition'' and ``that prevents a worker from operating a business in
the United States after the conclusion of the employment that includes
the term or condition'' (emphases added).
In addition, in response to comments expressing concern about
evasion of the rule through third-party hiring,\355\ the Commission has
revised the phrase ``after the conclusion of the worker's employment
with the employer'' to read ``after the conclusion of the employment
that includes the term or condition.'' The Commission recognizes that
non-competes can cover workers who are hired by one party but work for
another, such as workers hired through staffing agencies. The
Commission intends for the final rule to apply to such non-competes,
and for this revision to eliminate any ambiguity as to whether such
clauses are covered by the definition of non-compete clause in Sec.
910.1.
---------------------------------------------------------------------------

\355\ These comments are described in greater detail in Part
III.G.
---------------------------------------------------------------------------

With respect to the comment about union no-raid agreements, the
Commission notes that the definition would apply only to the extent the
agreement is a ``term or condition of employment'' and only if the
agreement ``prevents a worker from seeking or accepting work in the
United States with a different person where such work would begin after
the conclusion of the employment that includes the term or

[[Page 38369]]

condition'' or ``operating a business in the United States after the
conclusion of the employment that includes the term or condition.''
\356\ The Commission's understanding is that union no-raid agreements
are not terms and conditions of employment that prevent workers from
seeking or accepting work or operating a business.
---------------------------------------------------------------------------

\356\ Sec. 910.1.
---------------------------------------------------------------------------

With respect to the comment asking whether the definition would
apply to non-competes in agreements between motor carriers and brokers
in the trucking industry, the Commission notes as a general matter that
the definition would not apply to non-competes between businesses, but
the Commission declines to opine on specific factual circumstances.

E. Definition of ``Person''

The proposed rule did not separately define the term ``person.''
Instead, proposed Sec. 910.1(c)--the proposed definition of
``employer''--stated that an 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.'' The statutory provision cross-referenced in proposed
Sec. 910.1(c) is section 20(a)(6) of the FTC Act, which defines
``person'' for purposes of the Commission's authority to issue civil
investigative demands. Section 20(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.'' No comments were received concerning the use of ``person'' in
proposed Sec. 910.1(c).
As explained in Part III.C, the Commission has removed the defined
term ``employer'' from the regulatory text of the final rule. However,
the regulatory text still uses the term ``person.'' For example, Sec.
910.2(a)(1) prohibits a ``person'' from, among other things, entering
into a non-compete clause. As a result, the Commission has adopted a
separate definition of the term ``person.'' Section 910.1 defines
``person'' as ``any natural person, partnership, corporation,
association, or other legal entity within the Commission's
jurisdiction, including any person acting under color or authority of
State law.'' This text consists of the proposed definition from section
20(a)(6), plus the phrase ``within the Commission's jurisdiction,''
which clarifies that only persons within the Commission's jurisdiction
are subject to the final rule.

F. Definitions Related to Senior Executives

With respect to existing non-competes, i.e., non-competes entered
into before the final rule's effective date, the Commission adopts a
different approach for ``senior executives'' than for other workers.
Existing non-competes with senior executives can remain in force; the
final rule does not cover such agreements.\357\ For workers who are not
senior executives, existing non-competes are no longer enforceable
after the final rule's effective date.\358\ The Commission describes
its rationale for the final rule's differential treatment of senior
executives in Part IV.C.
---------------------------------------------------------------------------

\357\ See Part IV.C.3.
\358\ See Sec. 910.2(a)(1)(i).
---------------------------------------------------------------------------

Section 910.1 defines the term ``senior executive'' as well as
related terms. Because the Commission's rationale for the final rule's
differential treatment of senior executives provides important context
for these definitions, the Commission describes these definitions in
Part IV.C.4.

G. Definition of ``Worker''

1. Proposed Definition
In the NPRM, the Commission proposed to define ``worker'' in
proposed Sec. 910.1(f) as ``a natural person who works, whether paid
or unpaid, for an employer.'' \359\ Proposed Sec. 910.1(f) also stated
that ``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.'' \360\
---------------------------------------------------------------------------

\359\ NPRM, proposed Sec. 910.1(f).
\360\ Id.
---------------------------------------------------------------------------

In the NPRM, the Commission explained it intended the term
``worker'' to include not only employees, but also individuals
classified as independent contractors, as well as other kinds of
workers.\361\ The Commission explained that, 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 FLSA or
any other statute that draws a distinction between ``employees'' and
other types of workers.\362\
---------------------------------------------------------------------------

\361\ Id. at 3511.
\362\ Id.
---------------------------------------------------------------------------

The Commission stated in the NPRM that it was 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.\363\ The Commission
explained it had no reason to believe non-competes that apply to
workers who are treated as independent contractors under the FLSA or
interns tend to negatively affect competitive conditions to a lesser
degree than non-competes that apply to employees, and that such non-
competes may, in fact, be more harmful to competition, given that these
other types of workers tend to have shorter working relationships.\364\
In addition, the Commission explained that the purported business
justifications for applying non-competes to independent contractors
would not be different or more cognizable from those related to
employees.\365\
---------------------------------------------------------------------------

\363\ Id.
\364\ Id.
\365\ Id.
---------------------------------------------------------------------------

Proposed Sec. 910.1(f) also stated the term worker ``does not
include a franchisee in the context of a franchisee-franchisor
relationship.'' \366\ The Commission explained that the relationship
between a franchisor and franchisee may in some cases be more analogous
to the relationship between two businesses than the relationship
between an employer and a worker, and that the evidentiary record
before the Commission related primarily to non-competes arising solely
out of employment.\367\ The Commission therefore stated that it
believed 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).\368\
---------------------------------------------------------------------------

\366\ Id. at 3511, 3520.
\367\ Id.
\368\ Id.
---------------------------------------------------------------------------

Proposed Sec. 910.1(f) further clarified, however, that the term
worker ``includes a natural person who works for the franchisee or
franchisor,'' and that ``non-competes between franchisors and
franchisees remain subject to [F]ederal antitrust law as well as all
other applicable law.'' \369\ The Commission explained that these laws
include State laws that apply to non-competes in the franchise
context.\370\ The Commission also clarified that it was not proposing
to find that non-competes between franchisors and franchisees are
beneficial to competition.\371\
---------------------------------------------------------------------------

\369\ Id. at 3511.
\370\ Id.
\371\ Id.
---------------------------------------------------------------------------

2. Comments Received
Several commenters stated that they agreed with the proposed
definition of ``worker'' because it applies to all workers without
regard to their classification. Many of these

[[Page 38370]]

commenters specifically urged the Commission to adopt a final
definition that includes all categories of workers regardless of
whether they are classified as employees, including independent
contractors, ``gig'' workers, and others. These commenters pointed to
the Commission's preliminary finding that non-competes are widely used
across the economy. They cited employers' frequent misclassification of
workers as independent contractors, agreeing with concerns raised in
the NPRM that, if ``worker'' excludes independent contractors,
employers may misclassify workers as independent contractors to avoid
complying with the rule. Many commenters stated that millions of
workers are misclassified as independent contractors, including a
disproportionate number of women, people of color, and low-income
workers. These commenters expressed concern that, if the rule excluded
independent contractors from coverage, it would fail to benefit these
groups, for whom non-competes may be particularly exploitative and
coercive.
On the other hand, several commenters suggested removing bona fide
independent contractors and sole proprietors from the definition of
``worker.'' Two industry groups contended that there is a lack of data
regarding the prevalence and effects of non-competes among independent
contractors as opposed to other kinds of workers and that, as a legal
matter, the evidence is insufficient to justify including independent
contractors as ``workers'' under the rule. A few industry organizations
also contended that, because they have more control over their work and
generally work for more than one employer, independent contractors have
greater bargaining power than other workers. One academic commenter
suggested that non-competes between employers and independent
contractors are more akin to agreements between businesses than
agreements between employers and workers. A few of these industry
organizations also contended that non-competes are justified because
independent contractors provide services outside the scope of their
employers' expertise and thus have greater access to sensitive
information than other workers. Other industry organizations contended
that small businesses employ more independent contractors than their
larger rivals. These commenters stated that, to protect small
businesses from being impacted disproportionately by the rule, the
definition of ``worker'' should exclude independent contractors.
Finally, a few industry trade organizations and an academic commenter
stated that independent contractors should be excluded from coverage
under the rule to avoid ``free riding,'' in which a contractor working
for one firm can use that firm's assets--like tools or databases--to
benefit another firm.
Several commenters suggested changes to the definition of
``worker'' to maximize the rule's coverage and close potential
loopholes. One worker advocacy group noted that, combined with the
proposed definition of ``employer,'' the proposed definition of
``worker''--a natural person who works ``for an employer''--appeared to
exclude workers who work for a person other than the person who hired
or contracted with them to work. The commenter noted that workers are
often employed indirectly--by way of a contractual relationship with a
staffing agency, an affiliate of their common-law employer, or some
entity other than their common-law employer--and that non-competes are
often imposed on workers by the non-hiring party. In order to ensure
these workers are covered by the rule, the commenter suggested that the
definition of ``worker'' should also cover a person who works
``directly or indirectly'' for an employer and that the definition
specifically include ``a person who works for the employer under an
arrangement with a professional employer organization, statutory
employer, wholly owned entity of which the person is the sole or
principal employee or service provider, loan-out arrangement or similar
arrangement.''
The same commenter also argued that employers often impose non-
competes on workers who own a portion of the business while not
applying the same restriction to outside investors who do not work for
the company, and that such worker-owner non-competes should be treated
as employment-related non-competes. In order to ensure these workers
are covered by the rule, the commenter suggested that ``worker'' should
also include ``a person who holds direct or indirect equity or other
interest in the employer and who provides services to or for the
benefit of the employer.'' Another commenter suggested that, for
clarity, ``worker'' should specifically exclude a ``substantial owner,
member or partner'' as defined in the sale-of-business exception.
Several State attorneys general, local government commenters,
academic commenters, and a worker advocacy group warned that
categorically excluding franchisees from the definition of ``worker''
would lead employers to misclassify workers as franchisees to evade the
rule's requirements. Some commenters suggested incorporating the
``ABC'' test--a common law test designed to determine whether a worker
is an employee based on fact-specific conditions--into the definition
of ``worker'' to prevent evasion.\372\
---------------------------------------------------------------------------

\372\ See, e.g., Dynamex Operations W. v. Superior Ct., 4 Cal.
5th 903, 955-957 (Cal. 2018).
---------------------------------------------------------------------------

Some commenters requested that the Commission revise the definition
of ``worker'' to exclude or include certain workers from coverage under
the rule. These comments are addressed in Part IV.C (comments
requesting an exclusion for senior executives) and in Part V.D
(comments requesting exclusions for other categories of workers).
3. The Final Rule
After considering the comments, the Commission revised the
definition of ``worker'' in three ways to clarify that the term covers
all current and former workers, regardless of which entity hired or
contracted with them to work, and regardless of a worker's title or
status under any other applicable law.
First, the Commission added ``or who previously worked'' to the
basic definition of ``worker'' as ``a natural person who works.'' This
revision is designed to clarify that former workers are considered
``workers'' under the final rule, such as where an employer is required
to notify a former worker that their non-compete is no longer
enforceable.\373\
---------------------------------------------------------------------------

\373\ See Sec. 910.2(b).
---------------------------------------------------------------------------

Second, the Commission removed ``for an employer'' from the
definition. This revision is designed to ensure that the final rule
covers workers who are hired by one party but work for another, closing
the unintended loophole identified by commenters regarding third-party
hiring.
Third, the Commission added ``without regard to the worker's title
or the worker's status under any other State or Federal laws'' prior to
the list of examples of different categories of workers that the
definition covers. This change is designed to make more explicit that
the term ``worker'' includes all workers regardless of their titles,
status under other laws, or the details of the contractual relationship
with their employer.
The Commission has made two additional changes to the definition
for clarity. First, the Commission has revised the phrase ``individual
classified as an independent contractor'' to ``independent
contractor.'' Second, the Commission has added ``a natural person who
works for a franchisee or

[[Page 38371]]

franchisor'' to the non-exclusive list of examples of types of workers
that would be covered by the definition. This language is simply moved
from elsewhere in the definition. Third, the Commission has removed the
sentence reading ``[n]on-competes between franchisors and franchisees
would remain subject to Federal antitrust law as well as all other
applicable law'' from the definition to avoid the implication that only
such non-competes remain subject to Federal antitrust law and other
applicable law.
The Commission declines to specify that a ``worker'' includes an
owner who provides services to or for the benefit of their business
because the definition already encompasses the same.
The Commission is not persuaded by commenters' arguments that
independent contractors or sole proprietors are inherently different
from other kinds of workers with respect to non-competes, and therefore
declines to exclude them from the definition of ``worker.'' Commenters
did not present persuasive evidence that non-competes that apply to
independent contractors or sole proprietors tend to negatively affect
competitive conditions to a lesser degree--or are restrictive,
exclusionary, exploitative, or coercive to a lesser degree--than non-
competes that apply to other workers. As noted by commenters who
supported including independent contractors, non-competes' tendency to
negatively affect competitive conditions by restricting workers'
ability to change jobs or start businesses is not contingent on whether
the worker is an employee or an independent contractor. While some
commenters contended that independent contractors have more
independence and more access to intellectual property than other
workers, commenters did not provide evidence that this is the case.
Moreover, even were this to be true, it would not justify an exclusion,
because the Commission generally declines to exclude workers based on
their access to intellectual capital or their independence for the
reasons explained in Part V.D.
Furthermore, whether a worker is an employee or an independent
contractor does not impact employers' ability to exploit imbalances of
bargaining power or limit employers' ability to use less restrictive
alternatives to non-competes to protect their intellectual property.
While commenters who supported excluding independent contractors
contended that independent contractors have more bargaining power than
other workers, this contention is not backed by evidence. While some
economists hypothesize that, theoretically, independent contractors may
have more bargaining power vis-[agrave]-vis employers than employees
do, they do not provide empirical evidence to support that assertion.
Furthermore, as described by a report from the Treasury Department that
was based on an extensive literature review, independent contractors
may have less bargaining power than employees in many respects.\374\
---------------------------------------------------------------------------

\374\ U.S. Treasury Dep't, Report, The State of Labor Market
Competition (Mar. 7, 2022) (hereinafter ``Treasury Labor Market
Competition Report'').
---------------------------------------------------------------------------

The Commission is also not persuaded that non-competes are
necessary to prevent ``free riding'' by independent contractors who use
one firm's assets to benefit another. The final rule prohibits
agreements that restrain a worker from working after the scope of
employment has ended and does not prohibit agreements which prevent a
worker from working for two firms simultaneously. In addition, any
``free riding'' may be addressed through less restrictive means,
including through agreements prohibiting an independent contractor from
using assets provided by one firm to benefit another.
Nor is the Commission persuaded that small businesses will be
disproportionately harmed by a rule which prohibits non-competes for
independent contractors. Commenters did not provide evidence to support
their assertion that small businesses employ more independent
contractors than larger ones.
The Commission agrees with the commenters who contended that
excluding independent contractors may have the effect of excluding
misclassified workers, who may be among the most vulnerable to
exploitation and coercion. The recent overview by the U.S. Department
of Labor (``DOL'') of the evidence on misclassification led it to
conclude that although the prevalence of misclassification of employees
as independent contractors is unclear, there is evidence that it is
nonetheless ``substantial'' and has a disproportionate effect on
workers who are people of color or immigrants because of the disparity
in occupations most affected by misclassification, which include jobs
in construction, trucking, delivery, home care, agriculture, personal
care, ride-hailing services, and janitorial and building services.\375\
The Commission also agrees with commenters' contentions that excluding
independent contractors from the definition of ``worker'' could
increase employers' incentive to misclassify workers as independent
contractors. Indeed, misclassification is often motivated by attempts
to evade the application of laws.
---------------------------------------------------------------------------

\375\ Employee or Independent Contractor Classification Under
the Fair Labor Standards Act, 89 FR 1638, 1735 (Jan. 10, 2024).
---------------------------------------------------------------------------

Because there is no reason to believe non-competes that apply to
independent contractors or sole proprietors tend to negatively affect
competitive conditions to a lesser degree, or are restrictive,
exclusionary, exploitative, or coercive to a lesser degree, than non-
competes that apply to employees--and in light of substantial evidence
of widespread employee misclassification--the Commission declines to
exclude independent contractors from the definition of ``worker.'' For
this reason, the Commission also declines to incorporate the ``ABC''
test or other tests designed to differentiate between independent
contractors and employees.

IV. Section 910.2: Unfair Methods of Competition

A. Introduction

1. Overview of the Commission's Findings and Determinations
In the NPRM, the Commission proposed to categorically ban employers
from using non-competes with all workers, including existing
agreements. However, the Commission sought comment on whether it should
adopt different standards for non-competes with senior executives, and,
if so, how it should define senior executives.\376\ Based on the
totality of the evidence, including its review of the empirical
literature, its review of the full comment record, and its expertise in
identifying practices that harm competition, the Commission in this
final rule finds that non-competes with all workers are an unfair
method of competition--although its rationale differs with respect to
workers who are and are not senior executives.
---------------------------------------------------------------------------

\376\ NPRM at 3519.
---------------------------------------------------------------------------

The final rule provides that it is an unfair method of
competition--and therefore a violation of section 5--for employers to,
inter alia, enter into non-competes with workers on or after the final
rule's effective date.\377\ The Commission thus adopts a comprehensive
ban on new non-competes with all workers. With respect to existing non-
competes, i.e., non-competes entered into before the final rule's
effective date, the Commission adopts a different approach for senior
executives \378\ than for other workers.

[[Page 38372]]

Existing non-competes with senior executives can remain in force; the
final rule does not cover them.\379\ For workers who are not senior
executives, existing non-competes are no longer enforceable after the
final rule's effective date.\380\ Employers must provide such workers
with existing non-competes notice that the non-competes will not be
enforced after the final rule's effective date.\381\
---------------------------------------------------------------------------

\377\ See Sec. 910.2(a)(1)(i) and Sec. 910.2(a)(2)(i).
\378\ See Sec. 910.1 (defining ``senior executive'').
\379\ See Part IV.C.3.
\380\ See Sec. 910.2(a)(1)(ii) and Sec. 910.2(a)(1)(iii).
\381\ See Sec. 910.2(b).
---------------------------------------------------------------------------

Specifically, with respect to workers who are not senior
executives, the Commission determines that it is an unfair method of
competition for a person to enter into or attempt to enter into a non-
compete clause; enforce or attempt to enforce a non-compete clause; or
represent to the worker that the worker is subject to a non-compete
clause.\382\ The Commission finds that with respect to these workers,
these practices are unfair methods of competition in several
independent ways:
---------------------------------------------------------------------------

\382\ See Sec. 910.2(a)(1).
---------------------------------------------------------------------------

The use of non-competes is restrictive and exclusionary
conduct that tends to negatively affect competitive conditions in labor
markets.
The use of non-competes is restrictive and exclusionary
conduct that tends to negatively affect competitive conditions in
product and service markets.
The use of non-competes is exploitative and coercive
conduct that tends to negatively affect competitive conditions in labor
markets.
The use of non-competes is exploitative and coercive
conduct that tends to negatively affect competitive conditions in
product and service markets.
In contrast, with respect to senior executives, the Commission
determines that it is an unfair method of competition for a person to
enter into or attempt to enter into a non-compete clause; enforce or
attempt to enforce a non-compete clause entered into after the
effective date; or represent that the senior executive is subject to a
non-compete clause, where the non-compete clause was entered into after
the effective date. The Commission does not find that non-competes with
senior executives are exploitative and coercive. With respect to senior
executives, the Commission finds that non-competes are unfair methods
of competition in two independent ways:
The use of non-competes is restrictive and exclusionary
conduct that tends to negatively affect competitive conditions in
product and service markets.
The use of non-competes is restrictive and exclusionary
conduct that tends to negatively affect competitive conditions in labor
markets.
The final rule allows existing non-competes with senior executives
to remain in force. Because the harm of these non-competes is
principally that they tend to negatively affect competitive conditions
(rather than exploiting or coercing the executives themselves), and due
to practical concerns with extinguishing existing non-competes for such
executives, the final rule prohibits employers only from entering into
or enforcing new non-competes with senior executives.
Parts IV.B and IV.C set forth the findings that provide the basis
for the Commission's determinations that the foregoing practices are
unfair methods of competition under section 5 for these two categories
of workers, respectively.\383\ In these sections, the Commission also
describes and responds to comments regarding the preliminary findings
in the NPRM that informed its preliminary determinations related to
unfair methods of competition.
---------------------------------------------------------------------------

\383\ In addition to the findings described in Parts IV.B and C,
the Commission finds that the use of non-competes by employers
substantially affects commerce as that term is defined in section 5
and burdens a not insubstantial portion of commerce. The findings in
Parts IV.B and C apply with respect to senior executives and other
workers, whether considered together or respectively. The evidence
establishes that non-competes affect labor mobility, workers'
earnings, new business formation, and innovation, including
empirical evidence specifically identifying cross-border effects
with respect to earnings, see infra notes 464-468 and accompanying
text, and innovation, see infra note 563 and accompanying text.
---------------------------------------------------------------------------

2. Analytical Framework for Assessing Empirical Evidence
Before turning to the basis for its findings, the Commission
describes the analytical framework it has applied in assessing the
empirical evidence on non-competes. In the NPRM, the Commission
discussed the existing empirical literature on non-competes and its
assessment of those studies, including its preliminary view of which
studies were more robust and thus should be given more weight.\384\ In
response, some commenters argued the Commission gave too much weight to
certain studies or too little weight to others.\385\
---------------------------------------------------------------------------

\384\ See NPRM at 3484-93.
\385\ The Commission discusses comments addressing specific
studies in Parts IV.B, IV.C, and IV.D.
---------------------------------------------------------------------------

The Commission notes that the methodologies of empirical studies on
the effects of non-competes vary widely. In this final rule, based on
the Commission's longstanding expertise assessing empirical evidence
relating to the effects of various practices on competition, the
Commission gives more weight to studies with methodologies that it
finds are more likely to yield accurate, reliable, and precise results.
In evaluating studies, the Commission utilized the following five
principles that reflect best practices in the economic literature.
First, the Commission gives more weight to studies examining the
effects of a change in legal status or a change in the enforceability
of non-competes, and less weight to studies that simply compare
differences between workers who are subject to non-competes and those
who are not. Studies that look at what happens before and after a
change in State law that affects the enforceability of non-competes
provide a reliable way to study the effects of the change. This is
especially true when only the enforceability of non-competes changes,
and not other factors affecting firms and workers. If other substantial
changes do not also occur around the same time, this study design often
allows the researcher to infer that the change caused the effects--
since the likelihood that confounding variables are driving the effects
or outcomes is minimal.\386\
---------------------------------------------------------------------------

\386\ In Parts IV.B and C, the Commission describes how these
``enforceability'' studies show that increased enforceability of
non-competes results in various harms, such as reduced earnings, new
business formation, and innovation. Notably, the available evidence
also shows that workers are chilled from engaging in competitive
activity even where a non-compete is likely unenforceable--for
example, because they are unaware of the law or unable to afford a
legal battle against the employer. See Part IV.B.3.a.i. The fact
that many workers may not adjust their behavior in response to
changes in State-level enforceability of non-competes suggests that
the final rule could result in even greater effects than those
observed in the research, particularly because it would require
employers to provide workers with notice that their non-compete is
no longer in effect, which would help correct for workers' lack of
knowledge of the law. See Sec. 910.2(b).
---------------------------------------------------------------------------

In contrast, other studies of the use of non-competes compare a
sample of workers who are subject to non-competes with a sample of
workers who are not subject to non-competes. The shortcoming of these
studies is that they cannot easily differentiate between correlation
and causation. For example, if such a study shows that workers with
non-competes earn more, there could be many confounding reasons for
this result. For example, employers may be more likely to enter into
non-competes with workers who earn more. In contrast, a study showing
that workers' earnings increase or decrease when non-

[[Page 38373]]

competes are made more or less enforceable provides much stronger
evidence regarding the effect of non-competes, in isolation.
Researchers studying non-competes are aware of this bias and frequently
caution that estimates of the correlation between outcomes and the use
of non-competes should not be misinterpreted as causal.\387\
---------------------------------------------------------------------------

\387\ See, e.g., Starr, Prescott, & Bishara, supra note 68 at 73
(``Our analysis of the relationships between noncompete use and
labor market outcomes . . . is best taken as descriptive and should
not be interpreted causally.''); Johnson & Lipsitz, supra note 80 at
711 (``These regressions [of firm investment on non-compete use]
should be interpreted as correlations rather than causation, since
the decisions to make these investments and use [non-competes] are
made jointly.'').
---------------------------------------------------------------------------

Second, the Commission gives more weight to studies examining the
effects of changes in non-compete enforceability and less weight to
studies that simply compare economic outcomes between States where non-
competes are more enforceable and States where non-competes are less
enforceable. This latter category of studies is known as ``cross-
sectional studies of enforceability.'' Like studies based on the use of
non-competes, these cross-sectional studies of enforceability cannot
easily differentiate between correlation and causation. This is because
differences between States that are unrelated to non-competes and their
enforceability can easily pollute comparisons. For example, non-
competes are less enforceable in California than in Mississippi, and
the cost of living is higher in California than in Mississippi.
However, the difference in the cost of living is likely to be due to
underlying differences between the economies and geographies of the two
States, rather than being attributable to non-competes. In contrast,
studies examining how changes in enforceability of non-competes affect
various outcomes--studies that look at what happens within States
before and after a change in State law that affects the enforceability
of non-competes--allow researchers to infer that the change caused the
effects.\388\
---------------------------------------------------------------------------

\388\ Matthew S. Johnson, Kurt J. Lavetti, & Michael Lipsitz,
The Labor Market Effects of Legal Restrictions on Worker Mobility,
Nat'l Bureau of Econ. Rsch. 2 (2023) (``. . . cross-sectional
variation in enforceability might be correlated with other
unobserved differences across states.'').
---------------------------------------------------------------------------

Despite having this limitation, the Commission believes that cross-
sectional studies of enforceability are still superior to the ``use''
studies described under the first principle. This is because although
comparisons of different States may have unreliable results due to
confounding variables--depending on which States are compared--``use''
studies are inherently unreliable due to confounding effects. For
example, because employers enter into non-competes more often with
highly paid workers, all ``use'' studies related to worker earnings are
inherently unreliable, although studies that utilize data on the use of
non-competes but employ a design that plausibly identifies a causal
effect may be less unreliable.
Third, the Commission gives more weight to studies assessing
changes in the enforceability of non-competes in multiple States. This
reduces the possibility that the observed change in economic outcomes
was driven by an idiosyncratic factor unique to a particular State. For
example, assume State X changed its laws to make non-competes less
enforceable, and new business formation subsequently increased compared
with other States. However, around the same time it changed its non-
compete law, State X also enacted legislation to provide attractive tax
incentives to entrepreneurs. It would be difficult to isolate the
effect of the change in non-compete law from the effect of the tax law
change. For this reason, the Commission gives more weight to studies
that analyze the effects of multiple changes in enforceability. For
example, if a study shows that, compared with other States that did not
change their non-compete laws, new business formation rose not only in
State X, but also in several other States that changed their laws to
make non-competes less enforceable, the Commission would be more
confident inferring that changes in non-compete law caused these
effects.
Fourth, the Commission gives more weight to studies that use
sophisticated, nuanced measures of enforceability, such as non-binary
measures of non-compete enforceability that capture multiple dimensions
of non-compete enforceability. This fourth guiding principle ensures
accuracy and granularity in the measurement of non-compete
enforceability.
A variety of different factors affect the enforceability of non-
competes from State to State, including (among others) the permissible
geographic scope and duration of non-competes and how high the
employer's burden of proof is to establish that a non-compete is
enforceable. Given the different factors involved, the overall level of
non-compete enforceability from State to State falls along a spectrum;
it is not as simple as whether non-competes are enforceable or not.
Thus, scales which use binary measures miss nuance between States. This
is true for enforceability overall (e.g., scales which simply assign
States to ``enforcing'' or ``non-enforcing'' categories) and for
elements of enforceability (e.g., scales which assess whether a non-
compete is enforceable if a worker is fired with a yes or no answer).
While no scale is perfect, scales which allow for multidimensionality
and granularity measure non-compete enforceability (and thus the
effects that stem from it) with a higher degree of accuracy.\389\
---------------------------------------------------------------------------

\389\ Jonathan M. Barnett & Ted Sichelman, The Case for
Noncompetes, 87 U. Chi. L. Rev. 953 (2020).
---------------------------------------------------------------------------

Fifth, the Commission gives more weight to studies in which the
outcome studied by the researchers is the same as the outcome the
Commission is interested in or is an effective proxy for the outcome
the Commission is interested in. It gives less weight to studies that
use ineffective proxies. For example, some outcomes are relatively easy
to study. There is extensive data on workers' earnings at the State
level, so researchers can simply use this data to study how changes in
non-compete enforceability affect workers' earnings in a State. Other
outcomes, however, may be more challenging to quantify directly, and
thus researchers may use proxies for understanding the effect they are
studying. For example, there is no single metric that measures
innovation in the economy. For this reason, to learn about how non-
competes affect innovation, a researcher might study the effect of
changes in non-compete enforceability on the number of patents issued
in the State as a proxy for innovation. However, proxies can sometimes
be ineffective or inapt. For example, a study that analyzes the effect
of non-compete enforceability on the number of patents issued is
generally a weaker proxy for innovation than a study that also takes
into account the quality of patents issued. For this reason, the
Commission gives more weight to studies that measure the exact outcome
of interest or studies that use effective proxies.
While these five guiding principles are important indicators of the
relative strength of empirical studies evaluated by the Commission for
the purpose of this final rule, the Commission's assessment of
empirical studies was holistic and relied on its economic expertise. In
addition to the guiding principles described in this Part IV.A.2, the
Commission's holistic, expert assessment of the empirical evidence also
included considering characteristics of studies important in any
context, such as data quality, statistical precision, and other
factors.

[[Page 38374]]

In some instances, the Commission cites studies beyond those
discussed in the NPRM. The Commission cites such studies only where
they check or confirm analyses discussed in the NPRM, or where the
Commission is responding to comments raising them. The Commission's
findings do not rest on these studies, however, and they are not
necessary to support its findings.

B. Section 910.2(a)(1): Unfair Methods of Competition--Non-Competes
With Workers Other Than Senior Executives

The Commission now turns to the basis for its findings that non-
competes with workers other than senior executives are an unfair method
of competition. As explained in Part II.F, under section 5, the
Commission assesses two elements: (1) whether the conduct is a method
of competition, as opposed to a condition of the marketplace, and (2)
whether it is unfair, meaning that it goes beyond competition on the
merits. The latter inquiry has two components: (a) whether the conduct
has indicia of unfairness, and (b) whether the conduct tends to
negatively affect competitive conditions. These two components are
weighed according to a sliding scale.
Non-competes with workers other than senior executives satisfy all
the elements of the section 5 inquiry.\390\ As described in Part
IV.B.2, such non-competes are facially unfair because they are
restrictive and exclusionary, and because they are exploitative and
coercive. And as described in Part IV.B.3, such non-competes tend to
negatively affect competitive conditions in labor markets and markets
for products and services. As explained in Part II.F, the legal
standard for an unfair method of competition under section 5 requires
only a tendency to negatively affect competitive conditions. The
inquiry does not turn on whether the conduct directly caused actual
harm in a specific instance. Here, the tendency of non-competes to
impair competition is obvious from their nature and function. And even
if this tendency were not facially obvious, the evidence confirms that
non-competes do in fact have a negative effect on competitive
conditions.
---------------------------------------------------------------------------

\390\ For the sake of readability, in this Part IV.B, the
Commission refers to non-competes with workers other than senior
executives as ``non-competes.''
---------------------------------------------------------------------------

The Commission finds that the empirical research described in this
Part IV.B supports findings related to workers other than senior
executives.\391\
---------------------------------------------------------------------------

\391\ Some of the studies described in Part IV.B analyze non-
competes between employers and workers across the labor force. Other
studies analyze non-competes with particular populations of workers.
In each of the studies described in Part IV.B, non-competes with
workers other than senior executives represented a large enough
segment of the sample that the study supports findings related to
the effects of non-competes for such workers. Studies that focus
primarily on non-competes for senior executives are described in
Part IV.C, which explains the Commission's findings related to non-
competes with senior executives.
---------------------------------------------------------------------------

1. The Commission Finds That Non-Competes Are a Method of Competition,
Not a Condition of the Marketplace
With respect to the first element, whether the conduct is a method
of competition, the Commission preliminarily found in the NPRM that
non-competes are a method of competition under section 5 because they
are specific conduct undertaken by an actor in a marketplace, as
opposed to merely a condition of the marketplace.\392\ No commenters
disagreed with this finding, and the Commission reaffirms its
preliminary finding that non-competes are a method of competition.
---------------------------------------------------------------------------

\392\ NPRM at 3504.
---------------------------------------------------------------------------

2. The Commission Finds That Non-Competes Are Facially Unfair Conduct
The Commission finds that non-competes are facially unfair conduct
under section 5 because they are restrictive and exclusionary. The
Commission further finds that non-competes are facially unfair under
section 5 because they are exploitative and coercive.
a. Non-Competes Are Restrictive and Exclusionary Conduct
Under section 5, indicia of unfairness may be present where conduct
is restrictive or exclusionary, provided that the conduct also tends to
negatively affect competitive conditions.\393\ In the NPRM, the
Commission explained that non-competes are restrictive conduct.\394\ No
commenters disputed this analysis, and the Commission reaffirms its
preliminary finding that non-competes are restrictive.
---------------------------------------------------------------------------

\393\ See Part II.F.
\394\ NPRM at 3500.
---------------------------------------------------------------------------

The restrictive nature of non-competes is evident from their name
and function: non-competes restrict competitive activity. They do so by
restricting a worker's ability to seek or accept other work or start a
business after the worker leaves their job, and by restricting
competitors from hiring that worker. Because non-competes facially
restrict competitive activity, courts have long held they are
restraints of trade and proper subjects for scrutiny under the
antitrust laws.\395\
---------------------------------------------------------------------------

\395\ See, e.g., Am. Tobacco Co., 221 U.S. 106, 181-83 (1911)
(holding that 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-competes); Newburger, Loeb & Co., Inc., 563 F.2d 1057,
1082 (2d Cir.) (``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).
---------------------------------------------------------------------------

The restrictions that non-competes impose on workers are often
substantial. Non-competes can severely restrict a worker's ability to
compete against a former employer. For most workers, the most natural
alternative employment options are jobs in the same geographic area and
in the same field. These are the very jobs that non-competes typically
prevent workers from taking. Furthermore, for most workers, the most
practical entrepreneurship option is starting a business in the same
field. This is the very opportunity that non-competes typically prevent
workers from pursuing. Moreover, the record before the Commission
reflects that non-competes are often so broad as to force a worker to
sit out of the labor market altogether.
In the NPRM, the Commission used the term ``restrictive'' to
encompass both restrictive and exclusionary conduct.\396\ In this final
rule, in addition to finding that they are restrictive conduct, the
Commission separately finds that non-competes are exclusionary conduct
because they tend to impair the opportunities of rivals. Where a worker
is subject to a non-compete, the ability of a rival firm to hire that
worker is impaired. In addition, where many workers in a market are
subject to non-competes, the ability of firms to expand into that
market, or entrepreneurs to start new businesses in that market, is
impaired.
---------------------------------------------------------------------------

\396\ NPRM at 3500 (``Non-competes also restrict rivals from
competing against the employer to attract their workers.'').
---------------------------------------------------------------------------

For the foregoing reasons, the Commission finds that the use of
non-competes with workers other than senior executives is facially
unfair under section 5 because it is conduct that is restrictive or
exclusionary.
b. Non-Competes Are Exploitative and Coercive Conduct
Conduct may violate section 5 where it is exploitative or coercive
and tends to negatively affect competitive conditions.\397\ Indeed,
where conduct is exploitative or coercive, it evidences

[[Page 38375]]

clear indicia of unfairness, and less may be necessary to show a
tendency to negatively affect competitive conditions.\398\
---------------------------------------------------------------------------

\397\ See Part II.F.
\398\ See id.
---------------------------------------------------------------------------

In the NPRM, the Commission preliminarily found that non-competes
with workers other than senior executives were exploitative and
coercive because in imposing them on workers, employers take advantage
of their unequal bargaining power.\399\ The Commission also
preliminarily found that non-competes are exploitative and coercive at
the time of the worker's potential departure, because they force a
worker to either stay in a job the worker wants to leave or force the
worker to bear other significant harms and costs, such as leaving the
workforce or their field for a period of time; relocating to a
different area; violating the non-compete and facing the risk of
expensive and protracted litigation; or attempting to pay the employer
to waive the non-compete.\400\
---------------------------------------------------------------------------

\399\ NPRM at 3502-04.
\400\ Id. at 3504.
---------------------------------------------------------------------------

The Commission received an outpouring of comments on the question
of whether non-competes were exploitative or coercive. Thousands of
workers described non-competes as pernicious forces in their lives that
took advantage of their lack of bargaining power and forced them to
make choices detrimental to their finances, their careers, and their
families. Above all, the predominant themes that emerged from the
comments were powerlessness and fear.
Thousands of workers reported feeling powerless to avoid non-
competes, either because the worker needed the job or because non-
competes were pervasive in the worker's field. Hundreds of workers
reported non-competes were unilaterally imposed on them. Workers
overwhelmingly reported that they did not bargain over non-competes,
did not receive compensation for non-competes, and were not represented
by counsel in connection with non-competes, with only rare exceptions.
And hundreds of workers reported that even where they wanted a job
with better pay or working conditions, or to strike out on their own,
the fear of litigation from a deep-pocketed employer or the fear of
being without work prevented them from doing so. Hundreds of workers
described how this fear coerced them into remaining in jobs with poor
conditions or pay, including dangerous or toxic work environments; into
leaving an industry or profession that they invested, trained, studied,
or were experienced in, damaging or derailing their careers; into
moving away from their home, uprooting or separating their families; or
into enduring long-distance commutes, which made it harder to care for
and spend precious time with their loved ones. Many workers described
how this fear hung above them even if they thought the non-compete was
overbroad and probably unenforceable under State law, because having to
defend a lawsuit from an employer for any length of time would
devastate their finances.
Based on the entirety of the record, for the following reasons, the
Commission finds non-competes with workers other than senior executives
are exploitative and coercive because they are unilaterally imposed by
a party with superior bargaining power, typically without meaningful
negotiation or compensation, and because they trap workers in worse
jobs or otherwise force workers to bear significant harms and costs.
i. Non-Competes With Workers Other Than Senior Executives Are
Unilaterally Imposed
The Commission finds that employers almost always unilaterally
impose non-competes, exploiting their superior bargaining power to
impose--without any meaningful negotiation or compensation--significant
restrictions on workers' abilities to leave for better jobs or to
engage in competitive activity.
The Commission finds that employers have significantly more
bargaining power than workers. Most workers, especially workers other
than senior executives, depend on income from their jobs to get by--to
pay their rent or mortgage, pay their bills, and put food on the table.
The loss of a job or a job opportunity can severely damage workers'
finances and 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.
The Treasury Department, in a report based on an extensive
literature review, finds that firms generally have considerable labor
market power.\401\ The report states that concentration in particular
industries and locations can increase employers' labor market
power.\402\ However, the report explains that, even in the absence of
concentration, firms have significant labor market power due to a
variety of factors.
---------------------------------------------------------------------------

\401\ Treasury Labor Market Competition Report, supra note 374
at i-ii.
\402\ Id. at i.
---------------------------------------------------------------------------

As the report notes, some of these factors are inherent in the
firm-worker relationship. The report states that workers are at an
informational disadvantage relative to firms, often not knowing what
other workers earn or the competitive wages for their labor.\403\ The
report states further that workers often have limited or no ability to
switch locations and occupations quickly and may lack the financial
resources to support themselves while they search for jobs that pay
more and better match their skills and abilities.\404\ According to the
report, these conditions often enable firms to exert market power even
in labor markets that are not highly concentrated.\405\
---------------------------------------------------------------------------

\403\ Id.
\404\ Id.
\405\ Id.
---------------------------------------------------------------------------

In addition to factors inherent to the employer-worker
relationship, the report concludes that firms use a wide range of
practices to restrain competition for workers, including sharing wage
information and conspiring to fix wages with other firms; agreeing not
to hire other firms' workers; and adopting non-competes, mandatory
arbitration agreements, and overbroad NDAs.\406\ The report also states
that practices such as outsourcing and worker misclassification have
further diminished workers' market power.\407\ Overall, the report
finds that employers' labor market power has resulted in a 20% decrease
in wages relative to the level in a fully competitive market.\408\
---------------------------------------------------------------------------

\406\ Id.
\407\ Id. at ii.
\408\ Id.
---------------------------------------------------------------------------

The Commission finds that employers are able to exploit their
considerable labor market power--and indeed routinely do so--with
respect to non-competes imposed on workers other than senior
executives. Employers are repeat players likely to have greater
experience and skill at bargaining than individual workers in the
context of negotiating employment terms such as non-competes.\409\
Research has found that employers present non-competes in standard-form
contracts,\410\ which workers are unlikely to read,\411\ and that

[[Page 38376]]

workers rarely bargain over non-competes and rarely seek the assistance
of counsel in reviewing non-competes.\412\ Many workers also lack the
legal training or legal knowledge necessary to understand whether a
particular non-compete is enforceable or the consequences of entering
into a non-compete. The available evidence indicates that many workers
are not aware of the applicable law governing non-competes or their
rights under those laws.\413\ Research has also found that employers
exploit their power over workers by providing them with non-competes
after they have accepted the job offer--and in many 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.\414\
---------------------------------------------------------------------------

\409\ See, e.g., Samuel Stores, Inc. v. Abrams, 108 A. 541, 543
(Conn. 1919); Sunder Energy, LLC v. Jackson, 305 A.3d 723, 753 (Del.
Ct. Chancery 2023).
\410\ Starr, Prescott, & Bishara, supra note 68 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.'').
\411\ See, e.g., Todd D. Rakoff, Contracts of Adhesion: An Essay
in Reconstruction, 96 Harv. L. Rev. 1173 (1983); Russell Korobkin,
Bounded Rationality, Standard-Form Contracts, and Unconscionability,
70 U. Chi. L. Rev. 1203, 1217 (2003).
\412\ Starr, Prescott, & Bishara, supra note 68 at 72.
\413\ J.J. Prescott & Evan Starr, Subjective Beliefs About
Contract Enforceability, Forthcoming, J. L. Stud. 10-11 (2022).
\414\ Marx (2011), supra note 81 at 706.
---------------------------------------------------------------------------

The comment record provides strong support for the Commission's
finding that non-competes are coercive and exploitative because they
are typically unilaterally imposed by employers on workers other than
senior executives. Illustrative examples of the comments the Commission
received include the following:

I am a practicing OB/GYN physician in Shreveport, LA. .
. . I was put into a non-negotiable, vague non-compete with NO
expiration date. . . . I needed a job. I was in a large amount of
debt with accumulating interest during my four years of residency
with a minimal salary. Honestly, I could not afford an attorney. So
naively I trusted that the people that had been training me for the
past 4 years would not take advantage of me in a contract. I did not
have the ability to seek advice on ``how'' to negotiate a contract
with my mentors since my mentors were the ones who wrote the
contract.\415\
---------------------------------------------------------------------------

\415\ Individual commenter, FTC-2023-0007-4414.
---------------------------------------------------------------------------

As [a] physician who recently negotiated a new
contract, I support FTC changes to the non-compete rules. . . . All
three institutions [I considered working for] had unreasonable and
onerous non-competes. Essentially making it impossible to get
another job in the entire state of NJ--not just a few mile radius
but two thirds of the state. . . . Non-competes are never negotiable
even when hiring a lawyer to review and negotiate the contract.
Hospitals refused to negotiate on the majority of the contract
citing it is [an] across the board provision that cannot be
altered.\416\
---------------------------------------------------------------------------

\416\ Individual commenter, FTC-2023-0007-10547.
---------------------------------------------------------------------------

I'm a worker that has had to consider whether to take a
job that requires signing a no-compete agreement . . . . Several
times in my career, after weeks of interviewing and salary
negotiation, I've found myself facing a required no-compete
agreement that would drastically limit my future career options and
negotiating power. Several times I've accepted these agreements
because I had already turned down competing offers and found myself
with limited options.\417\
---------------------------------------------------------------------------

\417\ Individual commenter, FTC-2023-0007-12428.
---------------------------------------------------------------------------

I'm a project manager at an Interior Design & Home
Staging company in Manhattan; we're the largest staging company on
the East Coast. After I accepted my job offer and went in to file
paperwork, I was very briefly walked through what this non-compete
means (the details were not made entirely clear; I believe they left
it intentionally murky) and it was buried deep in the new employee
rules and regulations packet I needed to read and sign at my
onboarding. I personally am very against these agreements because,
as mine states, I cannot work with ``a competing staging company''
or for any of the clients of my current company. Again, we're the
largest staging firm on the east coast and have a lot of clients (we
do over 100 stagings per year). Essentially, I am completely shut
out of working in the industry in NYC as there are only a handful of
other staging companies that can pay me a living wage to do so.\418\
---------------------------------------------------------------------------

\418\ Individual commenter, FTC-2023-0007-12480.
---------------------------------------------------------------------------

You might say that we might be able to negotiate out of
a non-compete in our contract, but that is simply not true. In my
hospital, I was already established, owning a house and having kids
in school in a spouse in a career when the Hospital came forward and
sit on my next contract renewal that I had no choice, but to sign a
noncompete. They had me over a barrel. At my next contract
negotiation, I try to negotiate out of the noncompete, with less
salary or less benefits, and it was a nonstarter. There is zero
tolerance for negotiating out of the noncompete.\419\
---------------------------------------------------------------------------

\419\ Individual commenter, FTC-2023-0007-14706.
---------------------------------------------------------------------------

At the end of 2018, as a Manager at a small business
(150 employees) in a niche technology industry, I was offered shares
in our company as we were acquired by a Private Equity firm. . . . I
worked with a company-provided attorney on an Employment Agreement.
This agreement offered a 6-month severance with a 1-year non-compete
period, which I negotiated down to a 6-month non-compete to match
the severance period. Later that month, I was sent an additional,
previously unseen 120-page Share Agreement that governed how I would
vest the shares I had earned. I didn't realize it at the time, but
buried toward the end of this document was another non-compete that
had a much longer timeframe dictated--1 year from when I no longer
held any shares. As it would potentially take up to 6 years for the
company to sell again, that meant an incredibly long and indefinite
sounding time period. I was given only one business day to review
this agreement, and was sent a signature packet the following day. I
honestly thought I was signing my Employment Agreement negotiated
with a company attorney, not the share agreement that neither myself
nor the attorney had reviewed, and which I had only received the day
prior.\420\
---------------------------------------------------------------------------

\420\ Individual commenter, FTC-2023-0007-2347.
---------------------------------------------------------------------------

Desperate to obtain an entry level job in the
Accounting field in which I am currently obtaining my Associate's
degree, I was presented with an offer of employment and a non-
compete agreement contract to sign. Because I needed to pay rent, I
signed it.\421\
---------------------------------------------------------------------------

\421\ Individual commenter, FTC-2023-0007-2600.
---------------------------------------------------------------------------

On the first day of my husband's employment, without
prior notice, an extensive 2 year non-compete clause was put in his
employment contract and while it was noted within the clause he
could seek counsel, when you are in the middle of your first day of
work it's not practical. In addition, for most people, if it is your
first experience with a non-compete, you likely do not have the
funds to pay a $750 per hour lawyer to advise and negotiate on your
behalf, nor realize the possible long-term consequences.\422\
---------------------------------------------------------------------------

\422\ Individual commenter, FTC-2023-0007-5933.

Many commenters agreed with the Commission's preliminarily finding
that employers generally have considerable labor market power. Even
commenters opposing the NPRM did not generally dispute the notion that
there is unequal bargaining power between employers and workers. Many
workers stated that non-competes are pervasive in their industry,
meaning they could not find a job without one. Many commenters stated
that high wages or skills do not automatically translate into more
bargaining power or sufficiently mitigate the harms from non-competes,
especially in concentrated markets or markets where so many employers
use non-competes that workers effectively have no choice but to sign
them. Commenters also said that underrepresented groups may have even
less bargaining power to negotiate non-competes and are less likely to
have the resources for litigation, which could have an increased
deterrent effect on worker mobility.
Hundreds of commenters stated that workers are rarely, if ever,
able to negotiate their non-competes because non-competes are typically
presented in a take-it-or-leave-it fashion. These comments spanned both
lower-wage workers and workers in high-wage industries.\423\ Workers
often stated that they were ``forced'' to sign a non-

[[Page 38377]]

compete. Very few workers said they were able to decline signing a non-
compete and still be hired or employed. An employment law firm also
agreed with the Commission and stated that non-competes are rarely
subject to negotiation.
---------------------------------------------------------------------------

\423\ Industries that the Commission considered as higher wage
industries included but were not limited to engineers, entertainment
(namely on-air talent), entrepreneurs, financial services, dentists,
physicians, sales workers, tech industry workers, and veterinarians.
Industries were assessed as high wage based on BLS occupational wage
data. BLS, Occupational Employment and Wage Statistics, https://www.bls.gov/oes/tables.htm (based on the May 2022 National XLS
table).
---------------------------------------------------------------------------

Confirming the research described in this Part IV.B.2.b.i, many
workers--including highly paid and highly skilled workers--stated that
they did not receive notice that they would be required to sign a non-
compete until after accepting a job offer. Some workers said they were
told of the non-compete after accepting the job but before starting
work. Many workers who described when they were notified of a non-
compete said it was on their first day of work or even later. Many
workers stated that they were required to sign their non-compete after
a merger or acquisition--i.e., after they were already on the job but
there was a change in ownership of the company. For example, a trade
organization stated that it is common for the purchaser of a business
to impose non-competes on its workers, which may trap workers in an
organization different from the one they originally agreed to work for.
An employment law firm commented that even highly paid or highly
skilled workers do not always receive notice of non-competes with the
employment offer.
Many workers also stated that non-competes are often hidden or
obscured. Several workers said their non-compete was buried in other
paperwork or confusingly worded or vague. Some commenters stated that
their employer refused to allow them to have a copy of their non-
compete. Many workers said their employers gave them misleading or
incorrect information about the terms or enforcement of non-competes.
Each of the above categories included not only workers from low-wage
industries, but also workers from high-wage industries. While these
practices appear to be commonplace, based on the comments, the
Commission also notes that even workers who knew about non-competes
before accepting the job offer--and who did not report being misled
about the non-compete--did not report bargaining or negotiating over
it.
Only a small number of workers reported any negotiating over non-
competes. For example, a sales worker said they were able to negotiate
a non-compete, though that worker still supported the proposed rule. A
surgeon group stated hospitals were willing to negotiate over non-
competes, but that hospitals use the non-competes as a negotiating
tactic to drive down surgeon salaries.
Few workers who submitted comments reported being compensated for
signing a non-compete. Among those workers who did report receiving
compensation, most still said they considered their non-competes to be
exploitative or coercive. For example, some workers said they were laid
off and then required to sign a non-compete as a condition for
receiving severance. A few workers said their employer had threatened
to withhold their commissions and/or pay on departure if they did not
sign a non-compete. One worker reported never receiving the
compensation associated with a non-compete, because they were
terminated two months after signing.
In addition, the Commission finds that employers frequently impose
non-competes even when they are unenforceable under State law. An
economist suggested that non-competes may be used in States in which
they are unenforceable because the employer hopes the State's policy
might change, or the employer might be able to forum-shop to apply the
law of another jurisdiction more favorable to non-competes. Some
commenters stated that firms may remind workers they are subject to a
non-compete upon departure even when those non-competes are
unenforceable because they hope that workers and competitors will abide
by them.
These comments that employers often use unenforceable non-competes
are supported by research finding that employers frequently use non-
competes even when they are unenforceable under State law.\424\ This
research suggests 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 or the challenges
workers face enforcing their rights.
---------------------------------------------------------------------------

\424\ Starr, Prescott, & Bishara, supra note 68 at 81.
---------------------------------------------------------------------------

A far smaller number of commenters--a group that included many
businesses and trade organizations, and very few workers--argued that
non-competes were not exploitative or coercive. An industry
organization said non-competes are understandable to a layperson with
respect to their geographic scope, time in effect, and industry to
which they apply, while an alternative trade secret case would be more
complex. But even if workers understand the basic terms of non-
competes, that does not alter the Commission's core concern that non-
competes are exploitative and coercive because they take advantage of
unequal bargaining power between employers and workers and force
workers to stay in jobs they want to leave or otherwise bear
significant harms or costs. It also does not alter the Commission's
concern that non-competes tend to negatively affect competitive
conditions. Moreover, the Commission notes that the available evidence
indicates that many workers are not aware of the applicable law
governing non-competes or their rights under those laws.\425\ In
addition, many commenters stated that non-competes were not disclosed
to them before they started their job. Furthermore, the Commission
addresses why trade secret law is a less restrictive alternative for
protect employers' legitimate interests in Part IV.D.2.
---------------------------------------------------------------------------

\425\ See supra note 413 and accompanying text.
---------------------------------------------------------------------------

A few commenters stated that unequal bargaining power does not
constitute an unfair method of competition. In response, the Commission
notes that it does not find that unequal bargaining power itself is an
unfair method of competition; rather, unequal bargaining power informs
its analysis of exploitation and coercion.
The comment record indicates that while some highly paid workers
may seek the assistance of counsel when negotiating non-competes, many
do not. Commenters did not present studies or other quantitative
evidence that undermines the finding in Starr, Prescott, & Bishara that
less than 8% of workers seek assistance of counsel in connection with
non-competes.\426\ The Commission thus finds that the vast majority of
workers lack assistance of counsel in connection with entering non-
competes. The Commission believes that its definition of senior
executives, discussed in Part IV.C.4, captures those workers who are
most likely to seek assistance of counsel. To the extent any other
individual workers seek assistance of counsel and/or are able to
actually bargain over non-competes sufficient that a given non-compete
is not exploitative and coercive, the Commission still finds that such
non-competes are unfair methods of competition for the independent
reason that they are restrictive and exclusionary conduct that tends to
negatively affect competitive conditions.
---------------------------------------------------------------------------

\426\ Starr, Prescott, & Bishara, supra note 68 at 72.
---------------------------------------------------------------------------

Overall, the comments provide strong support for the Commission's
finding that, with respect to workers other than senior executives,
employers almost always unilaterally impose non-competes--exploiting
their superior bargaining power to significantly restrict workers'
abilities to leave for better jobs or engage in competitive activity.

[[Page 38378]]

ii. Non-Competes With Workers Other Than Senior Executives Trap Workers
in Jobs or Force Them to Otherwise Bear Significant Harms and Costs
The Commission finds that non-competes are exploitative and
coercive because they force workers to either stay in jobs they want to
leave or bear other significant harms and costs, such as leaving the
workforce or their field for a period of time; relocating out of their
area; or violating the non-compete and facing the risk of expensive and
protracted litigation. In addition, the Commission finds non-competes
exert a powerful in terrorem effect: they trap workers in jobs and
force them to bear these harms and costs even where workers believe the
non-competes are overbroad and unenforceable, due to workers' fear that
having to defend a lawsuit from their employer for any length of time
would devastate their finances or ruin their professional reputations.
The comment record provides strong support for this finding. Many
workers submitted comments supportive of the Commission's preliminary
finding that non-competes coerce workers into remaining in their
current jobs. Many workers reported staying in their jobs because they
feared harm to their careers if they were forced out of their field;
feared having to relocate or endure a lengthy commute due to a non-
compete; or feared their non-competes would cause them to be unemployed
if they left. Several workers reported they were unable to take a
specific desired job because of a non-compete. Many workers recounted
how non-competes trapped them in jobs with poor working conditions or
where they were subject to illegal conduct, including sexual
harassment.\427\ Some workers said they were subject to particularly
broad, even global, non-competes, meaning leaving their field was their
only option if they left their current job. These comments spanned both
lower-wage workers and workers in high-wage industries.
---------------------------------------------------------------------------

\427\ These comments are addressed in greater detail in Part
IV.B.3.a.iii.
---------------------------------------------------------------------------

Illustrative examples of the comments the Commission received
include the following:

I am a journalist who has been forced to move across
the country three times, and leave my field entirely for one year,
in order to comply with stringent non-compete agreements. . . . In
[one] situation, I was stuck working for abusive management who
fostered a toxic and abusive workplace, and I had to work there for
more than a year until I could find a job in another city entirely
because they had threatened to sue me under the non-compete if I
left and worked for another local station. . . . [E]ven if these
clauses are unenforceable, as we've all heard before, who can afford
the legal representation to go up against a corporation and their
lawyers when the lawsuit threat comes? My life would have been very
different if I weren't trapped by non-competes at points in my
career.\428\
---------------------------------------------------------------------------

\428\ Individual commenter, FTC-2023-0007-0747.
---------------------------------------------------------------------------

As a veterinarian I support the elimination of non-
compete agreements. In our profession they still are overwhelmingly
the normal expectation with contracts. . . . [C]ompanies use the
fear of litigation to enforce them. As veterinary medicine very
quickly becomes more corporate owned, basically they pit us as a
singular employee against large corporations that have substantial
means both financially and legally. No reasonable employee wants to
take on that battle or even can financially take on that battle. So
regardless if the clauses are `unenforceable' they are enforced via
intimidation. . . . When [my] job was a terrible fit and my boss
ultimately ended up `not renewing my contract' I was still left with
a noncompete. This basically eliminated my ability to work within a
reasonable distance of our home. I ended up commuting an hour and 15
minutes one way for 10 months until my husband, myself, and my very
young child were able to move closer to my new job. While it was
likely legally unreasonable in nature, I did not have the resources
financially to even consider the legal battle that would have had to
happen for reconsideration and I desperately needed an income to
continue to pay the student debt that comes with being a young
doctor. Furthermore I had a baby that needed my focus as well.\429\
---------------------------------------------------------------------------

\429\ Individual commenter, FTC-2023-0007-2855
---------------------------------------------------------------------------

I was fired unjustly 11/2021 for declining the Covid
vaccine. My medical and religious exemptions were both denied. In
addition to this, I was required by my former employer contract to
abide by the two-year 10 mile restrictive covenant. This greatly
hindered my ability to find employment, and I was out of work for
approximately three months. I could only find part-time work for a
fraction of my former salary. Had I not had the noncompete clause, I
could have found a full-time job almost immediately.\430\
---------------------------------------------------------------------------

\430\ Individual commenter, FTC-2023-0007-7561.
---------------------------------------------------------------------------

Unfortunately, the average dental school graduate has
nearly $300,000 in student loan debt, and most new dentists are
unable to make their practice-ownership dreams a reality immediately
after residency. Thus, we rely on entry-level associate dentist
positions to gain experience, pay off debt, and become fiscally/
professionally prepared to become practice owners. Much to my
dismay, upon interviewing for my first associate dentist position, I
quickly realized how non-competes are being used in the dental
profession to prevent vulnerable young dentists like myself from
taking the next step in our careers. . . . Although dental associate
positions come with relatively high compensation, it doesn't make
this issue any less problematic.\431\
---------------------------------------------------------------------------

\431\ Individual commenter, FTC-2023-0007-8858.
---------------------------------------------------------------------------

My daughter had an inter-state non-compete enforced as
a minimum wage medical scribe. Originally she was working with a
medical scribe company in Indiana prior to Covid. Due to COVID and
graduating from college she then moved to our home in Oregon. She
applied for a medical scribe job in Oregon with a company that did
not provide any scribe services in Indiana. But her original scribe
company had 1 ``office'' they were providing scribe services to in
Salem, Oregon. My daughter had applied with the local scribe company
to provide services but when examined further found that her
original scribe company from Indiana was going to enforce a $5000
non-compete buy-out fee on her to provide the services in Salem,
Oregon that were within the sphere of restriction for her ``new''
local scribe opportunity.\432\
---------------------------------------------------------------------------

\432\ Individual commenter, FTC-2023-0007-15249.

Many commenters explained that non-competes forced them to relocate
and described the toll the relocation took on their families. Other
commenters stated that their families have been forced to live apart,
or they had been separated from elderly relatives, due to a non-compete
forcing the relocation of one of the family members. Many commenters
described how long commutes undertaken to avoid non-competes increased
transportation costs and caused the worker to lose precious time with
their families.
The comment record bolsters the Commission's finding that employers
wield non-competes to coerce and exploit workers into refraining from
competitive activity even where non-competes are unenforceable. Many
workers explained that they--and others in their industry--abided by
non-competes, even where they believed the non-compete was overbroad
and likely unenforceable. According to a law firm specializing in
executive compensation, even workers who can afford counsel may be
unwilling to mount a long and uncertain legal battle to challenge a
non-compete. The firm said employers almost always have deeper pockets
and more access to counsel than individual workers, making workers more
reluctant to litigate. Commenters further stated that employers may be
able to deduct litigation costs as a business expense, giving them the
wherewithal to enforce their non-competes.
Many workers with non-competes stated that they feared legal action
from their employer or enormous legal fees if they left their current
job, and most of those workers said they could not afford litigation.
Workers also stated that they are reluctant to engage in litigation
against an employer because it would harm their reputation in their
industry.
Many workers reported being threatened with litigation over a non-

[[Page 38379]]

compete when they attempted to leave an employer. Some commenters said
their non-competes contained additional clauses making litigation more
difficult, such as attorneys' fee-shifting provisions or forced
arbitration. Other workers feared having to pay financial penalties or
feared having their compensation clawed back if their employer claimed
they violated the non-compete. Each of the above comment categories
included numerous comments from workers in high-wage industries.
Commenters asserted that employers have several advantages in
litigation, further increasing the risk of challenging a non-compete. A
commenter said even an extremely overbroad non-compete may be
enforceable because a court can modify it to reduce its scope or
duration. An employment attorney said employers who use overbroad non-
competes to stifle competition suffer few if any negative consequences
for doing so. The employment attorney further said that most employers
do well even in a legal regime that nominally disfavors non-competes,
due to the chilling effect of the threat of litigation. One researcher
cited in the NPRM stated that non-competes have a powerful chilling
effect because State laws generally do not prohibit employers from
requiring employees to sign overbroad non-competes. Accordingly, the
researcher recommended that non-competes be banned rather than
restricted in scope, thereby preventing the possibility of lawsuits
(and the threat thereof).
No commenters submitted studies or empirical evidence to contradict
or otherwise call into question the research cited in the NPRM finding
employers frequently use non-competes even when they are unenforceable
under State law. Many commenters said they perceived non-competes to be
a tool used to intimidate workers, and others specifically said they
had been intimidated when their employers took legal action against
other workers who left. These comments spanned workers in both lower-
wage and high-wage industries.
The comments reflected that fields with high compensation levels
were not immune from coercion and exploitation, and that, to the
contrary, specialization can increase employers' ability to coerce and
exploit workers. For example, some commenters said highly trained and/
or specialized workers face heightened challenges in finding a job that
does not violate a non-compete without relocating or become entirely
unemployable, given the smaller number of such specialized jobs
available. One commenter said that many workers are compensated highly
because they are in a small field or have a niche skillset, meaning
non-competes significantly limit their ability to find another job in
their field. Some commenters in professions requiring advanced
education also submitted comments stating that significant student loan
debt decreased their bargaining power or increased the financial risk
of attempting to change jobs. An employment law firm stated that highly
paid or highly skilled workers in roles that are not limited to a
single industry or business, such as finance or human resources, are
more likely to be able to find employment in another industry, while
those with training and expertise in a particular industry or type of
business are at a greater risk of unemployment. Some medical
organizations and others pointed out that non-competes can be
particularly exploitative and coercive for professions such as
physicians that require State licenses, credentials, and insurance,
making relocation even more difficult.
A far smaller number of commenters claimed non-competes are not
exploitative or coercive and do not trap workers in jobs or force
workers to bear significant harms or costs. Several commenters argued
that, because non-competes are often not exploitative and coercive at
the time of contracting, they are also not exploitative and coercive at
the time workers seek to leave their jobs. According to these
commenters, to the extent a non-compete is bargained for and fairly
compensated, that same non-compete does not become exploitative and
coercive at the time of departure. In response, the Commission notes
that commenters overwhelmingly reported workers rarely bargain in
connection with, or receive compensation for, non-competes,\433\ and
the mere existence of compensation does not automatically make that
compensation fair.
---------------------------------------------------------------------------

\433\ See Part IV.B.2.b.i.
---------------------------------------------------------------------------

Some business and business association commenters contended that
workers with higher earnings can more easily forgo wages to wait out
non-competes, and thus do not feel forced to stay in their jobs. These
commenters also argued that non-competes for these workers are often
tied to equity or severance, which the worker can choose to forego if
they want to compete. These comments are contrary to the extensive
comment record indicating that even workers with higher earnings cannot
afford to forgo compensation and feel forced to stay in jobs they want
to leave due to non-competes. To the extent any such individual workers
bargained for or received compensation for a non-compete, the
Commission still finds that such non-competes are unfair methods of
competition for the independent reason that they are restrictive and
exclusionary conduct that tends to negatively affect competitive
conditions.
Overall, the comments provide strong support for the Commission's
finding that non-competes are exploitative and coercive because they
trap workers in jobs or force them to bear significant harms and costs.
For the foregoing reasons, the Commission finds that non-competes
with workers other than senior executives are exploitative and coercive
and thus facially unfair under section 5.
3. The Commission Finds That Non-Competes Tend To Negatively Affect
Competitive Conditions
Based on the Commission's expertise and after careful review of the
rulemaking record, including the empirical research and the public
comments, the Commission finds that non-competes tend to negatively
affect competitive conditions in labor markets for the reasons
explained in this Part IV.B.3.a. (As explained in Part IV.B.3.b, the
Commission further finds that non-competes tend to negatively affect
competitive conditions in markets for products and services.)
As explained in Part II.F, the legal standard for an unfair method
of competition under section 5 requires only a tendency to negatively
affect competitive conditions. The inquiry does not turn on whether the
conduct directly caused actual harm in a specific instance. Here, the
tendency of non-competes to impair competition is clear from their
nature and function. In any event, the evidence confirms that non-
competes do in fact have a negative effect on competitive conditions.
The Commission turns now to the significant evidence of harm to
competition in labor markets from non-competes, including evidence of
suppressed labor mobility, suppressed earnings, and reduced job
quality.
a. Non-Competes Tend to Negatively Affect Competitive Conditions in
Labor Markets
The Commission finds that non-competes tend to negatively affect
competitive conditions in labor markets by inhibiting efficient
matching between workers and employers.
Labor markets function by matching workers and employers. In a
competitive labor market, workers compete for jobs by offering their
skills and time (i.e., their labor services) to

[[Page 38380]]

employers, and employers in turn compete for those labor services by
offering better pay, benefits, or other elements of job
satisfaction.\434\ 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. Prospective employers can compete for the worker's
services, and the worker's current employer may also compete by seeking
to retain the worker--e.g., by offering a raise, promotion, or other
enticement.\435\ Ultimately, the worker chooses the job that best meets
their objectives, and the employer chooses the worker who best meets
theirs. In general, the more jobs and the more workers that are
available--i.e., the more competing options the worker and employer
each have--the stronger the match will be.
---------------------------------------------------------------------------

\434\ See Treasury Labor Market Competition Report at 3-4.
\435\ See id.
---------------------------------------------------------------------------

Thus, a key component of a competitive labor market is voluntary
labor mobility. Choice--the ability of market participants to satisfy
their preferences where possible--facilitates competition. In the labor
market, voluntary labor mobility reflects both the choices or
preferences of workers and that of rival competitors.
However, non-competes introduce a major friction that tends to
impair the competitive functioning of labor markets. Non-competes
inhibit the efficient matching between workers and employers via the
competitive process because, even if a competing employer offers a
better job and the worker wants to accept that better job, the non-
compete will prevent the worker from accepting it if the new job is
within the scope of the non-compete (or if the worker is unsure or
afraid it may be). Meanwhile, the employer who would like to hire the
worker is prevented from competing to attract that talent. 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 many jobs that would otherwise be available, the
worker may decide not to look for a job at all. Or the worker may enter
the labor market but take a job in which they are less productive, such
as when a non-compete forces a worker to leave their field of expertise
and training.
In this way, non-competes frustrate competitive processes in labor
markets. In competitive markets, the ``unrestrained interaction of
competitive forces'' yields a variety of benefits such as lower prices
for consumers, better wages and working conditions for workers, and
higher quality products.\436\ In contrast, when ``[i]ndividual
competitors lose their freedom to compete'' in the labor market, the
importance of worker preference in setting the level of wages and
working conditions is reduced, which is ``not consistent with [the]
fundamental goal of antitrust law.'' \437\ The restraint imposed by
non-competes on the interaction of competing employers and competing
workers directly undercuts the functioning of the competitive process
in determining wages and working conditions. Accordingly, non-competes
facially harm the competitive process and tend to negatively affect
competitive conditions in labor markets. Evidence that non-competes
have in fact had actual detrimental impacts on outcomes of the
competitive process--such as workers' earnings, new business formation,
and innovation--demonstrate that non-competes do in fact harm
competition.
---------------------------------------------------------------------------

\436\ See N. Pac. Ry. Co. v. United States, 356 U.S. 1, 4
(1958).
\437\ See NCAA v. Bd. of Regents of Univ. of Okla., 468 U.S. 85,
106-07 (1984).
---------------------------------------------------------------------------

The Commission notes that the actual effect of any one individual
non-compete on the overall level of competition in a particular labor
market may be marginal or impossible to discern statistically. However,
as explained in Part I.B.2, non-competes are prevalent across the U.S.
labor force. The empirical literature and other record evidence
discussed in this section reflect that non-competes, in the aggregate,
negatively affect competitive conditions in labor markets--resulting in
harm not only to workers subject to non-competes and the employers
seeking to hire them, but also workers and employers who lack non-
competes.
The Commission finds that evidence of the effects of non-competes
on workers' labor mobility and earnings is sufficient to support its
finding that non-competes tend to negatively affect competitive
conditions in labor markets.\438\ In addition, the Commission believes
that this finding is further bolstered by strong qualitative evidence
that non-competes reduce job quality.\439\
---------------------------------------------------------------------------

\438\ See Part IV.B.3.a.i-ii.
\439\ See Part IV.B.3.a.iii.
---------------------------------------------------------------------------

The Commission's findings relating to labor mobility and earnings
are principally based on the empirical evidence described in Parts
IV.B.3.a.i and ii. However, the comments provide strong qualitative
evidence that bolsters these findings. Furthermore, the Commission
notes that the legal standard for an unfair method of competition under
section 5 requires only a tendency to negatively affect competitive
conditions; empirical evidence of actual harm is not necessary to
establish that conduct is an unfair method of competition. In the case
of non-competes, however, there is extensive empirical evidence, as
well as extensive corroborating public comments, that non-competes
negatively affect competitive conditions in labor markets.
i. Non-Competes Suppress Labor Mobility
Evidence of Suppressed Labor Mobility
The Commission finds that non-competes tend to negatively affect
competitive conditions in labor markets by suppressing labor mobility,
which inhibits efficient matching between workers and employers. The
evidence indicates that non-competes reduce labor mobility. Several
empirical studies find that non-competes limit the movement of workers
between firms and reduce the pool of labor available to existing
employers and potential entrants.\440\
---------------------------------------------------------------------------

\440\ As the Commission stated in the NPRM, it does not view
reduced labor mobility as a harm in and of itself. See NPRM at 3490.
Instead, the Commission finds that the empirical evidence showing
non-competes reduce labor mobility is powerful evidence that non-
competes do indeed restrict labor market competition by inhibiting
the movement of workers between firms--and therefore efficient
matching between workers and firms.
---------------------------------------------------------------------------

In the NPRM, the Commission described the empirical research on
non-competes and labor mobility.\441\ The Commission stated that,
across the board, studies of non-competes and labor mobility find
decreased rates of mobility, measured by job separations, hiring rates,
job-to-job mobility, implicit mobility defined by job tenure, and
within-industry and between-industry mobility.\442\ Based on that body
of empirical evidence and its review of the record as a whole following
the comment period, the Commission finds that non-competes reduce labor
mobility.
---------------------------------------------------------------------------

\441\ NPRM at 3489.
\442\ Id.
---------------------------------------------------------------------------

Several empirical studies find that non-competes reduce labor
mobility. Some of these studies analyze the effects of non-competes on
labor mobility across the labor force.
A study by Johnson, Lavetti, and Lipsitz examined the impact on
labor mobility of all legal changes in the enforceability of non-
competes from 1991 to 2014 across the entire labor force.\443\ This
study finds that

[[Page 38381]]

substantial decreases in non-compete enforceability cause a significant
increase in job-to-job mobility in industries that use non-competes at
a high rate.\444\
---------------------------------------------------------------------------

\443\ Johnson, Lavetti, & Lipsitz, supra note 388. This study
was updated in 2023. The updated version of the study reports
results slightly differently than the 2022 version cited in the
NPRM, but the analysis and results themselves do not meaningfully
change. Accordingly, the update to Johnson, Lavetti, and Lipsitz
does not materially affect the Commission's analysis of the study.
\444\ Id. at 21.
---------------------------------------------------------------------------

Evan Starr's study comparing workers in occupations that use non-
competes at a high versus low rate finds 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. Tenure in this study serves as a proxy for
mobility, since tenure is the absence of prior mobility.\445\ This use
of a proxy means the outcome of interest is not precisely measured, and
the study is less robust than those that examine changes in legal
enforceability of non-competes. The study's findings are, however,
consistent with the other studies finding that non-competes reduce
labor mobility.
---------------------------------------------------------------------------

\445\ Evan Starr, Consider This: Training, Wages, and the
Enforceability of Covenants Not to Compete, 72 I.L.R. Rev. 783
(2019). 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.
---------------------------------------------------------------------------

Starr, Prescott, and Bishara's study of non-compete use likewise
finds that having a non-compete was associated with a 35% decrease in
the likelihood that a worker would leave for a competitor.\446\ While
this finding is based on the use of non-competes (and is accordingly
given less weight), the authors also survey workers, who report that
the cause of their reduced mobility is their non-compete. The study
finds that the mechanism underlying reduced mobility is not whether
non-competes are legally enforceable or not, but rather, it is the
worker's belief about the likelihood that their employer would seek to
enforce a non-compete. Workers who did not believe that employers would
enforce non-competes in court were more likely to report they would be
willing to leave for a competitor.\447\ This study thus not only
supports the Commission's finding that the use of non-competes impacts
labor mobility, but also supports the Commission's finding that non-
competes can exert an in terrorem effect on labor mobility even where
they are unenforceable.\448\ This supports the need to ensure that
workers are aware of the prohibition on non-competes.\449\
---------------------------------------------------------------------------

\446\ Evan Starr, J.J. Prescott, & Norman Bishara, The
Behavioral Effects of (Unenforceable) Contracts, 36 J. L., Econ., &
Org. 633, 652 (2020).
\447\ Id. at 664.
\448\ See Part IV.B.2.b.ii.
\449\ See Part IV.E (describing the final rule's notice
requirement).
---------------------------------------------------------------------------

Other studies analyze how non-competes affect the labor mobility of
specific populations of workers. A study by Jessica Jeffers finds that
decreases in non-compete enforceability were associated with a
substantial increase in departure rates of workers, especially for
other employers in the same industry.\450\ This study's sample is
limited to knowledge workers (i.e., workers whose primary asset is
applying their mental skills to tasks), and the study uses a binary--
rather than continuous--measure of non-compete enforceability. It does,
however, examine several changes in the enforceability of non-competes
to generate its results, making it fairly robust.
---------------------------------------------------------------------------

\450\ Jessica S. Jeffers, The Impact of Restricting Labor
Mobility on Corporate Investment and Entrepreneurship, 37 Rev. Fin.
Stud. 1 (2024). The 2024 version of Jeffers' paper finds a decline
in the departure rate of 7% of the sample mean, and a decline in the
within-industry departure rate of 10%.
---------------------------------------------------------------------------

In addition, two recent studies examined subgroups of the
population that were affected by State law changes and find major
effects on those populations' labor force mobility. Balasubramanian et
al., in 2022, focused on Hawaii's ban of non-competes for high-tech
workers and find that the ban increased mobility by 12.5%.\451\ Lipsitz
and Starr, in 2022, focused on Oregon's ban of non-competes for hourly
workers and find that mobility increased by 17.3%.\452\
---------------------------------------------------------------------------

\451\ Natarajan Balasubramanian, Jin Woo Chang, Mariko
Sakakibara, Jagadeesh Sivadasan, & Evan Starr, Locked In? The
Enforceability of Covenants Not to Compete and the Careers of High-
Tech Workers, 57 J. Hum. Res. S349, S351 (2022).
\452\ Lipsitz & Starr, supra note 72 at 157.
---------------------------------------------------------------------------

Comments Pertaining to Labor Mobility Evidence and Commission Responses
The Commission's finding that non-competes suppress labor mobility
is principally based on the empirical evidence described in this Part
IV.B.3.a.i. However, the comments provide strong qualitative evidence
that bolsters this finding.
Many commenters agreed with the Commission's preliminary finding
that non-competes suppress labor mobility and stated that this
reduction in labor mobility leads to less labor market competition and
poorer wages and working conditions.
In response to the NPRM's discussion of this literature, some
commenters questioned the adequacy of the studies. For example, one
commenter stated that the available research is either limited to
specific sectors of the economy, limited geographically, or limited by
small sample sizes. Some commenters claimed the empirical research
lacked appropriate counterfactuals.
The Commission acknowledges that some of the studies focus on
specific industries or specific geographies, and that the studies vary
in the methodologies the authors rely on. These arguments do not
undermine the utility of the studies, particularly given that they all
find that non-competes reduce labor mobility. Moreover, the Commission
finds that each of the studies discussed in this Part IV.B.3.a.i
conduct their analyses against appropriate counterfactuals. And while
there may be some variation in the magnitude of the effect on mobility
among industries, several of the empirical studies find economy-wide
effects. That evidence shows that non-competes restrict the movement of
workers to a significant degree.
Additionally, the record is replete with examples of commenters who
recounted personal stories that accord with the empirical literature.
The Commission received comments from several thousand individual
workers stating that their mobility is or has been restricted by a non-
compete. While some commenters who opposed the proposed rule disputed
that non-competes prevent workers from finding other jobs in their
industry, the Commission finds the weight of the evidence clearly
demonstrates a significant effect on labor mobility.
The Commission further notes that many commenters' submissions
substantiated its finding that non-competes can have an in terrorem
effect on labor mobility even where they would not ultimately be
enforceable in court.\453\ As many commenters explained, the high costs
and complexities of non-compete litigation can have a chilling effect
on workers and thus reduce worker mobility regardless of whether a
court would enforce the non-compete. For this reason, the very
existence of a non-compete is likely to deter workers from switching
jobs or starting their own business, even if it would ultimately not be
enforced. This supports the Commission's view that not only should non-
competes' enforcement be prohibited, it is also important to provide a
readily understandable,

[[Page 38382]]

uniform Federal approach, and notice to workers of
unenforceability.\454\
---------------------------------------------------------------------------

\453\ See Part IV.B.2.b.ii.
\454\ See Part IX.C. See also supra note 386 (explaining that
studies assessing changes in enforceability of non-competes likely
underestimate the effects of non-competes, given that workers may
refrain from seeking or accepting work or starting a business even
if the non-compete is likely unenforceable, and explaining the
importance of notice to workers).
---------------------------------------------------------------------------

Some commenters who generally opposed the rule questioned the
virtue of labor mobility, arguing that when colleagues leave, remaining
workers can experience increased workloads or harm to their employer.
However, this comment ignores the benefits that will also accrue from
those same firms having more ready access to incoming potential
colleagues as well. The Commission also notes that unfair conduct
cannot be justified on the basis that it provides the firm undertaking
the conduct with pecuniary benefits.\455\
---------------------------------------------------------------------------

\455\ Atl. Refin. Co. v. FTC, 381 U.S. 357, 371 (1965)
(considering that defendant's distribution contracts at issue ``may
well provide Atlantic with an economical method of assuring
efficient product distribution among its dealers'' and holding that
the ``Commission was clearly justified in refusing the participants
an opportunity to offset these evils by a showing of economic
benefit to themselves''); FTC v. Texaco, 393 U.S. 223, 230 (1968)
(following the same reasoning as Atlantic Refining and finding that
the ``anticompetitive tendencies of such a system [were] clear'');
L.G. Balfour Co. v. FTC, 442 F.2d 1, 15 (7th Cir. 1971) (``While 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.''). Justifications that are not
cognizable under other antitrust laws are also not cognizable under
section 5.
---------------------------------------------------------------------------

Some commenters argued labor mobility has generally been increasing
in the U.S. labor market. Setting aside whether this is true, it is not
probative of whether the practice of using non-competes reduces labor
mobility or negatively affects labor market competition.
For these reasons, the empirical evidence that non-competes
suppress labor mobility supports the Commission's finding that non-
competes tend to negatively affect competitive conditions in labor
markets.
ii. Non-Competes Suppress Workers' Earnings
Evidence of Suppressed Earnings
The Commission finds that non-competes suppress workers' earnings
as a result, in part, of decreased labor mobility, supporting the
Commission's finding that non-competes tend to negatively affect
competitive conditions in labor markets. As the NPRM explained, many
studies find increased enforceability of non-competes reduces earnings
for workers across the labor market generally; for specific types of
workers; and even for workers not subject to non-competes.\456\ Several
major empirical studies of how changes in non-compete enforceability
affect workers' earnings show that increased enforceability of non-
competes suppresses workers' earnings.
---------------------------------------------------------------------------

\456\ NPRM at 3486-88.
---------------------------------------------------------------------------

A study conducted by Johnson, Lavetti, and Lipsitz finds that non-
competes limit workers' ability to leverage favorable labor markets to
receive greater pay.\457\ The authors find that when non-competes are
more enforceable, workers' earnings are less responsive to low
unemployment rates, which workers typically leverage to negotiate pay
raises. The authors estimate that a nationwide ban on non-competes
would increase average earnings by approximately 3-14%.\458\ Of the
studies of how non-competes affect earnings, this study has the
broadest coverage. It spans the years 1991 to 2014, examines workers
across the labor force, and uses all known common law and statutory
changes in non-compete enforceability to arrive at its estimates. This
study is very robust, as it satisfies all of the principles outlined in
Part IV.A.2.
---------------------------------------------------------------------------

\457\ Johnson, Lavetti & Lipsitz, supra note 388 at 37.
\458\ Id. at 3. The NPRM reported an increase in average
earnings of 3.3-13.9%. Those numbers were taken from an earlier
version of the Johnson, Lavetti, and Lipsitz paper. The updated
paper finds an increase in average earnings of 3.2-14.2%. The change
does not materially affect the paper's findings or the Commission's
analysis of the paper.
---------------------------------------------------------------------------

The same study also finds that non-competes increase racial and
gender wage gaps by disproportionately suppressing the wages of women
and non-White workers. While the study estimates that earnings of White
men would increase substantially if a nationwide ban on non-competes is
enacted, the comparable earnings increase for workers in other
demographic groups would be up to twice as large, depending on the
characteristics of the group.\459\ The authors estimate that making
non-competes unenforceable would close racial and gender wage gaps by
meaningful amounts, although the mechanism behind this effect is
unclear.\460\
---------------------------------------------------------------------------

\459\ Id. at 42. The 2023 version of the paper by Johnson,
Lavetti, and Lipsitz reports earnings increases of 1.3% for White
men, and increases between 1.5-3.2% for workers in other demographic
groups, corresponding to a change in non-compete enforceability
equal to the difference between the 75th and 25th percentiles. These
differences are statistically significant for Black men and non-
White, non-Black women.
\460\ Id. The 2023 version of the paper reports that the
earnings gaps would close by 1.5-3.8% given a change in non-compete
enforceability equal to the difference between the 75th and 25th
percentiles.
---------------------------------------------------------------------------

Furthermore, a study conducted by Evan Starr estimates that
earnings fall by about 4% where a State shifts its policy from non-
enforcement of non-competes to a higher level of enforceability.\461\
This study covers a sample which is broadly representative of the
entire labor force from 1996 to 2008. Unlike many of the other studies
described in this Part IV.B.3, this study does not use a change in
enforceability of non-competes to analyze the impact of enforceability.
Rather, it examines the differential impact of enforceability on
workers in occupations that use non-competes at a high rate versus
workers in occupations that use non-competes at a low rate. As
described in Part IV.A.2, studies comparing differential usage of non-
competes are generally less informative than studies examining changes
in enforceability, although in this particular study the comparison
between workers in high- and low-use occupations may effectively
control for State-level differences between labor markets, lending more
credibility to the estimates. More importantly, the Commission notes
that the study corroborates the estimates from other studies that rely
on more credible research designs, and therefore is appropriately
viewed as additional evidence supporting the range of estimated effects
on wages across the labor market.
---------------------------------------------------------------------------

\461\ Starr, supra note 445 at 783.
---------------------------------------------------------------------------

Two additional studies analyze effects of non-competes on earnings
for specific populations of workers. A study conducted by Lipsitz and
Starr focuses on a natural experiment in Oregon, where non-competes
were banned for hourly workers with relatively low earnings. The study
estimates that when Oregon stopped enforcing non-competes for hourly
workers, their wages increased by 2-3% relative to workers in States
that did not experience legal changes. The study also finds a greater
effect (4.6%) on workers in occupations that used non-competes at a
relatively high rate.\462\ The authors additionally find that women's
earnings increased at a higher rate, with earnings increases after the
non-compete ban of 3.5% for women, versus 1.5% for men.
---------------------------------------------------------------------------

\462\ Lipsitz & Starr, supra note 72 at 143.
---------------------------------------------------------------------------

A study by Balasubramanian et al. focuses on a natural experiment
in Hawaii, which banned non-competes for high-tech workers in 2015. The
study finds earnings of new hires increased by about 4% after the ban,
relative to earnings in other States without bans.\463\
---------------------------------------------------------------------------

\463\ Balsubramanian et al., supra note 451 at S349.
---------------------------------------------------------------------------

In addition to this research, which shows that increased
enforceability of

[[Page 38383]]

non-competes reduces workers' earnings across the labor market
generally and for specific types of workers, two empirical studies find
that increased enforceability of non-competes suppresses earnings even
for workers who are not subject to non-competes.
The Johnson, Lavetti, and Lipsitz study, in a separate analysis,
isolates the impact of a State's enforceability policy on workers not
directly affected by that policy to demonstrate that non-competes
affect not just the workers subject to non-competes, but the broader
labor market as well. The study finds that increases in non-compete
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 (but taper off as
the distance to the bordering State increases).\464\ The study
estimates that a legal change in one State has an effect on the
earnings of workers just across that State's border that is 76% as
great as for workers in the State in which the law was changed.\465\ In
other words, when one State changes its law to be more permissive of
non-competes and itself experiences a decrease in workers' earnings of
4%, workers just across the border (i.e., workers who share a labor
market) \466\ would experience decreased earnings of 3%.\467\ 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.\468\ The researchers based their
analysis on where workers worked, rather than their residence, so the
results are not tainted by workers who worked in the State where the
law changed but lived across the border.
---------------------------------------------------------------------------

\464\ The NPRM cited an earlier version of Johnson, Lavetti, and
Lipsitz's study that estimated that a legal change in one State
would have an effect on the earnings of workers just across that
State's border that was 87% as great as for workers in the State in
which the law was changed. NPRM at 3488. The data cited in this
final rule reflect an updated version of this study.
\465\ Johnson, Lavetti, & Lipsitz, supra note 388 at 51.
Seventy-six percent is calculated as the coefficient on the donor
State NCA score (-.137) divided by the coefficient on own State NCA
score (-.181).
\466\ 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/.
\467\ The Commission notes that the estimates in the updated
version of Johnson, Lavetti, and Lipsitz's study are slightly
different, but qualitatively similar to the earlier estimates noted
in the NPRM. The results remain statistically significant and do not
materially affect the Commission's analysis.
\468\ Johnson, Lavetti, & Lipsitz, supra note 388 at 30.
---------------------------------------------------------------------------

The second of these studies, a study conducted by Starr, Frake, and
Agarwal, analyzed workers without non-competes who worked in States and
industries in which non-competes were used at a high rate.\469\ The
authors find that, when the rate of use of non-competes in an industry
in a State is higher, wages are lower for workers who do not have non-
competes but who work in the same State and industry. This study also
finds that this effect is stronger where non-competes are more
enforceable.\470\
---------------------------------------------------------------------------

\469\ Evan Starr, Justin Frake, & Rajshree Agarwal, Mobility
Constraint Externalities, 30 Org. Sci. 961 (2019), online ahead of
print at https://pubsonline.informs.org/doi/abs/10.1287/orsc.2018.1252 at 6.
\470\ Id. at 11.
---------------------------------------------------------------------------

The authors show that the reduction in earnings (and in labor
mobility) is due to a reduction in the rate of job offers. Individuals
in State/industry combinations that use non-competes at a high rate do
not receive job offers as frequently as individuals in State/industry
combinations in which non-competes are not frequently used.\471\ The
authors also demonstrate that 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).\472\
---------------------------------------------------------------------------

\471\ Id. at 10.
\472\ Id. at 13.
---------------------------------------------------------------------------

Given some methodological limitations of this study, the Commission
views it as supporting the other evidence that non-competes have
negative spillover effects on earnings for workers without non-competes
and reduce labor mobility. Namely, the research design relies on cross-
sectional differences in enforceability of non-competes. Although this
study also examines the use of non-competes, it does not compare
individuals who are bound by non-competes to individuals who are not.
Instead, it examines the rate of use across industries and States, and
therefore avoids the statistical biases inherent in studies which
compare individuals with and without non-competes. The authors also
employ tests to increase confidence in the causal interpretation of
these results, but they cannot conclusively rule out explanations
outside of the scope of their data.
Several additional studies examine the association between non-
compete use--rather than enforceability--and earnings. For the reasons
described in Part IV.A.2, the Commission finds that these studies are
less credible in measuring how non-competes affect earnings, and
accordingly the Commission gives these studies minimal weight.
In one such study, Starr, Prescott, and Bishara examine survey
results and find that non-compete use is associated with 6.6% to 11%
higher earnings.\473\ In another study, using Payscale.com data,
Balasubramanian, Starr, and Yamaguchi find that individuals with non-
competes (regardless of what other post-contractual restrictions they
had) had 2.1-8.2% greater earnings than individuals with no post-
contractual restrictions. However, this positive association may be due
to non-competes often being bundled with NDAs. The authors find that,
compared with individuals subject only to NDAs, non-competes are
associated with a 3.0-7.3% decrease in earnings, though the authors do
not disentangle this effect from the effects of non-solicitation and
non-recruitment provisions.\474\ Another study, by Lavetti, Simon, and
White, finds that use of non-competes among physicians is correlated
with greater earnings (by 14%) and greater earnings growth.\475\
Finally, Rothstein and Starr find that greater use of non-competes is
correlated with higher earnings.\476\
---------------------------------------------------------------------------

\473\ Starr, Prescott, & Bishara supra note 68 at 75.
\474\ Balasubramanian, Starr, & Yamaguchi, supra note 74 at 40.
The percentage range is calculated as e^-\0.030\-1 and
e^-\0.076\-1, respectively.
\475\ Lavetti, Simon, & White, supra note 82 at 1051. The
increase in earnings is calculated as e\0.131\-1.
\476\ Rothstein & Starr, supra note 77 at 1.
---------------------------------------------------------------------------

Because these studies merely reflect correlation and are unlikely
to reflect causation, the Commission gives them little weight. The NPRM
noted that the Lavetti, Simon, and White physician study partially
mitigates this methodological flaw by comparing earnings effects in a
high- versus a low-enforceability State (Illinois versus California).
However, at best, this comparison is a cross-sectional comparison with
a minimally small number of States being compared. The study does not
consider changes in non-compete enforceability over time. Therefore, it
is impossible to disentangle underlying differences in those two States
from the effects of non-compete enforceability. The Commission
accordingly gives this study, like the other studies reliant on
comparisons of populations using non-competes and not using non-
competes, little weight, though the shortcoming is slightly mitigated
in the case of this study. While this study is specific to physicians,
the Commission nonetheless finds that studies employing stronger
methodologies (especially studies of

[[Page 38384]]

workers positioned similarly in the income distribution \477\ and
studies which broadly represent the U.S. workforce \478\) provide
compelling evidence that non-competes significantly suppress wages.
---------------------------------------------------------------------------

\477\ Balasubramanian et al., supra note 451.
\478\ Johnson, Lavetti, & Lipsitz, supra note 388.
---------------------------------------------------------------------------

Comments Pertaining to Suppressed Earnings and Commission Responses
The Commission's finding that non-competes suppress earnings is
principally based on the empirical evidence described in this Part
IV.B.3.a.ii. However, the comments provide strong qualitative evidence
that bolsters this finding.
The Commission received thousands of comments from workers
describing how non-competes suppressed their earnings. These commenters
spanned a wide variety of industries, hailed from across the U.S., and
recounted a common experience: a non-compete prevented them from
earning more. Illustrative examples of these comments include the
following:

I worked at a TV station. A corporation owned us and
forced me to sign a yearly non-compete in order to remain in my
position. After a few years, I was offered a management job with a
much bigger title and much more money. . . . However, the
corporation that owned us wouldn't even talk about letting me out of
the non-compete. They wouldn't even discuss a settlement. They
totally refused to allow me to pursue a much higher salary and a
much higher position, no matter what was offered. I was forced to
choose between staying in my current job, and not being able to
improve my job or money, or being unemployed for 6 months.\479\
---------------------------------------------------------------------------

\479\ Individual commenter, FTC-2023-0007-8067.
---------------------------------------------------------------------------

I have been subject to a non-compete for 11 years in
aggregate as a physician. Because of my non-compete, I am unable to
take a position with another organization without having to drive
much farther outside of my non-compete stipulated geographic
restrictions (which would add to the time that I am away from my
family, and costs more in fuel and vehicle maintenance). Because of
my non-compete, I haven't had a raise in 6 years, because I can't
negotiate with my employer because I have no bargaining position to
negotiate from if I don't have options of alternate employment
within the restrictions of my non-compete.\480\
---------------------------------------------------------------------------

\480\ Individual commenter, FTC-2023-0007-0616.
---------------------------------------------------------------------------

I recently received two job offers with better
compensation, but I had my non-compete reviewed by an attorney and
learned that it would open myself up to a significant lawsuit and
potential fines. I most likely have to sit out a year and either
work completely outside my field where I have advanced degrees or
not work at all. Since I am the primary breadwinner, this is not
financially possible for my family, so I have to stick with my
current employer who has not given me a pay increase in 2
years.\481\
---------------------------------------------------------------------------

\481\ Individual commenter, FTC-2023-0007-0651.
---------------------------------------------------------------------------

I am a Certified Nurse Practitioner and signed [a non-
compete]. I live in Minnesota and would be required to travel one
hour one way in order to fulfill [the] agreement. . . . My employer
increased my responsibilities (on-call hours added) without
additional pay using vague language in my binding agreement. I would
have to hire a lawyer and spend thousands of dollars to file a
lawsuit to get the agreement releasing me. . . . My employer took
advantage of my binding agreement and did not increase my [Relative
Value Unit] rate in 5 years for my or other Nurse Practitioners in
our organization.\482\
---------------------------------------------------------------------------

\482\ Individual commenter, FTC-2023-0007-0857. Relative value
units are a component of a methodology that calculates earnings for
some healthcare workers.
---------------------------------------------------------------------------

I was just starting out in my career when I finally got
a part time job in my field of geology. Unfortunately, it didn't
last long and I was let go. But because of a non compete agreement I
had to sign I couldn't take another job in my field even though I
had a good lead on one. Instead I had to take a job as a waitress
making less than minimum wage.\483\
---------------------------------------------------------------------------

\483\ Individual commenter, FTC-2023-0007-11973.
---------------------------------------------------------------------------

I work for an IT company, low-level employee just above
minimum wage, and I had to sign one of these to get the job even
though I don't know any knowledge above what someone could learn in
10 or 15 hours on YouTube, yet I still had to sign this which makes
it so I can't compete . . . if they offered me better pay.\484\
---------------------------------------------------------------------------

\484\ Individual commenter, FTC-2023-0007-11137.
---------------------------------------------------------------------------

I began working for my employer 10 years ago as a very
young and inexperienced single mother. I desperately needed a job
that could pay more than minimum wage, and I eagerly accepted my
position and non-compete status. I have now been working at almost
the same rate of pay (as raises are not readily given to us
regardless of recessions or cost of living increases)--for a DECADE.
My children are approaching college age, and I will absolutely need
a higher income to help fund their educations.\485\
---------------------------------------------------------------------------

\485\ Individual commenter, FTC-2023-0007-7238.
---------------------------------------------------------------------------

I am in the laboratory medicine field and was laid off
from a job as an implementation rep for an instrument vendor. Other
companies were the competition, and I was held to a non-compete.
This caused me to go from a six figure salary with great benefits
back to the hospital making barely 60k as a single mother with twins
and no emergency fund saved! I later went into the UV disinfection
field and developed a tremendous amount of knowledge regarding
minimizing the spread of infections in hospitals (pre-covid). After
5 years, I was laid off and prevented from continuing in this niche
field that I had spent so much time developing a skillset and
statistics within. I was only given a 2 week severance (along with a
reminder of legal action if I worked for the competition). Companies
use this as a bully tactic! \486\
---------------------------------------------------------------------------

\486\ Individual commenter, FTC-2023-0007-2416.

In addition to receiving thousands of comments recounting personal
stories of non-competes stymieing the commenters' ability to get a
better-paying job or a raise, many commenters also described how, over
the long term, non-competes can lower wages and diminish career
prospects for workers forced to sit out of the market or start over in
a new field. The Commission also received numerous comments stating
that non-competes exacerbate wage gaps based on gender and race,
including by decreasing entrepreneurship and wages to a greater extent
for women and people of color and by giving firms more power to engage
in wage discrimination.\487\
---------------------------------------------------------------------------

\487\ See also Part IV.B.3.a.iii (summarizing comments from
workers and worker advocates stating that non-competes increase
illegal conduct by employers and make it harder for workers to
report illegal conduct).
---------------------------------------------------------------------------

With respect to the empirical literature, numerous commenters
agreed that there is a wealth of empirical evidence to support the
Commission's preliminary finding that, by inhibiting efficient matching
between workers and employers, the use of non-competes is harming
workers by suppressing their earnings. In addition to the literature
discussed in the NPRM and in this final rule, some commenters pointed
to a 2016 report from the Treasury Department that examines the
correlation between non-compete enforceability and both earnings and
earnings growth at the State level. The Treasury report finds that a
one-standard-deviation increase in State-level enforceability of non-
competes is correlated with 1.38% to 1.86% lower earnings, which can be
found in both lower earnings upon starting a job and lower earnings
growth.\488\ The Commission agrees with commenters that this provides
additional support for the final rule. However, the Commission gives
less weight to cross-sectional studies of enforceability, like the 2016
Treasury report, that examine the correlation between non-compete
enforceability and earnings growth.\489\ The Commission relies more
heavily on the studies that find that non-competes suppress earnings
based on examining natural experiments.
---------------------------------------------------------------------------

\488\ Dept. of the Treasury, Non-Compete Contracts: Economic
Effects and Policy Implications (March 2016) at 20.
\489\ See Part IV.A.2.
---------------------------------------------------------------------------

Some commenters opposing the rule argued that studies of non-
compete use, including the studies described in this Part IV.B.3.a.ii,
show a positive association between non-compete use and earnings,
especially when early notice of non-competes is provided,

[[Page 38385]]

while others cautioned against interpreting these relationships as
causal. The Commission agrees with commenters who caution against a
causal interpretation of these studies, which are unable to determine
whether non-compete use causes differences in earnings, whether
earnings cause differences in non-compete use, or whether a third
factor simultaneously determines both, as discussed in Part IV.A.2.
Some commenters opposing the rule stated that the most
comprehensive study of the earnings effects of non-competes (the
Johnson, Lavetti, and Lipsitz study described in this Part IV.B.3.a.ii)
examines only relatively incremental changes in laws governing the
enforceability of non-competes (i.e., changes other than full bans),
and claimed that this study thus does not shed light on the effects of
a full prohibition. In response, the Commission notes that the analysis
in Johnson, Lavetti, and Lipsitz finds that the effects of changes in
non-compete enforceability are broadly linear. This means the effect of
a change in enforceability twice the size of another change results in
a change in workers' earnings that is approximately twice as large. As
a result, the Commission finds that it would be appropriate to
extrapolate from the effects of incremental changes in non-compete laws
to the effects of prohibitions, at least in the context of worker
earnings.\490\ In other words, if incremental changes in enforceability
lead to a certain level of earnings effects, it is reasonable to
presume--based on the linearity of the relationship between changes in
enforceability and workers' earnings--larger changes will lead to
larger effects.
---------------------------------------------------------------------------

\490\ See Figure 3; Johnson, Lavetti, & Lipsitz, supra note 388
at 17.
---------------------------------------------------------------------------

That said, in the regulatory impact analysis, the Commission does
not extrapolate from the incremental changes observed in these studies
with respect to earnings effects.\491\ Instead, the Commission follows
a conservative approach and assumes that the prohibition in the final
rule, even though it is comprehensive, will have the same effects on
earnings as the incremental legal changes observed in these studies.
Therefore, even if the effects of changes in non-compete enforceability
are not linear, the Commission's analysis of the economic impacts of
the final rule is not undermined because, if anything, it
underestimates the benefits of the rule.
---------------------------------------------------------------------------

\491\ See Part X.F.5.
---------------------------------------------------------------------------

A commenter argued that the Johnson, Lavetti, and Lipsitz dataset
is outdated because it examines enforceability between 1991 and 2014.
In response, the Commission finds that while the enforceability
measures contained in that dataset do not perfectly reflect current
enforceability due to changes in State law in the intervening several
years, the measures still reflect the impacts of non-compete
enforceability on economic outcomes, and likely still have strong
predictive power.
Some commenters opposing the rule asserted that the overall
competitiveness of U.S. labor markets undermines the argument that
workers suffer from non-competes. In response, the Commission notes
that a range of factors have weakened competition in labor
markets.\492\ In any event, the level of competitiveness of a labor
market does not justify use of a practice that tends to negatively
affect competitive conditions.
---------------------------------------------------------------------------

\492\ See Treasury Labor Market Competition Report at i.
---------------------------------------------------------------------------

Some commenters opposing the rule pointed to academic writings,
including a summary of the research by an FTC economist writing in his
personal capacity in 2019, stating that there was limited evidence on
the effects of such clauses. The Commission finds that these writings
are generally outdated and disagrees with them. As the various
explanations of the empirical research in Parts IV.B and IV.C
illustrate, much of the strongest evidence on the effects of non-
competes has been published in recent years. The Commission notes
further that Evan Starr, one expert who voiced concerns over the state
of the evidence in the past, submitted a comment that was broadly
supportive of the interpretation of the evidence in the NPRM and of the
proposed rule.\493\
---------------------------------------------------------------------------

\493\ Comment of Evan Starr, FTC-2023-0007-20878.
---------------------------------------------------------------------------

Other comments opposing the rule stated that the heterogeneity of
the impact of a non-compete ban on earnings undermined the Commission's
preliminary finding regarding the effects of non-competes on earnings.
These commenters asked whether the population-wide average effects
noted in certain studies apply across the workforce or only to certain
individuals (e.g., at certain points in the income distribution),
certain professions, or in certain geographies (e.g., where local labor
markets tend to be more concentrated). Another commenter argued that if
a ban on non-competes drives up earnings for highly skilled workers,
wages might decrease for other categories of workers.\494\
---------------------------------------------------------------------------

\494\ These commenters were generally referring to higher-wage
workers, but not senior executives. Comments that focused on senior
executives are addressed in Part IV.C.
---------------------------------------------------------------------------

In response to these comments, the Commission finds that, while
estimates of the magnitude of the effect of non-competes on earnings
vary to some extent across groups of workers, the effects are
directionally and qualitatively similar across groups. For example,
while Balasubramanian et al. do not report a table with average
earnings for workers in their study, workers in the high tech jobs
studied tend to be relatively highly paid, and the study finds non-
competes suppress these workers' earnings.\495\ On the lower end of the
earnings spectrum, Lipsitz and Starr report average earnings of $16.41
per hour for workers in their study, which corresponds to annual
earnings of approximately $34,133 per year (assuming 2,080 hours worked
per year), and their study likewise finds that non-competes suppress
the earnings of these workers.\496\
---------------------------------------------------------------------------

\495\ Workers in the occupation Computer and Information
Research Scientists (SOC code 15-1221) in the private sector had
median earnings of $156,620 in 2022, while Software Developers (SOC
code 15-1252) in the private sector had median earnings of $127,870
in 2022. BLS, Occupational Employment and Wage Statistics, https://www.bls.gov/oes/tables.htm. These private-sector data are from the
May 2022 National industry-specific and by ownership XLS table (see
table labeled ``national_owner_M2022_dl'').
\496\ Lipsitz & Starr, supra note 72 at 148.
---------------------------------------------------------------------------

Additionally, Johnson, Lavetti, and Lipsitz's study of workers
across the economy shows that, while college-educated workers and
workers in occupations and industries in which non-competes are used at
a high rate experience relatively larger adverse effects on their
earnings from non-compete enforceability, the estimated effect of
increased enforceability on other workers is still negative (albeit
statistically insignificant in this study).\497\ In short, while these
studies do not estimate the magnitude of negative effects for every
subset of the population, the finding of negative effects on earnings
is consistent across dissimilar subsets of the population.
---------------------------------------------------------------------------

\497\ Johnson, Lavetti, & Lipsitz, supra note 388 at 57.
---------------------------------------------------------------------------

A commenter that opposed the NPRM asserted that a categorical ban
could decrease wages for highly paid workers, arguing that such workers
could negotiate higher wages in exchange for the non-compete that they
would lose with a ban. This speculative assertion is belied by the
comment record, which indicates that the highly paid, highly skilled
workers who are not senior

[[Page 38386]]

executives are also unlikely to negotiate non-competes.\498\ It is also
belied by empirical evidence that non-competes suppress earnings for
highly paid workers.\499\
---------------------------------------------------------------------------

\498\ See Parts IV.B.2.b.i and IV.C.1.
\499\ See, e.g., Balasubramanian et al., supra note 451.
---------------------------------------------------------------------------

Similarly, commenters opposing the rule questioned whether earnings
effects merely result from firms hiring different types of workers
after changes in non-compete enforceability (for example, workers with
different levels of experience or education). In response to these
comments, the Commission first notes that the studies find adverse
impacts across the labor force. Therefore, even if a different mix of
types of workers were hired due to non-compete enforceability, the
evidence shows workers' wages are suppressed across the labor force
when non-competes are more enforceable. Additionally, the Commission
notes that the study by Lipsitz and Starr compares the earnings growth
of individual workers before and after the legal change in Oregon,
showing that earnings growth increased after the non-compete ban. This
provides some evidence that the effects observed in the literature are
not simply due to substitution, since individual workers' earnings
trajectories would not be changed if all the effects were simply due to
firms substituting one type of worker for another.\500\
---------------------------------------------------------------------------

\500\ Lipsitz & Starr, supra note 72, Online Appendix at 18.
---------------------------------------------------------------------------

Some commenters opposing the rule asserted that enforceability
indices are likely measured with substantial error. These commenters
argue that the indices are based on qualitative analyses of State laws
and not data on how frequently non-competes are actually enforced or
the results of these enforcement cases. The Commission finds the
enforceability indices are sufficiently reliable, because they are
generated through careful analysis of State law that takes into account
variation in legal enforceability along multiple dimensions.\501\
Moreover, a 2024 study using enforcement outcome data finds that a non-
compete ban in Washington increased earnings, consistent with the
studies using enforceability indices.\502\
---------------------------------------------------------------------------

\501\ Norman D. Bishara, Fifty Ways to Leave Your Employer:
Relative Enforcement of Covenants Not to Compete, Trends, and
Implications for Employee Mobility Policy, 13 U. Pa. J. Bus. L. 751
(2011); Barnett & Sichelman, supra note 389.
\502\ Takuya Hiraiwa, Michael Lipsitz, & Evan Starr, Do Firms
Value Court Enforceability of Noncompete Agreements? A Revealed
Preference Approach (2024), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4364674.
---------------------------------------------------------------------------

Some commenters opposing the rule asserted that Hawaii's
prohibition of non-competes in the technology industry may not have
covered the workers claimed (in particular, omitting workers in the
broadcast industry).\503\ These commenters also asserted that Hawaii
simultaneously banned non-solicitation clauses.
---------------------------------------------------------------------------

\503\ Balasubramanian et al., supra note 451.
---------------------------------------------------------------------------

The Commission finds the study of Hawaii's non-compete ban to be
informative, despite these limitations. First, any workers omitted from
coverage by the statute, but considered as affected in the study, would
lead to a phenomenon known as ``attenuation bias,'' which causes
estimated effects to underestimate the true impact.\504\ Second, the
non-solicitation agreements banned by the Hawaii law were non-
solicitation of coworker agreements (otherwise known as non-recruitment
agreements)--agreements under which workers are barred from recruiting
former coworkers, as opposed to non-solicitation of client agreements,
under which workers are barred from soliciting former clients. While
non-solicitation of coworker agreements may have a marginal impact on
workers' earnings (e.g., in situations in which workers only find out
about job opportunities via past coworkers), the Commission does not
find it likely that they have a major effect on workers' earnings. They
may prevent some workers from hearing about some job opportunities, but
unlike non-competes, they do not prevent workers from taking those
opportunities. And unlike non-solicitation of client agreements, they
do not frustrate workers' ability to build up a client base after
moving to a new employer. The Commission therefore finds it likely that
much of the impact identified in the study of the Hawaii law is due to
non-competes. The Commission also notes that the Hawaii study is
directionally consistent with the results from other more robust
studies that use different methodologies.
---------------------------------------------------------------------------

\504\ Attenuation bias occurs when the independent variable
(here, whether a worker is covered by the ban) is measured with
error.
---------------------------------------------------------------------------

Some commenters opposing the rule argued that the impact of Oregon
banning non-competes for low-wage workers may have been limited because
the law did not affect existing non-competes; because non-competes were
already disfavored in Oregon before the law change; and because the law
included multiple carve-outs. Commenters also argued the negative
effects on earnings found in Oregon may have been confounded by the
Great Recession.
The Commission finds that those concerns are not a compelling
reason to discard the study. The study carefully examines multiple
comparisons of workers within Oregon and across States. The results
therefore cannot be explained by a differential response of Oregon to
the Great Recession, a differential response of hourly workers to the
Great Recession, or even a differential response of hourly workers in
Oregon to the Great Recession. The Commission also does not believe
that the study is undermined because the law did not affect existing
non-competes and included multiple carve-outs, or because non-competes
were disfavored in Oregon before the law changed. These factors likely
mitigated the magnitude of the law's negative effect on earnings,
rather than exaggerating it.
Some commenters opposing the rule argued that Johnson, Lavetti, and
Lipsitz \505\ claim that ``[t]he overall effect of [non-compete]
enforceability on earnings is ambiguous,'' and that this undermines the
Commission's preliminary findings. However, these commenters take this
quote out of context. The authors were referring to a theoretical
model, not to the empirical work in their paper. When economists do
empirical research, they often begin by constructing a theoretical
model and describing what the theory would predict; they then describe
their empirical findings, which may show a different result. The
authors described that it is unclear, theoretically, whether non-
compete enforceability would increase or decrease earnings. However,
the empirical findings of the study were clear: as the authors stated,
``We find that increases in [non-compete] enforceability decrease
workers' earnings.'' \506\ The fact that the authors described the
theoretical results of a hypothesized model as ambiguous does not
undermine the fact that their study had clear empirical results.
---------------------------------------------------------------------------

\505\ Matthew S. Johnson, Kurt Lavetti, & Michael Lipsitz, The
Labor Market Effects of Legal Restrictions on Worker Mobility (2021)
at 11; https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3455381.
\506\ Id. at 2.
---------------------------------------------------------------------------

Some healthcare businesses and trade organizations opposing the
rule argued that, without non-competes, physician shortages would
increase physicians' wages beyond what the commenters view as fair. The
commenters provided no empirical evidence to support these assertions,
and the Commission is unaware of any such evidence. Contrary to
commenters' claim that the rule would increase physicians' earnings
beyond a ``fair'' level, the weight of the evidence indicates that the
final rule

[[Page 38387]]

will lead to fairer wages by prohibiting a practice that suppresses
workers' earnings by preventing competition; that is, the final rule
will simply help ensure that wages are determined via fair competition.
The Commission also notes that it received a large number of comments
from physicians and other healthcare workers stating that non-competes
exacerbate physician shortages.\507\
---------------------------------------------------------------------------

\507\ See Part IV.B.3.b.iv for a more detailed summary of these
comments.
---------------------------------------------------------------------------

One commenter opposing the rule criticized the analysis in the
Johnson, Lavetti, and Lipsitz study, suggesting that data on where
individuals live are not necessarily indicative of where individuals
work, and that identified spillover effects may simply be due to cross-
border commuters. The Commission disagrees, because, as noted, the
study considers whether the workers are subject to enforceable non-
competes based on their work location.
A commenter also argued that if the absence of non-competes helped
workers, one would expect California, North Dakota, and Oklahoma to
have the highest median incomes among all the States. The Commission
believes this expectation is inapt. Given the evidence that non-
competes suppress workers' earnings, earnings in California, North
Dakota, and Oklahoma are likely higher than they would be if non-
competes were enforceable, but there is no reason to expect they would
necessarily be higher than all other States.
One commenter opposing the rule asserted that the Commission's
citation of one study in the NPRM was insufficient to show that non-
competes are directly tied to discriminatory behavior by employers, or
that non-competes worsen racial or gender wage gaps. The Commission
does not rest its finding in this final rule that non-competes tend to
negatively affect competitive conditions on findings of increased
discriminatory behavior or exacerbation of gender and wage gaps. The
Commission merely notes that there are two empirical studies--described
under ``Evidence of suppressed earnings''--that find that non-competes
do, in fact, exacerbate earnings gaps.
One commenter opposing the rule stated that closing racial and
gender wage gaps may harm racial minorities and women if their wages
were to fall in absolute terms. Another commenter argued that the
proposed rule would reduce capital investment and output, which would
decrease White male workers' wages. In response, the Commission notes
that the study by Johnson, Lavetti, and Lipsitz shows that the impact
of a decrease in non-compete enforceability on earnings is positive for
workers in each of these groups.
The empirical evidence makes clear that, by restricting a worker's
ability to leave their current job to work for a competitor or to start
a competing business, non-competes reduce workers' earnings, supporting
the Commission's finding that non-competes tend to negatively affect
competitive conditions in labor markets.
iii. Non-Competes Reduce Job Quality
In the NPRM, the Commission recognized that non-competes may also
negatively affect working conditions, i.e., job quality,\508\ although
this had not been studied in the empirical literature (likely because
it is harder to quantify). Competition in labor markets yields not only
higher earnings for workers, but also better working conditions.\509\
In a well-functioning labor market, workers who are subject to poor
working conditions can offer their labor services to an employer with
better working conditions. Such workers can also start businesses,
giving them more control over working conditions. Non-competes
frustrate this competitive process by restricting a worker's ability to
switch jobs or start a business. Furthermore, in a well-functioning
labor market, employers compete to retain their workers by improving
working conditions. Where workers are locked into a job--because their
alternative employment options are restricted--those competitive forces
are diminished and working conditions can suffer. The Commission
accordingly sought comment on this topic.
---------------------------------------------------------------------------

\508\ NPRM at 3504.
\509\ Treasury Labor Market Competition Report at i.
---------------------------------------------------------------------------

In response, thousands of workers with non-competes described how,
by frustrating these competitive processes, non-competes prevent them
from escaping poor working conditions or demanding better working
conditions. Based on the large number of comments the Commission
received on this issue and the wide variety of negative and severe
impacts commenters described, the Commission finds that, in addition to
suppressing earnings, non-competes negatively affect working conditions
for a significant number of workers.
The Commission finds that the effects of non-competes on labor
mobility and workers' earnings are sufficient, standing alone, to
support its finding that non-competes with workers other than senior
executives tend to negatively affect competitive conditions in labor
markets. However, the Commission believes its finding that non-competes
are an unfair method of competition is further bolstered by this strong
qualitative evidence related to non-competes degrading working
conditions.
Numerous workers and worker advocacy organizations described how
non-competes compel workers to endure jobs with poor working
conditions. Illustrative examples of these comments include the
following:

In March 2018, I was fired from a job in local news for
refusing to go into an unsafe situation. I'd recently received a
letter from a man threatening to kidnap me. When my boss decided he
would still send me out alone in the field, I fought him on it,
lost, and was terminated. Three weeks later, I found out I was
pregnant. Unable to work in my field because of a noncompete
enforced even AFTER I was terminated, I had no choice but to apply
for WIC and government assistance, and work at a retail job making
half my previous salary. I wanted to work. I wanted money to support
my child. I wanted money to move closer to home, to escape a
domestic violence situation. My noncompete kept me in a horrible
spot, and nearly cost me my life.\510\
---------------------------------------------------------------------------

\510\ Individual commenter, FTC-2023-0007-12813.
---------------------------------------------------------------------------

I started my first job as a Nurse Practitioner in 2019.
All positions I interviewed for required a non-compete. . . . In my
case, I work for an employer that is hostile, discriminated against
me during pregnancy and maternity leave and has raised his voice at
me in meetings. He told me I was lucky to even have a job after
becoming pregnant. I learned after starting at the practice that he
has shown this pattern before with previous employees. I say this
because all of these above-mentioned reasons are why I have the
right to want to quit my job and move on. I desperately want to
leave and start another job but I can't because of the non compete.
I feel like a prisoner to my job. I feel depressed in my work
conditions and I feel like I have no way out.\511\
---------------------------------------------------------------------------

\511\ Individual commenter, FTC-2023-0007-4989.
---------------------------------------------------------------------------

I'm a barber and violated a non-compete about 6 months
ago. . . . I worked for my previous employer for two years in a
toxic environment. I told my employer how work was affecting my home
life on more than one occasion and she did nothing. . . . How was I
to know that I would be working in a toxic environment when I
applied? So ultimately, I decided in order to be happy and make a
living wage, I'd have no choice but to violate my non-compete. She
came after me in no time flat. Now I'm paying legal fees and at risk
of going to court and losing my job for 6 more months. . . . [I]f
I'm working in poor working conditions, I should be able to work
where I please. For two years, my job and employer affected my
mental health. I chose to take anti-depressants after things got bad
at work, upped my dosage twice as work

[[Page 38388]]

became progressively worse and since I've left, I've stopped taking
my medication.\512\
---------------------------------------------------------------------------

\512\ Individual commenter, FTC-2023-0007-3323.
---------------------------------------------------------------------------

I am a commissioned employee in the mortgage world, and
I had a non-compete with my former company in Ohio. Near the end of
my time at this company, they merged with another company and put
the new company in charge of the sales staff. It was miserable. We
started having issues, even with having basic supplies, and it went
from just harming me to harming my ability to get business complete,
which harms the consumer. I left and I was sued for a three year
period. . . . I really do not feel that [non-competes] should be
allowed. You are stuck at employers and they can treat you in any
manner that they please because they know that they can make your
life a living hell if you leave them.\513\
---------------------------------------------------------------------------

\513\ Individual commenter, FTC-2023-0007-3955.
---------------------------------------------------------------------------

Like many new graduates in the medical field, I signed
on with a company that made numerous empty promises. . . . What I
was not prepared for, was the company's strategic increase in
facilities in which I was to perform services under this contract.
In the short span of 2 years, I did neurophysiological monitoring
for 24 facilities . . . . When working conditions fell apart
regardless of my requests for adequate sleep following 36 hours
straight of working on call at my designated stroke hospital, time
for meals or breaks within 18+ hour work days, and a reasonable
travel distance within the area the company demanded I relocate to,
I was met with threats from HR regarding my non-compete if I were to
leave. . . . Working conditions became so intense, I was placed on
migraine medications at the recommendations of my doctor and
required three separate trips in the ER for medical conditions
related to stress, inability to eat or drink while tied within tens
of hours long surgeries . . . . Again I was met with threats from HR
and now their legal team.\514\
---------------------------------------------------------------------------

\514\ Individual commenter, FTC-2023-0007-1252.

Many commenters stated that non-competes harm working conditions
for lower-wage workers. However, there were many commenters in higher-
wage jobs who also stated that non-competes harmed their working
conditions. For example, numerous physicians explained that they were
trapped in jobs with poor working conditions because of non-competes.
Many of these physicians described how non-competes accelerate burnout
in their profession by making it harder for workers to escape bad
working conditions or demand better working conditions. Many commenters
recounted how they left poor work environments but non-competes harmed
them by forcing them to leave their field, move out of the area where
they lived, or spend time and money defending themselves from legal
action. Many commenters argued that prohibiting non-competes would
increase workers' bargaining power and in turn incentivize employers to
provide better work environments.
Workers in both high-wage and low-wage professions, as well as
worker advocacy groups, stated that by diminishing workers' competitive
alternatives, non-competes keep workers trapped in jobs where they
experience dangerous, abusive, or toxic conditions; discrimination;
sexual harassment; and other forms of harassment. These commenters also
described how non-competes trap some workers in jobs where their
employer commits wage and hour violations, such as wage theft, as
employers that use non-competes can insulate themselves from the free
and fair functioning of competitive markets and are thus more likely to
be able to steal worker wages with impunity. Several commenters said
they were unable to receive benefits because a non-compete rendered
them unable to switch to a job with better benefits or rendered them
unable to leave their job when their employer took their benefits away.
A professional membership network for survivors of human trafficking
explained that traffickers masquerading as legitimate businesses use
non-competes to prevent trafficking victims from leaving.
Some workers and advocacy organizations stated that non-competes
increase the potential for harm from retaliation. These commenters
stated that restricting a worker's employment opportunities makes it
even harder for workers to find new jobs after experiencing
retaliation. These commenters argued that this discourages workers from
reporting fraud, harassment, discrimination, or labor violations. A
labor union commented that, by making it harder for workers to find new
jobs, non-competes can deter unionization and chill activities
protected by the National Labor Relations Act, including activities to
address unsafe, unfair, or unsatisfactory working conditions. According
to a trade organization of attorneys, whistleblower protections may
come too late for a fired whistleblower who cannot obtain another job
because of a non-compete. Several commenters provided survey or case
evidence showing that workers who report sexual harassment, wage theft,
or poor working conditions are frequently retaliated against, including
by being fired.\515\ These commenters stated that, because non-competes
make it harder for these workers to find new jobs, non-competes
decrease the likelihood that workers report these kinds of harms.
---------------------------------------------------------------------------

\515\ For example, the National Women's Law Center, which
operates and administers the TIME'S UP Legal Defense Fund, reported
that among individuals who contacted the Fund to request legal
assistance related to sexual harassment in the workplace, 72%
reported facing retaliation, and, among those, 36% had been fired.
Comment of Nat'l Women's L. Ctr., FTC-2023-0007-20297 at 5 (citing
Jasmine Tucker & Jennifer Mondino, Coming Forward: Key Trends and
Data from the TIME'S UP Legal Defense Fund, 4 (Oct. 2020), https://nwlc.org/wp-content/uploads/2020/10/NWLC-Intake-Report_FINAL_2020-10-13.pdf).
---------------------------------------------------------------------------

Many workers described how, by limiting their ability to get out of
harmful workplace environments, non-competes contributed to stress-
related physical and mental health problems. Many commenters,
particularly in the healthcare profession, stated that suicide is a
major problem in their profession and described non-competes as one of
the stressors, because non-competes make it harder to leave jobs with
unsustainable demands, leaving workers feeling trapped.
While thousands of commenters described, often in personal terms,
how non-competes have negatively affected their working conditions, the
Commission received few comments from workers or worker advocates
stating that non-competes improved working conditions. The few comments
received stated that workers who remain with an employer can be harmed
by departing and competing colleagues, via increased workloads or harm
to their employer.
Taken together, these comments provide strong qualitative evidence
that non-competes degrade working conditions, which supports the
Commission's finding that non-competes tend to negatively affect
competition in labor markets.
b. Non-Competes Tend to Negatively Affect Competitive Conditions in
Product and Service Markets
Based on the Commission's expertise and after careful review of the
rulemaking record, including the empirical research and the public
comments, the Commission finds that non-competes tend to negatively
affect competitive conditions in markets for products and services by
inhibiting new business formation and innovation.
New businesses are formed when new firms are founded by
entrepreneurs or spun off from existing firms. New business formation
increases competition by reducing concentration, bringing new ideas to
market, and 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

[[Page 38389]]

downturns.\516\ With respect to spinoffs, research shows that spinoffs
within the same industry are highly successful relative to other
entrepreneurial ventures.\517\
---------------------------------------------------------------------------

\516\ See, e.g., The Importance of Young Firms for Economic
Growth, Policy Brief, Ewing Marion Kauffman Foundation (Sept. 24,
2015).
\517\ Aaron K. Chatterji, Spawned With a Silver Spoon?
Entrepreneurial Performance and Innovation in the Medical Device
Industry, 30 Strategic Mgmt. J. 185 (2009).
---------------------------------------------------------------------------

Non-competes, however, tend to negatively affect competitive
conditions in product and service markets by inhibiting new business
formation in two ways. First, since many new businesses are formed by
workers who leave their jobs to start firms in the same industry, non-
competes reduce the number of new businesses that are formed in the
first place.\518\ Second, non-competes deter potential entrepreneurs
from starting or spinning off new businesses--and firms from expanding
their businesses--by locking up talented workers.\519\ Non-competes
thus create substantial barriers to potential new entrants into markets
and also stymie competitors' ability to grow by making it difficult for
those entrants to find skilled workers.
---------------------------------------------------------------------------

\518\ See, e.g., Evan Starr, Natarajan Balasubramanian, & Mariko
Sakakibara, Screening Spinouts? How Noncompete Enforceability
Affects the Creation, Growth, and Survival of New Firms, 64 Mgmt.
Sci. 552 (2018).
\519\ See, e.g., Shi, supra note 84.
---------------------------------------------------------------------------

Innovation refers to the process by which new ideas result in new
products or services or improvements to existing products or services.
Innovation may directly improve economic outcomes by increasing product
quality or decreasing prices, and innovation by one firm may also
prompt other firms to compete and improve their own products and
services. However, non-competes tend to negatively affect competitive
conditions in product and service markets by inhibiting innovation.
Non-competes tend to reduce innovation in three ways. First, non-
competes prevent workers from starting businesses in which they can
pursue innovative new ideas.\520\ Second, non-competes inhibit
efficient matching between workers and firms.\521\ Where workers are
less able to match with jobs that maximize their talents, employers'
ability to innovate is constrained. Third, and relatedly, non-competes
reduce the movement of workers between firms.\522\ This decreases
knowledge flow between firms, which limits the cross-pollination of
innovative ideas.
---------------------------------------------------------------------------

\520\ See Part IV.B.3.b.i.
\521\ See Part IV.B.3.a. While the Commission focuses on the
most direct negative effects on competition in product and service
markets in this Part IV.B.3.b, inefficient matching between workers
and firms may have additional negative effects, including on output.
\522\ See Part IV.B.3.a.i.
---------------------------------------------------------------------------

As described in Parts IV.B.3.b.i and ii, the Commission finds that
the effects of non-competes on new business formation and innovation
are sufficient to support its finding that non-competes tend to
negatively affect competitive conditions in product and service
markets. In addition, as described in Parts IV.B.3.b.iii and iv, the
Commission believes this finding is further bolstered by evidence that
non-competes increase concentration and consumer prices, as well as
evidence that non-competes reduce product quality.
The Commission's findings relating to new business formation and
innovation are principally based on the empirical evidence described in
Parts IV.B.3.b.i and ii. However, the comments provide strong
qualitative evidence that bolsters these findings. Furthermore, the
Commission notes that the legal standard for an unfair method of
competition under section 5 requires only a tendency to negatively
affect competitive conditions; empirical evidence of actual harm is not
necessary to establish that conduct is an unfair method of competition.
In the case of non-competes, however, there is extensive empirical
evidence, as well as extensive corroborating public comments, that non-
competes negatively affect competitive conditions in product and
service markets.
i. Non-Competes Inhibit New Business Formation
Evidence of Inhibited New Business Formation
The Commission finds that non-competes tend to negatively affect
competitive conditions in product and service markets by inhibiting new
business formation. The weight of the empirical evidence establishes
that when non-competes become more enforceable, the rate of new
business formation (i.e., the number of new businesses formed)
declines.
Several empirical studies assess the effects of non-competes on the
rate of new business formation. A study conducted by Jessica Jeffers
examines several State law changes in the technology sector and the
professional, scientific, and technical services sector and finds a
decline in new firm entry when non-competes become more enforceable.
Jeffers finds that as non-competes became more enforceable, the entry
rate of new firms decreases substantially.\523\ Jeffers' study uses
several changes in non-compete enforceability that are measured in a
binary fashion. While this study therefore does not satisfy all the
principles outlined in Part IV.A.2, it satisfies most of them and is
accordingly quite robust and weighted highly.
---------------------------------------------------------------------------

\523\ Jeffers, supra note at 450. The 2024 version of Jeffers'
study reports a 7% impact.
---------------------------------------------------------------------------

Another study, conducted by Matt Marx, examines the impact of
several changes in non-compete enforceability between 1991 and 2014 on
new business formation, and likewise finds a negative effect of non-
competes on new business formation.\524\ Marx finds that, when non-
competes become more enforceable, men are less likely to found a rival
startup after leaving their employer, that women are even less likely
to do so (15% less likely than men), and that the difference is
statistically significant.\525\ This study therefore supports both that
non-competes inhibit new business formation and that non-competes tend
to have more negative impacts for women than for men. Marx uses several
changes in non-compete enforceability measured in a continuous fashion.
The study therefore satisfies the principles outlined in Part IV.A.2
and is weighted highly.
---------------------------------------------------------------------------

\524\ Matt Marx, Employee Non-Compete Agreements, Gender, and
Entrepreneurship, 33 Org. Sci. 1756 (2022).
\525\ Id. at 1763.
---------------------------------------------------------------------------

In addition, Johnson, Lipsitz, and Pei analyze the extent to which
non-compete enforceability affects the rate of firm entry in high-tech
industries. They find that an average increase in non-compete
enforceability decreases the establishment entry rate by 3.2%.\526\
Outside of examining only innovative industries, this study's
methodology is otherwise strong, and the study is therefore weighted
highly. While this study uses multiple changes in a granular measure of
non-compete enforceability, a quite robust methodology, the study is
limited to high-tech industries.
---------------------------------------------------------------------------

\526\ Matthew S. Johnson, Michael Lipsitz, & Alison Pei,
Innovation and the Enforceability of Non-Compete Agreements, Nat'l.
Bur. Of Econ. Rsch. (2023) at 36.
---------------------------------------------------------------------------

In addition, a study conducted by Can and Fossen indicates that
decreases in enforceability of non-competes in Utah and Massachusetts
increased entrepreneurship among low-wage workers.\527\ Can and Fossen
examine just two changes in non-compete enforceability, measured in a
binary fashion, and the study is therefore given slightly less weight
than studies which

[[Page 38390]]

examine more changes or use a more granular measure of enforceability.
The study corroborates the results of studies using these stronger
methodologies.
---------------------------------------------------------------------------

\527\ Ege Can and Frank M. Fossen, The Enforceability of Non-
Compete Agreements and Different Types of Entrepreneurship: Evidence
From Utah and Massachusetts, 11 J. of Entrepreneurship and Pub. Pol.
223 (2022).
---------------------------------------------------------------------------

Furthermore, a study conducted by Benjamin Glasner focused on high-
tech industries finds that technology workers increased entrepreneurial
activity in Hawaii after non-competes were restricted, but finds no
effect on entrepreneurial activity from Oregon's restriction on non-
competes with low-wage workers.\528\ Similar to the study by Can and
Fossen, this study by Glasner uses two changes in non-compete
enforceability measured in a binary fashion. Additionally, a study
published by Stuart and Sorenson shows that increased enforceability of
non-competes decreases the amount by which firm acquisitions and IPOs
induce additional local business formation.\529\ This study uses cross-
sectional variation in non-compete enforceability measured in a binary
fashion, and studying the amount by which firm acquisitions and IPOs
induce additional local business formation does not cover all
entrepreneurship. These studies are thus given more limited weight, but
generally are in line with other evidence that non-competes reduce new
business formation and innovation.
---------------------------------------------------------------------------

\528\ Benjamin Glasner, The Effects of Noncompete Agreement
Reforms on Business Formation: A Comparison of Hawaii and Oregon,
Econ. Innovation Group White Paper (2023), https://eig.org/noncompetes-research-note/.
\529\ Toby E. Stuart & Olav Sorenson, Liquidity Events and the
Geographic Distribution of Entrepreneurial Activity, 48 Admin. Sci.
Q. 175 (2003).
---------------------------------------------------------------------------

Additionally, a study conducted by Starr, Balasubramanian, and
Sakakibara analyzes the effect of non-compete enforceability on
spinouts (i.e., when a firm creates a new business by splitting off
part of its existing business). The authors find that, when non-compete
enforceability increases by one standard deviation, the rate of
spinouts within the same industry decreases by 32.5%--a major decrease
in new business formation.\530\ Research shows that spinouts within the
same industry are highly successful, on average, when compared with
typical entrepreneurial ventures.\531\ This study uses cross-sectional
differences in non-compete enforceability, measured in a continuous
fashion, though it attempts to avoid problems related to the use of
cross-sectional differences in non-compete enforceability by using law
firms--which likely do not use non-competes due to ethical limits in
the legal profession \532\--as a control group. The Commission
therefore gives this study somewhat less weight than studies of changes
in non-compete enforceability, though the findings corroborate the
findings of the studies by Jeffers and Marx.
---------------------------------------------------------------------------

\530\ Starr, Balasubramanian, & Sakakibara, supra note 518 at
561. 32.5% is calculated as 0.0013/0.004, where 0.0013 is the
coefficient reported in Table 2, Column 6, and 0.004 is the mean WSO
entry rate reported in Table 1 for ``nonlaw'' firms.
\531\ For reviews of the literature, see, e.g., Steven Klepper,
Spinoffs: A Review and Synthesis, 6 European Mgmt. Rev. 159 (2009)
and April Franco, Employee Entrepreneurship: Recent Research and
Future Directions, in Handbook of Entrepreneurship Research 81
(2005).
\532\ See Am. Bar Ass'n, Model Rule 5.6, https://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/rule_5_6_restrictions_on_rights_to_practice/.
---------------------------------------------------------------------------

In addition, a study by Salom[eacute] Baslandze shows that non-
competes reduce new business formation, finding that greater non-
compete enforceability inhibits entry by spinouts founded by former
employees of existing firms.\533\ Baslandze notes that spinouts tend to
innovate more and are relatively higher quality than other new firms.
This study examines changes in non-compete enforceability on a
continuous measure but assumes that changes over a 19-year period occur
smoothly over time instead of identifying exactly when the legal
changes were made. While this study uses changes in non-compete
enforceability and corroborates the findings of the aforementioned
studies on new business formation, the assumption regarding the timing
of changes yields an imprecise measure of non-compete enforceability
over time. The Commission therefore gives this study somewhat less
weight than studies which precisely identify the timing of changes in
non-compete enforceability.
---------------------------------------------------------------------------

\533\ Salom[eacute] Baslandze, Entrepreneurship Through Employee
Mobility, Innovation, and Growth, Fed. Res. Bank of Atlanta Working
Paper No. 2022-10 (2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4277191.
---------------------------------------------------------------------------

Finally, in a 2011 study, Samila and Sorenson find that when non-
competes are more enforceable, rates of entrepreneurship, patenting,
and employment growth slow. They find that an increase in venture
capital funding creates three times as many new firms where non-
competes are unenforceable, compared to where non-competes are
enforceable.\534\ This study uses cross-sectional variation in non-
compete enforceability along two dimensions, both of which are measured
in a binary fashion. Due to this measurement, the Commission gives this
study less weight, though its results corroborate the findings of the
other studies on new business formation.
---------------------------------------------------------------------------

\534\ Samila & Sorenson find that a 1% increase in venture
capital funding increased the number of new firms by 0.8% when non-
competes were enforceable, and by 2.3% when non-competes were not
enforceable. 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.
---------------------------------------------------------------------------

The Commission gives minimal weight to two additional studies. One
of these estimates the job creation rate at startups increased by 7.8%
when Michigan increased non-compete enforceability.\535\ However, the
Commission places less weight on this study than the studies discussed
previously because it examines only one legal change in one State and
because the change to non-compete enforceability was accompanied by
several other simultaneous changes to Michigan's antitrust laws. Thus,
it is not possible to isolate the effect of the change in non-compete
enforceability standing alone.
---------------------------------------------------------------------------

\535\ Gerald A. Carlino, Do Non-Compete Covenants Influence
State Startup Activity? Evidence from the Michigan Experiment, Fed.
Res. Bank of Phila. Working Paper No. 21-26 at 16 (2021).
---------------------------------------------------------------------------

The other study finds mixed effects of non-compete enforceability
on the entry of businesses into Florida. The study examines a legal
change in Florida which made non-competes more enforceable. The authors
find larger businesses entered the State more frequently (by 8.5%) but
smaller businesses entered less frequently (by 5.6%) following the
change.\536\ Similarly, Kang and Fleming find that employment at large
businesses rose by 15.8% following the change, while employment at
smaller businesses effectively did not change.\537\ This study examines
a single change in non-compete enforceability. However, the Commission
gives this study minimal weight because the study does not examine new
business formation specifically; instead, it assesses the number of
``business entries,'' which does not necessarily reflect new business
formation because it also captures existing businesses moving to the
State.
---------------------------------------------------------------------------

\536\ 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).
\537\ Id. at 674. The value is calculated as 15.8% = e\0.1468\-
1.
---------------------------------------------------------------------------

Additional research analyzes the effects of non-competes on the
number of jobs created by new businesses.\538\

[[Page 38391]]

While the research described previously shows that non-competes inhibit
the rate of new business formation, this research indicates that even
where new businesses are created, these new businesses have fewer
workers where non-competes are more enforceable. This evidence suggests
that non-competes not only prevent small businesses from being formed,
but they also hinder entrepreneurship by tending to reduce the number
of employees new firms are able to hire.
---------------------------------------------------------------------------

\538\ In the NPRM, the Commission stated that the evidence
relating to the effects of non-competes on job creation was
inconclusive. However, in the final rule, the Commission does not
make a separate finding that non-competes reduce job creation.
Instead, it cites the research described herein--which relates
solely to job creation at newly founded firms--to support its
finding that non-competes inhibit new business formation.
---------------------------------------------------------------------------

In addition to analyzing the rate of firm entry in high-tech
industries, Johnson, Lipsitz, and Pei analyzes the number of jobs
created at newly founded firms in innovative industries.\539\ Using
evidence from several State law changes, the authors find that
increases in non-compete enforceability lead to a reduction in the
number of jobs created at newly founded firms in innovative industries
(though not necessarily across all industries or all types of firms) by
7.2%.\540\
---------------------------------------------------------------------------

\539\ Johnson, Lipsitz, and Pei, supra note 526 at 36.
\540\ Id. While this study satisfies each of the other metrics
outlined in Part IV.A.2, the sample is restricted to firms in
innovative industries, and therefore the outcome of interest is not
reflective of the entire population.
---------------------------------------------------------------------------

A study by Starr, Balasubramanian, and Sakakibara finds that
increases in non-compete enforceability decreased average per-firm
employment at new firms.\541\ In the NPRM, the Commission stated that
this study found that several increases in non-compete enforceability
were associated with a 1.4% increase in average per-firm employment at
new firms.\542\ However, upon further review of the study, the
Commission interprets this study as finding that increases in non-
compete enforceability decreased average per-firm employment at new
firms--both for spinouts within the same industry and spinouts into a
different industry.\543\ For spinouts into a different industry,
average per-firm employment at the time of founding decreases by 1.4%
due to greater non-compete enforceability. For spinouts into the same
industry, average per-firm employment decreases by 0.3%.\544\ At seven
years after founding, the results are similar: spinouts into a
different industry have average per-firm employment that is 1.5% lower
due to greater non-compete enforceability, while spinouts into the same
industry have per-firm employment that is 0.7% lower.\545\ The
Commission notes that this study compares States with different levels
of enforceability, using law firms as a control group, instead of
considering changes in non-compete enforceability. It is therefore
given less weight than studies with stronger methodologies.\546\
---------------------------------------------------------------------------

\541\ Starr, Balasubramanian, & Sakakibara, supra note 518 at
552.
\542\ NPRM at 3488-89.
\543\ While this study satisfies some of the principles for
robust design outlined in Part IV.A.2, the Commission notes that
average per-firm employment does not precisely correspond to the
economic outcome of interest, which is overall employment or job
creation.
\544\ Calculated as 1.4%-1.1%, based on the effect for non-
within-industry spinouts (1.4%) and the relative impact on within-
industry spinouts compared with non-within-industry spinouts (-
1.1%). See Starr, Balasubramanian, & Sakakibara, supra note 518 at
561.
\545\ Calculated as 1.5%-0.7%, based on the effect for non-
within-industry spinouts (1.5%) and the relative impact on within-
industry spinouts compared with non-within-industry spinouts (-
0.8%). See id. at 563.
\546\ There are also two studies analyzing how non-competes
affect job creation or employment generally. Neither study relates
to new business formation specifically. Goudou finds a decreased job
creation rate from an increase in non-compete enforceability in
Florida. Felicien Goudou, The Employment Effects of Non-compete
Contracts: Job Retention versus Job Creation (2023), https://www.jesugogoudou.me/uploads/JMP_Felicien_G.pdf. This study considers
just one change in non-compete enforceability, and is therefore
given less weight, though the results corroborate findings in papers
which satisfy more of the guideposts in Part IV.A.2. Additionally,
the 2023 version of Johnson, Lavetti, & Lipsitz, supra note 388,
finds that increased non-compete enforceability reduces employment
by 1.9%, though they do not estimate the impact on job creation
directly. Rather, the authors look only at the closely related
metric of changes in overall employment. This study otherwise has a
strong methodology, as discussed in Part IV.B.3.a.ii.
---------------------------------------------------------------------------

Comments Pertaining to Inhibited New Business Formation and the
Commission's Responses
The Commission's finding that non-competes inhibit new business
formation is principally based on the empirical evidence described in
this Part IV.B.3.b.i. However, the comments provide strong qualitative
evidence that bolsters this finding.
Hundreds of commenters agreed with the Commission's preliminary
finding that non-competes reduce new business formation. Illustrative
examples of comments the Commission received include the following:

I am a hairstylist . . . and have been with the company
for 11 years. Our work conditions have changed drastically over the
years and Covid has really sent us on a sharp decline. It is not the
same salon I signed on to work for. That being said, a few coworkers
want to open a salon and take some of us with them to bring back the
caliber of service we want to give our clients. Our non-compete
contracts state that we can't work within 30 miles of this salon. We
didn't expect that standards would drop so low and they would raise
prices so high that we lost so many clients. . . . We have all had
enough of the toxic environment and need to be free of this unfair
contract.\547\
---------------------------------------------------------------------------

\547\ Individual commenter, FTC-2023-0007-3299.
---------------------------------------------------------------------------

I am a veterinarian that has had to suffer under non-
compete clauses my entire career. I have had to sell my home and
relocate several times including moving out of State due to non-
compete clauses. I'm currently stuck in a [non-compete covering a]
30 mile radius of all 4 practices of a group of hospitals I work
for. This basically keeps me from working in an enormous area. I had
to sign it due to circumstances out of my control and they took
advantage of my situation. I recently tried to start my own
business, not related to the type of practice that I have the non-
compete clause with, and had to abandon the idea because I couldn't
get funding without my current employer releasing me from the
contract or by relocating again out of the huge area of non-
compete.\548\
---------------------------------------------------------------------------

\548\ Individual commenter, FTC-2023-0007-1448.
---------------------------------------------------------------------------

We own a small family practice in urban Wisconsin. I
previously was employed by a large healthcare organization and
burned out. When I left to star[t] my own business, I was restricted
from working close by, by a non-compete. I spent $24,000 [in] legal
fees challenging this successfully. . . . Now as a business owner
for 5 years, we have the opportunity to hire some physician
assistants who have been terminated without cause from my prior
employer. I am unable to do so because they also had to sign non-
competes. I have seen many disgruntled patients who have delayed
care because of this.\549\
---------------------------------------------------------------------------

\549\ Comment of Three Oaks Health, FTC-2023-0007-1397.
---------------------------------------------------------------------------

I am aesthetic nurse practitioner wanting to start my
own business but I am tied to a 2 year 10 mile non compete. I was
basically obligated to sign the non-compete when I needed to reduce
my hours to finish my master's degree (that I paid for and they
wanted me to get). I feel forced to stay at a job that is not paying
me what I am worth.\550\
---------------------------------------------------------------------------

\550\ Individual commenter, FTC-2023-0007-10157.
---------------------------------------------------------------------------

I am a licensed social worker with a non-compete which
is hindering my employment options. . . . I would like to start my
own business as the mental health facility I work for is not
supportive of mental health. This rule would be a great benefit for
mental health professionals and those seeking quality mental health
services.\551\
---------------------------------------------------------------------------

\551\ Individual commenter, FTC-2023-0007-11922.
---------------------------------------------------------------------------

As a recently graduated physician, I wanted to start my
own practice and become a small business owner. However, I also
needed a source of income to start out and wanted to work part time
at a local hospital for income and benefits. However, due to a non-
compete clause in their contracts, I could not start my own business
and practice in the same city if I was to work with them. This
hindered my ability to work as much as I wanted (ended up having to
work as an independent contractor for significantly less

[[Page 38392]]

shifts per month and no benefits), and made it more difficult to get
my business off the ground due to expenses for providing my own
benefits. Banning non-compete clauses would significantly help the
ability for citizens to pursue starting small businesses or other
work to increase their income and prosperity.\552\
---------------------------------------------------------------------------

\552\ Individual commenter, FTC-2023-0007-11777.
---------------------------------------------------------------------------

Mr. Z had worked for a company for over 15 years
installing windshields in vehicles. He was a lower-level employee
making $18.50 an hour and did not learn any trade secrets or
confidential information. After years of working for the company the
employer refused to raise his wages despite his experience, so he
decided to start his own business. Shortly after giving notice and
beginning his new endeavor, he received a letter from his previous
employer informing him that he was in breach of his non-compete
agreement and the employer would enforce it if he continued with his
business plan.\553\
---------------------------------------------------------------------------

\553\ Comment of NW Workers' Justice Project, FTC-2023-0007-
15199 (discussing a client).
---------------------------------------------------------------------------

Non-competes have prohibited me from making a living as
a fitness and wellness professional to such an extent, that it hurt
me economically. I opened up my own business that was different than
my previous employer, even though it was different and I told him I
was going to focus on a different area in wellness, my previous
employer sued me. I ended up having to hire an attorney to defend
myself and when it was all said and done, I spent close to 12,000 in
fees and penalties.\554\
---------------------------------------------------------------------------

\554\ Individual commenter, FTC-2023-0007-12904.
---------------------------------------------------------------------------

Non compete agreements are detrimental to the average
worker, preventing them from pursuing better paying job offers or
from starting their own business in the same industry. I am directly
affected by a non-compete clause I had signed as part of a job
acceptance. I am now forming my own business in the same industry as
my employer, and cannot do business within a 50-mile radius of my
employer. That radius covers the hometown I live in. Even though we
are in the same industry, we have very different target
markets.\555\
---------------------------------------------------------------------------

\555\ Individual commenter, FTC-2023-0007-12697.

As these comment excerpts reflect, many potential entrepreneurs
wrote to the Commission to describe how they wanted to strike out on
their own, but a non-compete preventing them from doing so. These
comments indicate that non-competes have deprived communities of
homegrown businesses--with respect to everything ranging from tech
companies, to hair salons, to physician practices, and many more types
of firms. This deprives markets of competing firms that can reduce
concentration--which in turn has benefits for lowering prices and
raising the quality of products and services, and increasing innovation
in bringing new ideas to market--as well as depriving communities of
opportunities for new job creation.
Even where entrepreneurs were able to start businesses, they
explained how non-competes prevented them from hiring talented workers
and made it harder for their nascent businesses to grow and thrive.
Many other commenters described personal experiences in which their
newly formed businesses were threatened by litigation costs related to
non-competes. Other commenters stated that the threat of litigation
related to non-competes increases the risk and cost of starting a new
business, particularly if that business intends to compete against a
large incumbent firm. One commenter stated that incumbent firms can use
non-compete litigation as a mechanism to chill startup formation where
startups lack the resources to contest a non-compete.
Numerous small businesses and organizations representing small
businesses submitted comments expressing support for the proposed rule
and describing how it would help small business owners. These
commenters contend that categorically prohibiting non-competes will
empower small businesses by providing them with new access to critical
talent and will drive small business creation as entrepreneurial
employees will be free to compete against their former employers. Many
small businesses also argued that non-competes can hinder small
business formation and can keep small businesses from growing once they
are formed. The extensive comments the Commission received from small
businesses are also addressed in Part XI.C.
Some small businesses said they spent tens or hundreds of thousands
of dollars defending themselves from non-compete lawsuits. A one-person
surveying firm said it has to regularly turn down work because of the
former employer's threat to sue over a non-compete. A small, five-
worker firm said it was sued by a billion-dollar company for violating
a non-compete despite the fact that the firm waited out the non-compete
period and did not use proprietary information or pursue the former
employer's customers; it fears the legal fees will force it out of
business. A legal aid organization relayed the story of a client, a
self-employed beauty worker who was unable to provide their service
during a non-compete lawsuit despite working outside the non-compete
geographic radius. The CEO of one small transport and logistics company
said a ban would remove a tool used mostly by the largest companies in
each industry to maintain their market dominance, as small competitors
cannot match their legal budgets. Further, many workers said they would
open their own business if non-competes were banned.
Many small businesses shared their experiences of how non-competes
have made hiring more difficult. For example, a small physician
practice said non-competes made it difficult to compete with larger
practices to attract and retain physicians. A small business and a
medical association said small businesses could not afford a lawsuit
when hiring workers. An IT startup tried to hire an executive who had
retired from a large firm, but the large firm sued the startup to
enforce what the startup said was an unenforceable non-compete.
According to the startup, because a lawsuit would have cost up to
$200,000, it was forced to settle and could not work with numerous
potential clients, and its growth was significantly slowed. It stated
that it continues to turn away many potential hires to avoid being sued
over non-competes.
Other commenters raised additional issues relevant to hiring.
According to one technology startup organization, the inability to
assemble the right team is a major reason startups fail, and small
businesses lose opportunities because they must avoid hiring workers
who are subject to even unenforceable non-competes. That organization
also said startups currently face legal and time costs from navigating
the patchwork and complexity of State non-compete laws, especially when
trying to determine if a potential hire's non-compete is enforceable;
the time and expense of navigating this landscape will thus often cause
the startups to forego that hire. That organization said some non-
competes prevent experienced workers from counseling, advising, or
investing in startups, and such mentoring can double a startup's
survival rate.
Several self-identified entrepreneurs commented that because of
their non-competes, they feared not being able to operate, build, or
expand their business. Numerous workers reported that they wanted to or
planned to start their own business, but their non-compete made them
too afraid to do so. A public policy organization referenced the Census
Bureau's Annual Business Survey to argue that a majority of business
owners and an even higher majority of Black business owners view
starting their own business as the best avenue for their ideas, and
that non-competes may prevent these potential entrepreneurs' ideas from
coming to market.
Several commenters stated that non-competes make it harder for new
businesses to hire workers with relevant

[[Page 38393]]

experience or industry knowledge. Some commenters argued that non-
compete bans, such as in California, have contributed to higher rates
of successful start-ups, while new firms in States where non-competes
are more enforceable tend to be smaller and are more likely to fail.
In contrast, several commenters opposed to the rule argued that
non-competes promote new business formation by protecting small and new
firms' investments, knowledge, and workers from appropriation by
dominant firms poaching their employees. Commenters also theorized
that, while non-competes directly inhibit employee spinoffs, they may
encourage businesses to enter the market by enhancing their ability to
protect their investments. As described in Part IV.D.2, the Commission
finds that firms have viable alternatives for protecting these
investments that burden competition to a less significant degree than
non-competes. The Commission further notes that these commenters did
not provide evidence to support their assertions.
In addition, when assessing how non-competes affect new business
formation, the Commission believes it is important to consider the net
impact. It is possible that the effects described by these commenters
and the effects described by the Commission earlier in this Part
IV.B.3.b.i can be occurring at the same time. That is, a non-compete
might in some instances be protecting a firm's investments in a manner
that is productivity-enhancing holding all else equal. But even that
same non-compete can--and certainly non-competes in the aggregate do--
inhibit new business formation by prohibiting workers from starting new
businesses and by locking up talented workers, preventing the worker
from efficiently matching with the job that is the highest and best use
of their talents. What the empirical evidence shows is that non-
competes reduce new business formation, overall and on net, indicating
that the tendency of non-competes to inhibit new business formation
more than counteracts any tendency of non-competes to promote new
business formation.
Other commenters said non-competes protect firms' value and assets
for sale in future acquisitions, which they said drives seed capital
investment in start-ups. An investment industry organization commented
that private-equity financing, particularly for early-stage companies,
often includes non-competes and is used to support growth, in turn
increasing competition. In response, the Commission notes that these
commenters provided no empirical evidence that decreases in non-compete
enforceability have affected seed capital investment and private-equity
financing. Moreover, the Commission notes that there is no indication
that small businesses or early-stage companies in States that have
banned or limited non-competes have been unable to obtain financing. To
the contrary, California, where non-competes are unenforceable, has a
thriving start-up culture.
Other commenters addressed empirical research related to new
business formation. Some commenters similarly argued that research on
the average quality of employee spinouts due to changes in non-compete
enforceability may imply negative effects of the rule (e.g., if
prohibiting non-competes decreases average employment or average
survival rates of new firms). Some commenters also noted that the
Baslandze study finds that weaker non-compete enforceability increases
the rate at which spinouts form but result in a lower proportion of
high-quality spinouts.\556\
---------------------------------------------------------------------------

\556\ Baslandze, supra note 533 at 40.
---------------------------------------------------------------------------

In response to these comments, the Commission notes commenters
primarily referenced Starr, Balasubramanian, & Sakakibara \557\ to
support this view. The findings in this study have been misinterpreted
by commenters. This study actually finds that spinouts that form when
non-compete enforceability is stricter are lower quality (i.e., create
fewer jobs), but that the effect is less drastic for spinouts within
the same industry versus spinouts into different industries. Coupled
with other evidence discussed in Part IV.B.3.b.i, the weight of which
points to increased job creation due to the rule, the Commission finds
that empirical studies have not established that non-competes lead to
higher-quality startups or higher-quality spinouts. The Commission also
notes that the result in the Baslandze study regarding the quality of
spinouts is theoretical, and the study does not test this theory
empirically.
---------------------------------------------------------------------------

\557\ Starr, Balasubramanian, & Sakakibara, supra note 518.
---------------------------------------------------------------------------

Commenters also argued that non-competes may have different effects
on different types of workers--for example, across different
industries, occupations, or levels of pay--and that these differences
may affect the impacts of non-competes on new business formation. In
response, the Commission notes that the studies show negative effects
across a range of industries and are directionally consistent, even if
they do not provide results for all subgroups.
Commenters asserted that non-competes may affect job creation
through several different mechanisms. The Commission agrees and finds
that, regardless of the specific mechanism, the weight of the evidence
indicates that non-competes inhibit job creation.
Commenters opposing the rule also questioned the usefulness of
studies of Michigan's law change, given that existing non-competes
remained enforceable under the Michigan law; they state that as a
result, it would take longer for effects from the law to be realized.
As noted under ``Evidence of inhibited new business formation,'' the
Commission gives minimal weight to this study, but for other reasons.
In an ex parte communication entered into the record, the author of
the study of the Michigan law change expressed concern over the
Commission's interpretation of the study.\558\ In particular, he stated
that his methodology mitigated concerns that the study's findings of an
increase in the job creation rate may be due to decreases in that
rate's denominator (total employment). While the Commission does not
agree with this assessment,\559\ the Commission places less weight on
the study for different reasons, as noted.
---------------------------------------------------------------------------

\558\ Ex Parte Communication: Email from G. Carlino to E.
Wilkins (Jan. 30, 2023), https://www.ftc.gov/system/files?file=ftc_gov/pdf/P201200NonCompeteNPRMExParteCarlinoRedacted.pdf.
\559\ In particular, the long time period and the difference-in-
difference methodology used in the study do not mitigate concerns
that decreases in employment due to non-compete enforceability could
drive increases in the job creation rate. The concern is not that
the findings somehow represent effects on anything other than the
average job creation rate (as noted by the author in his ex parte
communication), but that a rate is comprised of a numerator and
denominator, and effects on either may drive effects on the rate as
a whole. This concern is shared by at least two empirical studies of
non-competes. See Johnson, Lavetti, & Lipsitz supra note 388 at 19
and Johnson, Lipsitz, & Pei supra note 526 at 19.
---------------------------------------------------------------------------

Some commenters who opposed the rule also addressed the evidence
relating to non-competes and job creation, although these commenters
generally did not focus on job creation related to new businesses
specifically. Some of these commenters asserted that the studies
addressed in the NPRM indicated that non-competes are associated with a
greater number of jobs available and increased rates of job creation,
rather than decreased rates of job creation. Some asserted that the
evidence on job creation is mixed and that the issue is understudied.
In the NPRM, the Commission stated that the evidence relating to the
effects of non-competes on job creation was inconclusive. However, in
the final rule,

[[Page 38394]]

the Commission does not make a separate finding that non-competes
reduce job creation. Instead, it cites the research described herein--
which relates to job creation at newly founded firms--to support its
finding that non-competes inhibit new business formation.
ii. Non-Competes Inhibit Innovation
Evidence of Inhibited Innovation
The Commission finds that non-competes tend to negatively affect
competitive conditions in product and service markets by inhibiting
innovation. Three highly reliable empirical studies find that non-
competes reduce innovation.
One such study, a study by Zhaozhao He, finds that the value of
patents, relative to the assets of the firm, increases by about 31%
when non-compete enforceability decreases.\560\ In contrast to some
other studies of innovation discussed here, He's study focuses on the
value of patents, rather than the mere number of patents. The study
does so to mitigate concerns that patenting volume may not represent
innovation.\561\ The study analyzes the impact of several legal changes
to non-compete enforceability, using a binary measure of non-compete
enforceability. While this study therefore does not satisfy all the
principles outlined in Part IV.A.2, it nonetheless satisfies many of
them and contains a reasonably strong methodology.
---------------------------------------------------------------------------

\560\ Zhaozhao He, Motivating Inventors: Non-Competes,
Innovation Value and Efficiency 21 (2023), https://ssrn.com/abstract=3846964. Thirty one percent is calculated as e\0..272\-1.
\561\ Id. at 17.
---------------------------------------------------------------------------

A second study, by Johnson, Lipsitz, and Pei, finds that increased
enforceability of non-competes decreases the rate of ``breakthrough''
innovations and innovations which make up the most cited patents. This
study lends weight to the finding that non-competes harm both the
quantity and the quality of innovation.\562\ The authors also show that
when non-compete enforceability decreases, patenting increases even in
industries where most new innovations are patented. These increases
imply that the effect is a true increase in innovation, rather than
firms substituting between patents and non-competes.
---------------------------------------------------------------------------

\562\ Johnson, Lipsitz, & Pei, supra note 526.
---------------------------------------------------------------------------

Johnson, Lipsitz, and Pei also show that State-level changes in
non-compete policy do not simply reallocate innovative activity across
State lines, which would result in no change in innovation at the
national level. Instead, they find that decreasing non-compete
enforceability, even in one State, increases innovative activity
nationally.\563\ Johnson, Lipsitz, and Pei's study uses several legal
changes to analyze the impact of enforceability. It also uses several
metrics of quality and quantity to mitigate concerns over whether
patenting is an accurate reflection of innovation, especially in this
context. The study thus satisfies all the principles outlined in Part
IV.A.2 and is therefore given substantial weight by the Commission.
---------------------------------------------------------------------------

\563\ Id.
---------------------------------------------------------------------------

A third study, by Rockall and Reinmuth, finds that non-competes
have a significant negative impact on innovation. They further find
that this effect is not driven solely by the entry of new businesses.
Their work suggests a potentially central role for knowledge
spillovers, which are hampered when worker mobility is diminished. The
study uses many changes to non-compete enforceability quantified on a
continuous basis and considers several metrics which represent the
quantity and quality of patenting, in order to accurately capture the
relationship between non-competes and innovation.\564\ Similar to the
study by Johnson, Lipsitz, and Pei, this study therefore satisfies all
the principles described in Part IV.A.2 and is given substantial
weight.
---------------------------------------------------------------------------

\564\ Emma Rockall & Kate Reinmuth, Protect or Prevent? Non-
Compete Agreements and Innovation (2023), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4459683.
---------------------------------------------------------------------------

The Commission places the greatest weight on the foregoing three
studies, in which factors unrelated to the legal changes at issue are
less likely to drive the results. There are additional studies that
relate to non-competes and innovation, but the Commission gives them
less weight.
A study by Samila and Sorenson finds that venture capital induced
less patenting by 6.6 percentage points when non-competes are
enforceable.\565\ However, the authors note that patenting may or may
not reflect the true level of innovation, as firms may use patenting as
a substitute for non-competes where they seek to protect sensitive
information.\566\ Furthermore, this study assesses only the quantity of
patents and does not take into account the quality of patents, which
would be a better proxy for innovation. For this reason, the Commission
gives less weight to this study (although its findings are
directionally consistent with the first three studies described
herein). This study also uses cross-sectional variation in non-compete
enforceability, which is measured along two dimensions in a binary
fashion. In addition, a 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 change in the law, but that drug patenting fell, and that
the quality of computer patents fell.\567\ However, the increase in
mechanical patenting appears to have primarily occurred approximately
14 years after non-compete enforceability changed. This suggests that
some other mechanism may have led to the increase in patenting
activity.\568\ Moreover, the study uses a single change in non-compete
enforceability to generate its results, and it uses only one measure of
innovation outside of patent quantity--quality as measured by patent
citations. Finally, this study examines a change to non-compete
enforceability which was accompanied by several other changes to
Michigan's antitrust laws, making it impossible to identify the effect
of the change in non-compete enforceability standing alone. For these
reasons, the Commission gives less weight to this study.
---------------------------------------------------------------------------

\565\ Samila & Sorenson, supra note 534 at 432. The value is
calculated as 6.6% = e\0.0208 + 0.0630\-e\0.0208\.
\566\ Id.
\567\ Carlino, supra note 535 at 40.
\568\ Id. at 48.
---------------------------------------------------------------------------

A study by Clemens Mueller does not estimate the overall impact of
non-compete policy on innovation, but instead focuses on career detours
of inventors.\569\ Mueller shows that inventors are more likely to take
``career detours''--that is, to change industries to avoid the reach of
their non-compete--when enforceability of non-competes is stricter. Due
to the lower match quality between that inventor and their new
industry, the innovative productivity of those inventors suffers after
they take career detours. However, the Commission assigns this study
less weight because, while its methodology satisfies the principles
outlined in Part IV.A.2, the study is only informative of the
productivity of individuals taking career detours. It does not address
whether innovation in the aggregate increases. Mueller uses several
changes in non-compete enforceability to generate results, but those
changes are measured in binary--rather than continuous--fashion.
---------------------------------------------------------------------------

\569\ Clemens Mueller, Non-Compete Agreements and Labor
Allocation Across Product Markets, Proceedings of the EUROFIDAI-
ESSEC Paris December Finance Meeting 2023 (2023), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4283878.
---------------------------------------------------------------------------

Coombs and Taylor examine the impact of non-compete enforceability
on innovation. They find that research

[[Page 38395]]

productivity, as measured by the number of products in biotechnology
firms' prospectuses, was lower in California than other States, which
they suggest implies that California's ban on non-competes hampers
research productivity.\570\ However, this study is purely cross-
sectional, and results may be due to other differences between
California and other States; the Commission accordingly places less
weight on this study.
---------------------------------------------------------------------------

\570\ Porcher L. Taylor, III, and Joseph E. Coombs, Non-
Competition Agreements and Research Productivity in the
Biotechnology Industry, 26 Frontiers of Entrepreneurship Rsch. 1
(2006).
---------------------------------------------------------------------------

Two additional studies address firm strategies related to
innovation. However, the Commission gives them little weight because
the outcomes studied do not inform how non-competes would affect the
overall level of innovation in the economy. The first, by Raffaele
Conti, uses two changes in non-compete enforceability (in Texas and
Florida), and indicates that firms engage in riskier strategies with
respect to research and development (``R&D'') when non-compete
enforceability is greater.\571\ However, this study does not address
whether these riskier strategies lead to greater innovation. The
second, by Fenglong Xiao, finds that increases in non-compete
enforceability led to increases in exploitative innovation (i.e.,
innovation which stays within the bounds of the innovating firm's
existing competences) in the medical device industry.\572\ The study
finds this increase in exploitative innovation leads to an increase in
the rate at which new medical devices are introduced. However, the
study also finds that explorative innovation (i.e., innovation which
moves outside those bounds) decreased, and explorative innovation is
the mode of innovation which the empirical literature has found to be
associated with high growth firms.\573\ The net impact on innovation
from this study is thus unclear. The study examines several changes in
non-compete enforceability, measured with a binary indicator of non-
compete enforceability.
---------------------------------------------------------------------------

\571\ Raffaele Conti, Do Non-Competition Agreements Lead Firms
to Pursue Risky R&D Strategies?, 35 Strategic Mgmt. J. 1230 (2014).
\572\ Fenglong Xiao, Non-Competes and Innovation: Evidence from
Medical Devices, 51 Rsch. Pol'y 1 (2022).
\573\ Alessandra Colombelli, Jackie Krafft & Francesco Quatraro,
High-Growth Firms and Technological Knowledge: Do Gazelles Follow
Exploration or Exploitation Strategies?, 23 Indus. And Corp. Change
262 (2014).
---------------------------------------------------------------------------

Comments Pertaining to Inhibited Innovation and the Commission's
Responses
The Commission's finding that non-competes inhibit innovation is
principally based on the empirical evidence described in this Part
IV.B.3.b.ii. However, the comments provide strong qualitative evidence
that bolsters this finding.
Several academics and economic research groups, among other
commenters, agreed with the Commission's preliminary finding that non-
competes inhibit innovation. Commenters argued that non-competes reduce
knowledge flow and collaboration, force workers to leave their field of
expertise, and discourage within-industry spinouts that promote
innovation. Many commenters stated that banning non-competes would make
it easier for workers to pursue innovative ideas and to hire the best
talent to help develop those ideas. Illustrative examples of comments
the Commission received include the following:

I am a geneticist at Stanford University, and I am co-
founding a biotech startup that aims to discover new cancer
immunotherapies. Many of the most talented geneticists,
immunologists, cancer biologists, and other scientists with unique
and valuable skillsets for drug development are bound by non-
competes that prevent them from leaving jobs at big pharma companies
to join biotech startups like mine. The result is artificial
scarcity in the market for top scientific talent--a phenomenon that
precludes healthy competition between industry incumbents and new
entrants. Given that much of our country's most cutting-edge
translational research happens within biotech startups, and given
that many of the most successful drugs on the market originate in
biotech startups, non-competes in pharma and biotech prevent the
most talented scientists from working on the most innovative science
and obstruct the development of new treatments and cures for human
disease--leaving our society worse off.\574\
---------------------------------------------------------------------------

\574\ Individual commenter, FTC-2023-0007-0198.
---------------------------------------------------------------------------

As a practicing Physician for over thirty years, and
one who trained fellows in pain management, who followed many of
their students' careers, I was able to see the detriments of unfair
Non-Compete clauses in their contracts. Often a physician would take
a job, and if it did not work out, the restrictions were so severe,
that they would need to move to a new geographic location in order
to be employed. . . . Other scenarios exist as well. Where large
institutions can block scientific discovery of their research
physicians from moving to other institutions which may be better
able to support their research, potentially blocking the promotion
of scientific discovery.\575\
---------------------------------------------------------------------------

\575\ Individual commenter, FTC-2023-0007-3885.
---------------------------------------------------------------------------

I am an engineer in the orthopedic space. I have an
idea for a truly innovative foot and ankle plating system that I
believe could become the standard of care for fracture fixation and
foot deformity correction. It could save 10-15 minutes of operating
room time per surgery, which studies show carries a cost of $1000
(times millions of surgeries annually). It does not directly compete
with my former employer's product, but I have to wait a year to
start engaging surgeons about it because of a very broad non-
compete, for a product that does not even compete.\576\
---------------------------------------------------------------------------

\576\ Individual commenter, FTC-2023-0007-0760.
---------------------------------------------------------------------------

I currently work as a mid-level technical employee at a
company that enforces long (a year or longer) noncompetes. . . .
After working for larger companies for a few years after college,
many of my friends started their own companies. Some succeeded
massively and some didn't but what was common among most of them was
that the companies they started were somewhat related to what they
were working on before. They either saw a gap in the industry while
working for a larger company, or had a bold idea in their domains
that they wanted to quit their jobs and try executing it. All this
risk taking has in turn resulted in innovation, more competition,
and hundreds of jobs. This would not have been possible if these
people were under non-compete agreements from their previous
employers. In fact, many of my friends who are currently working for
companies that have non-competes have personally told me that they
want to try a different approach than the current incumbents in
their industry, but they simply can't take this risk because of the
long non-competes they are under. Note that non-competes are even
more consequential for workers of relatively less experience because
sitting out for 1 year while only having 3 to 4 years of experience
is a lot more detrimental to one's career when compared to an
individual with 20 years of experience. Given that younger workers
are more willing to take risks and try new ideas, the impact of non-
competes on innovation is far worse than many think.\577\
---------------------------------------------------------------------------

\577\ Individual commenter, FTC-2023-0007-19807.
---------------------------------------------------------------------------

I am an engineer who has worked on software and
hardware in several domains, including the semiconductor industry. I
perceive non-competes to not only be detrimental to free trade but
also to be detrimental to American innovation and manufacturing. If
the United States is serious about supporting the growth of the
semiconductor industry in the U.S., it must ensure that
semiconductor companies inside the United States truly act to
benefit American innovation. . . . The FTC would act prudently to
ban such agreements.\578\
---------------------------------------------------------------------------

\578\ Individual commenter, FTC-2023-0007-12872.
---------------------------------------------------------------------------

I am a physician. I have worked for public entities for
my entire career. I have worked under non-competes for my entire
career. The result of these non-compete clauses is that myself and
my colleagues keep our imagination and creativity locked away. We
see novel applications of pharmaceuticals and medical devices which
our leadership

[[Page 38396]]

does not want to pursue, and we are also precluded from pursuing
these ideas due to the noncompete. We see new ways to reach people
and help people with our unique skill sets, and our noncompete keeps
us from being able to reach them. The noncompete allows our employer
to own us. They monopolize the talent of their workforce and this
deprives the community of the innovation that may stem from the
unleashing of the creativity of the physician workforce. I see the
direct impact of non-compete clauses. The public has so much to gain
by releasing healthcare workers from their noncompete clauses. These
talented individuals, once released from their noncompetes, will
begin to contribute to their communities with new ideas and
innovation that will serve their communities. Many entities have so
many reasons to avoid innovation and this stifles the individuals
who work for them and oppresses new ideas. Once released from the
bureaucracy and burden of non-competes I believe you will see an
abundance of community outreach, device innovation and community
service from many physicians currently subjugated by their
noncompete clauses.\579\
---------------------------------------------------------------------------

\579\ Individual commenter, FTC-2023-0007-2340.

A research organization said a ban on non-competes would increase
the value workers realize from creativity and inventiveness, though it
also asserted that non-competes can incentivize firms to create and
share information. Some workers commented that they had innovative
ideas or research that their employer was unwilling to pursue, but the
worker could not leave to pursue their ideas elsewhere. A commenter
also argued that captive workforces can stifle competition for workers
and for clients or patients that leads to innovation. According to
several commenters, trapping workers in jobs can also lead to decreased
productivity and so-called ``quiet quitting.''
Some commenters contended that California's ban on non-competes
helped Silicon Valley and other industries in California thrive. For
example, a public policy organization pointed to industry clusters
where studies have identified job hopping, which may otherwise be
prohibited by non-competes, as the primary mechanism of knowledge
diffusion and argued that restricting non-competes for knowledge
workers would improve the U.S.'s competitiveness. Other commenters
questioned whether non-competes played a role in Silicon Valley's
growth. In response, the Commission notes that it does not attribute
California's success in the technology industry to its non-compete
laws. The Commission merely notes (in Part IV.D) that the technology
industry is highly dependent on protecting trade secrets and that it
has thrived in California despite the inability of employers to enforce
non-competes, suggesting that employers have less restrictive
alternatives for protecting trade secrets.
Other commenters opposing the rule argued that non-competes may
promote innovation by encouraging firms to make productivity-enhancing
investments and by decreasing the risk of workers leaving. These
commenters stated that non-competes protect firms' investments in
workers, R&D, intellectual capital, and innovation. The Commission does
not believe that non-competes are needed to protect valuable firm
investments. As described in Part IV.D.2, the Commission finds that
firms have less restrictive alternatives that protect these investments
adequately while burdening competition to a less significant degree.
In addition, when assessing how non-competes affect innovation, the
Commission believes it is important to consider the net impact. It is
possible that the effects described by these commenters and the effects
described by the Commission earlier in this Part IV.B.3.b.ii can be
occurring at the same time. That is, a non-compete might in some
instances be protecting a firm's investments in a manner that is
productivity-enhancing holding all else equal. But even that same non-
compete can--and certainly non-competes in the aggregate do--inhibit
innovation by preventing workers from starting new businesses in which
they can pursue innovative ideas; inhibiting efficient matching between
workers and firms; and reducing the movement of workers between firms.
What the empirical evidence shows is that non-competes reduce
innovation, overall and on net, indicating that the tendency of non-
competes to inhibit innovation more than counteracts any tendency of
non-competes to promote innovation.
The Commission addresses the available evidence on the relationship
between non-competes and firm investment in Part IV.D.1.
A business commenter contended that worker mobility does not
necessarily improve innovation since the new firm may be unable or
unwilling to use the worker's knowledge or ideas, or the new start-up
may fail and leave consumers with less innovative products and
services. In response, the Commission notes that it is certainly
possible that some workers switch jobs to firms that are unable or
unwilling to use their knowledge or ideas, or to startups that may
fail. However, the fact that the empirical evidence shows that reduced
non-compete enforceability increases innovation suggests that these
effects are outweighed by workers who can switch jobs to firms that
make better use of their talents, or to startups that thrive and bring
innovative new products to market.
Other commenters stated that non-competes promote the sharing of
ideas and information within firms and incentivize risk-taking. The
Commission is not aware of evidence that non-competes promote the
sharing of ideas within firms specifically, but in any event the
Commission explains in Part IV.D.2 that trade secrets and NDAs provide
less restrictive means than non-competes for protecting confidential
information. With respect to risk-taking, the Commission notes that the
Conti study finds that firms engage in riskier R&D strategies when non-
compete enforceability is greater, but it is not clear whether these
riskier R&D strategies translate into increased innovation.
Commenters also argued that non-competes may have different effects
on different types of workers--for example, across different
industries, occupations, or levels of pay--and that these differences
may affect the impacts of non-competes on innovation. In response, the
Commission notes that the most methodologically robust studies show
negative effects across a range of industries and are directionally
consistent, even if they do not provide results for all subgroups.
A research organization argued that non-competes decrease the
likelihood that innovative technologies are developed outside the U.S.
and that non-competes promote economic growth, competitiveness, and
national security. The Commission is not aware of any reliable evidence
of the effects of non-competes on whether innovative technologies are
developed outside the U.S. However, the weight of the empirical
evidence indicates that non-competes reduce the amount of innovation
occurring within the U.S.
Some commenters noted that innovation hubs have emerged in States
that enforce non-competes. In response, the Commission notes that it
does not find that it is impossible for innovation hubs to emerge where
non-competes are enforceable. Instead, the Commission finds that,
overall, non-competes inhibit innovation.
One commenter performed an empirical exercise in which he
correlated Global Innovation Index rankings of innovation clusters with
the enforceability of non-competes in each location. The commenter
found that only one of the top five clusters bans non-competes, and
only three others in the top 100 ban non-competes. The

[[Page 38397]]

commenter cited the success of Chinese innovation clusters, noting that
non-competes are permitted in each of them.\580\ The Commission does
not find this evidence persuasive. Other differences across countries
may explain these results better than policy towards non-competes,
which is one factor among many that affect the level of innovation in
an economy.
---------------------------------------------------------------------------

\580\ Comment of Mark Cohen, FTC-2023-0007-12064, at 12-13.
---------------------------------------------------------------------------

Some commenters argued that the empirical research cited in the
NPRM has mixed results. These commenters point to the study by Xiao
(2022) showing that non-competes increase exploitative innovation
(innovation that incrementally extends firms' existing capabilities),
but not explorative innovation (innovation that extends the scope of
firms' capabilities). In response, the Commission notes that, within
this particular study, the net impact of non-competes on innovation was
unclear. But the Commission does not believe the evidence overall is
mixed, given that the three empirical studies of the effects of non-
competes on innovation that use the most reliable empirical methods all
find that non-competes reduce innovation.
Some commenters claimed that two studies cited in the NPRM--the
Xiao and Conti studies--had findings that were omitted or
misinterpreted: first, the Xiao finding that non-compete enforceability
increases the rate of new discoveries of medical devices due to
increases in the rate of exploitative innovation but not explorative
innovation); and second, the Conti finding that greater non-compete
enforceability leads to riskier innovation, which these commenters
assert is a positive outcome.\581\ In response, the Commission notes
that the NPRM described both of these findings and did not omit or
misinterpret them.\582\ The Commission explains why it gives these
studies little weight under ``Evidence of inhibited innovation.''
---------------------------------------------------------------------------

\581\ Referring to Xiao, supra note 572 and Conti, supra note
571.
\582\ NPRM at 3492-93.
---------------------------------------------------------------------------

A commenter asserted that the He study is insufficient evidence to
support a finding, and that the study examines the effects of non-
compete enforceability on the value of patents, which the commenter
asserts misses other aspects of innovation. In response, the Commission
believes that the He study is methodologically robust and that, while
no single metric can capture all aspects of innovation, the value of
patents is a meaningful proxy. The Commission also notes that the
effects observed in the He study are considerable, as the study finds
that the value of patents, relative to the assets of the firm,
increases by about 31% when non-compete enforceability decreases. In
addition, the Commission notes that the comment record provides
substantial qualitative support in line with the empirical findings.
Furthermore, additional research, published since the release of the
NPRM, helps confirm the Commission's finding regarding the effect of
non-competes on innovation. As described under ``Evidence of inhibited
innovation,'' this evidence moves beyond assessing the impact of non-
competes on the value of patents or the number of patents to identify
the quality of new innovation, as well as the mechanisms underlying
these effects.
Many commenters referred to a law review article, which was also
submitted as a comment itself, that critiques the literature on non-
competes and innovation.\583\ First, the authors argue that a measure
of enforceability used in part of the economic literature is incorrect
and that a more recently developed measure is imperfect but
better.\584\ The Commission agrees with the authors that the more
recently developed measure of enforceability, the scale based on
Bishara (2011), is stronger than other measures of enforceability due
to its granularity. This metric is used in many studies cited in this
final rule, including the Johnson, Lipsitz, and Pei study, which
largely reinforces the conclusions in the He study, lending weight to
the conclusions in these studies that non-competes suppress the overall
level of innovation in the economy.
---------------------------------------------------------------------------

\583\ Barnett & Sichelman, supra note 389.
\584\ The allegedly flawed measures use binary indicators for
enforcement versus non-enforcement, or binary indicators for several
facets of enforceability (Stuart and Sorenson, supra note 529; Mark
J. Garmaise, Ties that Truly Bind: Noncompetition Agreements,
Executive Compensation, and Firm Investment, 27 J. L., Econ., & Org.
(2011)), and the more recent measure is more nuanced (Bishara, supra
note 501).
---------------------------------------------------------------------------

Second, the authors argue that a given non-compete may be governed
by the laws of a State other than the State where the worker lives,
which undermines the reliability of studies analyzing the effects of
non-compete enforceability. The authors argue that cross-border
enforcement of non-competes may be a difficult issue to properly
address in empirical work and has not been accounted for in the work to
date. In response, the Commission notes that if the State law that
applied to a given non-compete were totally random--for example, if a
non-compete in Oregon was no more likely to be governed by Oregon's law
than any other State's law--we would expect to observe no effects on
economic outcomes (such as earnings, innovation, and new business
formation) from changes in State law. Instead, the empirical research
shows that changes in State law have clear impacts on economic outcomes
in particular States. This indicates that enough non-competes within a
particular State are subject to that State's law for changes in that
State's law to affect economic outcomes in that State.
Third, the authors argue that there is a lack of data on the use of
non-competes and that such data are needed to completely assess the
effects of non-competes. Although there is not comprehensive data on
individual workers' employment agreements, the Commission believes the
studies that examine changes in enforceability do so based on
sufficient data to be reliable and are otherwise methodologically
sound. These studies are also highly probative with respect to the
effects of the final rule because what they are examining--how changes
in the enforceability of non-competes affect various outcomes--matches
closely with what the final rule does. The Commission also notes that
there is considerable data regarding the prevalence of non-competes,
which it discussed in Part I.B.2.
Fourth, the article argues that some studies of non-competes have
small sample sizes, which may lead to measurement error. In response to
concerns about small sample sizes, the Commission notes that the most
recent studies use a greater breadth of variation in the legal
environment surrounding non-competes, overcoming this obstacle. Fifth,
the article expresses concern about certain studies that are based on
legal changes in Michigan. The Commission takes this critique into
account throughout this final rule and notes it when discussing the
applicable studies that examine legal changes in Michigan, including
under ``Evidence of inhibited innovation.''
In an ex parte communication included in the public record, the
author of one of the studies of innovation stated that studies which
examine multiple legal changes may be biased, since affected parties
may anticipate the legal change and adjust their behavior prior to the
date that the legal change is made. The author stated that examination
of the legal change in Michigan was therefore preferable, since it was
``inadvertent'' and therefore not

[[Page 38398]]

subject to anticipation effects.\585\ The Commission agrees that, in
general, anticipation effects can bias the findings of empirical
studies. However, empirical work shows that the legal changes used in
much of the literature on non-competes are not subject to anticipation
effects.\586\ This may be because the vast majority are changes based
on judicial decisions, rather than statutory changes, as hypothesized
by researchers.\587\ Moreover, even if anticipation effects occur in
studies of non-compete enforceability, that would likely not change the
measurable observed benefits of reducing non-compete enforceability,
and may indeed lead to underestimation of observed benefits.
Underestimation would occur if parties were adjusting their behavior in
advance of the change in enforceability in the same direction as the
effects observed after the change. This would occur if, for example,
firms began to decrease use of non-competes in advance of a decrease in
non-compete enforceability, knowing that those non-competes would soon
be less enforceable. This ultimately would mean that the actual effects
on labor mobility, earnings, new business formation, innovation, and
other outcomes could be even greater. Additionally, the legal change in
Michigan is subject to other criticism, as discussed under ``Evidence
of inhibited innovation'' and by commenters.
---------------------------------------------------------------------------

\585\ Ex Parte Communication: Email from G. Carlino, supra note
558.
\586\ Johnson, Lavetti & Lipsitz, supra note 388 at 12-14.
\587\ Id. at 12.
---------------------------------------------------------------------------

iii. Non-Competes May Increase Concentration and Consumer Prices
Evidence of Increased Concentration and Consumer Prices
As described in Parts IV.B.3.b.i and ii, the Commission finds that
non-competes tend to negatively affect competitive conditions in
product and service markets by inhibiting new business formation and
innovation, and have in fact done so. The Commission finds that these
effects, standing alone, are sufficient to support its finding that
non-competes tend to negatively affect competitive conditions in
product and service markets.
However, the Commission notes that there is also evidence that non-
competes increase industrial concentration more broadly, which in turn
tends to raise consumer prices. The empirical literature on these
effects is less developed than the empirical work documenting declines
in new business formation and innovation; specifically, the empirical
evidence on consumer prices relates only to healthcare markets (though
the evidence on concentration spans all industries in the economy). For
this reason, the Commission does not rest its finding that non-competes
tend to negatively affect competitive conditions in product and service
markets on a finding that non-competes increase concentration and
consumer prices. However, there are several reliable studies finding
that non-competes increase concentration and/or consumer prices,
bolstering the Commission's finding that non-competes tend to
negatively affect competitive conditions in product and service
markets.
The Commission finds that non-competes reduce new business
formation.\588\ By doing so, non-competes may increase concentration.
Non-competes may also stunt the growth of existing firms that would
otherwise better challenge dominant firms, for example, by limiting
potential competitors' access to talented workers.\589\
---------------------------------------------------------------------------

\588\ See Part IV.B.3.b.i.
\589\ See Part IV.C.2.c.i (describing a study addressing how
non-competes force firms to make inefficiently high buyout
payments).
---------------------------------------------------------------------------

Non-competes may also affect prices in a variety of ways. By
suppressing workers' earnings, non-competes decrease firms' costs,
which firms may theoretically pass through to consumers in the form of
lower prices. However, non-competes may also have several
countervailing effects that would tend to increase prices. First, non-
competes may increase concentration, which could lead to less
competition between firms on price, and therefore higher prices for
consumers. Second, by inhibiting efficient matching between workers and
firms, non-competes may reduce the productivity of a firm's workforce,
which may lead to higher prices. Third, by inhibiting innovation, non-
competes may hinder the development of lower-cost products or more
efficient manufacturing processes.
One study, by Hausman and Lavetti, focuses on physician markets.
The study finds that as the enforceability of non-competes increases,
these markets become more concentrated, and prices for consumers for
physician services increase. The study finds that while non-competes
allow physician practices to allocate clients more efficiently across
physicians, this comes at the cost of greater concentration and higher
consumer prices. This study examines several changes in non-compete
enforceability measured continuously. The authors note that, in theory,
if decreased non-compete enforceability decreases earnings, then the
fall in prices may simply be due to pass-through of labor costs.
However, empirical research shows that decreased non-compete
enforceability increases earnings (as discussed in Part IV.B.3.a.ii).
Even if that were not the case, Hausman and Lavetti show that labor
cost pass-through cannot explain their findings.\590\ This study
satisfies all of the principles described in Part IV.A.2, and is
accordingly weighted highly by the Commission.
---------------------------------------------------------------------------

\590\ Naomi Hausman & Kurt Lavetti, Physician Practice
Organization and Negotiated Prices: Evidence from State Law Changes,
13 Am Econ. J. Applied Econ. 278 (2021).
---------------------------------------------------------------------------

Another study, by Lipsitz and Tremblay, examines all industries in
the economy and shows empirically that increased enforceability of non-
competes at the State level increases concentration.\591\ Lipsitz and
Tremblay theorize that non-competes inhibit entrepreneurial ventures
that could otherwise enhance competition in goods and service markets.
The authors show that the potential for harm is greatest in the
industries in which non-competes are likely to be used at the highest
rate.\592\
---------------------------------------------------------------------------

\591\ Michael Lipsitz & Mark Tremblay, Noncompete Agreements and
the Welfare of Consumers 6 (2021), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3975864. Concentration is measured by an
employment-based Herfindahl-Hirschman Index (HHI).
\592\ Id. at 3.
---------------------------------------------------------------------------

If the general causal link governing the relationship between
enforceability of non-competes, 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
than healthcare. Lipsitz and Tremblay use several changes in non-
compete enforceability measured in a continuous fashion, but do not
measure the impact on consumer prices or welfare. The Commission
therefore finds the study's conclusion that non-competes increase
concentration highly robust, but the study is not itself direct
empirical evidence of a relationship between non-competes and prices.
Two additional studies assess the effects of non-competes on
concentration and prices. However, the Commission gives these studies
little weight.
A study of physician non-competes by Lavetti, Simon, and White
finds that prices charged by physicians with non-competes are similar
to those charged by physicians without non-competes.\593\

[[Page 38399]]

The Commission gives this study less weight because it merely analyzes
differences between workers based on the use of non-competes.\594\
---------------------------------------------------------------------------

\593\ See Lavetti, Simon, & White, supra note 82.
\594\ See Part IV.A.2 (describing the shortcomings of such
studies).
---------------------------------------------------------------------------

A study by Younge, Tong, and Fleming finds that non-competes
contribute to economic concentration because non-compete enforceability
increases the rate of mergers and acquisitions.\595\ This study uses
one change in non-compete enforceability--in Michigan--to generate its
results. However, in addition to its use of a single legal change in a
single State, the change to non-compete enforceability was accompanied
by several other changes to Michigan's antitrust laws, so it is not
possible to identify the effect of the change in non-compete
enforceability standing alone.
---------------------------------------------------------------------------

\595\ Kenneth A. Younge, Tony W. Tong, & Lee Fleming, How
Anticipated Employee Mobility Affects Acquisition Likelihood:
Evidence From a Natural Experiment, 36 Strategic Mgmt. J. 686
(2015).
---------------------------------------------------------------------------

Comments Pertaining to Increased Concentration and Consumer Prices and
the Commission's Responses
Several commenters addressed the question of whether non-competes
affect concentration and consumer prices. Some commenters asserted that
the rule would lower consumer prices by improving matches between
employers and workers, increasing productivity. Commenters also argued
that locking up talent, particularly in specialized markets, prevents
entrepreneurship and new business formation and can thus contribute to
increased concentration.
Some commenters opposing the NPRM claimed that banning non-competes
could increase concentration. These commenters argued that larger firms
could discourage companies from expanding into new and underserved
markets by poaching, or threatening to poach, their key employees,
leading to increased costs that could force some firms out of business.
These commenters also argued that non-competes protect small businesses
from dominant consolidators, as high recruitment, retention, and other
costs may induce small businesses to sell or larger businesses may hire
away their workers. A medical trade organization stated that without
non-competes, independent practices might not be able to afford to hire
and thus may be unable to grow or compete.\596\
---------------------------------------------------------------------------

\596\ See also Part XI.C.2, which addresses these types of
comments in greater detail.
---------------------------------------------------------------------------

While these commenters theorize that prohibiting non-competes would
increase concentration, the Commission notes that the available
evidence indicates that non-competes increase concentration, rather
than reducing it. The Commission further notes that these theories are
inconsistent with the robust empirical literature finding that non-
competes reduce new business formation, as well as with the hundreds of
comments from small businesses, including physician practices,
recounting how non-competes stymied their ability to enter markets or
grow because they make it harder to hire talent.
Several commenters claimed that prohibiting non-competes would
increase worker earnings and increase transaction costs related to
hiring, which firms would pass through to consumers in the form of
higher prices. However, the only study of how non-competes affect
prices--the Hausman and Lavetti study--finds that decreased non-compete
enforceability decreases prices in the healthcare market, rather than
increasing them. Moreover, while it is theoretically possible that
higher labor costs could be passed on to consumers in the form of
higher prices, there are several countervailing effects from
prohibiting non-competes that would tend to lower prices. Additionally,
empirical research shows that labor cost pass-through cannot explain
decreases in prices in healthcare markets associated with non-competes
becoming less enforceable.\597\
---------------------------------------------------------------------------

\597\ Hausman & Lavetti, supra note 590.
---------------------------------------------------------------------------

An insurance company stated that insurance premiums would increase
if the rule allows non-profit hospitals to dominate the hospital market
and have more leverage in network negotiations. These commenters do not
provide any empirical evidence to support this assertion. Moreover, for
the reasons described in Part V.D.5, the Commission disagrees that the
ability to use non-competes will provide a material competitive
advantage to non-profit hospitals. Another commenter stated that if
non-competes are prohibited, physicians will leave States with lower
market reimbursement rates for those with higher rates, increasing
healthcare costs and shortages. Commenters did not cite any empirical
evidence that supports this hypothetical assertion that the final rule
would increase healthcare costs or shortages due to physicians leaving
States with lower reimbursement rates, and the Commission is aware of
none. However, the Commission notes that it received many comments from
doctors, nurses, and other healthcare professionals asserting that non-
competes worsen healthcare shortages.\598\
---------------------------------------------------------------------------

\598\ These comments are summarized in greater detail in Part
IV.B.3.b.iv.
---------------------------------------------------------------------------

Some commenters stated that non-competes may improve access to
physicians due to non-compete-led consolidation or more efficient
patient-sharing within practices, and that Hausman and Lavetti's study
is unable to quantify these benefits. In response, the Commission notes
that there is no empirical literature bearing out this theory, and that
the commenters overwhelmingly stated that non-competes decrease
patients' access to the physicians of their choice, increase healthcare
shortages, and negatively affect the quality of health care.\599\
---------------------------------------------------------------------------

\599\ See Part IV.B.3.b.iv.
---------------------------------------------------------------------------

iv. Non-Competes May Reduce Product and Service Quality and Consumer
Choice
The negative effects of non-competes on competition may also
degrade product and service quality and consumer choice. Competition
encourages firms to expand their product offerings and innovate in ways
that lead to new and better products and services.\600\ However, by
inhibiting new business formation, increasing concentration, and
reducing innovation, non-competes reduce competitive pressure in
product and service markets, which may reduce product quality and
consumer choice. In addition, poor working conditions and less optimal
matching of workers and firms may lead to reductions in the quality of
products and services. For these reasons, non-competes may tend to
negatively affect competitive conditions in product and service markets
by reducing product quality and consumers' options.
---------------------------------------------------------------------------

\600\ In the NPRM, the Commission noted that innovation and
entrepreneurship can, in turn, have positive effects on product
quality. See NPRM at 3492. The Commission did not make specific
findings on the effect of non-competes on consumer choice. However,
the Commission discussed the closely related questions of how non-
competes affect new business formation, innovation, concentration,
and consumer prices. See id. at 3490-93.
---------------------------------------------------------------------------

Such effects are less readily quantifiable than the other negative
effects of non-competes on product and service markets--i.e., the
negative effects on new business formation, innovation, concentration,
and consumer prices. It is thus unsurprising that there are not
reliable empirical studies of these effects. However, the Commission
received an outpouring of public comments on this issue. Hundreds of
commenters, primarily from the healthcare field, described how

[[Page 38400]]

non-competes reduce product and service quality and consumer choice.
The large number of comments the Commission received on this issue,
the wide variety of impacts commenters describe, and the fact that the
impacts commenters describe are overwhelmingly negative, indicate that
non-competes reduce product quality and consumer choice, further
bolstering the Commission's finding that non-competes tend to
negatively affect competitive conditions in product and service
markets.\601\
---------------------------------------------------------------------------

\601\ As described in Parts IV.B.3.b.i and ii, the Commission
finds that the effects of non-competes on new business formation and
innovation, standing alone, are sufficient to sustain its finding
that non-competes tend to negatively affect competitive conditions
in product and service markets.
---------------------------------------------------------------------------

The commenters who addressed the effects of non-competes on product
quality and consumer choice primarily discussed the healthcare
industry. The majority of these comments focused on how non-competes
harm patient care. Hundreds of physicians and other commenters in the
healthcare industry stated that non-competes negatively affect
physicians' ability to provide quality care and limit patient access to
care, including emergency care. Many of these commenters stated that
non-competes restrict physicians from leaving practices and increase
the risk of retaliation if physicians object to the practices'
operations, poor care or services, workload demands, or corporate
interference with their clinical judgment. Other commenters from the
healthcare industry said that, like other industries, non-competes bar
competitors from the market and prevent providers from moving to or
starting competing firms, thus limiting access to care and patient
choice. Physicians and physician organizations said non-competes
contribute to burnout and job dissatisfaction, and said burnout
negatively impacts patient care.
In addition, physicians and physician organizations stated that, to
escape non-competes, physicians often leave the area, and that this
severs many physician/patient relationships. These commenters stated
that non-competes therefore cause patients to lose the knowledge,
trust, and compatibility that comes with long-established
relationships. These commenters also said that strong physician/patient
relationships and continuity of care improve health outcomes,
particularly for complex, chronic conditions or patients who need
multiple surgeries. These commenters described how patients who lose
their physicians to non-competes either travel long distances to see
that physician, switch physicians, or lose access entirely if no other
physicians are available. One physician argued that taking away a
patient's ability to choose their provider violates the Patients' Bill
of Rights.\602\
---------------------------------------------------------------------------

\602\ See President's Advisory Commission on Consumer Protection
and Quality in the Health Care Industry, Consumer Bill of Rights and
Responsibilities, Executive Summary (1997), https://govinfo.library.unt.edu/hcquality/cborr/index.htm.
---------------------------------------------------------------------------

One medical society cited a 2022 survey of Louisiana surgeons in
which 64.4% of the surgeons believed non-competes force patients to
drive long distances to maintain continuity of care, and 76.7% believed
they force surgeons to abandon their patients if they seek new
employment.\603\ This study had a small sample size and thus the
Commission gives it limited weight, but the Commission notes that it
accords with the many comments the Commission received describing how
patients must drive long distances to maintain continuity of care--or
are unable to do so, resulting in harms to their health. Illustrative
comments on how non-competes affect the quality of patient care include
the following:
---------------------------------------------------------------------------

\603\ See William F. Sherman et al., The Impact of a Non-Compete
Clause on Patient Care and Orthopaedic Surgeons in the State of
Louisiana: Afraid of a Little Competition?, 14 Orthopedic Revs.
(Oct. 2022), https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9569414/.

As a primary care physician I truly hope to see [the
rule] move forward. I recently left my position at one company and
for a year commuted an hour to be outside of my non-compete radius.
I recently returned to my community and discovered I have more
patients than I can count who simply didn't get care for over a year
because they didn't want to find a new [primary care physician] but
also couldn't make the hour drive to see me at my new location. The
commute was annoying for me, but ultimately the only ones truly hurt
were patients. Let's stop hurting our patients by restricting their
ability to see their physicians.\604\
---------------------------------------------------------------------------

\604\ Individual commenter, FTC-2023-0007-19853.
---------------------------------------------------------------------------

My practice has operated since the 1990s in Danville,
Kentucky. We are the only cardiology practice that has been present
and has worked tirelessly to serve this rural community. The
practice was a private practice originally. Unfortunately, just as
most cardiac practices throughout the country have had to, our
practice had to come under the control of these hospital systems to
maintain its viability. . . . The CEO and the administration . . .
have squeezed us out and forced us to leave the area with the
employment contract non-compete in place. . . . I have spent the
last 6 months hugging patients, medical staff, nursing who are
stricken by the fact that we are being pushed out. Patients
desperately ask me how they can maintain care if they have to travel
up to an hour to see their doctors with this change. They worry how
they can pay for the steep gas prices to see their doctors. . . .
They are truly concerned for the health of their families. All the
while all I can do is tell them that my non-compete does not allow
me, their cardiologist for the past decade, to give them any advice
on how to maintain their care.\605\
---------------------------------------------------------------------------

\605\ Individual commenter, FTC-2023-0007-4072.
---------------------------------------------------------------------------

As a Physician, I had a non compete clause in my
contract that extended two counties wide (100 square miles). . . .
[W]hen I would not sign a contract amendment regarding pay that was
very unfavorable and nebulous I was called in and summarily
dismissed `no cause.' Because of that I had to work out of state and
my patients were instantly without a physician. The community did
not have enough physicians to be able to care for the patients who
now had no medical provider. During COVID this lack of access to
healthcare for patients most certainly led to increased unnecessary
illness and death. . . . Patients are suffering with access to
healthcare, and physician shortages are being exacerbated because
every time a physician has to leave because of a non compete clause
they start hiring and credentialing all over again and it can take
months for them to be able to work again.\606\
---------------------------------------------------------------------------

\606\ Individual commenter, FTC-2023-0007-4440.
---------------------------------------------------------------------------

Being a therapist, non-competes are extremely scary
when it comes to patient care. Some include date ranges in which we
cannot communicate with our patients, some of whom have severe
trauma histories or suicidal ideations. If a clinician changes
companies but is unable to continue meeting a patient, who is at
fault if there is an injury or death? . . . Some non-competes
include mileage in which a clinician cannot create their own company
or rent out an office within a certain radius--how is this a safe
practice? How can clients continue to work on their mental health
and desire to stay alive if they have to change clinicians due to a
noncompete clause? \607\
---------------------------------------------------------------------------

\607\ Individual commenter, FTC-2023-0007-4270.
---------------------------------------------------------------------------

Due to mistreatment and to escape workplace toxicity,
one of my colleagues left our practice in compliance to our non-
compete conditions, even though they caused great hardship. I, too,
wanted to leave, but could not because doing so would have harmed my
family's well being. What I witnessed in the aftermath was
unconscionable. There was a void in patient care and months later,
there still is a void. Not only was this physician required to move
quite a distance from the practice, he was forbidden to even inform
his patients that he was leaving. The practice in turn, did not
inform the patients, and when asked, just informed them that he was
no longer with the practice. Consequently, wait times to treat
cancers doubled and now have tripled.\608\
---------------------------------------------------------------------------

\608\ Individual commenter, FTC-2023-0007-2384.
---------------------------------------------------------------------------

I would like to open a new clinic in my town, but my
noncompete would disallow that from happening immediately.
Furthermore, I worry that my patients that need medical care
wouldn't be able to access it at my current clinic because the
providers

[[Page 38401]]

are booked out 6+ months, and if one left that would make those
immediately increase to nearly a year, which could potentially cause
my patient lasting damage. If I could open my own clinic locally
without the constraints of the noncompete, those patients would be
able to continue care as necessary with me, and I wouldn't feel
stuck with poor management worsening patient care for my
patients.\609\
---------------------------------------------------------------------------

\609\ Individual commenter, FTC-2023-0007-1206.
---------------------------------------------------------------------------

As a veterinarian, I can personally assure the FTC that
such restrictions have caused both death and permanent disability of
pets. . . . In nearly every scenario I have heard of, the veterinary
business that requires and enforces non-compete clauses is
underserving the pet-owning public. This is the current situation
for veterinary medicine on a national level. Hospitals are so
overwhelmed that they are not accepting new patients, turning away
emergency cases, and imposing extremely long (several months or
more) waiting lists for appointments and/or scheduled procedures. If
a hospital cannot accommodate the patients who require veterinary
care, that hospital is not able to compete with the existing demand
for services. . . . Is it fair for pet owners who cannot get their
pets in to see a veterinarian (even on emergency situations) to have
the veterinary hospitals who refuse to see their pets remove other
options for care via non-compete clauses? These clauses are being
blatantly abused by certain large veterinary businesses so that
these organizations can maintain a pool of potential patients (on
waiting lists) to draw from. Unfortunately, many of these dogs and
cats die while waiting to be seen. At least in my profession, the
non-compete concept has reached an epitome of unethical conduct. In
addition, economic growth has been stunted due to self-serving
greedy people in power. Please get rid of this horrible clause and
lets make sure pets and their owners get what they need, when they
need it.\610\
---------------------------------------------------------------------------

\610\ Individual commenter, FTC-2023-0007-0677.

Some hospital associations argued that a study of physician markets
\611\ shows that non-competes improve patient care. According to these
commenters, this research finds that non-competes make in-practice
referrals more likely, increasing revenue and wages and providing
patients with more integrated and better care. In response, the
Commission notes that while the study finds that non-competes make
physicians more likely to refer patients to other physicians within
their practice--increasing revenue for the practice--it makes no
findings on the impact on the quality of patient care. The Commission
further notes that pecuniary benefits to a firm cannot justify an
unfair method of competition.\612\
---------------------------------------------------------------------------

\611\ Lavetti, Simon, & White, supra note 82.
\612\ See supra note 305 and accompanying text.
---------------------------------------------------------------------------

Some medical practices argued that within-group referrals allow
physicians to coordinate care plans and simplify logistics, and that
non-competes protect the stability of those care teams to patients'
benefit. Some industry associations and hospitals argued that non-
competes improve patient choice and continuity of care because they
stop physicians from leaving a health provider, benefiting patients who
cannot follow the provider due to geographic or insurance limitations.
One physician association said physicians leaving jobs can be costly to
patients, who must transfer records and reevaluate insurance coverage.
The Commission notes that the vast majority of comments from
physicians and other stakeholders in the healthcare industry assert
that non-competes result in worse patient care. The Commission further
notes that the American Medical Association discourages the use of non-
competes because they ``can disrupt continuity of care, and may limit
access to care.'' \613\ In addition, there are alternatives for
improving patient choice and quality of care, and for retaining
physicians, that burden competition to a much less significant degree
than non-competes.
---------------------------------------------------------------------------

\613\ See, e.g., Comment of Am. Med. Ass'n, FTC-2023-0007-21017,
at 4-5 (citing AMA Code of Medical Ethics Opinion 11.2.3.1). After
the comment period closed, the AMA adopted a policy supporting
banning non-competes for physicians in clinical practice who are
employed by hospitals, hospital systems, or staffing companies,
though not those employed by private practices. This policy change
does not have legal effect. Andis Robeznieks, AMA Backs Effort to
Ban Many Physician Noncompete Provisions, Am. Med. Ass'n (Jun. 13,
2023), https://www.ama-assn.org/medical-residents/transition-resident-attending/ama-backs-effort-ban-many-physician-noncompete.
---------------------------------------------------------------------------

A related issue frequently raised in the comments is the impact
non-competes have on healthcare shortages. According to many
commenters, non-competes contribute to shortages by preventing
physicians from moving to areas where their skills and specialties are
needed; forcing physicians out of such areas; or forcing them out of
practice entirely due to contractual restrictions or burnout. Such
shortages, according to these commenters, decrease access to care,
increase wait times, lead to canceled procedures, and decrease the
quality of care. Many commenters stated that these effects of non-
competes are particularly acute in rural, underserved, and less
affluent areas that already have difficulty attracting healthcare
professionals. Some commenters argued that provider shortages can, in
combination with non-competes, create monopolies.
A smaller number of commenters from the healthcare industry argued
that non-competes alleviate healthcare shortages and prevent hospital
or facility closures by keeping physicians from leaving underserved
areas and reducing fluctuations in labor costs. Some of these
commenters asserted that a ban on non-competes would upend healthcare
labor markets, thereby exacerbating healthcare workforce shortages,
especially in rural and underserved areas. A medical society argued
that non-competes can allow groups to meet contractual obligations to
hospitals, as physicians leaving can prevent the group from ensuring
safe care. As the Commission notes, there are not reliable empirical
studies of these effects, and these commenters do not provide any.
However, the Commission notes that the rule will increase labor
mobility generally, which makes it easier for firms to hire qualified
workers.
Commenters in a variety of industries beyond healthcare markets
also provided a wide range of examples of how non-competes diminish the
quality of goods and services, including preventing businesses from
hiring experienced staff and creating worker shortages. Commenters
stated that, where firms in a market use non-competes, it can be
difficult for other firms to remain in the market, and consumers thus
lose the freedom to choose providers. Several comments pointed
favorably to the American Bar Association's longstanding ban on non-
competes for most lawyers to protect clients' freedom to choose their
lawyer, in contrast with other highly paid and highly skilled
professions such as physicians and their patients or clients.\614\
---------------------------------------------------------------------------

\614\ See Model Rule 5.6, supra note 532.
---------------------------------------------------------------------------

Commenters from outside the healthcare industry mainly focused on
how non-competes increase concentration within industries, which
reduces firms' incentive to innovate and results in consumers having
fewer choices. Other commenters described how non-competes lock highly
talented workers out of their fields or force them into jobs where they
are less productive, depriving the marketplace of the products and
services they would have developed. Illustrative examples of these
comments include the following:

As a software developer who often works under contracts
containing sections stipulating non-compete agreements, I have
observed first hand how they can harm the economy by bolstering
monopolies, such as in sectors where clientele only have a single
choice for meeting their engineering needs. Often, these clients
have no other options and are forced to meet whatever arbitrary
price point is set by the leading (sole)

[[Page 38402]]

company, and that company may in turn operate howsoever they choose
without feeling the need to adopt reasonable business practices that
might exist were there competition.\615\
---------------------------------------------------------------------------

\615\ Individual commenter, FTC-2023-0007-5818.
---------------------------------------------------------------------------

As an aspiring tree care professional, non-compete
agreements prevent me from switching employers/companies to access
better work conditions or opportunities. No tree service company has
ever invested in me. I learned to climb and saw while working for
Federal agencies (USDA and NPS), and also through self-education and
practice on my own. I believe that non-compete agreements have
adversely limited competition in the tree service industry. This
hurts employees who could do better if they were free to change
their place of employment, and it hurts consumers who have fewer
tree service providers to choose from.\616\
---------------------------------------------------------------------------

\616\ Individual commenter, FTC-2023-0007-1980.
---------------------------------------------------------------------------

I worked in a business supplying technology and
materiel considered critical for national defense. I was labeled an
expert in the field by my DoD customers and commended multiple times
for solving logistical and technical problems with protective
equipment during the previous two wars. I lead development contracts
from the DoD to advance the state-of-the-art in warfighter
protection, which set multiple records for figures of merit within
my business, and which our program manager volunteered was the most
exciting technology she had ever managed. When my business decided
to discontinue that technology and transfer me, my noncompete
agreement prevented me from continuing to support the DoD. I was
removed from consideration at another firm in the third round of
interviews because of my noncompete agreement--again, for a
technology my business had decided to not pursue and had transferred
me out of. So, instead of having the opportunity to advance my
career into management in the service of protecting warfighters, I
had to exit that industry and move laterally, into a different
industry that cannot value 20 years of my expertise, and which will
not further the defense of my country. If the FTC had nationalized a
prohibition on noncompete clauses two years ago, this would not have
happened, and I would have had the opportunity to advance my career,
improve my family's economic fortune, and continue to contribute to
our nation's defense.\617\
---------------------------------------------------------------------------

\617\ Individual commenter, FTC-2023-0007-4446.

Overall, the Commission believes that the large number of comments
it received on the issue of product quality and consumer choice and the
wide variety of overwhelmingly negative impacts commenters describe
further bolsters the Commission's finding that non-competes tend to
negatively affect competitive conditions in product and service
markets.
4. Prohibitions in Section 910.2(a)(1)
Based on the totality of the evidence, including its review of the
empirical literature, its review of the full comment record, and its
expertise in identifying practices that harm competition, the
Commission adopts Sec. 910.2(a)(1), which defines unfair methods of
competition related to non-competes with respect to workers other than
senior executives. Section 910.2(a)(1) provides that, with respect to a
worker other than a senior executive, it is an unfair method of
competition for a person to enter into or attempt to enter into a non-
compete clause; enforce or attempt to enforce a non-compete clause; or
represent that the worker is subject to a non-compete clause.
Part IV.A sets forth the Commission's determination that the
foregoing practices are unfair methods of competition under section 5,
and Parts IV.B.1 through IV.B.3 explain the findings that provide the
basis for this determination. In this Part IV.B.4, the Commission
explains the three prongs of Sec. 910.2(a)(1) and addresses comments
on proposed Sec. 910.2(a).\618\
---------------------------------------------------------------------------

\618\ Several commenters requested changes to proposed Sec.
910.2(a) to provide various exceptions to coverage under the final
rule. The Commission addresses these comments in Part V.C.
---------------------------------------------------------------------------

a. Entering Into or Attempting To Enter Into (Sec. 910.2(a)(1)(i))
Proposed Sec. 910.2(a) would have provided that it is an unfair
method of competition for an employer to, among other things, ``enter
into or attempt to enter into a non-compete clause with a worker.'' The
Commission adopts this same language in the final rule in Sec.
910.2(a)(1)(i). As a result, the final rule prohibits persons from
entering into or attempting to enter into non-competes with workers
other than senior executives as of the effective date. (Section
910.2(a)(2)(i) separately prohibits persons from entering into or
attempting to enter into non-competes with senior executives as of the
effective date.)
A business commenter requested that the Commission remove ``attempt
to enter into'' from Sec. 910.2(a) on the basis that it may encourage
workers to sue employers for contractual provisions that have no
practical effect on the worker or which are not finalized in any
employment agreement. The Commission disagrees that conduct that would
be covered by the attempt provision--such as presenting the worker with
a non-compete, even if the employer and worker do not ultimately
execute the non-compete--has no practical effect on the worker. The
Commission is concerned that such attempts to enter into non-competes
still have in terrorem effects that deter competition. For example,
workers presented with non-competes may not realize they are not bound
by them. Such workers may therefore refrain from seeking or accepting
other work or starting a business, yielding the same tendency of non-
competes to negatively affect competitive conditions that motivate this
final rule.
The Commission accordingly finalizes the language as proposed.
b. Enforcing or Attempting To Enforce (Sec. 910.2(a)(1)(ii))
Proposed Sec. 910.2(a) would have provided that it is an unfair
method of competition for an employer to, among other things,
``maintain with a worker a non-compete clause.'' In addition, proposed
Sec. 910.2(b)(1) would have provided that, to comply with this
prohibition on maintaining a non-compete, an employer that entered into
a non-compete with a worker prior to the compliance date must ``rescind
the non-compete no later than the compliance date.''
As elaborated in Part IV.E, the Commission has decided not to
finalize a rescission requirement. As a result, the Commission also
removes ``maintain'' from the text of Sec. 910.2(a), to avoid any
ambiguity about whether the final rule contains a rescission
requirement. Instead of a rescission requirement, the final rule
focuses more narrowly on the future enforcement of existing non-
competes with workers other than senior executives. It provides that,
with respect to a worker other than a senior executive, it is an unfair
method of competition for a person to enforce or attempt to enforce a
non-compete clause. An employer attempts to enforce a non-compete
where, for example, it takes steps toward initiating legal action to
enforce the non-compete, even if the court does not enter a final order
enforcing the non-compete.
For workers other than senior executives, this prohibition on
enforcing a non-compete applies to all non-competes, but affects only
enforcement or attempted enforcement conduct taken after the effective
date of the rule. In so doing, the Commission reduces the burden on
employers by eliminating the need to take steps to formally rescind
provisions of existing contracts, instead simply requiring that
employers refrain from enforcing or attempting to enforce in the future
(after the effective date) non-competes that are rendered unenforceable
by this provision of the rule.
As explained in Part IV.C, the Commission in the final rule does
not prohibit the future enforcement or attempted enforcement of
existing non-

[[Page 38403]]

competes with senior executives. The Commission considered whether to
take this approach for workers other than senior executives, but based
on the totality of the evidentiary record concludes that such non-
competes should not remain in force after the effective date for three
main reasons. First, existing non-competes with workers other than
senior executives negatively affect competitive conditions to a
significant degree, for the same reasons as new non-competes. The
Commission believes that non-competes with such workers that were
entered into before the effective date implicate the concerns described
in Part IV.B.3--relating to the negative effects of non-competes on
competitive conditions in labor, product, or service markets--to the
same degree as non-competes entered into as of the effective date. Of
course, the Commission notes that the empirical evidence quantifying
the harms to competition from non-competes by definition relates to
existing non-competes.
Second, for workers other than senior executives, existing non-
competes not only impose acute, ongoing harms to competition, they also
impose such harms on individual workers by restricting them from
engaging in competitive activity by seeking or accepting work or
starting their own business after their employment ends. As described
in Part IV.B.2.b, the Commission received thousands of comments from
workers that described non-competes as pernicious forces in their lives
that forced them to make choices that were detrimental to their
finances, their careers, and their families. These concerns are less
present for senior executives, who are far more likely than other
workers to have negotiated their non-compete and received compensation
in return, thereby mitigating this kind of acute, ongoing harm.
Third, because the Commission finds that non-competes with workers
other than senior executives generally are not bargained for and such
workers generally do not receive meaningful, if any, compensation for
non-competes, the practical considerations that are present with
respect to existing non-competes for senior executives (discussed in
Part IV.C.3) are far less likely to be present for other workers. For
these reasons, the Commission concludes that, consistent with the
proposed rule, existing non-competes with workers other than senior
executives should not remain in force after the effective date.
Several commenters argued that the Commission should allow all
existing non-competes to remain in effect. Some of these commenters
argued that the rule would upset bargained-for agreements. Commenters
asserted that workers who received benefits in exchange for agreeing to
non-competes would receive a windfall if such clauses cannot be
maintained and are no longer enforceable. A few of these commenters
also argued that invalidating existing non-compete agreements will
upset workers' economic interests because they will lose out on
enhanced compensation that they have received or expect to receive in
exchange for their non-competes. Some commenters contended that
invalidating existing non-competes would be especially harmful to
workers' interests in non-competes tied to particularly large amounts
of compensation, complex compensation arrangements, or unique forms of
compensation such as equity grants. Relatedly, some commenters
expressed concern that the NPRM did not explain whether employers could
recoup benefits already paid in exchange for non-competes. A few
commenters suggested that they have given workers confidential and
trade secret information in exchange for the worker agreeing to a non-
compete that may no longer be enforceable.
The Commission is not persuaded by comments arguing that the rule
would upset existing bargained-for agreements. As noted in Part IV.B
and Part IV.C, the Commission finds that workers who are not senior
executives are unlikely to negotiate non-competes or to receive
compensation for them. Moreover, the Commission has also determined
that non-competes with senior executives that predate the effective
date may be enforced,\619\ which will substantially reduce the number
of workers with complex compensation arrangements whose non-competes
are rendered unenforceable after the effective date.
---------------------------------------------------------------------------

\619\ See Part IV.C.3.
---------------------------------------------------------------------------

Other commenters argued that employers relied on the expectation of
a non-compete when deciding how much to invest in training their
workers or the extent to which they share trade secrets with their
workers. In response, the Commission notes that firms that are
concerned about retention have tools other than non-competes for
retaining workers, including fixed-duration employment contracts (i.e.,
forgoing at-will employment and instead making a mutual contractual
commitment to a period of employment) and providing improved pay and
benefits (i.e., competing on the merits to retain the worker's labor
services). In addition, while some workers that have received training
may leave a firm for a competitor, firms will also be able to attract
highly trained workers from competitors, and this increased job-
switching will likely lead to more efficient matching between workers
and employers overall.\620\
---------------------------------------------------------------------------

\620\ See Part IV.B.3.a.
---------------------------------------------------------------------------

The Commission is not persuaded by commenters who contended that
invalidating existing non-competes would disturb employer expectations
with respect to sharing trade secrets or other commercially sensitive
information. As explained in Part IV.D.2, the Commission finds that
employers have adequate alternatives to non-competes to protect these
interests, including trade secret law and NDAs, and that these
alternatives do not impose the same burden on competition as non-
competes. Some commenters contended that employers may not have
adequate alternatives in place for existing non-competes and that
former workers may not agree to new NDAs. But the Commission finds that
it is rare for an employer who entered into a non-compete agreement as
a means of protecting trade secrets or commercially sensitive
information to have not also entered into an NDA with the worker.\621\
This is especially true given that non-competes are generally less
enforceable than NDAs.\622\ In any event, nothing in the final rule
prevents employers from entering new NDAs with workers.
---------------------------------------------------------------------------

\621\ See, e.g., Balasubramanian, Starr, & Yamaguchi, supra note
74 at 35 (finding that 97.5% of workers with non-competes are also
subject to a non-solicitation agreement, NDA, or a non-recruitment
agreement, and 74.7% of workers with non-competes are subject to all
three provisions).
\622\ Camilla A. Hrdy & Christopher B. Seaman, Beyond Trade
Secrecy: Confidentiality Agreements that Act Like Noncompetes, 133
Yale L. J. 669, 676 (2024) (``Courts across jurisdictions routinely
give confidentiality agreements `more favorable treatment' than
noncompetes. And confidentiality agreements are not typically
subject to the same limitations that are applied to noncompetes. . .
. Overall, courts tend to apply a default rule of enforceability.'')
(internal citations omitted).
---------------------------------------------------------------------------

Some commenters contended that invalidating existing non-competes
would enable new employers to ``free ride'' off former employers'
investments in training. The Commission addresses comments about ``free
riding'' and training investments in Part IV.D.2.
Several comments argued that a final rule should not invalidate
existing non-competes because the economic impact is too unpredictable.
These commenters maintained that the number of individual employment
contracts that would be invalidated means that the economic impact
would be exceptionally widespread, and likely impossible to accurately
predict. In response, the Commission notes that it

[[Page 38404]]

has assessed the benefits and costs of the final rule and finds that
the final rule has substantial benefits that clearly justify the costs
(even in the absence of full monetization).\623\
---------------------------------------------------------------------------

\623\ See Part X.E.
---------------------------------------------------------------------------

c. Representing (Sec. 910.2(a)(1)(iii))
Proposed Sec. 910.2(a) would have provided that it is an unfair
method of competition for an employer to, among other things,
``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.'' The
Commission adopts the same language in the final rule. Pursuant to
Sec. 910.2(a)(1)(iii), it is an unfair method of competition for an
employer to represent that a worker other than a senior executive is
subject to a non-compete clause. The ``good faith'' language remains in
the final rule but, for clarity, it has been moved to Sec. 910.3,
which contains exceptions to the final rule.\624\
---------------------------------------------------------------------------

\624\ See Part V.C.
---------------------------------------------------------------------------

Under this ``representation'' prong, the final rule prohibits an
employer from, among other things, threatening to enforce a non-compete
against the worker; advising the worker that, due to a non-compete,
they should not pursue a particular job opportunity; or telling the
worker that the worker is subject to a non-compete. The Commission
believes that this prohibition on representation is important because
workers often lack knowledge of whether employers may enforce non-
competes.\625\ In addition, the evidence indicates that employers
frequently use non-competes even when they are unenforceable under
State law, suggesting that employers may believe workers are unaware of
or unable to vindicate their legal rights.\626\ Employers can exploit
the fact that many workers lack knowledge of whether non-competes are
unenforceable under State law by representing to workers that they are
subject to a non-compete when they are not or when the non-compete is
unenforceable. Such misrepresentations can have in terrorem effects on
workers, causing them to refrain from looking for work or taking
another job, thereby furthering the adverse effects on competition that
the Commission is concerned about.
---------------------------------------------------------------------------

\625\ See Prescott & Starr, supra note 413 at 10-11.
\626\ See Starr, Prescott, & Bishara, supra note 68 at 81.
---------------------------------------------------------------------------

In addition, threats to litigate against a worker--even where the
worker is aware of the Commission's rule and believes the non-compete
is unenforceable--may deter the worker from seeking or accepting work
or starting their own business. As explained in Part IV.B.2.b.ii, many
commenters--including highly paid workers--explained in their comments
that they believed their non-compete was unenforceable, but they
nevertheless refrained from seeking or accepting work or starting their
own business because they could not afford to litigate against their
employer for any length of time. For this reason, the Commission
believes it is important for the final rule to prohibit employers not
only from enforcing or attempting to enforce non-competes against
workers other than senior executives, but also threatening to do so.
A commenter suggested limiting the ``representation'' prong to
instances where the employer has no good-faith basis to believe the
non-compete is valid ``under local or State law,'' even if the non-
compete is invalid under the final rule. The Commission does not adopt
this approach because representing to workers that they are subject to
a non-compete, where the rule provides that the non-compete is
unenforceable, would mislead the worker and would tend to deter them
from competing against the employer by seeking or accepting work or
starting a business.

C. Section 910.2(a)(2): Unfair Methods of Competition--Non-Competes
With Senior Executives

In the NPRM, the Commission proposed to prohibit non-competes--
including non-competes entered into before the effective date--with all
workers.\627\ The Commission preliminarily found that all non-competes,
whether with senior executives or other workers, were restrictive
conduct that negatively affected competitive conditions.\628\ However,
while the Commission preliminarily found that non-competes with workers
other than senior executives were exploitative and coercive, the
Commission stated that this finding did not apply to senior
executives.\629\ The Commission requested comment on that preliminary
finding, as well as on whether non-competes with senior executives
should be excluded from the rule or otherwise subject to a different
standard. The NPRM did not define the term ``senior executive,'' but
sought comment on potential approaches to defining the term.\630\
---------------------------------------------------------------------------

\627\ NPRM, proposed Sec. 910.2(a).
\628\ Id. at 3500.
\629\ Id. at 3502-04.
\630\ Id. at 3520.
---------------------------------------------------------------------------

In the final rule, the Commission does not find that senior
executives--specifically, highly paid workers with the highest levels
of authority in an organization--are exploited or coerced in connection
with non-competes, and it describes the record on this issue in Part
IV.C.1. The Commission does, however, find that non-competes with
senior executives are an unfair method of competition, based on the
totality of the evidence, including its review of the empirical
literature, its review of the full comment record, and its expertise in
identifying practices that impair competitive conditions in the
economy. Specifically, the Commission finds that such non-competes are
restrictive and exclusionary conduct that tends to negatively affect
competitive conditions in product and service markets and labor
markets. Indeed, non-competes with senior executives may tend to
negatively affect competitive conditions in product and service markets
to an even greater degree than non-competes with other workers, given
the outsized role senior executives play in forming new businesses and
setting the strategic direction of firms with respect to innovation.
The Commission explains the basis for these findings in Part IV.C.2.
Because non-competes with senior executives are not exploitative or
coercive, however, this subset of workers is less likely to be subject
to the kind of acute, ongoing harms currently being suffered by other
workers subject to existing non-competes. In addition, commenters
raised credible concerns about the practical impacts of extinguishing
existing non-competes for senior executives. For these reasons, as
described in Part IV.C.3, the Commission allows existing non-competes
with senior executives to remain in force--unlike existing non-competes
with all other workers, which employers may not enforce after the
effective date.
In Part IV.C.4, the Commission explains the final rule's definition
of ``senior executive'' and the related definitions it is
adopting.\631\ The Commission finds that the final rule's definition of
``senior executive'' appropriately captures the workers that are more
likely to have complex compensation packages that present practical
challenges to untangle, and who are less likely to be exploited or
coerced in connection with their non-competes. To capture this subset
of

[[Page 38405]]

workers for whom the Commission decides to leave existing non-competes
unaffected, the final rule adopts a definition of senior executive that
uses both an earnings test and a job duties test. Specifically, the
final rule defines the term ``senior executive'' to refer to workers
earning more than $151,164 who are in a ``policy-making position'' as
defined in the final rule.\632\
---------------------------------------------------------------------------

\631\ See Sec. 910.1.
\632\ Id.
---------------------------------------------------------------------------

Finally, in Part IV.C.5, the Commission explains the regulatory
text it is adopting in Sec. 910.2(a)(2), which defines unfair methods
of competition related to non-competes with senior executives.
1. The Commission Does Not Find That Non-Competes With Senior
Executives Are Exploitative or Coercive
The Commission stated in the NPRM that its preliminary finding that
non-competes are exploitative and coercive did not apply to senior
executives. The Commission stated that non-competes with 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.\633\ The Commission also stated that such non-competes are
unlikely to be exploitative or coercive at the time of the executive's
potential departure, because senior executives are likely to have
bargained for a higher wage or more generous severance package in
exchange for agreeing to the non-compete.\634\ The Commission sought
comment on whether there are other categories of highly paid or highly
skilled workers (i.e., other than senior executives) who are not
exploited or coerced in connection with non-competes.\635\
---------------------------------------------------------------------------

\633\ NPRM at 3503.
\634\ Id. at 3504.
\635\ Id. at 3503-04.
---------------------------------------------------------------------------

Based on the totality of the record, including the many comments
submitted on these questions, the Commission finds that senior
executives--specifically, highly paid workers with the highest levels
of authority in an organization--are substantially less likely than
other workers to be exploited or coerced in connection with non-
competes. For these reasons, the Commission does not find that non-
competes with senior executives are exploitative or coercive.
There is little empirical evidence on the question of whether non-
competes with senior executives are exploitative or coercive. A 2006
study of non-competes with CEOs finds that many of these workers
negotiated a severance period as long or longer than their non-compete
period, making it easier to sit out of the market.\636\ However, this
study was limited to very-high-earning CEOs at large public companies--
the average total compensation of the CEOs studied was $1.65 million
\637\--so its findings do not necessarily capture the experiences of
other senior executives. Many Americans work in positions with ``senior
executive'' classifications. According to BLS, there were almost 3.4
million ``top executives'' in the U.S. in 2022 at firms under private
ownership, and the median income for these workers was $99,240.\638\
---------------------------------------------------------------------------

\636\ 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).
\637\ Id. at 244.
\638\ BLS, Occupational Employment and Wage Statistics, Tables
Created by BLS, https://www.bls.gov/oes.tables.htm. These data are
from the May 2022 National XLS table for Top Executives under
private ownership.
---------------------------------------------------------------------------

The comment record on whether senior executives experience
exploitation and coercion in relation to their non-competes is mixed.
Many commenters asserted that, because some senior executives negotiate
their non-competes 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, and thus their
non-competes are not exploitative or coercive. Several commenters
stated that senior executives frequently negotiate non-competes for
valuable consideration and/or typically agree to non-competes only in
exchange for compensation. Some senior executives said they were not
exploited or coerced in connection with non-competes.\639\ Several
commenters agreed with the Commission's preliminary finding that senior
executives often obtain the assistance of counsel with respect to non-
competes. Some commenters stated that to the extent a non-compete is
not exploitative or coercive at the time of contracting, it is also not
exploitative or coercive at the time of departure. One CEO stated that
non-competes should be permissible for senior executives when they are
entered into in exchange for severance and when the senior executive
leaves voluntarily.
---------------------------------------------------------------------------

\639\ For the sake of readability, the Commission refers to the
commenters based on how they described themselves. For example, if a
commenter said they were a senior executive, the Commission refers
to them as a senior executive (rather than as a ``self-described
senior executive'').
---------------------------------------------------------------------------

The Commission notes that a relatively small number of self-
identified senior executives submitted comments in their personal
capacity. While the Commission did receive some comments from self-
identified senior executives suggesting that their non-competes were
exploitative and coercive, such comments were far less common than for
other workers. However, some senior executives did report experiencing
similar issues of exploitation and coercion. Several senior executives
said that their non-competes were required and non-negotiable. Multiple
senior executives described their own non-competes as ``one-sided'' in
favor of the employer. Some senior executives said they were not given
consideration for the non-compete, and even some who said they received
consideration still said their non-competes were exploitative and
coercive. For example, some senior executives said they: (1) were
required to sign a non-compete under threat of losing their job or
their earned compensation; (2) were forced into a stock share buyout
that included a non-compete; or (3) could obtain long-term compensation
only if they signed a non-compete. Two advocacy groups stated that many
senior executives may lack power to avoid non-competes and that
employers still hold most of the leverage in employment negotiations,
even with respect to senior executives. An employment law firm stated
that in its experience, it had not seen higher compensation for senior
executives and other highly paid workers in jurisdictions where non-
competes were allowed, and that employers rarely provide compensation
for non-competes. The firm said that senior executives and other highly
paid workers are more likely to receive severance payments, but such
payments are paid only in some cases. It said that even when paid, the
severance payments often do not fully compensate for what a senior
executive could have otherwise earned during the non-compete period.
Furthermore, several self-identified senior executives said they
felt unable to leave their company because of their non-competes. Many
of these commenters said they feared being unemployed. Some senior
executives said they feared or could not afford litigation, while two
senior executives said that they could not afford to fight non-competes
they believed were unenforceable. Several self-identified senior
executives, having spent their careers in one industry, said they were
forced to sit out of the market for long periods, forgoing earnings and
the ability to work. Others reported struggling to find a job and
suffering

[[Page 38406]]

financially, including living on Social Security or nearing bankruptcy.
One law firm specializing in executive compensation said many
senior executives may have achieved top roles at companies because they
have spent decades in the same industry and would struggle to find work
with firms other than competitors. Another law firm said senior
executives blocked from an industry could lose their long-cultivated
reputation in the industry and, as a result, time out of an industry
could harm their careers. Worker advocacy organizations and a law firm
said senior executives tend to be relatively older and, as older
workers are forced out of the job market, they are likely to be losing
out on increasingly scarce employment opportunities relative to their
younger counterparts. Another advocacy group argued that the Commission
did not provide sufficient evidence to support its preliminary finding
that non-competes are not exploitative and coercive for senior
executives. A few commenters suggested that senior executives from
historically marginalized groups may be paid less and have less
bargaining power than other senior executives.\640\
---------------------------------------------------------------------------

\640\ One of those commenters cited two USA Today articles that
examined Federal workforce records for 88 companies in the S&P 100
to assess the number of Asian and Latina women in executive
positions. The articles did not include the underlying data used for
the evaluation. See Jessica Guynn & Jayme Fraser, Asian Women Are
Shut Out of Leadership at America's Top Companies. Our Data Shows
Why, USA Today (Apr. 25, 2022), https://www.usatoday.//money/2022/
04/25/asian-women-executives-discrimination-us-companies/7308310001/
?gnt-cfr=1; Jessica Guynn & Jayme Fraser, Only Two Latinas Have Been
CEOs at a Fortune 500 Company: Why So Few Hispanics Make It to the
Top, USA Today (Aug. 2, 2022), https://www.usatoday.com/story/money/
2022/08/02/hispanic-latina-business-demographics-executive//?gnt-
cfr=1. These news reports find a disparity in the number of Asian
and Latina women in senior executive roles at these companies but
make no specific findings on bargaining power. While lack of
representation and other factors may impact bargaining power, the
Commission believes that these two articles (with no underlying data
provided) are insufficient evidence at this time to find
exploitation and coercion with respect to this subset of senior
executives.
---------------------------------------------------------------------------

Critically, the Commission received an outpouring of comments
indicating that highly paid workers who are not senior executives
(i.e., who are not workers with the highest levels of authority in an
organization) are often coerced or exploited via non-competes. The
Commission received many comments from workers in relatively higher-
wage fields--such as medicine, engineering, finance and insurance, and
technology--who stated that employers exploited and coerced them
through the use of non-competes.\641\ The vast majority of higher-wage
workers who are not senior executives reported that they lacked
bargaining power in relation to their employer; did not negotiate their
non-compete or receive compensation for it; and/or were not informed of
the non-compete until after they received the job offer. Many of these
workers stated that their non-compete was hidden or obscured; that
their employers misled them about the terms of a non-compete; and/or
that the non-compete was confusingly worded or vague. In addition, many
high-wage workers recounted how non-competes coerced them into
refraining from competing against their employer by forcing them to
stay in jobs they wanted to leave or forcing them to leave their
profession, move their families far away, and/or commute long
distances. And a large share of high-wage workers argued that even
where their non-competes were overbroad and likely unenforceable, they
were deterred from seeking or accepting other work or starting a
business by the threat of a lawsuit from their employer, which they
said would be ruinous to their finances and professional
reputations.\642\ The Commission accordingly finds that higher-wage
workers who are not senior executives are often exploited and coerced
through employers' use of non-competes.
---------------------------------------------------------------------------

\641\ See Part IV.B.2.b.i-ii.
\642\ See Part IV.B.2.b.ii.
---------------------------------------------------------------------------

In addition, the Commission believes it is appropriate to conclude
that lower-earning workers, regardless of their job title or function
in an organization, are more likely to be exploited or coerced in
connection with non-competes. As noted, many workers classified as
``top executives'' make under $100,000. Commenters did not self-report
their income, so the Commission cannot definitively determine that the
self-identified senior executives who reported exploitation and
coercion are lower-wage senior executives. Because of their incomes,
however, lower-wage senior executives are likely subject to many of the
same exploitative and coercive factors that affect other workers, such
as the inability to afford a non-compete lawsuit, forgo work for a
lengthy period, leave the field, or relocate.\643\ Comments from some
senior executives confirmed that they did not have sufficient
bargaining power to negotiate the non-compete or consideration for it,
suffered serious financial harm from non-competes, and could not afford
to litigate their non-competes. Accordingly, the Commission finds that
a mere job title alone is insufficient to confer bargaining power on a
worker, and lower-wage senior executives can be subject to the same
exploitation and coercion that other workers face.
---------------------------------------------------------------------------

\643\ See id.
---------------------------------------------------------------------------

However, having considered the comments and the available empirical
evidence on this question, the Commission does not find that non-
competes with highly paid workers who are also senior executives are
likely to be exploitative or coercive. The Commission stresses that it
is not affirmatively finding that such non-competes can never be
exploitative or coercive. The Commission has simply determined the
record before it is insufficient to support such a finding at this
time.
2. The Use of Non-Competes With Senior Executives is an Unfair Method
of Competition Under Section 5
While the Commission does not find that non-competes with senior
executives are exploitative and coercive, the Commission determines
that these non-competes are nonetheless unfair methods of competition,
for the reasons described herein.
To determine whether conduct is an unfair method of competition
under section 5, the Commission assesses two elements: (1) whether the
conduct is a method of competition, as opposed to a condition of the
marketplace and (2) whether it is unfair, meaning that it goes beyond
competition on the merits. The latter inquiry has two components: (a)
whether the conduct has indicia of unfairness and (b) whether the
conduct tends to negatively affect competitive conditions. These two
components are weighed according to a sliding scale.\644\
---------------------------------------------------------------------------

\644\ See Part II.F.
---------------------------------------------------------------------------

Non-competes with senior executives satisfy all the elements of the
section 5 inquiry. As described in Part IV.C.2.a, these non-competes
are methods of competition. As described in Part IV.C.2.b, these non-
competes are facially unfair conduct because they are restrictive and
exclusionary. And as described in Part IV.C.2.c, these non-competes
tend to negatively affect competitive conditions in product and service
markets and in labor markets. Because the Commission finds that non-
competes with senior executives are unfair methods of competition, the
Commission declines to exclude them from the final rule. However, as
described in Part IV.C.3, the final rule allows existing non-competes
with senior executives to remain in effect, due to the considerations
described therein.

[[Page 38407]]

a. The Commission Finds That Non-Competes With Senior Executives are a
Method of Competition, Not a Condition of the Marketplace
With respect to the first element--whether conduct is a method of
competition--the Commission finds that non-competes with senior
executives are a method of competition for the same reasons as non-
competes with other workers.\645\
---------------------------------------------------------------------------

\645\ See Part IV.B.1.
---------------------------------------------------------------------------

b. Non-Competes With Senior Executives are Facially Unfair Conduct
Because They are Restrictive and Exclusionary
In Part IV.B.2.a, the Commission finds that non-competes with
workers other than senior executives are facially unfair conduct
because they are restrictive and exclusionary. The Commission finds
that non-competes with senior executives are facially unfair conduct
for the same reasons.
Like non-competes for all other workers, the restrictive nature of
non-competes with senior executives is evident from their name and
function: non-competes restrict competitive activity. They prevent
senior executives from seeking or accepting other work or starting a
business after leaving their job. And like non-competes for all other
workers, non-competes with senior executives are exclusionary because
they impair the opportunities of rivals. Where a worker is subject to a
non-compete, the ability of a rival firm to hire that worker is
impaired. In addition, where many workers in a market are subject to
non-competes, the ability of firms to expand into that market, or
entrepreneurs to start new businesses in that market, is impaired.
While non-competes may impair the opportunities of rivals in all labor
markets, non-competes for senior executives are especially pernicious
in this regard. Senior executives are relatively few in number, are
bound by non-competes at high rates,\646\ and have highly specialized
knowledge and skills. Therefore, it can be extremely difficult for
existing firms and potential new entrants to hire executive talent and
to form the most productive matches.
---------------------------------------------------------------------------

\646\ See Part I.B.2 (noting studies estimating that about two-
thirds of senior executives work under non-competes).
---------------------------------------------------------------------------

Because senior executives are often compensated in return for their
promise not to compete, some commenters argue that non-competes with
senior executives are not unfair methods of competition. However,
agreements can present concerns under the antitrust laws even when both
parties benefit. Here, non-competes with senior executives are not
unfair methods of competition under section 5 because they are unfair
to the individual executive, but because they tend to negatively impact
competitive conditions--i.e., harm competition in product and service
markets, as well as in labor markets--by imposing serious negative
externalities on other workers, rivals, and consumers.\647\
---------------------------------------------------------------------------

\647\ See Part IV.C.2.i-ii (describing the negative effects of
non-competes with senior executives on markets for products and
services and labor markets).
---------------------------------------------------------------------------

c. Non-Competes With Senior Executives Tend To Negatively Affect
Competitive Conditions
The Commission finds non-competes with senior executives tend to
negatively affect competitive conditions in product and service markets
and in labor markets. As explained in Part II.F, the legal standard for
an unfair method of competition under section 5 requires only a
tendency to negatively affect competitive conditions. The inquiry does
not turn on whether the conduct directly caused actual harm in a
specific instance. Here, the tendency of non-competes to impair
competition is obvious from their nature and function, as it is for
non-competes with workers who are not senior executives. And even if
this tendency were not facially obvious, the evidence confirms that
non-competes with senior executives do in fact negatively affect
competitive conditions.
i. Non-Competes With Senior Executives Tend To Negatively Affect
Competitive Conditions in Product and Service Markets
In the NPRM, the Commission stated that non-competes with senior
executives may harm competition in product and service markets in
unique ways.\648\ The Commission stated that non-competes with senior
executives may contribute more to negative effects on new business
formation and innovation than non-competes with other workers, to the
extent that senior executives may be likely to start competing
businesses, be hired by potential entrants or competitors, or develop
innovative products and services.\649\ The Commission also stated that
non-competes with 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.\650\ The Commission
preliminarily concluded that, as a result, prohibiting non-competes for
senior executives may have relatively greater benefits for consumers
than prohibiting non-competes for other workers.\651\
---------------------------------------------------------------------------

\648\ NPRM at 3502.
\649\ Id. at 3513.
\650\ Id.
\651\ Id.
---------------------------------------------------------------------------

Based on the Commission's expertise and after careful review of the
rulemaking record, including the empirical research and the public
comments, the Commission finds that non-competes with senior executives
tend to negatively affect competitive conditions in markets for
products and services, inhibiting new business formation and
innovation.
Non-Competes With Senior Executives Inhibit New Business Formation and
Innovation
In Part IV.B.3.b, the Commission described the extensive empirical
evidence indicating that non-competes inhibit new business formation
and innovation. The Commission's finding in Part IV.B.3.b that non-
competes inhibit new business formation and innovation does not examine
non-competes with senior executives specifically. However, the
Commission finds that non-competes with senior executives inhibit new
business formation and innovation at least as much as non-competes with
other workers and likely to a greater extent, given the outsized role
of senior executives in forming new businesses, serving on new
businesses' executive teams, and setting the strategic direction of
businesses with respect to innovation.
Specifically, non-competes with senior executives tend to
negatively affect competitive conditions in product and service markets
in three ways. First, non-competes with senior executives inhibit new
business formation. In Part IV.B.3.b.i, the Commission finds that non-
competes with workers other than senior executives inhibit new business
formation. The Commission finds that non-competes with senior
executives inhibit new business formation as much as non-competes with
other workers and likely to a greater extent, due to the important role
senior executives play in new business formation.
Senior executives are particularly well-positioned to form new
businesses because of their strategic expertise and business acumen;
knowledge of multiple facets of their industries; experience making
policy decisions for businesses; and ability to secure financing.
Senior executives are also often crucial to the formation of startups,
because startups often begin by

[[Page 38408]]

forming a leadership team, which is often comprised of experienced and
knowledgeable executives from elsewhere in the industry.\652\ Empirical
research shows that when startups hire top management teams from other
firms, they are more likely to grow beyond their initial stages \653\
and that top managers' experience in an industry allows startups to
grow more quickly.\654\ Additionally, empirical research finds that
startups that hire top management teams with experience are more likely
to become successful businesses.\655\ Empirical research also finds
that, in addition to experience, top management teams that have worked
together in the past are more successful than those that have not.\656\
For these reasons, non-competes with senior executives not only inhibit
new business formation by blocking the executives from forming new
businesses; they also prevent other potential founders from forming new
businesses, because potential founders are less likely to start new
businesses when they are unable to assemble the executive team they
need because so many executives in the industry are tied up by non-
competes. By inhibiting new business formation, these non-competes
deprive product and service markets of beneficial competition from new
entrants--competition that in turn tends to benefit consumers through
lower prices or better product quality.
---------------------------------------------------------------------------

\652\ See, e.g., Leslie Crowe, How to Hire Your First Leadership
Team (Oct. 24, 2023), https://baincapitalventures.com/insight/how-to-hire-your-first-leadership-team-as-a-startup-founder/.
\653\ Bradley Hendricks, Travis Howell, & Christopher Bingham,
How Much Do Top Management Teams Matter in Founder[hyphen]Led
Firms?, 40 Strategic Mgmt. J. 959 (2019).
\654\ Yasemin Y. Kor, Experience-Based Top Management Team
Competence and Sustained Growth, 14 Org. Sci. 707 (2003).
\655\ Agnieszka Kurczewska & Micha[lstrok] Mackiewicz, Are
Jacks-of-All-Trades Successful Entrepreneurs? Revisiting Lazear's
Theory of Entrepreneurship, 15 Baltic J. of Mgmt. 411 (2020).
\656\ Kathleen M. Eisenhardt, Top Management Teams and the
Performance of Entrepreneurial Firms, 40 Small Bus. Econ. 805
(2013).
---------------------------------------------------------------------------

Second, non-competes with senior executives inhibit innovation. In
Part IV.B.3.b.ii, the Commission finds that non-competes with workers
other than senior executives inhibit innovation. The Commission finds
that non-competes with senior executives inhibit innovation at least as
much as non-competes with other workers and likely to a greater extent,
because senior executives play a crucial role in setting the strategic
direction of firms with respect to innovation.
Non-competes with senior executives inhibit innovation by impeding
efficient matching between workers and firms. As described in Part
IV.B.3.a, labor markets function by matching workers and employers. The
same is true for senior executives. Executives compete for roles at
firms, and firms compete to attract (often highly sought-after)
executives; executives choose the role that best meets their
objectives, and firms choose the executive who best meets theirs. Non-
competes impede this competitive process by blocking executives from
pursuing new opportunities (i.e., positions that are within the scope
of their non-compete) and by preventing firms from competing to attract
their talent. Thus, because non-competes are prevalent, the quality of
the matches between executives and firms suffers.
By inhibiting efficient matching between firms and executives, non-
competes frustrate the ability of firms to hire executives who can best
maximize the firm's capacity for innovation. Senior executives play an
important role in advancing innovation at firms.\657\ Senior executives
are often a fundamental part of the innovative process, guiding the
strategic direction of the firm in terms of topics of new research and
the depth of new research; determining the allocation of R&D funding;
and making the decision to develop (and supervising the development of)
new products and services.\658\
---------------------------------------------------------------------------

\657\ See, e.g., Jean-Philippe Deschamps, Innovation Leaders:
How Senior Executives Stimulate, Steer and Sustain Innovation (John
Wiley & Sons, 2009); Jean-Philippe Deschamps & Beebe Nelson,
Innovation Governance: How Top Management Organizes and Mobilizes
For Innovation (John Wiley & Sons, 2014).
\658\ Christopher Kurzhals, Lorenz Graf[hyphen]Vlachy, & Andreas
K[ouml]nig, Strategic Leadership and Technological Innovation: A
Comprehensive Review and Research Agenda, 28 Corp. Governance: An
Int'l Review 437 (2020); Pascal Back & Andreas Bausch, Not If, But
How CEOs Affect Product Innovation: A Systematic Review and Research
Agenda, 16 Int'l J. of Innovation and Tech. Mgmt. 1930001 (2019);
Vassilis Papadakis & Dimitris Bourantas, The Chief Executive Officer
as Corporate Champion of Technological Innovation: An Empirical
Investigation, 10 Tech. Analysis & Strategic Mgmt. 89 (1998)
(finding that CEO characteristics significantly influence
technological innovation, and that the influence is particularly
powerful for new product introductions).
---------------------------------------------------------------------------

Research shows that labor mobility among senior executives may tend
to foster innovation. Empirical research finds that executives with
shorter job tenures tend to engage in more innovation than those who
are longer tenured at firms.\659\ In addition, empirical research shows
that the strength of executives' external networks--which are likely
stronger among executives hired externally--increase the rate of
innovation.\660\ Finally, when senior executives are hired by new
companies, they bring their experience and understanding of the
industry, which may cross-pollinate with the capabilities of the new
company, cultivating new research which would not otherwise be
achieved.\661\ By inhibiting efficient matching between executives and
firms, non-competes impede the ability of firms to develop innovative
products and services that benefit consumers.
---------------------------------------------------------------------------

\659\ Vincent L. Barker III & George C. Mueller, CEO
Characteristics and Firm R&D Spending, 48 Mgmt. Sci. 782 (2002).
\660\ Qing Cao, Zeki Simsek, & Hongping Zhang, Modelling the
Joint Impact of the CEO and the TMT on Organizational Ambidexterity,
47 J. of Mgmt. Stud. 1272 (2010); Olubunmi Faleye, Tunde Kovacs, &
Anand Venkateswaran, Do Better-Connected CEOs Innovate More?, 49 J.
of Fin. And Quant. Analysis 1201 (2014).
\661\ See, e.g., Orly Lobel, Talent Wants to Be Free (Yale Univ.
Press, 2013).
---------------------------------------------------------------------------

Furthermore, empirical research shows that better matching among
executives and firms drives productivity as well as innovation. When
firms and executives have a higher quality match, the firm as a whole
is more productive.\662\ By inhibiting efficient matching between firms
and executives, non-competes tend to reduce the productivity of firms.
---------------------------------------------------------------------------

\662\ Yihui Pan, The Determinants and Impact of Executive-Firm
Matches, 63 Mgmt. Sci. 185 (2017); Matthew Ma, Jing Pan, & Xue Wang,
An Examination of Firm-Manager Match Quality in the Executive Labor
Market (2021), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3067808.
---------------------------------------------------------------------------

In theory, firms that seek to hire an executive could just pay the
executive's employer (or former employer) to escape the non-compete.
However, research by Liyan Shi describes how non-competes with senior
executives force firms 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.'' \663\
---------------------------------------------------------------------------

\663\ Shi, supra note 84 at 427.
---------------------------------------------------------------------------

Shi explains that firms and executives jointly create market power
by entering into non-competes and excluding rivals from hiring
experienced labor in a competitive labor market. The existence of a
non-compete forces rivals to make an inefficiently high buyout payment,
where the inefficiency arises due to the market power of the incumbent
firm created by the non-compete. Rival firms must either make these
payments, which therefore lead to deadweight economic loss, or forgo
the payment--and, consequently, the ability to hire a talented
executive (and perhaps the ability to enter the market at all, for
potential new firms).\664\ New and small businesses in particular might
be unable to afford these buyouts. By calibrating

[[Page 38409]]

this theoretical model to data on executive non-competes and executive
compensation, the study shows that banning non-competes would result in
nearly optimal social welfare gains.
---------------------------------------------------------------------------

\664\ Id.
---------------------------------------------------------------------------

Shi notes that 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--all of which
tend to be the case for senior executives--there is no way for the
market to fill the gap created by non-competes.
Some of the evidence in this study arises from analysis of non-
compete use coupled with non-compete enforceability. Other evidence in
the study, including the finding that a ban on non-competes is close to
optimal, relies not on use at the individual level, but on prevalence
of non-competes across a labor market. The latter approach does not
rely, therefore, on comparing individuals with and without non-
competes, and is therefore not subject to the estimation bias that
leads the Commission to give less weight to evidence based on the use
of non-competes.
Relevant Comments and Commission Responses
Many commenters stated that non-competes with senior executives
reduce new business formation and innovation, confirming the
Commission's findings. Several senior executives recounted personal
experiences in which a non-compete prevented them from starting a
business. A tech executive stated that they knew many tech executives
who would have left their roles to start within-industry spinoffs if
not for their non-competes. A senior executive stated that they had
planned to start a small business that would not have harmed the former
employer but had signed a non-compete that prevented them from doing
so. A former executive stated that they were sued after starting a new
business despite confirming with the CEO of their former employer that
doing so would not violate the non-compete. Another senior executive
said their non-compete prevented them from taking a job at a smaller,
more innovative company in their industry. Some commenters warned that
permitting non-competes for senior executives would reinforce dominant
positions for industry incumbents who can foreclose new entrants from
access to critical talent and expertise. An advocate for startups
stated that small businesses significantly benefit from mentorship from
experienced founders, which can be inhibited by non-competes.
Other commenters argued that the Commission should exclude senior
executives from coverage under the final rule because doing so would
benefit competition in product and service markets. These commenters
generally stated that non-competes may promote innovation by
encouraging firms to make productivity-enhancing investments, such as
investments in developing trade secrets. The Commission does not
believe that non-competes are needed to protect valuable firm
investments. As discussed in Part IV.D, the Commission finds that
employers have less restrictive alternatives for protecting valuable
investments and that these alternatives are available for senior
executives as well as for other workers.
In addition, when assessing how non-competes with senior executives
affect competition in product and service markets, the Commission
believes it is important to consider the net impact. It is possible
that the effects described by these commenters and the effects
described by the Commission earlier in this Part IV.C.2.c.i can be
occurring at the same time. That is, a non-compete with a senior
executive might in some instances be protecting a firm's investments in
a manner that is productivity-enhancing, holding all else equal. At the
same time, however, that same non-compete may restrict the executive's
ability to start a new business after leaving the firm. And even that
same non-compete can--and certainly non-competes in the aggregate do--
prevent the most efficient match between senior executives and the
firms that can make the highest and best use of their talents, and
decrease knowledge flow between firms, which limits the cross-
pollination of innovative ideas. What the empirical evidence shows is
that overall, i.e., in net effect, non-competes reduce new business
formation and innovation,\665\ indicating that the tendency of non-
competes to inhibit new business formation and innovation more than
counteracts any effect of non-competes on promoting new business
formation and innovation by protecting a firm's investments.
---------------------------------------------------------------------------

\665\ See Part IV.B.3.b.i-ii.
---------------------------------------------------------------------------

A commenter--referencing the Shi study--argued that banning buyout
clauses in non-competes would enhance economic efficiency relative to
banning non-competes altogether. Other commenters, including Shi, the
author of the study, disagreed with this claim.\666\ In response to
these comments, the Commission finds that prohibiting buyout clauses
would not enhance efficiency relative to prohibiting non-competes
altogether. The Commission does not believe prohibiting buyout clauses
would address the tendency of non-competes for senior executives to
negatively affect competitive conditions, because it would mean that
fewer executives could escape their non-competes, reducing labor
mobility and efficient matching between executives and firms even
further.
---------------------------------------------------------------------------

\666\ Comment of Liyan Shi, FTC-2023-0007-19810.
---------------------------------------------------------------------------

Some commenters disputed the Commission's legal rationale for
prohibiting non-competes with senior executives. One comment stated
that the NPRM did not cite any case law where a non-compete for a
senior executive violated antitrust law and argued that there is no
widespread case law to support a per se ban. In response, the
Commission notes that it is determining that non-competes are an unfair
method of competition under section 5, not a per se violation of the
Sherman Act. For the reasons described in this Part IV.C.2, the
Commission finds that non-competes are restrictive and exclusionary and
that, based on the totality of the evidence, they tend to negatively
affect competitive conditions at least as much as non-competes with
other workers, and likely even more so, given the outsize role of
senior executives in new business formation and innovation. For these
reasons, the Commission finds that these non-competes are an unfair
method of competition under section 5.
Another commenter stated that the NPRM did not satisfy the standard
for finding a tendency to negatively affect competitive conditions for
senior executives as set forth in the Commission's section 5 Policy
Statement.\667\ The commenter stated that a per se ban on non-competes
considers neither the size, power, or purpose of the firm nor how non-
competes interact with individual markets. The commenter argued that
the evidence cannot justify an economy-wide ban.
---------------------------------------------------------------------------

\667\ See FTC Policy Statement, supra note 286.
---------------------------------------------------------------------------

The Commission finds that non-competes for senior executives are an
unfair method of competition under section 5 for all the reasons
described in this Part IV.C.2. The Commission states the applicable
legal standard under section 5 in Part II.F, which is consistent with
the standard set forth in the Policy Statement. As noted in Part

[[Page 38410]]

II.F, the Commission need not make a separate showing of market power
or market definition. Nor must the Commission show that the conduct
directly caused actual harm in the specific instance at issue. Instead,
the inquiry under section 5 focuses on the nature and tendency of the
conduct. Moreover, as noted in Part II.F, the Commission may consider
the aggregate effect of conduct as well. The language in the Policy
Statement stating that the size, power, and purpose of the respondent
may be relevant is not limiting, but instead provides guidance
regarding factors the Commission may consider in evaluating potentially
unfair methods of competition. This guidance may be especially relevant
in individual cases and less so in section 5 rulemakings. Finally, as
described in Part II.F, a finding that conduct is an unfair method of
competition does not require definition of a market or consideration of
individual markets. Moreover, as described in Part V.D, the Commission
considered and finds no basis for excluding particular industries or
workers.
ii. Non-Competes With Senior Executives Tend to Negatively Affect
Competitive Conditions in Labor Markets
The effects of non-competes with senior executives on product and
service markets are the primary reason why the Commission finds that
non-competes with senior executives are an unfair method of
competition. However, non-competes also tend to negatively affect
competitive conditions in labor markets.
Non-Competes With Senior Executives Suppress Labor Mobility and
Earnings
In Part IV.B.3.a, the Commission describes extensive empirical
evidence that non-competes reduce labor mobility and worker earnings.
The Commission's finding in Part IV.B.3.a that non-competes suppress
labor mobility and earnings does not examine non-competes with senior
executives specifically. However, the evidence cited by the Commission
is also probative with respect to non-competes with senior executives.
Non-competes reduce labor mobility for senior executives for the
same reasons they reduce labor mobility for other workers--they
directly restrict workers from seeking or accepting other work or
starting a business after they leave their job. In Part IV.B.3.a.i, the
Commission cites empirical evidence that non-competes reduce labor
mobility. This evidence shows that non-competes reduce labor mobility
for all subgroups of workers that have been studied, including
inventors, high-tech workers, low-wage workers, and workers across the
labor force. The impact of non-competes on labor mobility is direct,
since non-competes directly prohibit certain types of mobility.
Therefore, the Commission finds the non-competes restrict the labor
mobility of senior executives as well.
This finding is supported by Mark Garmaise's study of the
relationship between non-compete enforceability and the labor mobility
and earnings of executives.\668\ Garmaise finds that stricter non-
compete enforceability reduces within-industry executive mobility by
47% and across-industry executive mobility by 25%. The study, which is
limited to senior executives, uses multiple legal changes in non-
compete enforceability, measured along multiple dimensions in a binary
fashion. The Shi study qualitatively confirms these results--that
executives experience greater labor mobility in the absence of non-
competes.\669\ However, that study examines use, and not just
enforceability, of non-competes, so the Commission gives it less
weight.
---------------------------------------------------------------------------

\668\ Garmaise, supra note 584.
\669\ Shi, supra note 84.
---------------------------------------------------------------------------

Furthermore, by inhibiting efficient matching between executives
and firms--through a similar mechanism as for all other workers \670\--
non-competes reduce executives' earnings. Like non-competes for other
workers, non-competes block senior executives from switching to a job
in which they would be better paid. And by doing so, non-competes
decrease opportunities (and earnings) for senior executives who are not
subject to non-competes--as well as for workers who are not senior
executives, but who would otherwise move into one of those roles.
---------------------------------------------------------------------------

\670\ See Part IV.B.3.a.
---------------------------------------------------------------------------

As described in Part IV.B.3.a.ii, the empirical research indicates
that non-competes suppress wages for a wide range of subgroups of
workers across the spectrum of income and job function, including
workers who are not subject to non-competes. Importantly, an empirical
study that does focus on senior executives finds that non-competes
suppress earnings of senior executives. The Garmaise study finds that
decreased enforceability of non-competes increases executives' earnings
by 12.7%.\671\ Garmaise also finds that decreased enforceability of
non-competes increases earnings growth for CEOs by 8.2%. Since much of
the increase in earnings is attributable to an increase in earnings
growth (as opposed to earnings at the start of the employment
relationship), Garmaise hypothesizes that earnings increase because
CEOs are more likely to invest in their own human capital when they
have no non-compete.\672\ However, Garmaise also notes that while non-
competes may offer benefits to firms which use them, there may be
negative impacts across the labor markets in which they are used.\673\
This is the only study of executive earnings that does not examine the
use of non-competes: it examines multiple legal changes in non-compete
enforceability, measured along multiple dimensions (though in a binary
fashion).
---------------------------------------------------------------------------

\671\ Garmaise, supra note 584 at 403. The reduction in earnings
is calculated as e^-1.3575*0.1 -1, where -1.3575 is taken
from Table 4.
\672\ Id. at 402.
\673\ Id. at 379.
---------------------------------------------------------------------------

As noted in Part IV.C.1, many senior executives negotiate valuable
consideration for non-competes. However, the evidence suggests that
non-competes still have a net negative effect on senior executives'
earnings, because the suppression of earnings through reduced labor
market competition more than cancels out the compensation that some of
these executives individually receive for their non-competes.
A second study, by Kini, Williams, and Yin,\674\ simultaneously
estimates the impact of non-compete enforceability and non-compete use
on earnings and finds a positive correlation. The Commission gives this
study less weight because it analyzes the use of non-competes. As
described in Part IV.A.2, such studies cannot easily differentiate
between correlation and causation. Kini, Williams, and Yin use an
enforceability measure to generate their estimates, but do not estimate
models that omit use of non-competes, meaning that the Commission does
not interpret the findings as representing a causal relationship.
---------------------------------------------------------------------------

\674\ Kini, Williams, & Yin, supra note 83.
---------------------------------------------------------------------------

Relevant Comments and Commission Responses
Many commenters addressed negative effects of non-competes with
senior executives on competition in labor markets. Non-competes, these
commenters stated, can negatively affect a senior executive's career
when they leave their field or sit out of the workforce for a period,
causing their skills and knowledge (particularly in fast-paced fields)
to stagnate and affecting their reputations. Like other workers, some
senior executives said their non-compete limited their options and
earnings in their specialized field.

[[Page 38411]]

Other commenters argued the Commission should exclude senior
executives from the rule because they earn more compensation, including
higher wages, for non-competes than they would gain under the final
rule. Many of these commenters argued that because senior executives
have bargaining power, any findings on decreased wages would not apply
to them. Some employers stated they compensated their senior executives
for non-competes. Some industry organizations stated that some
additional compensation and bonuses might not be offered if non-
competes are banned. One business stated the compensation it pays
executives takes their non-competes into account. Another business
stated it provides severance benefits in exchange for non-competes that
fully compensate the executive for the duration of the non-compete.
In response to these comments, the Commission notes the Garmaise
study indicates that non-competes have a net negative effect on
earnings for senior executives in the aggregate because they suppress
competition, even if individual senior executives receive some amount
of compensation for their personal non-compete. Garmaise's analysis
accounts for any compensation the executive receives for the non-
compete.
An industry trade organization stated that non-competes create job
opportunities for executives and other highly skilled workers, rather
than restricting them, because, without non-competes to protect
confidential information, employers will often be reluctant to expand
their executive teams. The Commission notes this assertion is
unsupported by empirical evidence, and the Commission finds that firms
have less restrictive alternatives for protecting confidential
information.\675\
---------------------------------------------------------------------------

\675\ See Part IV.D.2.
---------------------------------------------------------------------------

An investment industry organization stated that the Commission
cannot assume senior executives will be equally or more effective at
new firms compared to their old firms. In response, the Commission
notes that voluntary labor mobility--for senior executives and all
workers--typically reflects a mutually beneficial outcome. To the
extent a firm is willing to pay more to attract a particular worker to
come work for them, it is typically because the firm places a higher
value on the worker's productivity than the worker's current employer.
In addition, the Commission notes that many commenters stated that non-
competes often force senior executives to sit out of the workforce,
causing them to lose valuable knowledge and skills. In general, senior
executives are more likely to be effective when they can remain in the
industry in which they have experience and expertise, rather than
starting over in a new industry because of a non-compete.
An industry trade organization stated that the Commission's
assertion that wages are reduced across the labor market is
inconsistent with the NPRM's preliminary finding that non-competes are
not coercive or exploitative for senior executives, because when more
issues are left for negotiation, the job market is increasingly
competitive, as workers can differentiate themselves through their
terms and tailor their terms to each employer. The Commission does not
believe these findings are in tension. Agreements do not need to be
exploitative or coercive to inhibit efficient matching between workers
and firms or to negatively affect competitive conditions. Furthermore,
the Commission believes that executives have many other ways to
differentiate themselves other than based on non-compete terms.
One commenter argued that the findings in the Kini, Williams, and
Yin study should not be interpreted as representing a causal
relationship. Upon further consideration, the Commission agrees with
this comment and does not interpret this study causally, as described
in this Part IV.C.2.c.ii.
For these reasons, the Commission finds that non-competes with
senior executives are an unfair method of competition. As a result, the
Commission declines to exclude senior executives from the final rule
altogether.
3. The Final Rule Allows Existing Non-Competes With Senior Executives
To Remain in Effect
The final rule prohibits employers from, among other things,
entering into or enforcing new non-competes with senior executives--
i.e., non-competes entered into on or after the effective date.\676\
However, the Commission decides to allow existing non-competes with
senior executives--i.e., non-competes entered into before the effective
date--to remain in effect. The Commission describes the basis for this
determination in this Part IV.C.3.
---------------------------------------------------------------------------

\676\ Sec. 910.2(a)(2).
---------------------------------------------------------------------------

The Commission believes the evidence could provide a basis for
prohibiting employers from enforcing existing non-competes with senior
executives, as the final rule does for all other workers, given the
tendency of such agreements to negatively affect competitive
conditions.\677\ However, the Commission has decided to allow existing
non-competes for senior executives to remain in effect, based on two
practical considerations that are far more likely to be present for
senior executives than other workers. First, as described in Part
IV.C.1, senior executives are substantially less likely than other
workers to be exploited or coerced in connection with non-competes. As
a result, this subset of workers is substantially less likely to be
subject to the kind of acute, ongoing harms currently being suffered by
other workers with existing non-competes (even if senior executive's
existing non-competes are still harming competitive conditions in the
economy overall). Second, commenters raised credible concerns about the
practical impacts of extinguishing existing non-competes for senior
executives, as described in this Part IV.C.3.\678\
---------------------------------------------------------------------------

\677\ See Part IV.C.2
\678\ Because the Commission proposed to require employers to
rescind existing non-competes--see NPRM, proposed Sec.
910.2(b)(1)--many of these comments addressed the proposed
rescission requirement specifically. Comments that pertain only to
the issue of rescission, and that do not apply to whether existing
non-competes for senior executives may remain in effect generally,
are addressed in Part IV.E.
---------------------------------------------------------------------------

Numerous businesses and trade associations argued that, if the
final rule were to invalidate existing non-competes for senior
executives, that would present practical challenges for employers,
because many such non-competes were exchanged for substantial
consideration. According to commenters, consideration exchanged for
non-competes includes long-term incentive plans, bonuses, stock awards,
options, or severance payments, among other arrangements.
Some commenters were concerned about a potential windfall for
workers. They argued that if the non-compete portion of the contract
were rescinded or otherwise invalidated, the worker may be left with
any benefits already received in exchange for the non-compete, such as
equity or bonuses, and could also compete. An industry association
stated that some of its members' workers have already received
thousands or hundreds of thousands of dollars in additional
compensation alongside non-competes, though it was unclear what each
worker received. Some business associations said businesses do not have
a clear way to recover those payments or benefits. A commenter asked
whether a worker who forfeited equity for competing could get the
equity back or if executives who were compensated by their new

[[Page 38412]]

employers for the non-compete would be paid twice.
The Commission views the problem as more complex than these
commenters suggest. First, the empirical evidence and comments
illustrate that in many cases, non-competes are currently trapping
workers, including senior executives, in their jobs, meaning the
employer is getting not only the benefit of trapping that individual
worker, but also the benefit of non-competition.\679\ In such
circumstances, employers may have already received part or all of the
benefit they sought from entering a non-compete, though the value would
be difficult if not impossible to quantitatively assess. Moreover, it
is impracticable for the Commission to untangle whether, to the extent
some workers received compensation that was denominated consideration
for a non-compete, that non-compete simultaneously suppressed other
compensation to the worker such as wages. For example, some commenters
who described negotiating their non-competes stated the employer used
it as a tactic to drive down wages.
---------------------------------------------------------------------------

\679\ See Part IV.B.2.b.
---------------------------------------------------------------------------

In addition, most workers subject to a non-compete are subject to
other restrictive covenants,\680\ both mitigating any purported harm
and complicating any quantitative valuation of a non-compete.
---------------------------------------------------------------------------

\680\ See Balasubramanian, Starr, & Yamaguchi, supra note 74
(finding that 97.5% of workers with non-competes are also subject to
a non-solicitation agreement, NDA, or non-recruitment agreement, and
74.7% of workers with non-competes are also subject to all three
other types of provisions).
---------------------------------------------------------------------------

The Commission also notes that, to the extent equity was provided
as consideration, owning a share in the prior employer may induce
workers not to risk lowering the value of that equity by competing.
However, the concern about workers seeking already-forfeited
compensation is misplaced, as the final rule will not impact workers
who forfeited compensation for competing under a then-valid non-
compete.
Overall, however, where an employer has provided meaningful
consideration in exchange for a non-compete, the comments indicate that
being unable to enforce that non-compete may complicate that exchange
in a way that would be difficult to value and untangle. These difficult
practical assessments indicate that the final rule should contain a
limited, easily administrable exception for existing non-competes with
senior executives, who are considerably more likely than other workers
to have negotiated non-competes and received substantial consideration
in return.
In addition, an employment attorney suggested that employers may
suspend any mid-stream benefits and terminate unvested options and
stock and cancel bonuses. One commenter suggested employers may seek
refunds from workers, which could create uncertainty. Similarly, an
industry association said senior workers who signed a non-compete as
part of a severance agreement might see their severance payments taken
away, as employers would need to decide whether to continue paying
despite the elimination of non-competes or, to the extent they legally
can, attempt to renegotiate any outstanding severance agreements.
Finally, a business said executives in the middle of their contracts
might need to renegotiate those contracts. The Commission shares these
concerns about the practicalities of untangling non-competes that are
more likely to have been bargained for. Senior executives who engaged
in a fair bargaining process may have obtained significant
consideration and planned accordingly, as have their employers. While
employers' ability to stop payments or claw back consideration is
uncertain, any efforts to do so could be disruptive.
Other commenters stated that they believed rescission could result
in litigation against workers. An employment lawyer said litigation was
difficult to predict but that there could be litigation seeking
declarations from courts on how the rule impacts existing contracts. A
group of commenters stated that rescinding or invalidating agreements
would lead to increased litigation against workers who received the
benefit of the bargain but were no longer bound by a non-compete in
exchange, and that such litigation would seek to nullify severance
agreements, employment agreements, clawback agreements, and others.
One business said the NPRM was silent on how to address specially
taxed arrangements, but the business did not provide additional details
on any such arrangements. A law firm said workers who received
consideration in a prior year would have paid taxes on it and would now
need to amend their prior tax return to get a refund if they have to
pay back that consideration, while employers might have to amend their
return to reflect the loss of a deduction. That law firm also said some
executives and other workers use and plan for non-competes to reduce
their ``golden parachute'' tax burden.
Finally, an accountant explained that valuations of senior
executive non-competes are conducted during many merger and acquisition
transactions. Similarly, an industry association said acquisition
prices may include the value of non-competes that ensure the buyer
retains certain talent, so if non-competes were rescinded or
invalidated the buyer would lose the value of what they paid for with
no way to recoup the costs. The commenter stated that the bargained-for
value of such sales may decrease if existing senior executive non-
competes cannot be enforced. The exemption for existing non-competes
addresses this concern. Moreover, this concern does not exist for
future transactions in any event, since they would not account for non-
competes that have been banned.
In response to the foregoing comments, the Commission finds it
plausible that rendering existing non-competes with senior executives
enforceable could create some of these practical implementation
challenges. The Commission accordingly elects to exclude existing non-
competes with senior executives from the rule, reducing the burden of
implementation of the final rule.
The Commission also understands that some of these practical
concerns could arise for workers other than senior executives if they
received substantial consideration in exchange for a non-compete.
However, the evidence indicates that any such agreements with workers
other than senior executives are very rare, and that such workers are
more likely to experience exploitation and coercion in connection with
non-competes. Therefore, allowing only existing non-competes with
senior executives to remain in force will significantly reduce these
practical concerns for employers. In contrast, a wider exemption for
all existing agreements would leave in place a large number of non-
competes that tend to harm competitive conditions, including a large
number of exploitative and coercive non-competes for which no
meaningful consideration was received.
Some commenters suggested the Commission exempt from the final rule
non-competes in exchange for which the worker received consideration.
One business asked for an exception to the final rule for paid non-
competes, asserting that such an exception would allow workers to
receive guaranteed payments while accessing information and training
and would allow workers to start their own businesses after the non-
compete period. Another business recommended allowing non-competes that
provide severance equal to a worker's salary for the non-compete
period. An employment attorney suggested an exception from the rule for
non-competes that are part of a severance agreement or where the

[[Page 38413]]

worker receives a paid non-compete period or garden leave, which the
attorney says do not align with the Commission's concerns about non-
competes and represent a balanced trade-off.
The Commission declines to adopt an exception for non-competes in
exchange for which the worker received consideration (whether under an
existing or future non-compete). The fact that a worker received
compensation for a non-compete does not mean the worker received fair
compensation, i.e., compensation commensurate with earnings that would
be received in a competitive labor market. In addition, such an
exception would raise significant administrability concerns. For
example, a rule that exempts non-competes exchanged for ``substantial
consideration'' or ``meaningful consideration'' would not provide
sufficient clarity to employers and workers to avoid significant
compliance costs and litigation risks. Requiring a brighter-line
specific amount (or standard) of compensation would be unlikely to
appropriately capture highly fact-specific, varying financial
circumstances of workers and firms. Moreover, it would be difficult to
prevent employers from suppressing compensation or benefits along other
dimensions (e.g., a requirement for severance equal to the worker's
salary during the non-compete period as one commenter suggested could
lead to the salary being suppressed). The Commission also notes,
however, that while it is not adopting a blanket exemption from the
final rule for non-competes in exchange for which the worker received
consideration, it is satisfying this request to some extent by adopting
an exemption for existing non-competes for senior executives, which are
the non-competes most likely to have been exchanged for consideration.
Finally, the Commission concludes that allowing existing non-
competes for senior executives to remain in effect is appropriate
despite the significant negative effects of such non-competes on
competition described in Part IV.C.2. The Commission took into
consideration that non-competes with senior executives are less likely
to be causing ongoing harm to individuals by preventing them from
seeking or accepting other work or starting their own business, because
such non-competes were likely to have been negotiated or exchanged for
consideration. In addition, the negative effects of these non-competes
on competitive conditions will subside over time as these non-competes
expire.
4. Defining Senior Executives
As noted earlier, the Commission did not define the term ``senior
executive'' in the NPRM. Instead, the Commission requested comment on
how the term should be defined.\681\ In this final rule, the Commission
adopts a definition of ``senior executive'' to isolate the workers who
are least likely to have experienced exploitation and coercion and most
likely to have bargained for meaningful compensation for their non-
compete. Workers for whom exploitation and coercion concerns are likely
most relevant and who are unlikely to have bargained for or received
meaningful consideration for a non-compete--namely, lower-earning
workers, and relatively higher paid or highly skilled workers who lack
policy-making authority in an organization--do not fall within this
final definition.
---------------------------------------------------------------------------

\681\ NPRM at 3520.
---------------------------------------------------------------------------

This definition is relevant because, as explained in Part IV.C.2,
the basis for the Commission's findings that non-competes with senior
executives are unfair methods of competition differs in some ways from
the evidence and rationales underpinning its findings that non-competes
with other workers are unfair methods of competition. Furthermore, as
explained in Part IV.C.3, the final rule allows existing non-competes
with senior executives to remain in force, while prohibiting employers
from enforcing existing non-competes with other workers after the
effective date.
The Commission defines ``senior executives'' based on an earnings
test and a job duties test. In general, the term ``senior executives''
refers to workers earning more than $151,164 \682\ who are in a
``policy-making position'' as defined in the final rule. The Commission
adopted this definition after considering the many comments on who
senior executives are and how to define them. Notably, the Commission
concluded that, unlike highly paid senior executives, highly paid
workers other than senior executives and lower-wage workers with senior
executive titles as a formal matter likely experience exploitation and
coercion and are unlikely to have engaged in bargaining in connection
with non-competes, much like lower-wage workers.\683\ In other words,
the Commission finds that the only group of workers that is likely to
have bargained for meaningful compensation in exchange for their non-
compete is senior executives who are both highly paid and, as a
functional matter, exercise the highest levels of authority in an
organization.\684\ The Commission estimates that approximately 0.75% of
workers are such senior executives.\685\
---------------------------------------------------------------------------

\682\ This threshold is based on the 85th percentile of earnings
of full-time salaried workers nationally. See Part IV.C.4.b.
\683\ See Part IV.C.1.
\684\ See id.
\685\ See Part X.F.11.
---------------------------------------------------------------------------

a. Definition of ``Senior Executive''
The NPRM requested comment on how to define senior executives while
providing sufficient clarity to employers and workers.\686\ The NPRM
stated that there is no generally accepted legal definition of ``senior
executive'' and that the term is challenging to define given the
variety of organizational structures used by employers.\687\ The NPRM
raised the possibility of looking to existing Securities and Exchange
Commission (``SEC'') definitions; adopting a definition closely based
on a definition in an existing Federal regulation; adopting a new
definition; defining the category according to a worker's earnings;
using some combination of these approaches; or using a different
approach.\688\ Commenters proposed a wide variety of definitions,
largely focused on two types: an exception based on a worker's job
duties or title, and an exception based on a compensation threshold.
Upon review of the full record, the Commission determines that a test
that combines both of these criteria best captures the subset of
workers who are likely to have bargained for meaningful compensation in
exchange for their non-compete in a readily administrable manner.
---------------------------------------------------------------------------

\686\ NPRM at 3520.
\687\ Id.
\688\ Id.
---------------------------------------------------------------------------

i. The Need for a Two-Part Test
Many commenters suggested combining a compensation threshold with a
job duties test. For example, one business supported excepting workers
who met a combination of tests based on a compensation threshold, FLSA
exemption status, and access to trade secrets. A law firm suggested the
final rule should account for both pay, exempting only low-wage hourly
workers, and job duties in determining an exception. One commenter
suggested defining ``senior executive'' based on total compensation,
job title, and job duties. Though the Commission does not adopt these
specific duties and wage combinations, the Commission agrees that a
combined approach is necessary.
The Commission has determined that the definition of ``senior
executive'' should include both a compensation threshold and job duties
test, similar to

[[Page 38414]]

the DOL regulations that define and delimit the FLSA's exemption for
executive employees.\689\ The key advantage of a compensation
threshold, as one industry organization commenter stated, is that
compensation thresholds are objective and easily understood by all
stakeholders--yielding significant administrability benefits. However,
since not all workers above any given compensation threshold are senior
executives, a job duties test is also needed to identify senior
executives.
---------------------------------------------------------------------------

\689\ The FLSA is the Federal statute establishing minimum wage,
overtime, recordkeeping, and youth employment standards. See 29
U.S.C. 201 et seq.
---------------------------------------------------------------------------

The two-part test isolates the workers most likely to have
bargaining power to negotiate meaningful consideration for a non-
compete and least likely to experience exploitation and coercion in
connection with non-competes. A compensation threshold ensures that
stakeholders do not need to spend time assessing the job duties of
workers below the threshold--minimizing the amount of detailed analysis
stakeholders must undertake. A compensation threshold also helps ensure
that workers who work in positions with ``senior executive''
classifications but likely lack meaningful bargaining power due to
their relatively low incomes and who likely did not receive meaningful
consideration for a non-compete are excluded from the definition. The
job duties test ensures that the definition identifies the individuals
most likely to have bespoke, negotiated agreements--those with the
highest level of authority over the organization--while also ensuring
that high-earning workers who are not senior executives, who likely
experience exploitation and coercion from non-competes and do not
generally bargain over them, are not captured by the definition.\690\
---------------------------------------------------------------------------

\690\ See Part IV.C.1.
---------------------------------------------------------------------------

Clarity from a compensation threshold is essential, as without
clarity workers and employers would often be uncertain about a non-
compete's enforceability (absent adjudication), and such uncertainty
often fosters in terrorem effects.\691\ For example, an attorney
commenter stated that an exception for executive, management, and
professional employees and those with access to trade secrets would
inherently lack clarity. A lack of clarity could also facilitate
evasion by employers, as one law firm commented.
---------------------------------------------------------------------------

\691\ See Part IX.C.
---------------------------------------------------------------------------

While there may be some workers other than senior executives as
defined here who may have bargained for consideration for a non-
compete, the benefits to workers and employers of a clear and
administrable definition outweigh the risk that some bargained-for non-
competes are invalidated. In Part IV, the Commission finds even
bargained-for non-competes tend to negatively affect competitive
conditions. The Commission finds that the need to avoid an
overinclusive exception that increases those harms to competitive
conditions outweighs the risk that in rare instances private parties
with non-competes other than with senior executives may need to
restructure their employment agreements to utilize less restrictive
alternatives that burden competition to a lesser degree.
Many commenters sought an exception for senior executives and/or
highly paid and highly skilled workers based on justifications such as
access to trade secrets or confidential information, rather than
compensation thresholds. Some argued that compensation thresholds do
not align with or allow individualized assessments of which workers
meet a given justification such as access to confidential information.
One law firm commented that a bright-line compensation threshold would
eliminate non-competes for lower wage workers while allowing non-
competes for what the commenter viewed as legitimate business purposes.
Some commenters opposed an exception for senior executives because they
believed ``senior executive'' would be too difficult to define. In Part
V.D.2, the Commission explains why it is not adopting an exception for
workers based on their access to trade secrets and other intellectual
property. Further, in the Commission's view, eliminating the need for
individualized assessments for most workers is the primary advantage of
a compensation threshold, not a drawback (although the Commission
declines to adopt a compensation threshold alone for reasons stated
previously and in Part V.D.1). However, the evidence indicates that an
exception for existing senior executive non-competes is appropriate,
which the Commission defines here.
Commenters, both those supporting and opposing the rule, pointed
out several issues with compensation thresholds standing alone. Some
commenters were concerned a compensation threshold would exclude some
workers, such as many physicians, from the final rule's benefits based
on their income level. Two commenters said an exception would penalize
the advancement of workers near a threshold and those workers may have
to choose between higher wages or being free from a non-compete.
Including the job duties tests alongside the compensation threshold
mitigates the risk of such cliff effects, assuming they exist (which is
far from clear).
Some commenters asserted a threshold would need to be updated for
inflation, while one law firm commented that frequent updates would
make the final rule more difficult to understand and implement.
Commenters also pointed out the need to explain when the threshold
would be measured. While adjusting for inflation could be important to
ensure the final rule continues serving its intended function if the
compensation threshold governed a total exemption from the rule (as
these commenters assume), it is unnecessary to the final rule because
the exception adopted applies only to existing non-competes (i.e., it
has only one-time application). The Commission explains in Part
IV.C.4.b its reasons for declining to adopt a locality adjustment.
ii. The Final Rule's Definition of ``Senior Executive''
Based on the considerations described in Part IV.C.4.a.i, the
Commission adopts a two-pronged definition of ``senior executive'' in
Sec. 910.1. Under Sec. 910.1, a senior executive is a worker who was
in a policy-making position and who received from a person for the
employment:
Total annual compensation of at least $151,164 in the
preceding year (under paragraph (2)(i)); or
Total compensation of at least $151,164 when annualized if
the worker was employed during only part of the preceding year (under
paragraph (2)(ii)); or
Total compensation of at least $151,164 when annualized in
the preceding year prior to the worker's departure if the worker
departed from employment prior to the preceding year and the worker is
subject to a non-compete (under paragraph (2)(iii)).
Paragraph (2)(ii) applies to workers who were in a policy-making
position during only part of the preceding year, which includes workers
who were hired or who left a business entity within the preceding year
as well as workers who were promoted to or demoted from a policy-making
position in the preceding year. Paragraph (2)(iii) ensures that the
exception applies to senior executives who departed from the employer
more than one year before the effective date but are still subject to a
non-compete (e.g., a worker who left more than a year ago and has a
non-compete term of 18 months). To account for those senior executives,
paragraph (2)(iii) considers total annual compensation in the year
preceding their departure.

[[Page 38415]]

To clarify the definition's compensation threshold, the final rule
includes definitions of ``total annual compensation'' and ``preceding
year.'' To clarify the job duties test, the final rule includes
definitions of ``policy-making position'' as well as two additional
terms that are in the definition of ``policy-making position'':
``officer'' and ``policy-making authority.'' These definitions are
described in Parts IV.C.4.b and IV.C.4.c.
b. Defining the Compensation Threshold
Pursuant to Sec. 910.1, the senior executive exception applies
only to workers who received total annual compensation of at least
$151,164 from a person for employment in a policy-making position in
the most relevant preceding year. Section 910.1 further defines ``total
annual compensation'' and ``preceding year,'' respectively. This
threshold is based on the 85th percentile of earnings of full-time
salaried workers nationally.\692\
---------------------------------------------------------------------------

\692\ BLS, Labor Force Statistics from the Current Population
Survey, https://www.bls.gov/cps///nonhourly-workers.htm (based on
the data from the table ``Annual average 2023'').
---------------------------------------------------------------------------

The Commission draws this line between more highly paid and less
highly paid workers based on its assessment of which workers are more
likely to experience exploitation and coercion and less likely to have
engaged in bargaining in connection with non-competes and the need to
implement a two-part test. As commenters noted, there is no single
compensation threshold above which zero workers will have been coerced
and exploited and below which zero workers will have been uncompensated
for the non-compete that binds them. Based on the Commission's
expertise and after careful review of the rulemaking record, including
relevant data, the empirical research, and the public comments, the
Commission concludes $151,164 in total annual compensation reflects a
compensation threshold under which workers are likely to experience
such exploitation and coercion and are less likely to have bargained
for their non-competes, while providing employers a readily
administrable line. With this line, market participants can easily know
that workers below the line cannot be subject to non-competes,
minimizing both in terrorem effects and eliminating the administrative
burden of conducting a job duties test for those workers.
The Commission looked to several sources and suggestions from the
comments in selecting a threshold. Numerous commenters suggested the
Commission should look to the FLSA, and some specifically recommended
the FLSA regulations' threshold for highly compensated employees.\693\
DOL sets the compensation threshold for highly compensated employees in
its overtime regulations under the FLSA based on earnings of full-time
salaried workers. Since January 2020, based on a regulation adopted in
2019, that threshold is $107,432 and reflects the 80th percentile of
full-time salaried workers nationally using combined 2018 and 2019
data.\694\ In September 2023, DOL proposed raising that threshold to
the 85th percentile of full-time salaried workers nationally and, inter
alia, updating the amount to reflect more current earnings data. For
2023, the 85th percentile of full-time salaried workers nationally is
$151,164.\695\ The Commission recognizes DOL's expertise in determining
who qualifies as a highly compensated worker and employers' likely
familiarity with DOL regulations. Given this familiarity, the
Commission borrows from DOL's definition of compensation to minimize
compliance burdens on employers.
---------------------------------------------------------------------------

\693\ However, at the time of commenting the highly compensated
employee threshold was $107,432 and the Department had not proposed
a new threshold.
\694\ 29 CFR 541.601; see also Defining and Delimiting the
Exemptions for Executive, Administrative, Professional, Outside
Sales, and Computer Employees, NPRM, 88 FR 62152, 62157 (Sept. 8,
2023) (hereinafter ``2023 FLSA NPRM'').
\695\ See Bur. Of Labor Stats., Research Series on Percentiles
of Usual Weekly Earnings of Nonhourly Full-Time Workers, at https://www.bls.gov/cps/research/nonhourly/earnings-nonhourly-workers.htm
(based on the table ``Annual average 2023''); 2023 FLSA NPRM at
62153. The DOL proposed a threshold at $143,998, the 85th percentile
of full-time salaried workers at the time the 2023 FLSA NPRM was
proposed. When the highly compensated employee test was originally
created in 2004, its $100,000 threshold exceeded the annual earnings
of 93.7% of salaried workers. Id. at 62159.
---------------------------------------------------------------------------

Another Federal regulatory threshold for high wage workers noted by
commenters also aligns with the 85th percentile of full-time salaried
workers nationally in 2023 or approximately $150,000. In the retirement
context, the IRS sets a threshold for highly compensated employees at
$150,000 for 2023 and $155,000 for 2024.\696\ Additionally, the
District of Columbia bans non-competes for workers making less than
$150,000.\697\
---------------------------------------------------------------------------

\696\ IRS, Definitions, (Aug. 29, 2023) (Highly Compensated
Employees), https://www.irs.gov/retirement-plans/plan-participant-employee/definitions; IRS, COLA Increases for Dollar Limitations on
Benefits and Contributions, (updated Nov. 7, 2023), https://www.irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions.
\697\ 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).
---------------------------------------------------------------------------

The Commission analyzed occupational wage data to identify a
threshold that would capture more highly paid senior executives, who
are likely to have bespoke, negotiated non-competes. BLS's most recent
wage data indicates that workers in the ``chief executive'' category
have a median wage of $209,810.\698\ Thus, most ``chief executives,''
most if not all of whom would meet the duties component of the two-part
test in this final rule, earn well above the $151,164 compensation
threshold, ensuring that the threshold is likely not underinclusive.
The Commission notes that some very high-wage occupations have a median
wage above $151,164, including: physicians; surgeons; computer and
information systems managers; and dentists.\699\ To qualify for the
exemptions, these workers would have to also meet the job duties
portion of the senior executive test, which is appropriate because the
Commission finds that workers in these professions are often subject to
coercion and exploitation and rarely have bespoke, negotiated non-
competes.
---------------------------------------------------------------------------

\698\ BLS Occupational Employment and Wage Statistics, supra
note 49. These data are from the May 2022 National XLS table for
Chief Executives under private ownership.
\699\ See id. These data are from the May 2022 National XLS
table for private ownership.
---------------------------------------------------------------------------

The Commission also considered a lower wage threshold of
approximately $100,000, which would be closer in range to the DOL
highly compensated employee threshold of $107,432 that DOL adopted in
2019. According to 2022 BLS data, the median wage for ``top
executives'' in the U.S. is $99,240.\700\ Workers in the ``top
executive'' category include ``chief executives,'' but also include
officials with less authority like ``general and operations managers.''
The latter have an annual median wage of $97,030 with their earnings at
the 75th percentile being $154,440.\701\ The Commission believes that a
significant number of general and operations managers (some of whom may
be in a policy-making position) likely do not have bespoke, negotiated
non-competes. For example, a vice president of operations of a local
retail chain with only a few locations would likely be in this
category. The same vice president--unlike the vice president of a
multinational

[[Page 38416]]

corporation--is unlikely to possess the same bargaining power or to
have a bespoke, negotiated employment agreement. Moreover, to the
extent an individual's total compensation is under $151,164, in the
unlikely event the individual received consideration for their non-
compete, such consideration is unlikely to represent a significant part
of their compensation.
---------------------------------------------------------------------------

\700\ Id. These data are from the May 2022 National XLS table
for Top Executives under private ownership.
\701\ Id. These data are from the May 2022 National XLS table
for General and Operations Managers under private ownership.
---------------------------------------------------------------------------

Similarly, the Commission believes a $107,432 (or thereabouts)
threshold would be overinclusive and individuals who likely do not have
bespoke, negotiated non-competes--and who were likely to be exploited
and coerced--could meet the threshold test. The $107,432 threshold was
adopted based on earnings in 2018 and 2019. Adjusting for inflation,
$107,432 in June 2019 is the equivalent of $130,158 in February 2024.
Moreover, as noted previously, BLS data reflect that chief executives
generally earn significantly more than $130,158. In contrast,
occupations with a median wage below $151,164 but above $107,432
include: advertising, marketing, promotions, public relations,
purchasing, and sales managers; financial managers; software
developers; physician assistants; optometrists; nurse practitioners;
and pharmacists.\702\ These are occupations that the comment record
reflects often experience coercion and exploitation with respect to
non-competes and rarely have negotiated or compensated non-competes. A
civic organization commenter also argued that the DOL regulations'
``highly compensated employee'' definition's $107,432 threshold was
close to the median wage in some industries and areas and cited several
cases that it said demonstrate that adopting this threshold would
exclude workers who are vulnerable to exploitation and coercion.
---------------------------------------------------------------------------

\702\ Id.
---------------------------------------------------------------------------

Accordingly, the Commission adopts a threshold of $151,164. This
threshold, combined with the duties test, reflects highly compensated
individuals who are most likely to have the bespoke, complex non-
competes that the Commission elects to leave undisturbed, and who the
Commission finds are less likely to experience coercion and
exploitation. This threshold also has significant administrability
benefits, as it is calculated in accord with definitions used in FLSA
compliance, with which employers are generally familiar. This alignment
will yield efficiency benefits that reduce compliance burdens on
employers.
After careful review, the Commission decided not to choose a
threshold higher or lower in part because as the compensation threshold
in the rule increased, fewer small businesses and firms in areas with
lower wages and costs of living would have senior executives with non-
competes who would qualify for the exception as compared to larger
businesses. Similarly, the lower a threshold is, the more workers who
live in areas with higher wages and costs of living would fall above
the threshold.\703\
---------------------------------------------------------------------------

\703\ See also 2023 FLSA NPRM at 62176.
---------------------------------------------------------------------------

The Commission also declines to adopt a locality adjustment. Some
commenters said that a uniform national threshold could lead to
geographic disparities because of the different cost of living and
average incomes in different areas. Geographic disparities are
difficult to resolve, as disparities often exist not just between
States, but, for example, between urban and rural areas within a State.
The Commission considered this factor in selecting the $151,164
threshold compared to other options. Tailoring a compensation threshold
to every locality or even State or region would be burdensome and
generate significant confusion for workers and employers. The
Commission finds that the importance of a uniform threshold to avoid
confusion and for administrability outweighs the drawbacks of any
geographic disparities, particularly in light of comments from
employers stating that the existing patchwork of State laws is
burdensome to navigate. The Commission notes that neither DOL nor IRS
have adopted thresholds for highly compensated individuals that vary
geographically. Given the rise in remote work, applying geographic
variation to employers and workers would also prove burdensome.
Moreover, total annual compensation under Sec. 910.1 includes
traditional bonuses or compensation a senior executive might receive,
such as a bonus tied to performance that is paid pursuant to any prior
contract, agreement, or promise. The rule also allows for the entire
amount of such bonuses to be credited to total annual compensation,
thus, increasing the likelihood of capturing highly compensated policy-
making individuals across the nation.
The Commission estimates that approximately 92% of workers will
fall below this compensation threshold, ensuring that existing non-
competes will be unenforceable for the vast majority of workers most
likely to experience exploitation and coercion in connection with non-
competes.\704\ The Commission also estimates that approximately 0.75%
of workers are likely to be considered senior executives.\705\ The
compensation threshold reflects the Commission's finding that non-
competes are very rarely bargained for, and to the extent they are,
below $151,164 such bargaining is almost non-existent and consideration
for a non-compete, if any, is likely to be relatively small. Pairing
the compensation threshold with the duties test will also minimize
compliance costs, as employers and the Commission will not need to
conduct job duties tests for those workers whose compensation fall
below the threshold.
---------------------------------------------------------------------------

\704\ See Steven Ruggles, Sarah Flood, Matthew Sobek, Daniel
Backman, Annie Chen, Grace Cooper, Stephanie Richards, Renae
Rodgers, & Megan Schouweiler. IPUMS USA: Version 15.0 [dataset].
Minneapolis, MN: IPUMS, 2024. https://doi.org/10.18128/D010.V15.0
(American Community Survey 2022 data, adjusted to 2023 dollars and
excluding government and non-profit workers).
\705\ See Part X.F.11.
---------------------------------------------------------------------------

i. Definition of ``Total Annual Compensation''
Section 910.1 provides that ``total annual compensation'' is based
on the worker's earnings over the preceding year. It is based on DOL's
regulation defining ``total annual compensation'' for highly
compensated employees in 29 CFR 541.601(b)(1) and matches DOL's
determination of what types of compensation can count towards total
annual compensation for highly compensated employees.
Section 910.1, like DOL's definition, states that total annual
compensation may include salary, commissions, nondiscretionary bonuses
and other nondiscretionary compensation earned during that 52-week
period. Nondiscretionary bonuses and compensation includes compensation
paid pursuant to any prior contract, agreement, or promise, including
performance bonuses the terms of which the worker knows and can
expect.\706\ The definition further states that total annual
compensation does not include board, lodging and other facilities as
defined in 29 CFR 541.606, and does not include payments for medical
insurance, payments for life insurance, contributions to retirement
plans and the cost of other similar fringe benefits. Section 541.606 is
part of DOL's regulations concerning salary requirements for employees
employed in a bona fide executive, administrative, or professional
capacity, and applies to

[[Page 38417]]

highly compensated employees.\707\ That regulation cross-references
DOL's regulations on wage payments under the FLSA in 29 CFR part 531,
including the term ``other facilities'' defined in 29 CFR 531.32.
---------------------------------------------------------------------------

\706\ 29 CFR 778.211(c); see also U.S. DOL, Fact Sheet #56C:
Bonuses under the Fair Labor Standards Act (FLSA) (Dec. 2019),
https://www.dol.gov/agencies/whd/fact-sheets/56c-bonuses.
\707\ 29 CFR 541.601(a)(1) (``[A]n employee with total annual
compensation of at least $107,432 is deemed exempt under section
13(a)(1) of the Act if the employee customarily and regularly
performs any one or more of the exempt duties or responsibilities of
an executive, administrative or professional employee as identified
in subparts B, C or D of this part.'').
---------------------------------------------------------------------------

This regulatory text makes one modification to the DOL approach to
correspond to the final rule's purposes and the non-compete context.
Based on comments received, the Commission decided not to adopt DOL's
base salary requirement for highly compensated employees in its
definition of compensation, which serves a different purpose than the
definition adopted here. The 2019 DOL regulation requires that a
portion of the worker's total annual compensation must be paid on a
salary or fee basis in order to qualify as a highly compensated
employee, to ensure that the worker receives at least a base salary and
to guard against potential abuses.\708\ In contrast, the exception in
Sec. 910.2(a)(2) applies only to senior executives. The Commission
understands that compensation for senior executives can be structured
in many different ways. A law firm commented that senior executive
compensation can be particularly complex, as base salary may be 20% or
less of a senior executive's annual pay, and much of their pay is
variable and does not vest until the end of the year. One comment said
some CEOs receive only a $1 salary and receive the rest of their
compensation in other forms. The definition of total annual
compensation in the final rule is designed to allow for different forms
of nondiscretionary compensation without requiring employers to pay a
particular amount as salary.
---------------------------------------------------------------------------

\708\ 29 CFR 541.601(b)(1); Defining and Delimiting the
Exemptions for Executive, Administrative, Professional, Outside
Sales and Computer Employees, 69 FR 22122, 22175 (Apr. 23, 2004)
(``This change will ensure that highly compensated employees will
receive at least the same base salary throughout the year as
required for exempt employees under the standard tests, while still
allowing highly compensated employees to receive additional income
in the form of commissions and nondiscretionary bonuses.'').
---------------------------------------------------------------------------

ii. Definition of ``Preceding Year''
The definitions of ``senior executive'' and ``total annual
compensation'' in Sec. 910.1 use the term ``preceding year.'' To
provide clarity and facilitate compliance, the Commission defines the
term ``preceding year'' in Sec. 910.1 as a person's choice among the
following time periods: the most recent 52-week year, the most recent
calendar year, the most recent fiscal year, or the most recent
anniversary of hire year. The term ``preceding year'' is drawn from
DOL's FLSA regulations in 29 CFR 541.601(b)(4), which states that
``[t]he employer may utilize any 52-week period as the year, such as a
calendar year, a fiscal year, or an anniversary of hire year. If the
employer does not identify some other year period in advance, the
calendar year will apply.'' Here, the Commission similarly gives
employers flexibility to minimize compliance costs, as many employers
may have compensation more readily available based on the last calendar
year, their fiscal year, or the anniversary of a worker's hire as part
of tax and other reporting requirements.
iii. Other Proposed Compensation Thresholds
In seeking to exempt senior executives and highly paid workers from
the rule altogether, commenters suggested several possible wage-related
thresholds, including specific dollar thresholds (e.g., $100,000) not
tied to any existing metric or standard; whether the worker is an
hourly worker; annual compensation at or above some multiple of the
Federal poverty level or minimum wage, as in New Hampshire, Maine, and
Rhode Island statutes; State average wages or ten times the local
median wage; and $330,000, the IRS annual compensation limit for 401(k)
retirement contributions.\709\
---------------------------------------------------------------------------

\709\ IRS, COLA Increases for Dollar Limitations on Benefits and
Contributions, (updated Nov. 7, 2023), https://www.irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions; Treas. Reg. sec. 1.401(a)(17)-1.
---------------------------------------------------------------------------

As explained in Part V.D, the Commission declines to exempt workers
from the rule altogether based on their earnings. With respect to
defining the workers whose existing non-competes the Commission
exempts, the Commission also declines to use these thresholds or
standards. For the reasons described in this Part IV.C.4.b, the
Commission believes the compensation threshold it is adopting--in
combination with the job duties test it is adopting--most effectively
isolates the workers (namely, senior executives) who are likely to
bargain with employers and receive compensation for their non-competes
and who are unlikely to be exploited or coerced in connection with non-
competes. While thresholds based on State lines or metrics would
reflect differences in wages and costs of living among States, they
would not reflect differences between, for example, urban and rural
areas within a State and could generate confusion where the threshold
varies between States, in addition to increasing compliance burdens by
requiring employers to assess which State adjustment applies--a
particularly challenging task in increasingly cross-border and remote
work environments. Using the local median wage would generate too much
unpredictability for employers and workers and would face the same
administrability and confusion challenges to an even higher degree. In
contrast, a uniform national compensation threshold as part of the test
provides clarity that reduces the risks of in terrorem effects and
increases ease of compliance. Finally, the $330,000 threshold is an
annual compensation limit, while the IRS has a different test to
identify highly compensated employees. A $330,000 threshold would be
too high for employers in areas with lower average incomes and costs of
living and would likely exclude from the definition many senior
executives who bargained for their non-compete in exchange for
consideration.
One business recommended an exception for individuals in the top
10% income tier at their respective employers to exempt workers at
start-ups that might not be able to compensate their workers at a high
level but whose workers may still be exposed to trade secrets. Another
proposed using Internal Revenue Code section 414(q), defining highly
compensated employee as the highest paid 1% or 250 employees in the
corporation. A percentage threshold, however, has significant practical
issues including workers entering and exiting, earnings changes, and
factoring in independent contractors, workers at subsidiaries, or
workers at parent companies. It would also lead to disparities between
large and small firms, as large firms could use non-competes for far
more workers than could small firms.
Other commenters pointed to State laws setting a compensation
threshold to support excluding highly paid workers from the final rule
or suggested the Commission look to those States as an example. A
public policy organization that supported a categorical ban said any
threshold should be at least higher than $100,000, citing research on
Washington's non-compete reforms that indicated employers did not value
non-competes up to that threshold.\710\ The compensation threshold the

[[Page 38418]]

Commission is adopting is higher than this amount.
---------------------------------------------------------------------------

\710\ Hiraiwa, Lipsitz & Starr, supra note 502.
---------------------------------------------------------------------------

c. Defining the Job Duties Component
i. Definitions of ``Officer,'' ``Policy-Making Authority,'' and
``Policy-Making Position''
In NPRM, the Commission suggested that the final rule's definition
of senior executive could be based on SEC Rule 3b-7.\711\ The
Commission did not receive comments specifically addressing this
option, but the Commission carefully considered arguments for and
against job duties or job title distinctions as well as numerous
comments on potential job duties tests, alone or in combination with
compensation thresholds, before determining that a modified version of
SEC Rule 3b-7's job duties requirements would best meet the exception's
goals. The duties test adopted by the Commission is precise and more
tailored than the other definitions proposed by commenters \712\ and
minimizes the risk that workers who likely experienced exploitation and
coercion are included in the definition of senior executive. The test
focuses primarily on job duties, rather than solely on job titles,
because businesses do not all use the same job titles, and a job title
might not reflect the worker's actual level of authority in an
organization, which is a key indicator of whether a worker is likely to
face exploitation and coercion or to have bargained in connection with
non-competes.
---------------------------------------------------------------------------

\711\ 17 CFR 240.3b-7; NPRM at 3520.
\712\ See Part IV.C.4.c.ii.
---------------------------------------------------------------------------

Section 910.1 defines ``policy-making position'' as a business
entity's president, chief executive officer or the equivalent, any
other officer of a business entity who has policy-making authority, or
any other natural person who has policy-making authority for the
business entity similar to an officer with policy-making authority. The
definition of ``policy-making position'' further states that an officer
of a subsidiary or affiliate of a business entity that is part of a
common enterprise who has policy-making authority for the common
enterprise may be deemed to have a policy-making position for the
business entity for purposes of this paragraph. Finally, the definition
of ``policy-making position'' states that a natural person who does not
have policy-making authority over a common enterprise may not be deemed
to have a policy-making position even if the person has policy-making
authority over a subsidiary or affiliate of a business entity that is
part of the common enterprise.
Section 910.1 also defines terms used in the definition of
``policy-making position.'' Section 910.1 defines ``officer'' as a
president, vice president, secretary, treasurer or principal financial
officer, comptroller or principal accounting officer, and any natural
person routinely performing corresponding functions with respect to any
business entity whether incorporated or unincorporated. To account for
differences in the way business entities may use and define job titles,
the definition includes workers in equivalent roles. By incorporating
this definition of ``officer,'' ``senior executive'' applies to workers
at the highest levels of a business entity.
This definition is nearly verbatim of the SEC definition of
``officer'' in 17 CFR 240.3b-2. That term ``officer'' is used in SEC
Rule 3b-7.\713\ To maintain consistency with the SEC regulations by
ensuring that ``officer'' has the same meaning, and to utilize the
SEC's expertise in this area, the Commission adopts the SEC's
definition of ``officer.''
---------------------------------------------------------------------------

\713\ 17 CFR 240.3b-7 (``The term executive officer, when used
with reference to a registrant, means its president, any vice
president of the registrant in charge of a principal business unit,
division or function (such as sales, administration or finance), any
other officer who performs a policy making function or any other
person who performs similar policy making functions for the
registrant. Executive officers of subsidiaries may be deemed
executive officers of the registrant if they perform such policy
making functions for the registrant.''); 17 CFR 240.3b-2 (``The term
officer means a president, vice president, secretary, treasury or
principal financial officer, comptroller or principal accounting
officer, and any person routinely performing corresponding functions
with respect to any organization whether incorporated or
unincorporated.'').
---------------------------------------------------------------------------

Section 910.1 defines ``policy-making authority'' as final
authority to make policy decisions that control significant aspects of
a business entity or a common enterprise. The definition further states
that policy-making authority does not include authority limited to
advising or exerting influence over such policy decisions or having
final authority to make policy decisions for only a subsidiary of or
affiliate of a common enterprise.
Accordingly, for a worker to be a senior executive, in addition to
meeting the compensation threshold, the worker must be at the level of
a president, chief executive officer or the equivalent, officer
(defined in Sec. 910.1), or in a position that has similar authority
to a president or officer. Further, an officer or other qualifying
person must have policy-making authority. Presidents, chief executive
officers, and their equivalents are presumed to be senior executives
(i.e., employers do not need to consider the further element of
``policy-making authority''). The term ``chief executive officer or the
equivalent'' was added to the definition of ``policy-making position''
to increase clarity on who was included and to reflect the wider range
of businesses with various structures that are subject to the final
rule (as compared to SEC Rule 3b-7). The definition of ``policy-making
position'' includes workers with equivalent authority because job
titles and specific duties may vary between companies. This ensures
that the term ``senior executive'' is broad enough to cover more than
just a president or chief executive officer, especially for larger
companies, as others may have final policy-making authority over
significant aspects of a business entity.
For example, many executives in what is often called the ``C-
suite'' will likely be senior executives if they are making decisions
that have a significant impact on the business, such as important
policies that affect most or all of the business. Partners in a
business, such as physician partners of an independent physician
practice, would also generally qualify as senior executives under the
duties prong, assuming the partners have authority to make policy
decisions about the business. The Commission notes that such partners
would also likely fall under the sale of business exception in Sec.
910.3 if the partner leaves the practice and sells their shares of the
practice. In contrast, a physician who works within a hospital system
but does not have policymaking authority over the organization as a
whole would not qualify.
The Commission changed some aspects of SEC Rule 3b-7 to fit the
context of this rulemaking. First, because Sec. 910.2(a)(2) will
extend to non-public companies, unlike SEC regulations, the final
rule's definition of ``policy-making position'' does not include the
phrase ``any vice president of the registrant in charge of a principal
business unit, division or function (such as sales, administration or
finance)'' in the definition of ``executive officer.'' \714\ The
Commission believes that in the context of this final rule, in which
the definition is relevant to a broader array of entities than public
companies, that phrase would encompass workers who, despite their
titles, are among those who are likely to be coerced or exploited by
non-competes. For example, this aspect of the definition can be too
easily applied to managers of small departments, who the Commission
finds

[[Page 38419]]

are unlikely to have bargained for their non-competes. At the same
time, a manager who does in fact have policy-making authority would
meet the definition of ``officer'' in Sec. 910.1 and thus be included
in the definition of senior executives (if the manager also meets the
compensation threshold). Similarly, depending on the organization, a
vice president may have final policy-making authority over significant
aspects of a business entity. The adapted definition is based on
functional job duties rather than formal job titles.
---------------------------------------------------------------------------

\714\ 17 CFR 240.3b-7.
---------------------------------------------------------------------------

Second, SEC Rule 3b-7 uses the term ``policy making function'' as
part of its definition of the types of job duties that could classify a
person as an ``executive officer.'' \715\ While the term ``policy
making function'' is undefined in SEC Rule 3b-7 and other SEC
regulations, the Commission believes that defining the term ``policy-
making authority'' in Sec. 910.1 would provide greater clarity and
facilitate compliance with the final rule. The final rule applies to a
wider range of business entities than SEC rules, and the Commission
seeks to minimize the need to consult with counsel about the meaning of
this term. The Commission is also concerned that if the term is left
undefined, employers could, inadvertently or otherwise, label too many
workers who have any involvement in the employer's policy making as
senior executives, especially workers without bargaining power.
---------------------------------------------------------------------------

\715\ Id.
---------------------------------------------------------------------------

In defining this term, the Commission seeks to broadly align with
the SEC's definition of ``executive officer'' while focusing on senior
executives in a wider variety of entities, who are less likely to
experience exploitation and coercion. As explained in Part IV.C.4.b
with respect to the compensation threshold, there is no job duties test
that will exclude every worker who experiences exploitation and
coercion with respect to non-competes while including every worker who
does not. Building on the SEC definition provides firms and workers
with a more administrable definition that isolates workers at the most
senior level of an organization.
To ensure that the final rule's job duties test for senior
executives broadly aligns with the SEC definition, the Commission
looked to case law interpreting that SEC definition. Few courts have
interpreted SEC Rule 3b-7's ``policy making function'' language, though
some courts view it as an officer test.\716\ In the most in-depth
discussion, the U.S. District Court for DC considered a defendant who
was a member of a corporate body that discussed important policy
decisions and made recommendations to the CEO, and supervised and had
``substantial influence'' over a major aspect of the company's
business. However, the court held that only the CEO, and not the
defendant, had authority to make company policy and ultimate decisions
on significant issues.\717\ The court conducted a fact-intensive
analysis of the defendant's duties and held that the defendant did not
have the authority to make policy. The court also held that the term
did not include individuals solely ``involved in discussing company
strategy and policy.'' \718\
---------------------------------------------------------------------------

\716\ See, e.g., SEC v. Enters. Solutions, 142 F. Supp. 2d 561,
570, 574 (S.D.N.Y. 2001) (finding that a so-called consultant's role
was ``sufficiently similar to the duties of an officer or director
of the company that his involvement, along with his history of
criminal and regulatory violations, ought to have been disclosed''
where the consultant controlled the company, including hiring the
CEO, arranging loans from companies controlled by the consultant,
negotiating acquisitions, and putting his daughter on the board in
his place); In re Weeks, SEC Release No. 8313 at *9 (Oct. 23, 2003)
(finding a consultant was de facto in charge of the company while
the officers and directors were figureheads who lacked authority and
influence over the company).
\717\ SEC v. Prince, 942 F. Supp. 2d 108, 133-36 (D.D.C. 2013).
\718\ Id. at 136.
---------------------------------------------------------------------------

The Commission finds this case law instructive and thus defines
``policy-making authority'' in the final rule as ``final authority to
make policy decisions that control significant aspects of a business
entity and does not include authority limited to advising or exerting
influence over such policy decisions.'' Adding this definition provides
stakeholders with additional clarity as to what type of authority meets
the definition of ``senior executive'' and prevents overbroad
application of the definition. It expressly does not include workers
who merely advise on or influence policy, as a wide range of workers in
an organization can advise on or influence policy without being a
senior executive.
In order to ensure that lower-level workers, whom the Commission
finds likely experience exploitation and coercion, are not included in
the definition of senior executive, policy-making authority is assessed
based on the business as a whole, not a particular office, department,
or other sublevel. It considers the authority a worker has to make
policy decisions that control a significant aspect of a business entity
without needing a higher-level worker's approval. For example, if the
head of a marketing division in a manufacturing firm only makes policy
decisions for the marketing division, and those decisions do not
control significant aspects of the business (which would likely be
decisions that impact the business outside the marketing division),
that worker would not be considered a senior executive. Similarly, in
the medical context, neither the head of a hospital's surgery practice
nor a physician who runs an internal medical practice that is part of a
hospital system would be senior executives, assuming they are decision-
makers only for their particular division. The definition is limited to
the workers with sufficient pay and authority such that they are more
likely to have meaningful bargaining power and actually negotiated
their non-competes.
For the same reason, the Commission added language to the
definitions of ``policy-making authority'' and ``policy-making
position'' to exclude from the definition of ``senior executives''
workers with policy-making authority over only a subsidiary or
affiliate of a common enterprise who do not have policy-making
authority over the common enterprise. One commenter argued that the
proposed definition of ``business entity'' would allow firms to divide
themselves into separate entities to evade the final rule. In addition
to sharing this concern, the Commission is concerned that executives of
subsidiaries or affiliates of a common enterprise \719\ could rely on
their final authority to make policy decisions for only that subsidiary
or affiliate to classify the head of each office as a senior executive
even though that individual only has authority over one component of a
coordinated common enterprise. Rather, the worker must have policy-
making authority with respect to the common enterprise as a whole, not
just a segment of it, to be a senior executive. Workers who head a
subsidiary or affiliate of a common enterprise are similar to
department heads; the senior executives controlling the entire common
enterprise control those individual subsidiaries and affiliates. As the
Commission has explained, the Commission finds that department heads
and other highly paid non-senior executives do not have sufficient
bargaining power to avoid exploitation and coercion and are unlikely to
have bargained in connection with non-competes. The job duties test
identifies the workers with the highest levels of authority in an
organization, i.e., the workers most likely to have bargaining power
and a bespoke, negotiated agreement, and a

[[Page 38420]]

common enterprise is effectively a single organization. Such workers
may have a senior executive job title, but they are unlikely to meet
the job duties test.
---------------------------------------------------------------------------

\719\ FTC v. WV Universal Mgmt., LLC, 877 F.3d 1234, 1240 (11th
Cir. 2017) (``[C]ourts have justly imposed joint and several
liability where a common enterprise exists'').
---------------------------------------------------------------------------

To be considered a ``common enterprise'' for the purposes of
defining policy-making authority and policy-making position, the
Commission looks beyond legal corporate entities to whether there is a
common enterprise of ``integrated business entities.'' \720\ This means
that the various components of the common enterprise have, for example,
one or more of the following characteristics: maintain officers,
directors, and workers in common; operate under common control; share
offices; commingle funds; and share advertising and marketing.\721\
Therefore, the definitions of policy-making authority and policy-making
position include provisions whose purpose is to exclude those
executives of a subsidiary or affiliate of a common enterprise from
being considered senior executives. For example, if a business operates
in several States and its operations in each State are organized as
their own corporation, assuming these businesses and the parent company
meet the criteria for a common enterprise, the head of each State
corporation would not be a senior executive. Rather, only the senior
executives of the parent company (or whichever company is making policy
decisions for the common enterprise) could qualify as senior executives
for purposes of this final rule, because they are the workers with the
highest level of authority in the organization and most likely to have
bargaining power and a bespoke, negotiated agreement. However, a worker
could qualify as a senior executive even if they were an executive of
one or more subsidiaries or affiliates of the common enterprise, so
long as that senior executive exercised policy-making authority over
the common enterprise in its entirety. These provisions are consistent
with the approach taken elsewhere in this final rule to focus on real-
world implications and authority rather than formal titles, labels, or
designations. This exclusion from the definitions of ``policy-making
authority'' and ``policy-making position'' applies only to common
enterprises; for subsidiaries or affiliates that are not part of a
common enterprise, a worker could qualify as a senior executive if they
have policy-making authority over that subsidiary or affiliate and meet
all of the requirements.
---------------------------------------------------------------------------

\720\ See FTC v. E.M.A. Nationwide, Inc., 767 F.3d 611, 636-37
(6th Cir. 2014).
\721\ See id. (```If the structure, organization, and pattern of
a business venture reveal a `common enterprise' or a `maze' of
integrated business entities, the FTC Act disregards corporateness.
Courts generally find that a common enterprise exists `if, for
example, businesses (1) maintain officers and employees in common,
(2) operate under common control, (3) share offices, (4) commingle
funds, and (5) share advertising and marketing.''') (quoting FTC v.
Wash. Data. Res., 856 F. Supp. 2d 1247, 1271 (M.D. Fla. 2012)). In
assessing a common enterprise, ``no one factor is controlling,'' and
``federal courts routinely consider a variety of factors.'' FTC v.
Wyndham Worldwide Corp., No. CIV.A. 13-1887 ES, 2014 WL 2812049, at
*7 (D.N.J. Jun. 23, 2014); see also Del. Watch Co. v. FTC, 332 F.2d
745, 746 (2d Cir. 1964) (``[T]he pattern and frame-work of the whole
enterprise must be taken into consideration.'')
---------------------------------------------------------------------------

The Commission has also substituted ``business entity'' in the
definitions of ``officer'' and ``policy-making position'' where SEC
Rule 3b-7 uses the word ``registrant'' and 17 CFR 240.3b-2 uses
``organization,'' because ``registrant'' has a specific meaning in the
SEC context that is inapplicable to the wider array of business
entities covered by this final rule and because ``business entity'' is
defined in Sec. 910.1 and is used throughout this final rule. The
Commission substituted ``natural person'' where SEC Rule 3b-7 and 17
CFR 240.3b-2 use ``person'' because ``person'' is separately defined
for purposes of this final rule in Sec. 910.1.
ii. Other Proposed Job Duties Tests
The FLSA
Numerous commenters suggested basing a job duties test on the
categories of occupations that are exempt from requirements under the
FLSA. Some commenters suggested using only some of the exemptions such
as executive employees,\722\ administrative employees, learned or
creative professionals, or workers in the practice of medicine.\723\
DOL's regulations also set a salary threshold at not less than $684 per
week ($35,568 annually),\724\ though other commenters suggested using a
higher compensation threshold.
---------------------------------------------------------------------------

\722\ See 29 CFR 541.100(a).
\723\ See DOL, Fact Sheet #17A: Exemption for Executive,
Administrative, Professional, Computer & Outside Sales Employees
Under the Fair Labor Standards Act (FLSA) (revised Sept. 2019),
https://www.dol.gov/agencies/whd/fact-sheets/17a-overtime.
\724\ Id.
---------------------------------------------------------------------------

One civic organization opposed applying any FLSA exemptions,
stating that the FLSA provides numerous exemptions that do not relate
to any non-compete policy considerations, and an exception or more
lenient standards for FLSA-exempt workers would not solve the problems
caused by non-competes. It opposed using the FLSA's executive,
administrative, or professional exemptions, arguing that updates to the
FLSA's salary threshold are often delayed and outdated, often falling
below the poverty threshold, and the duties test serves as a loophole
for wage and hour protections.
Commenters offered several reasons for adopting the FLSA
exemptions: these categories are already well-established in Federal
law; nonexempt workers under the FLSA tend not to have access to trade
secrets or be able to take an employer's goodwill and are thus less
likely to harm the employer; the exemptions would capture both wage and
job duties tests; some States use a similar standard to the FLSA in
their non-compete statutes; and the exemptions would ban non-competes
for low-skilled workers for whom there are insufficient justifications
for non-competes. An employment attorney also pushed back on the NPRM's
concerns that the FLSA exemptions could enable misclassification,\725\
asserting that misclassification under the FLSA is unlawful and
penalized, and thus usually inadvertent.
---------------------------------------------------------------------------

\725\ See NPRM at 3511.
---------------------------------------------------------------------------

The Commission does not adopt the FLSA exemptions for purposes of
this final rule because it would exempt millions of non-competes that
harm competition and workers. For example, the FLSA exempts most highly
paid and highly skilled workers,\726\ who the Commission finds
experience exploitation and coercion (except where those workers are
also senior executives).\727\ The Commission also adopts brighter-line
rules than the FLSA to ease compliance burdens and address in terrorem
effects that result from uncertainty about whether a non-compete is
unenforceable.\728\ Although the Commission does not believe that the
FLSA job duties tests are appropriate for this final rule, it does view
the FLSA wage threshold methodology for ``highly compensated
employees'' as a useful benchmark.\729\
---------------------------------------------------------------------------

\726\ See 2023 FLSA NPRM at 62190 (estimating that 36.4 million
salaried, white-collar employees currently qualify as FLSA-exempt
executive, administrative, or professional employees).
\727\ See Part IV.C.1.
\728\ See Part IX.C.
\729\ See Part IV.C.4.b.
---------------------------------------------------------------------------

Trade Secret and Confidential Information Exceptions
Numerous commenters urged the Commission not to ban non-competes
for workers who have access to trade secrets and confidential
information, often noting this justification is commonly used for
highly paid and highly skilled workers, including senior executives.
One comment expressly stated that this exception should apply
regardless of earnings, though many

[[Page 38421]]

others did not mention compensation thresholds. One business suggested
a bright-line rule for the types of confidential business information
that can be protected by a non-compete based on existing State
statutes, to increase certainty about what is allowed. Commenters
suggested exceptions based on a variety of job types they viewed as
more likely to be exposed to trade secrets and confidential
information, including all highly skilled workers; key scientific,
technical, R&D, or sales workers; or workers with highly detailed
knowledge of business and marketing plans. The Commission explains why
it is not adopting exceptions based on access to trade secrets or other
intellectual property in Parts V.D.1 and V.D.2.
Additional Proposed Job Duties and Job Title Tests
The Commission carefully considered several other proposed tests.
The NPRM stated that the Commission could base the definition of senior
executive on SEC Regulation S-K's definition of senior executives.\730\
Commenters did not discuss this potential option. The Commission is not
adopting this approach because it bears little relation to the
likelihood that a senior executive bargained for a non-compete, and
because it would designate roughly seven individuals per company as
``senior executives'' regardless of their compensation level or the
size of the company, meaning it would not apply equally among employers
or workers.\731\ For example, a ten-person company could potentially
use non-competes for most of its workforce irrespective of whether they
are senior executives, whereas a company with ten thousand employees
would be limited to the same number.\732\
---------------------------------------------------------------------------

\730\ See NPRM at 3520 (citing 17 CFR 229.402(a)(3)).
\731\ See 17 CFR 229.402(a)(3).
\732\ Additionally, while the reporting obligations of public
companies may provide them with an incentive to avoid generating a
profusion of ``senior executives,'' privately held companies would
not face a similar constraint and could potentially avoid any ``per-
company'' limitations through corporate restructuring.
---------------------------------------------------------------------------

One commenter proposed adopting a definition similar to the tax
code provision on ``golden parachute payments.'' \733\ Several
commenters drafted their own definition of senior executive based on
job duties, titles, or ownership status, such as C-suite executives and
their immediate subordinates, partners and equity holders, managers,
workers involved in strategic decision-making, and more.
---------------------------------------------------------------------------

\733\ This provision determines who is an ``officer'' ``on the
basis of all the facts and circumstances in the particular case
(such as the source of the individual's authority, the term for
which the individual is elected or appointed, and the nature and
extent of the individual's duties) . . . .'' Treas. Reg. sec.
1.280G-1, Q/A-18.
---------------------------------------------------------------------------

The Commission carefully considered each proposed definition and
how it would operate in practice before selecting the two-part test.
Elements of some of these proposals, such as strategy development or
decision-making, are also similar to the job duties test the Commission
is finalizing. The Commission believes that definitions based on job
titles alone would be inadequate because, as one industry association
commented, employers define job titles differently, and a title might
not accurately reflect a worker's job duties. The other definitions
proposed by commenters, such as the provision on golden parachute
payments, would generally require a more fact-intensive analysis than
the job duties test the Commission is adopting. Market participants
would need to conduct the analysis for more workers, including workers
who are exploited and coerced by non-competes. A more fact-intensive
analysis would require more resources for litigation and is thus likely
to have in terrorem effects for lower-wage workers.\734\ Moreover, many
of these proposals would exempt more workers than the Commission's
definition, such as managers, even though workers in such roles and
occupations are often coerced and exploited by non-competes.
---------------------------------------------------------------------------

\734\ See Part IX.C.
---------------------------------------------------------------------------

As explained in this Part, the Commission pairs a relatively easy-
to-apply job duties test with a compensation threshold to maximize
administrability and clarity while identifying those senior executives
most likely to have bargained for non-competes. In addition, proposals
to except partners, shareholders, and similar groups are likely covered
by the sale of business exception if they sell their share of the
business upon leaving.
5. Prohibitions in Section 910.2(a)(2)
Based on the totality of the evidence, including its review of the
empirical literature, its review of the full comment record, and its
expertise in identifying practices that harm competition, the
Commission adopts Sec. 910.2(a)(2), which defines unfair methods of
competition related to non-competes with respect to senior executives.
Section 910.2(a)(2) provides that, with respect to a senior executive,
it is an unfair method of competition for a person: (i) to enter into
or attempt to enter into a non-compete clause; (ii) to enforce or
attempt to enforce a non-compete clause entered into after the
effective date; or (iii) to represent that the senior executive is
subject to a non-compete clause, where the non-compete clause was
entered into after the effective date. Part IV.A.1 sets forth the
Commission's determination that the foregoing practices are unfair
methods of competition under section 5, and Part IV.C.2 explains the
findings that provide the basis for this determination.
Section 910.2(a)(2) uses similar language as Sec. 910.2(a)(1);
however, there are two key differences. First, the prohibition in Sec.
910.2(a)(2)(ii) on enforcing or attempting to enforce a non-compete
applies only to non-competes entered into after the effective date.
Second, the prohibition in Sec. 910.2(a)(2)(iii) on representing that
a senior executive is subject to a non-compete applies only where the
non-compete was entered into after the effective date. Sections
910.2(a)(2)(ii) and (iii) include this language because, for the
reasons described in Part IV.C.3, the Commission has determined not to
prohibit existing non-competes with senior executives--i.e., non-
competes entered into before the effective date--from remaining in
effect.
Otherwise, the explanation of the three prongs of Sec. 910.2(a)(1)
in Part IV.B.4--relating to issues such as, for example, what ``attempt
to enter into'' and ``attempt to enforce'' mean, and what conduct the
``representation'' prong applies to--is applicable to the corresponding
language in Sec. 910.2(a)(2). The good-faith exception in Sec. 910.3
is also applicable to the relevant prohibitions with respect to senior
executives and is explained in Part V.C.

D. Claimed Justifications for Non-Competes Do Not Alter the
Commission's Finding That Non-Competes Are an Unfair Method of
Competition

For the reasons described in Parts IV.B and IV.C, the Commission
determines that certain practices related to non-competes are unfair
methods of competition under section 5. In this Part IV.D, the
Commission finds the claimed justifications for non-competes do not
alter the Commission's determination that non-competes are an unfair
method of competition.
As noted in Part II.F, some courts have declined to consider
justifications altogether and the Commission and courts have
consistently held that pecuniary benefit to the party responsible for
the conduct in question

[[Page 38422]]

is not cognizable as a justification.\735\ However, where defendants
raise justifications as an affirmative defense, they must be legally
cognizable,\736\ and non-pretextual,\737\ and any restriction used to
bring about the benefit must be narrowly tailored to limit any adverse
impact on competitive conditions.\738\
---------------------------------------------------------------------------

\735\ Atl. Refin. Co., 381 U.S. at 371 (considering that
defendant's distribution contracts at issue ``may well provide
Atlantic with an economical method of assuring efficient product
distribution among its dealers'' and holding that the ``Commission
was clearly justified in refusing the participants an opportunity to
offset these evils by a showing of economic benefit to
themselves''); FTC v. Texaco, 393 U.S. 223, 230 (1968) (following
the same reasoning as Atlantic Refining and finding that the
``anticompetitive tendencies of such system [were] clear''); L.G.
Balfour Co. v. FTC, 442 F.2d 1, 15 (7th Cir. 1971) (``While 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.''). For provisions of the antitrust laws
where courts have not accepted justifications as part of the legal
analysis, the Commission will similarly not accept justifications
when these claims are pursued through section 5.
\736\ See, e.g., FTC v. Ind. Fed'n of Dentists, 476 U.S. 447,
463 (1986); Fashion Originators' Guild of Am. v. FTC, 312 U.S. 457,
467-68 (1941); FTC v. Superior Ct. Trial Lawyers Ass'n, 493 U.S.
411, 423-24 (1990).
\737\ See, e.g., Ind. Fed'n of Dentists, 476 U.S. at 464. See
also United States v. Microsoft Corp., 253 F.3d 35, 62-64, 74 (D.C.
Cir. 2001); Eastman Kodak Co. v. Image Tech. Svcs., 504 U.S. 451,
484-85 (1992); Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472
U.S. 585, 608-10 (1985).
\738\ NCAA v. Alston, 594 U.S. 69, 99-104 (2021); Polygram
Holding, Inc. v. FTC, 416 F.3d 29, 38 (D.C. Cir. 2005); 2000
Collaboration Guidelines, sec. 3.36b. See also Union Circulation Co.
v. FTC, 241 F.2d 652, 658 (2d Cir. 1957) (``The agreements here went
beyond what was necessary to curtail and eliminate fraudulent
practices.'').
---------------------------------------------------------------------------

In the NPRM, the Commission considered the commonly cited business
justifications for non-competes and preliminarily found they did not
alter the Commission's determination that non-competes are an unfair
method of competition.\739\ The Commission has reviewed and considered
the comments on its analysis of the justifications for non-competes.
For two reasons, the claimed justifications for non-competes do not
alter the Commission's determination that non-competes are an unfair
method of competition. First, employers have more narrowly tailored
alternatives to non-competes for protecting valuable investments that
tend to negatively affect competitive conditions to a lesser degree.
Second, the asserted benefits from the claimed business justifications
from non-competes do not justify the considerable harm from non-
competes.
---------------------------------------------------------------------------

\739\ NPRM at 3504-08.
---------------------------------------------------------------------------

1. Claimed Business Justifications for Non-Competes and Empirical
Evidence
Claimed business justifications for non-competes relate to
increasing employers' incentives to make productive investments, such
as investments in worker human capital (worker training), client and
customer attraction and retention, or in creating or sharing trade
secrets or other confidential information with workers. According to
these asserted justifications, without non-competes, employment
relationships are subject to an investment hold-up problem. Investment
hold-up would occur where an employer--faced with the possibility that
a worker may depart after receiving some sort of valuable investment or
obtaining valuable information--opts not to make that investment in the
first place, thereby decreasing the firm's productivity and overall
social welfare. For example, according to this claimed justification,
an employer may be more reticent to make capital investments or invest
in workers' human capital by training its workers if it knows the
worker may depart for or may establish a competing firm. Similarly,
commenters argued that employers may decrease investments or experience
harm if a worker takes a trade secret or other confidential information
to a competitor.
Courts have cited these justifications when upholding non-competes
under State common law and in cases challenging non-competes under the
Sherman Act.\740\ However, courts have not considered non-competes'
aggregate harms, and neither legislatures nor courts have had occasion
to consider these justifications in the context of section 5. The
Commission has considered them and found them unavailing in cases in
which it has successfully obtained consent decrees against non-competes
alleged to be an unfair method of competition in violation of section
5.\741\
---------------------------------------------------------------------------

\740\ See, e.g., United States 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).
\741\ See FTC, In the Matter of O-I Glass, Inc and In the Matter
of Ardagh Group S.A., Ardagh Glass Inc., and Ardagh Glass Packaging
Inc., Analysis of Agreements Containing Consent Order to Aid Public
Comment, FTC File No. 2110182 (Jan. 4, 2023) at 6-7; FTC, In the
Matter of Prudential Security, Inc., et al., Analysis of Agreement
Containing Consent Order to Aid Public Comment, FTC File No. 2210026
(Jan. 4, 2023) at 7; FTC, In the Matter of Anchor Glass Container
Corp. et al., FTC File No. 2210182 Analysis of Agreement Containing
Consent Order to Aid Public Comment (Mar. 15, 2023) at 6.
---------------------------------------------------------------------------

There is some empirical evidence that non-competes increase
investment in human capital of workers, capital investment, and R&D
investment. However, the Commission also finds that there are
alternatives that burden competition to a lesser degree,\742\ and, in
any event, these claimed benefits do not justify the harms from non-
competes.\743\
---------------------------------------------------------------------------

\742\ See Part IV.D.2.
\743\ See Part IV.D.3.
---------------------------------------------------------------------------

As explained in the NPRM, a study by Evan Starr finds that moving
from mean non-compete enforceability to no non-compete enforceability
would decrease the number of workers receiving training by 14.7% in
occupations that use non-competes at a high rate (relative to a control
group of occupations that use non-competes at a low rate).\744\ The
study further finds that changes in training are primarily due to
changes in firm-sponsored, rather than employee-sponsored,
training.\745\
---------------------------------------------------------------------------

\744\ Starr, supra note 445 at 796-97.
\745\ Id. at 797.
---------------------------------------------------------------------------

Firm-sponsored training is the type of investment in human capital
that non-competes are often theorized to protect, as the firm may be
unwilling to make an unprotected investment. However, the study does
not distinguish between core training, i.e., training required to
perform job duties, and advanced training, i.e., training with
potential to increase productivity beyond the baseline requirements for
job performance. When non-competes are more enforceable, workers may
receive additional core training rather than advanced training, but
this may actually reflect a reduction in efficiency. When non-competes
are more enforceable, labor mobility decreases and workers may also
move to new industries to avoid potentially triggering non-compete
clause violations (as discussed in Part IV.B.2.b.ii), both of which
make experienced workers less often available for hire. Firms therefore
may need to train workers at a greater rate because they will hire
inexperienced workers who require more core training. On the other
hand, advanced training can be associated with productivity gains, and
firms using non-competes may increase rates of advanced training for
experienced workers because non-competes increase the likelihood that
firms receive a return on the training investment. The study does not
distinguish between these types of training, and thus leaves unclear
whether the observed increases in training reflect productivity gains
or losses (or neither in net).
Additionally, the Starr study uses data on the use of non-competes,
comparing high- and low-use occupations, rather than changes in
enforceability; however, the study does not examine differences between
individuals who are bound by non-

[[Page 38423]]

competes and individuals who are not. This study is the only study that
attempts to identify the causal link between non-competes and worker
human capital investment, and the Commission gives it some weight,
though not as much weight as it would receive if it examined changes in
non-compete enforceability. The Commission also weights it less highly
because it does not distinguish between core and advanced training.
The second study, by Jessica Jeffers, finds knowledge-intensive
firms invest substantially less in capital equipment following
decreases in the enforceability of non-competes, though the effect is
much more muted (and statistically insignificant) when considering all
industries.\746\ 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 R&D expenditure as a whole, which
is in large part composed of labor expenses. This allows the study to
isolate the effects of non-compete enforceability on investment from
other effects of non-competes, such as reduced worker earnings.
---------------------------------------------------------------------------

\746\ Jeffers, supra note 450 at 28. Jeffers reports 34%-39%
increases in capital investment due to increases in non-compete
enforceability at knowledge-intensive firms in the 2024 version of
the study, and the Commission calculates increases of 7.9% across
all sectors (see Part X.F.9.a.i).
---------------------------------------------------------------------------

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-competes reduce competition, and firms' returns to
capital expenditure are greater when competition is lower,
incentivizing firms to invest more in capital.\747\ Jeffers does not
find any impact of non-compete enforceability on R&D expenditure
(intangible investment). The sample in this study's examination of
capital investment is limited to incumbent firms, and the study also
finds decreases in new firm entry due to increases in non-compete
enforceability. The study therefore does not offer clear insights into
the overall net effect on capital investment (which includes investment
by incumbent firms as well as investment by entering firms).
Additionally, the Commission notes that if Jeffers' hypothesis--that
firms increase investment in capital because of decreased competition--
is correct, then this increased capital investment may not necessarily
reflect increased economic efficiency. Jeffers uses multiple changes in
non-compete enforceability, measured in a binary fashion, and the
Commission therefore gives this study substantial weight, but less
weight than studies which additionally measure enforceability in a non-
binary fashion.
---------------------------------------------------------------------------

\747\ Id. at 29.
---------------------------------------------------------------------------

Two studies published after the release of the NPRM also assess the
effects of non-competes on firm investments. A study by Johnson,
Lipsitz, and Pei revisits the form of the regressions used by Jeffers.
The authors find that greater non-compete enforceability increases R&D
expenditure.\748\ This is consistent with the NPRM's preliminary
finding, and the finding of the Jeffers study, that there is evidence
that non-competes increase employee human capital investment and other
forms of investment. The Commission gives this study substantial weight
because it examines multiple changes in non-compete enforceability
measured in a non-binary fashion.
---------------------------------------------------------------------------

\748\ Johnson, Lipsitz, and Pei, supra note 526.
---------------------------------------------------------------------------

Similarly, a study by Liyan Shi examines the relationship between
non-compete enforceability, the use of non-competes among executives,
and firm investment.\749\ Shi finds that intangible capital
(expenditure on R&D) is positively associated with use of non-competes,
especially in States that enforce non-competes more strictly. However,
Shi finds that--unlike in the Jeffers study--physical capital
expenditure has no relationship with the use of non-competes, even in
high enforceability States. The Commission notes that this evidence
pertains specifically to non-competes with highly paid senior
executives: the executives in Shi's study earned $770,000 in cash
compensation, on average. The Commission also notes that this evidence
arises from analysis of non-compete use coupled with non-compete
enforceability. The Commission therefore gives less weight to these
empirical findings.
---------------------------------------------------------------------------

\749\ Shi, supra note 84.
---------------------------------------------------------------------------

As the NPRM described, there are also two studies examining the
impact of non-compete use (as opposed to non-compete enforceability) on
investment. However, these studies simply compare differences between
samples of workers that do and do not use non-competes, a methodology
the Commission gives less weight to.\750\ The first is a study by
Starr, Prescott, and Bishara using their 2014 survey of non-compete
use. They find no statistically significant association with either
training or the sharing of trade secrets (after inclusion of control
variables) but do not examine other investment outcomes.\751\ The
second study, by Johnson and Lipsitz, examines investment in the hair
salon industry. That study finds that firms that use non-competes 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.\752\
---------------------------------------------------------------------------

\750\ See Part IV.A.2.
\751\ Starr, Prescott, & Bishara, supra note 68 at 76.
\752\ Johnson & Lipsitz, supra note 80 at 711.
---------------------------------------------------------------------------

As the Commission stated in the NPRM, it gives these two studies
(the 2021 Starr, Prescott, and Bishara studies and the 2021 Johnson and
Lipsitz studies) minimal weight, because they do not necessarily
represent causal relationships, a point recognized by the authors of
both of these studies.\753\ Similar to other studies of non-compete
use--as opposed to changes in non-compete enforceability--these studies
are less reliable because the use of non-competes and the decision to
invest may be jointly determined by other characteristics of the firms,
labor markets, or product markets.\754\
---------------------------------------------------------------------------

\753\ Starr, Prescott, & Bishara, supra note 68 at 73; Johnson &
Lipsitz, supra note 80 at 711.
\754\ See Part IV.A.2 (describing the analytical framework the
Commission is applying to weigh the empirical studies, including why
it assigns greater weight to studies assessing changes in non-
compete enforceability than to studies of non-compete use).
---------------------------------------------------------------------------

One additional study, by Younge and Marx, finds that the value of
publicly traded firms increased by 9% due to an increase in non-compete
enforceability.\755\ As the Commission noted in the NPRM, the authors
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 Parts IV.B and
IV.C. As the NPRM stated, if the 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 benefit of non-competes. 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.\756\ This study

[[Page 38424]]

does not address the effects of non-competes on firm investments
specifically.
---------------------------------------------------------------------------

\755\ Kenneth A. Younge & Matt Marx, The Value of Employee
Retention: Evidence from a Natural Experiment, 25 J. Econ. & Mgmt.
Strategy 652 (2016).
\756\ Id. at 674.
---------------------------------------------------------------------------

As the Commission stated in the NPRM, it is unaware of any evidence
of a relationship between the enforceability of non-competes and the
rate at which companies invest in creating or sharing trade
secrets.\757\ Similarly, the Commission is unaware of any evidence non-
competes reduce trade secret misappropriation or the loss of other
types of confidential information, difficult areas for researchers to
study given the lack of reliable data on firms' trade secrets and
confidential information.\758\ As explained in Part IV.D.2, even
assuming non-competes do reduce misappropriation or information loss,
the Commission finds that there are alternatives to protect these
investments that burden competition to a lesser degree.
---------------------------------------------------------------------------

\757\ Recent evidence suggests that trade secret litigation does
not increase following bans on non-competes. Brad N. Greenwood,
Bruce Kobayashi, Evan Starr, Can You Keep a Secret? Banning
Noncompetes Does Not Increase Trade Secret Litigation (2024),
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4771171. The
Commission does not rely on this study to support the findings
described in this Part IV.D.
\758\ 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. 106, 120-
22 (2018).
---------------------------------------------------------------------------

2. Employers Have Alternatives to Non-Competes for Protecting Valuable
Investments
a. The Proposed Rule
In the NPRM, the Commission preliminarily found that employers have
alternatives to non-competes for protecting valuable investments.\759\
The Commission stated that these alternatives may not be as protective
as employers would like, but they reasonably accomplish the same
purposes as non-competes while burdening competition to a less
significant degree.\760\
---------------------------------------------------------------------------

\759\ NPRM at 3505-07.
\760\ Id.
---------------------------------------------------------------------------

The Commission stated that trade secret law--a form of intellectual
property law that protects confidential business information--already
provides significant legal protections for an employer's trade
secrets.\761\ The Commission also stated that employers that seek to
protect valuable investments are able to enter into NDAs with their
workers. NDAs, which are also commonly known as confidentiality
agreements, are contracts in which a party agrees not to disclose or
use information designated as confidential.\762\ The Commission further
stated that, if an employer wants to prevent a worker from leaving
right after receiving valuable investment in their human capital, the
employer can sign the worker to an employment contract with a fixed
duration.\763\ In addition, the Commission stated that employers that
wish to retain their workers can also pay their workers more, offer
them better hours or better working conditions, or otherwise improve
the conditions of their employment--i.e., compete to retain their labor
services.\764\
---------------------------------------------------------------------------

\761\ Id. at 3505-06.
\762\ Id. at 3506-07.
\763\ Id. at 3507.
\764\ Id.
---------------------------------------------------------------------------

The Commission also noted that in three States--California, North
Dakota, and Oklahoma--employers generally cannot enforce non-competes,
so they must protect their investments using one or more of these less
restrictive alternatives.\765\ The Commission stated that the economic
success in these three States of industries that are highly dependent
on trade secrets and other confidential information illustrates that
companies have viable alternatives to non-competes for protecting
valuable investments.\766\
---------------------------------------------------------------------------

\765\ Since the NPRM was issued, Minnesota has become the fourth
State to make non-competes unenforceable. See Minn. Stat. Ann. sec.
181.988 (effective July 1, 2023).
\766\ NPRM at 3507.
---------------------------------------------------------------------------

b. The Commission's Final Findings
Based on the totality of the evidence, including its review of the
empirical literature, its review of the full comment record, and its
expertise in identifying practices that harm competition, the
Commission in this final rule finds that the asserted business
justifications for non-competes do not alter the Commission's
determination that non-competes are an unfair method of competition.
Employers have alternatives to non-competes for protecting valuable
investments that burden competition to a less significant degree.
Rather than restraining a broad scope of beneficial competitive
activity--by barring workers altogether from leaving work with the
employer or starting a business and by barring competing employers and
businesses from hiring those workers--these alternatives are much more
narrowly tailored to limit impacts on competitive conditions.
For the protection of trade secrets and other confidential
information, these alternatives include enforcement of intellectual
property rights under trade secret and patent law, NDAs, and invention
assignment agreements. Employers also have alternative mechanisms to
protect their investments in worker human capital, including fixed
duration contracts, and competing on the merits to retain workers by
providing better pay and working conditions.
The experiences of certain States in banning non-competes bolster
this conclusion. Non-competes have been void in California, North
Dakota, and Oklahoma since the 1800s.\767\ In these three States,
employers generally cannot enforce non-competes, so they must protect
their investments using one or more less restrictive alternatives.
There is no evidence that employers in these States have been unable to
protect their investments (whether in human capital, physical capital,
intangible assets, or otherwise) or have been disincentivized from
making them to any discernible degree. Rather, in each of these States,
industries that depend on highly trained workers and trade secrets and
other confidential information have flourished. California, for
example, is home to four of the world's ten largest companies by market
capitalization, and it also maintains a vibrant startup culture.\768\
Technology firms are highly dependent on highly-trained and skilled
workers as well as protecting trade secrets and other confidential
information--and, since the 1980s, California has become the epicenter
of the global technology sector, even though employers cannot enforce
non-competes.\769\ Indeed, researchers have posited that high-tech
clusters in California may have been aided by increased labor mobility
due to the unenforceability of non-competes.\770\ In

[[Page 38425]]

North Dakota and Oklahoma, the energy industry has thrived, and firms
in the energy industry depend on highly-trained workers as well as the
ability to protect trade secrets and other confidential information.
---------------------------------------------------------------------------

\767\ Non-competes have been void in California since 1872, in
North Dakota since 1865, and in Oklahoma since 1890. See 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, 616 (1999) (California); Werlinger v. Mut. Serv.
Casualty Ins. Co., 496 NW2d 26, 30 (N.D. 1993) (North Dakota);
Brandon Kemp, Noncompetes in Oklahoma Mergers and Acquisitions, 88
Okla. Bar J. 128 (2017) (Oklahoma). Minnesota also recently
prohibited non-competes, through a law that took effect in July
2023. See Minn. Stat. sec. 181.988. However, Minnesota's experience
is too new to draw conclusions about the ability of industries that
depend on trade secrets to thrive where non-competes are
unenforceable.
\768\ Josh Dylan, What Is Market Cap In Stocks?, Nasdaq.com
(Aug, 12, 2022), https://www.nasdaq.com/articles/whatmarketcap-in-
stocks; Ewing Marion Kauffman Found., State Entrepreneurship
Rankings, https://www..com/public_affairs//02/25/
_foundation_state_entrepreneurship_rankings.html.
\769\ See, e.g., Gilson, supra note 767 at 594-95.
\770\ See, e.g., id. at 585-86, 590-97; 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).
---------------------------------------------------------------------------

The Commission finds that the economic success in these three
States of industries that are highly dependent on highly trained
workers, trade secrets, and other confidential information illustrates
that non-competes are not necessary to protect employers' legitimate
interests in trained workers or securing their intellectual property
and confidential information. These alternatives are available to
employers and viable both with respect to senior executives and to
workers other than senior executives. The Commission addresses these
alternatives in this Part IV.D.2.b and summarizes and responds to the
comments on these alternatives in Part IV.D.2.c.
i. Trade Secret Law
The Commission finds that trade secret law provides employers with
a viable, well-established means of protecting investments in trade
secrets, without the need to resort to the use of non-competes with
their attendant harms to competition. Trade secret law is a form of
intellectual property law that is specifically focused on providing
employers with the ability to protect their investments in trade
secrets.\771\
---------------------------------------------------------------------------

\771\ Brian T. Yeh, Protection of Trade Secrets: Overview of
Current Law and Legislation, Cong. Rsch. Serv. 4 (Apr. 22, 2016)
(Report R43714), https://sgp.fas.org/crs/secrecy/R43714.pdf.
---------------------------------------------------------------------------

Forty-seven States and DC have adopted the Uniform Trade Secrets
Act (``UTSA'').\772\ 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.\773\ The UTSA also provides for injunctive and monetary
relief, including compensatory damages, punitive damages, and
attorney's fees.\774\
---------------------------------------------------------------------------

\772\ See Levine & Seaman, supra note 758 at 113. The three
States that have not adopted the UTSA offer protection to trade
secrets under a different statute or under common law. Yeh, supra
note 771 at 6 n.37.
\773\ Uniform Trade Secrets Act with 1985 Amendments (Feb. 11,
1986) at sec. 1(2).
\774\ Id. at secs. 2-4.
---------------------------------------------------------------------------

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.\775\ 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.'' \776\ 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.\777\ 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.'' \778\ There is thus a clear Federal statutory protection
that specifically governs protection of trade secrets.
---------------------------------------------------------------------------

\775\ Defend Trade Secrets Act of 2016, Public Law 114-153, 130
Stat. 376, 379 (2016).
\776\ U.S. Senate, Report to Accompany S. 1890, the Defend Trade
Secrets Act of 2016, S. Rep. No. 114-220 at 3 (2016).
\777\ 18 U.S.C. 1836(b)(3).
\778\ 18 U.S.C. 1836(b)(2).
---------------------------------------------------------------------------

Trade secret theft is also 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'').\779\ The EEA authorizes substantial criminal fines
and penalties for these crimes.\780\ 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.\781\ The EEA also requires offenders to pay
restitution to victims of trade secret theft.\782\
---------------------------------------------------------------------------

\779\ 18 U.S.C. 1831 (economic espionage); 18 U.S.C. 1832 (theft
of trade secrets).
\780\ 18 U.S.C. 1831 through 1832.
\781\ 18 U.S.C. 1834, 2323.
\782\ 18 U.S.C. 1834, 2323.
---------------------------------------------------------------------------

Under the UTSA, DTSA, and EEA, the term ``trade secret'' is defined
expansively and includes a wide range of confidential information.\783\
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 that 1,156 trade secret lawsuits were filed in
Federal court in 2022.\784\ In addition, an analysis by the law firm
Morrison Foerster finds that 1,103 trade secret cases were filed in
State courts in 2019.\785\ The number of cases filed in State court has
held steady since 2015, when 1,161 cases were filed.\786\ The fact that
a considerable number of trade secret lawsuits are filed in Federal and
State courts--over 2,200 cases per year--and the fact that this number
has held relatively steady for several years suggests that many
employers themselves view trade secret law as a viable means of
obtaining redress for trade secret theft.
---------------------------------------------------------------------------

\783\ 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. UTSA, supra note 773 at sec. 1(4).
The DTSA and EEA use a similar definition. 18 U.S.C. 1839(3). The
Supreme Court has held that ``some novelty'' is required for
information to be a trade secret, because ``that which does not
possess novelty is usually known.'' Kewanee Oil Co. v. Bicron Corp.,
416 U.S. 470, 476 (1974). As the high court of one State noted in
applying a State statute based on the UTSA, ``business information
may . . . fall within the definition of a trade secret, including
such matters as maintenance of data on customer lists and needs,
source of supplies, confidential costs, price data and figures.''
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, 959 (7th Cir. 2006) (``A trade secret is really
just a piece of information (such as a customer list, or a method of
production, or a secret formula for a soft drink) that the holder
tries to keep secret by executing confidentiality agreements with
employees and others and by hiding the information from outsiders by
means of fences, safes, encryption, and other means of concealment,
so that the only way the secret can be unmasked is by a breach of
contract or a tort.'').
\784\ Gloria Huang, Lex Machina Releases its 2023 Trade Secret
Litigation Report, Lex Machina (Jul. 13, 2023), https://.com/blog/
lex-machina-releases-its-2023-trade-secret-litigation-report/.
\785\ Kenneth A. Kuwayti & John R. Lanham, Morrison Foerster,
Client Alert, Happy Anniversary, DTSA: The Defend Trade Secrets Act
at Five (May 25, 2021), https://www.mofo.com///210525-defend-trade-secrets-act-dtsa.
\786\ Id. at n.5.
---------------------------------------------------------------------------

The use of trade secret law burdens competition to a lesser degree
than the use of non-competes. Trade secret law provides firms with a
viable means of redressing trade secret misappropriation--and deterring
trade secret misappropriation by workers--without blocking beneficial
competitive activity, such as workers switching to jobs in which they
can be more productive or starting their own businesses.
ii. NDAs
NDAs provide employers with another well-established, viable means
for protecting valuable investments.\787\

[[Page 38426]]

NDAs are contracts in which a party agrees not to disclose and/or use
information designated as confidential. If a worker violates an NDA,
the worker may be liable for breach of contract.\788\ Employers
regularly use NDAs to protect trade secrets and other confidential
business information. Researchers estimate that between 33% and 57% of
U.S. workers are subject to at least one NDA.\789\ One study finds that
95.6% of workers with non-competes are also subject to an NDA; 97.5% of
workers with non-competes are also subject to a non-solicitation
agreement, NDA, or a non-recruitment agreement; and 74.7% of workers
with non-competes are subject to all three provisions.\790\ In most
States, NDAs are more enforceable than non-competes.\791\ While some
commenters argued that NDAs would not be an adequate alternative to
non-competes because of the NPRM's proposed functional definition of
``non-compete clause,'' the final rule will not prevent employers from
adopting garden-variety NDAs; rather, it prohibits only NDAs that are
so overbroad as to function to prevent a worker from seeking or
accepting employment or operating a business.\792\
---------------------------------------------------------------------------

\787\ The Commission uses 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 S. Arnow-Richman et al., Supporting
Market Accountability, Workplace Equity, and Fair Competition by
Reining In Non-Disclosure Agreements, UC-Hastings Research Paper 2-6
(Jan. 2022), https://papers.ssrn.com/sol3/.?abstract_=.
\788\ See Chris Montville, Reforming the Law of Proprietary
Information, 56 Duke L.J. 1159, 1168 (2007).
\789\ Arnow-Richman, supra note 787 at 2-3.
\790\ Balasubramanian, Starr, & Yamaguchi, supra note 74 at 44.
The value 97.5% is calculated as (1-0.6%/24.2%), where 0.6%
represents the proportion of workers with only a non-compete (see
Table 1 on page 36), and no other post-employment restriction, and
24.2% represents the proportion of workers with a non-compete,
regardless of what other post-employment restrictions they have.
\791\ Montville, supra note 788 at 1179-83.
\792\ See Part III.D.2.b.
---------------------------------------------------------------------------

Appropriately tailored NDAs burden competition to a lesser degree
than non-competes. Such NDAs may prevent workers from disclosing or
using certain information, but they generally do not prevent workers
from seeking or accepting other work, or starting their own business,
after their employment ends. As the Tenth Circuit has stated, workers
subject to NDAs, unlike workers subject to non-competes, ``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.\793\
---------------------------------------------------------------------------

\793\ MAI Basic Four, Inc. v. Basis, Inc., 880 F.2d 286, 288
(10th Cir. 1989).
---------------------------------------------------------------------------

iii. Other Means of Protecting Valuable Investments
The Commission finds that employers have additional well-
established means of protecting valuable investments in addition to
trade secret law and NDAs. For the protection of trade secrets and
other confidential information, the Commission finds that these
additional means include patent law and invention assignment
agreements. Patent law provides inventors with the right, for a certain
period of time, to exclude others from making, using, offering for
sale, or selling an invention or importing it into the U.S.\794\ During
the period when patent protection is effective, patents grant the
patent holder these exclusive rights, while other firms may use trade
secrets if they are independently developed, reverse-engineered, or
inadvertently disclosed.\795\ In some cases, however, firms may choose
to keep their invention a trade secret rather than seeking a patent
because patent protection only lasts a certain number of years, after
which the invention becomes part of the public domain.\796\ Where a
technology, process, design, or formula is able to meet the rigorous
standards for patentability, patent law provides companies with a less
restrictive alternative than non-competes for protecting it.\797\
---------------------------------------------------------------------------

\794\ 35 U.S.C. 271.
\795\ Yeh, supra note 771 at 3-4.
\796\ Id. at 4-5. See also United States v. Dubilier Condenser
Corp., 289 U.S. 178, 186 (1933) (rather than seeking a patent, an
inventor ``may keep his invention secret and reap its fruits
indefinitely.'').
\797\ Yeh, supra note 771 at 4-5.
---------------------------------------------------------------------------

Employers can further protect their property interests in these
forms of intellectual property through appropriately tailored invention
assignment agreements. These are agreements that give the employer
certain rights to inventions created by the employee during their
employment with a firm.\798\ Like patent law, this tool, when
appropriately tailored, provides employers with additional protection
for some of their most valuable intellectual property interests.
---------------------------------------------------------------------------

\798\ See, e.g., Milliken & Co. v. Morin, 731 SE2d 288, 294-95
(S.C. 2012); Revere Transducers, Inc. v. Deere & Co., 595 NW2d 751,
759-60 (Iowa 1999); Ingersoll-Rand Co. v. Ciavatta, 542 A.2d 879,
886-87 (N.J. 1988).
---------------------------------------------------------------------------

With respect to investments in worker human capital, the Commission
finds that these less restrictive alternatives include fixed duration
contracts and competing on the merits to retain workers. 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 that is long
enough for the employer to recoup its human capital investment, without
restricting who the worker can work for, or their ability to start a
business, after their employment ends. In doing so, the employer makes
a commitment to the worker and vice versa.
Finally, instead of using non-competes to lock in workers, the
Commission finds that employers that wish to retain their workers can
also compete on the merits for the worker's labor services--i.e., they
can provide a better job than competing employers by paying their
workers more, offering them better hours or better working conditions,
or otherwise improving the conditions or desirability of their
employment. These are all viable tools for protecting human capital
investments and other investments an employer may make that do not rely
on suppressing competition.
c. Comments and Responses to Comments
Many commenters agreed with the Commission's preliminary finding
that employers have less restrictive alternatives to non-competes.
These commenters asserted that trade secret law, combined with NDAs,
creates a powerful deterrent to post-employment disclosures of trade
secrets and confidential information, and that these tools adequately
protect valuable investments in the absence of non-competes. The
Commission agrees with these commenters. Other commenters asserted that
the alternatives to non-competes identified in the NPRM are inadequate
for protecting employer investments. The Commission summarizes and
responds to the comments it received on less restrictive alternatives
in this Part IV.D.2.c.
i. Comments and Responses to Comments on Trade Secrets and Other
Confidential Information
Several commenters who generally supported the proposed rule stated
that trade secret law and NDAs offer meaningful enforcement advantages
to employers compared with non-competes. A few commenters stated that,
unlike non-competes, trade secret law and NDAs are broadly enforceable
in all fifty States. A few commenters stated that, while monetary
penalties for breaching non-competes are ordinarily difficult to
obtain, employers can obtain substantial monetary recovery for trade
secret law and NDA violations. The Commission agrees with these
comments.
Several commenters stated that the scope of trade secret law is
limited in various respects. Several commenters stated, for example,
that customer lists, pricing, and bid development information are
typically excluded from the definition of ``trade secret'' under the
DTSA and the law of many States.

[[Page 38427]]

In response to these comments, the Commission notes that customer
information may be classified as trade secrets under certain
circumstances, such as when the information is not generally known or
not otherwise easy to obtain and when a firm has taken measures to
protect the confidentiality of the information.\799\ Employers may also
use NDAs to protect such information. NDAs broadly protect all
information defined as confidential, regardless of whether such
information constitutes a ``trade secret'' under State or Federal
law.\800\
---------------------------------------------------------------------------

\799\ See U.S. West Commc'ns, Inc. v. Off. of Consumer Advoc.,
498 NW2d 711, 714 (Iowa 1993) (``business information may . . . fall
within the definition of a trade secret, including such matters as
maintenance of data on customer lists and needs . . .''); Guy
Carpenter & Co. v. Provenzale, 334 F.3d 459, 467 (5th Cir. 2003)
(``A customer list may be a trade secret, but not all customer lists
are trade secrets under Texas law. The broader rule of trade
secrets, that they must be secret, applies to customer lists'');
Home Paramount Pest Control Cos. v. FMC Corporation/Agricultural
Prods. Group, 107 F. Supp. 2d 684, 692 (D. Md. 2000) (``There is no
question that a customer list can constitute a trade secret.'');
Liebert Corp. v. Mazur, 827 NE2d 909, 922 (2005) (``[W]hether
customer lists are trade secrets depends on the facts of each
case.'').
\800\ See, e.g., Tendeka, Inc. v. Glover, No. CIV.A. H-13-1764,
2015 WL 2212601 at *14 (S.D. Tex. May 11, 2015).
---------------------------------------------------------------------------

Some commenters argued that other tools under intellectual property
law, such as patent and trademark law, are inadequate to protect
employers' investments. These commenters misinterpret the Commission's
findings. The Commission did not find in the NPRM, nor does it find in
this final rule, that patent law standing alone or trademark law
standing alone provide employers benefits equal to the benefits they
may reap from an unfair method of competition, namely the use of non-
competes. Rather, the Commission finds that patent law can be used,
together with the other tools the Commission cites, including NDAs and
fixed-term employment contracts, to protect legitimate investments in
intellectual property and worker human capital investment and therefore
that these tools, taken together, are viable alternatives to non-
competes.
A number of commenters stated that there are enforceability
disadvantages to trade secret law and NDAs compared to non-competes.
Several commenters stated that trade secret law and NDAs are inadequate
to protect employer investments prophylactically because employers can
enforce them only after the trade secrets or other confidential
information have already been disclosed. These commenters stated that
trade secrets and confidential information can be highly valuable, and
its value could be destroyed as soon as a worker discloses such
information to a competing employer. Additionally, some commenters
argued that trade secret law and NDAs are inadequate to protect
employers' investments because enforcement outcomes for trade secrets
and NDAs are less predictable and certain than with non-competes. Some
comments suggested that this purported clarity of non-competes benefits
workers, arguing that non-competes offer bright lines workers can
follow to ensure against unintended violations. Other commenters assert
that non-competes themselves are not necessarily effective as a
prophylactic remedy, because it is often unclear whether a particular
non-compete is enforceable, and non-competes are difficult to enforce
in many jurisdictions. A few commenters stated that prophylactic
remedies are already available under trade secret law in almost half of
U.S. States where the doctrine of inevitable disclosure is recognized,
while other commenters were concerned that not all States recognize the
doctrine. Other commenters argued the inevitable disclosure doctrine
may be worse for workers, and one commenter argued that the final rule
would increase the use of the inevitable disclosure doctrine and thus
reduce worker mobility.
Some commenters stated that prophylactic remedies are necessary to
adequately protect trade secrets and confidential information because
workers can exploit their former employers' trade secrets and
confidential information without ever disclosing the information
themselves, thus leaving aggrieved employers with no recourse under
trade secret law or an NDA. Specifically, these commenters argued that
when workers take new roles, they will inevitably use their knowledge
of former employers' confidential information. For example, where a
worker has experience with attempts and failures to develop new ideas
or products with a former employer, they will likely use this knowledge
to prevent a new employer from making similar mistakes, thus free
riding off the former employer's development efforts, costs, and time.
A commenter argued that preventing non-competes from restricting this
type of misappropriation would discourage investment and harm
innovation in the long run.
The Commission believes that what some commenters describe as the
``prophylactic'' benefits of non-competes--that an employer can block a
worker from taking another job, without respect to any alleged
misconduct--is also the source of their overbreadth because it enables
employers to restrict competition in both labor markets and product and
service markets, as detailed in Parts IV.B and IV.C. That employers
prefer to wield non-competes as a blunt instrument on top of or in lieu
of the specific legal tools designed to protect legitimate investments
in intellectual property and other investments cannot justify an unfair
method of competition. The Commission also disagrees that banning non-
competes would discourage investment and would harm innovation in the
long run. As discussed in Part IV.B.3.b.ii, the Commission finds that
the weight of the evidence indicates that non-competes reduce
innovation by preventing workers from starting businesses in which they
can pursue innovative new ideas; inhibiting efficient matching between
workers and firms (making it less likely that workers match with firms
that can maximize their talent and productivity); and decreasing the
cross-pollination of ideas.
Additionally, the Commission notes that non-compete agreements
themselves cannot be said to provide ironclad ``prophylactic''
protections against disclosure of trade secrets and other confidential
information. As other commenters point out, in the absence of this
rule, it is often unclear whether and to what extent a specific non-
compete is enforceable, and they are difficult to enforce in many
jurisdictions. Moreover, non-competes do not prevent the worker from
disclosing trade secrets or confidential information after the end of
the non-compete period or outside of the clause's geographic
restriction. The Commission also notes that, as a few commenters
stated, prophylactic remedies are already available under trade secret
law in almost half of U.S. States where the doctrine of inevitable
disclosure is recognized.\801\
---------------------------------------------------------------------------

\801\ 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. See, e.g., PepsiCo, Inc. v. Redmond, 54 F.3d 1262, 1269,
1272 (7th Cir. 1995). The inevitable disclosure doctrine is
controversial. Several States have declined to adopt it altogether,
citing the doctrine's harsh effects on worker mobility. 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, 470-71
(Md. 2004). 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. See
generally Eleanore R. Godfrey, Inevitable Disclosure of Trade
Secrets: Employee Mobility v. Employer Rights, 3. J. High Tech. L.
161 (2004).
---------------------------------------------------------------------------

Several commenters argued that detecting and proving violations of
NDAs and trade secret law is more

[[Page 38428]]

difficult than for non-competes, and that enforcement is accordingly
more expensive, because it is more difficult to detect and obtain
evidence of the disclosure or use of confidential information than it
is to determine that a former worker has moved to a competitor. Some
commenters asserted that trade secret litigation is expensive because
the cases are fact-intensive and involve litigating multiple
challenging issues. Some commenters argued that as a result, the
proposed rule conflicted with Congressional intent underlying the DTSA.
A few commenters similarly argued that breaches of non-solicitation
agreements are difficult to detect and can be enforced only after the
solicitation has occurred. While the Commission recognizes that trade
secrets litigation and NDA and non-solicitation enforcement may be more
costly than non-compete enforcement in some instances, the Commission
is not persuaded that higher costs associated with alternative tools
make those tools inadequate. The comments do not establish that
pursuing remedies through trade secrets litigation or NDA enforcement
are prohibitively expensive. In any event, the Commission and courts
have consistently held that pecuniary benefit to the party responsible
for the conduct in question is not cognizable as a justification.\802\
While employers may find that protecting trade secrets and confidential
information or customer relationships by using non-competes to restrict
worker mobility, regardless of whether that worker would misappropriate
confidential information or solicit customers, is easier for them, the
Commission finds that same overbreadth of non-competes imposes
significant negative externalities on workers, consumers, businesses,
and competition as a whole.\803\ This overbreadth that employers
benefit from wielding is what causes the harms from non-competes
relative to more narrowly-tailored alternatives.
---------------------------------------------------------------------------

\802\ See supra note 305 and accompanying text.
\803\ See Parts IV.B and IV.C.
---------------------------------------------------------------------------

Some commenters contended that higher burdens for establishing
violations of trade secret and IP laws will harm employer incentives to
share trade secrets with workers and to invest in valuable skills
training. The Commission is not persuaded that higher evidentiary
burdens render trade secret law and NDAs inadequate for protecting
employers' valuable investments. Heightened standards are a valuable
mechanism to filter out overbroad restrictions on beneficial
competitive activity. The comment record is replete with examples of
workers bound by non-competes who lacked knowledge of trade secrets or
whose employment with a competitor never threatened their previous
employer's investments. To the extent trade secret law and NDAs require
higher evidentiary showings, that makes these alternatives more
tailored tools for protecting employers' valuable investments without
unduly restricting a worker from engaging in competitive activity.
Some commenters argued that, without non-competes, employers would
limit access to valuable trade secrets within the workplace because
trade secret law requires employers to show reasonable efforts to
maintain the secrecy of an alleged trade secret to prove a violation,
and that reduced rates of intrafirm trade secrets sharing will
ultimately harm innovation as well as workers. In response, the
Commission notes that the empirical evidence indicates otherwise: when
non-competes are more enforceable, the overall level of innovation
decreases.\804\ Furthermore, these comments seem to overstate the
burden of reasonable efforts to keep information secret. Under the
DTSA, courts have found that employers meet this requirement by sharing
information at issue only among workers bound by NDAs or maintaining
such information in password-protected digital spaces.\805\
Accordingly, assertions that employers will need to take extraordinary
precautions to maintain secrecy over trade secrets and confidential
information are inconsistent with standards courts typically recognize
for determining whether reasonable efforts were taken to keep such
information confidential. The Commission is not persuaded that
requirements in trade secret law to show reasonable efforts to maintain
secrecy will deter intrafirm information sharing, or otherwise make
alternative tools inadequate.
---------------------------------------------------------------------------

\804\ See Part IV.B.3.b.ii.
\805\ See e.g., In re Adegoke, 632 B.R. 154, 167 (Bankr. N.D.
Ill. 2021); Houser v. Feldman, 569 F. Supp. 3d 216, 230 n.7 (E.D.
Pa. 2021); AvidAir Helicopter Supply, Inc. v. Rolls-Royce Corp., 663
F.3d 966, 974 (8th Cir. 2011).
---------------------------------------------------------------------------

Several commenters argued that the Commission should not find that
employers have adequate alternatives to protecting their valuable
investments because there is a lack of empirical evidence specifically
showing that trade secret law and NDAs are effective for the purpose of
protecting trade secrets and confidential information. In response, the
Commission notes that trade secret law is a body of law that is
specifically designed to protect the interests being asserted;
employers consistently bring cases under this body of law; and a
preference among firms for a blunter instrument for protecting trade
secrets and confidential information cannot justify an unfair method of
competition that imposes significant negative externalities on workers,
other firms, consumers, and the economy.\806\ An industry trade
organization commenter stated that neither fixed-duration employment
contracts nor improved pay, benefits, or working conditions
specifically protect against the disclosure of confidential
information. In response, the Commission notes that firms can protect
against the disclosure of confidential information using trade secret
law and NDAs, and, where applicable, patent law and invention
assignment agreements. And in response to these commenters, the
Commission notes that companies in California, North Dakota, and
Oklahoma have been able to protect their trade secrets and other
confidential information adequately using tools other than non-competes
since the late nineteenth century. Industries that are highly dependent
on trade secrets and other confidential information have flourished in
those States even though non-competes have been unenforceable.
---------------------------------------------------------------------------

\806\ See Parts IV.B. and IV.C (describing the negative
externalities from non-competes).
---------------------------------------------------------------------------

A few commenters disputed the NPRM's contention that the rate at
which employers pursue trade secrets litigation is evidence of the
viability of trade secret law as a means for redressing trade secret
theft or protecting confidential information, in part because those
employers were not necessarily relying exclusively on trade secret law.
The Commission does not assert that these data, alone, conclusively
establish trade secret law is a perfect vehicle for redressing trade
secret theft. Rather, the data show trade secret litigation is more
than a mere theoretical possibility--it is an avenue many companies
choose to redress trade secret theft and indeed it is the body of law
designed and developed for this very purpose. Accordingly, the
Commission believes that the fact that many companies bring claims
under the well-established body of State and Federal law on trade
secrets is relevant evidence that trade secret law provides a viable
means for redressing trade secret theft.
Some commenters suggested a higher volume of trade secrets
litigation in California may reflect a higher rate of trade secret
disclosure due to the State's policy against enforcing non-competes.
However, these commenters did not

[[Page 38429]]

provide evidence to support this hypothesis. The Commission also notes
industries in California that depend on protecting trade secrets have
thrived despite the inability to enforce non-competes; indeed, the
State is the capital of the global technology industry. Therefore,
regardless of whether there is a higher rate of trade secret litigation
in California, the less restrictive alternatives identified in this
Part IV.D have provided sufficient protection to enable these companies
to grow, thrive, and innovate. Furthermore, the rate of trade secret
litigation in California may result from factors unique to California's
economy, such as California's high concentration of technology
companies relative to other States. As such, the Commission does not
believe there is credible evidence to suggest trade secrets are
disclosed at a higher rate in California than in other
jurisdictions.\807\
---------------------------------------------------------------------------

\807\ See NPRM at 3507.
---------------------------------------------------------------------------

Many commenters agreed with the Commission's preliminary conclusion
that the economic success in California, North Dakota, and Oklahoma of
industries highly dependent on trade secrets and other confidential
information illustrates that companies have viable alternatives to non-
competes for protecting valuable investments. In contrast, a few
commenters argued that the Commission mischaracterized California's
non-compete ban because they claim that California permits non-competes
to protect trade secrets, citing dicta from the 1965 California Supreme
Court case Muggill v. Reuben H. Donnelley Corp.\808\ However, the
Commission is unaware of any cases in which a California court has
actually upheld a non-compete agreement under California law based on
the dicta in this opinion, and commenters do not point to any.\809\ To
the contrary, California courts have consistently refused to enforce
non-competes even where employers alleged they were needed to protect
trade secrets.\810\
---------------------------------------------------------------------------

\808\ 62 Cal. 2d 239, 242 (Cal. 1965).
\809\ See generally David R. Trossen, Edwards and Covenants Not
to Compete in California: Leave Well Enough Alone, 24 Berkeley Tech.
L.J. 539, 546 (2009).
\810\ See, e.g., D'sa v. Playhut, Inc., 102 Cal. Rptr. 2nd 495,
497-501 (Cal. Ct. App. 2nd 2000); Dowell v. Biosense Webster, Inc.,
102 Cal. Rptr. 3d 1, 11 (Cal. Ct. App. 2nd 2009); Arthur J.
Gallagher & Co. v. Lang, 2014 WL 2195062 (N.D. Cal. May 23, 2014) at
*4 n.3.
---------------------------------------------------------------------------

Another commenter argued that California's experience does not
necessarily demonstrate anything about the effect of banning non-
competes because California employers impose non-competes at rates
comparable to other States. In response, the Commission notes that
while Starr, Prescott, and Bishara state that workers are covered by
non-competes at ``roughly the same rate'' in States where non-competes
are unenforceable and enforceable,\811\ when the authors control for
employee characteristics to compare ``observationally equivalent
employees,'' they find that non-competes are less common (by 4-5
percentage points) in nonenforcing States compared to States that
permit vigorous enforcement of non-competes.\812\ Additionally,
California, North Dakota, and Oklahoma are still distinct from other
States because employers may not actually enforce non-competes, even if
employers in those States continue to enter into them.
---------------------------------------------------------------------------

\811\ Starr, Prescott & Bishara, supra note 68 at 81.
\812\ Id. at 68.
---------------------------------------------------------------------------

A commenter argued that the Commission misattributes California's
success in the technology industry and North Dakota's and Oklahoma's
success in the energy industry to their non-compete laws, rather than
the presence of top universities and venture capital firms in the State
(in the case of California) or of abundant natural resources in the
State (in the case of North Dakota and Oklahoma). The Commission
believes that this commenter mischaracterizes its analysis. The
Commission does not attribute California's success in the technology
industry and North Dakota's and Oklahoma's success in the energy
industry to their non-compete laws. The Commission merely notes that
these industries are highly dependent on protecting trade secrets and
having highly trained workers, and that these industries have thrived
in these States despite the inability of employers to enforce non-
competes.
One commenter argued that there are no alternatives that adequately
protect employers' legitimate interests because other restrictive
employment agreements do not sweep as broadly as non-competes. In this
Part IV.D, the Commission concludes that less restrictive alternatives
such as trade secret law, IP law, and NDAs are adequate to protect
trade secrets and other confidential information even where they do not
sweep as broadly as non-competes. Indeed, the Commission believes that
non-competes are overbroad with respect to protecting trade secrets and
other confidential information, because they enable employers to
restrict a wide swath of beneficial competitive activity without
respect to any alleged misconduct. That employers prefer to wield non-
competes as a blunt instrument on top of or in lieu of the specific
legal tools designed to protect legitimate investments in intellectual
property and other investments cannot justify an unfair method of
competition.
ii. Comments and Responses to Comments on Human and Physical Capital
Investment
Several commenters addressed the evidence concerning the effects of
non-competes on human capital investment and other investment. Several
commenters asserted that, even if non-competes increased human capital
investment, they still left workers worse off because they suppressed
workers' mobility and wages overall. Workers and worker advocates also
argued that workers lose the value of their skills and human capital
investment when non-competes force them to sit out of the workforce,
and non-competes can decrease their incentive to engage in human
capital investment since they cannot capitalize on their skills and
knowledge. These commenters stated that many workers, particularly
highly skilled workers, have had some form of education prior to
working for their employer, diminishing any potential need for non-
competes to protect the employers' human capital investment. For
example, many physicians pointed out that they had to go through
medical school, residency, internships, and/or fellowships--significant
investments that they made, not their employers.
Some commenters questioned the link between increased human capital
investment and non-compete enforcement, arguing that employer human
capital investment will still be provided without non-competes. Other
commenters also stated that prohibiting non-competes would make it
easier for firms to hire trained workers, because it would be easier
for them to switch jobs. More generally, one advocacy organization said
that employers frequently make investments that do not work out and
should not place the risk of that investment onto their workers. A
commenter who discussed physician non-competes argued that investment-
based justifications for non-competes overestimate the value added by
employers while failing to recognize the value physicians bring to
employers.
Some businesses and trade organizations argued that employers
invest significant time and money into training workers who lack the
specific skills needed for the job. These commenters stated that,
without non-competes, employers risk the worker taking that investment
to a competitor. Some commenters state that this risk is

[[Page 38430]]

greatest in underserved areas and when there are worker shortages.
Several commenters said that employment restrictions such as non-
competes incentivize businesses to pay for credentials, training, and
advanced education that low-wage and other workers would be unable to
afford on their own, facilitating upward mobility. For highly educated
workers, such as physicians, some employers said they need non-competes
to protect payments for continuing education as well as mentorships and
on the job training. Businesses and their advocates asserted that in
some industries, many new employees are unprofitable for a significant
period, requiring up-front investment and training from employers who
want to recoup that investment.
In response, the Commission notes that, as described in Part
IV.D.2.b.iii, firms have less restrictive alternatives for protecting
human capital investments, including fixed-duration contracts and
competing on the merits for the worker's labor services through better
pay, benefits, or working conditions. Through these means, employers
can retain workers without restricting who they can work for, or their
ability to start a business, after their employment ends. The
Commission also notes that these commenters often inaccurately describe
the increased labor mobility afforded by the final rule as a one-way
street. While it will be easier under the final rule for workers to
switch jobs and work for a competitor, it will also be easier for firms
to hire talented workers, since those workers are not subject to non-
competes. In general, firms will benefit from access to a wider pool of
labor, because the rule eliminates the friction non-competes impose on
the free functioning of competition in labor markets. Whether this will
be a net benefit to a particular firm, or not, will depend on the
firm's ability to compete for workers on the merits to attract and
retain talent.
A group of healthcare policy researchers stated that the investment
justifications offered by corporate owners of physician practices are
misleading since the true value of the investment in the practice is
the book of business and referrals. These researchers suggested that
non-competes are used to circumvent laws that prohibit payment for
physician referrals. The Commission notes that this comment aligns with
a statement by researcher Kurt Lavetti at the Commission's 2020 forum
on non-competes. Lavetti stated that patient referrals are a valuable
asset, but buying or selling those referrals is illegal, so non-
competes are a secondary method of protecting that asset.\813\
---------------------------------------------------------------------------

\813\ Kurt Lavetti, Economic Welfare Aspects of Non-Compete
Agreements, Remarks at the FTC Workshop on Non-Competes in the
Workplace, at 145-46 (Jan. 9, 2020), at https://www.ftc.gov//files//_events/1556256/non-compete-workshop-transcript-full.pdf.
---------------------------------------------------------------------------

Commenters also stated that non-competes protect investments other
than in human capital, capital expenditures, and R&D, including
recruiting and hiring, providing client and customer service,
facilities, marketing, and technology, among others. The Commission is
unaware of any empirical evidence showing that non-competes increase
these types of investments, and commenters did not provide any. In
general, however, firms can protect investments in trade secrets and
confidential information, and investments in workers, through the less
restrictive alternatives described in Part IV.D.2.b.
Two trade organizations stated that prohibiting non-competes could
cause businesses to lose staff, and that losing staff could cause them
to reduce investments that may be based on staffing assumptions. These
commenters did not provide empirical evidence to support these
arguments. The Commission also notes that firms would not necessarily
lose workers because of the final rule. As described previously, some
firms may lose workers because it will be easier for workers to leave
for better opportunities, while some firms may gain workers by
attracting workers from other firms. Additionally, firms can retain
workers by competing on the merits for their labor services--i.e., by
offering better jobs than their competitors.
Commenters asserted that Starr, Prescott, and Bishara \814\ found
that notice of non-competes alongside a job offer is positively
correlated with training compared to later notice. In response, the
Commission notes that the evidence is a correlation between early
notice and training, not a causal finding, so the Commission gives it
minimal weight. In addition, regardless of whether there is an increase
in training where notice of non-competes is provided along with the job
offer instead of later on, this data is not salient on the question of
whether employers have less restrictive alternatives to protecting
training investments.
---------------------------------------------------------------------------

\814\ Starr, Prescott & Bishara, supra note 68 at 53.
---------------------------------------------------------------------------

A few commenters stated non-competes protect against the
``disclosure'' of general trade knowledge and skills, while the less
restrictive alternatives cited in the NPRM do not. Relatedly, some
commenters argued prohibiting non-competes and broadly enabling workers
to take general trade knowledge and skills to competitors will mean
that their new employers will free ride off investments the former
employers made in their human capital, which will discourage future
investment in human capital. The Commission does not believe preventing
workers from using their general trade knowledge and skills, including
their gains in trade knowledge and skills through experience with a
particular employer, is a legally cognizable or legitimate
justification for non-competes. Under State common law, preventing a
worker from using their general knowledge and skills with another
employer is not a legitimate interest that can justify a non-
compete.\815\ Indeed, there is a general principle in the law of
restrictive employment agreements--and trade secret law as well--that
these tools cannot be used to prevent workers from using their general
trade knowledge and skills.\816\ The Commission does not view the
inability to prevent disclosure or use of general skills and knowledge
as a shortcoming of trade secret law and NDAs; instead, it considers
the use of general skills and knowledge as beneficial competitive
activity. Moreover, the Commission notes that sectoral job training
strategies can be a tool for employers and workers to access worker
training that is transferrable across employers.\817\
---------------------------------------------------------------------------

\815\ See NPRM at 3495 n.162.
\816\ See Montville, supra note 788 at 1161.
\817\ See, e.g., Mayu Takeuchi & Joseph Parilla, Federal
Investments in Sector-Based Training Can Boost Workers' Upward
Mobility, Brookings Inst. (Dec. 7, 2023), https://www.brookings.edu/articles/federal-investments-in-sector-based-training-can-boost-workers-upward-mobility/.
---------------------------------------------------------------------------

One commenter asserted trade secret law and NDAs are inadequate to
protect employers' goodwill, while another commenter asserted these
tools are inadequate to protect investments in relationships with
clients. Regarding whether trade secret law and NDAs are adequate to
protect employers' client relationships, the Commission interprets this
to refer to employers' concern that a client will follow a worker to a
competitor. The Commission believes that employers have alternatives
for protecting these investments, including fixed-duration contracts
(in the case of goodwill), NDAs (in the case of client lists), and
competing on the merits to retain workers and/or clients. Firms can
seek to protect client relationships by offering superior service and
value--through the free and fair functioning of competition. These more
narrowly

[[Page 38431]]

tailored alternatives reasonably protect the applicable interest while
burdening competition to a lesser degree because they do not restrict
the worker's ability to seek or accept work or start a business after
their employment ends. Therefore, while trade secret law and NDAs may
not protect goodwill or client relationships, the Commission finds that
employers have adequate alternative tools to protect these interests.
Furthermore, the Commission notes the final rule does not restrict
employers from using trade secret law and NDAs in tandem--along with
other alternatives--to protect their investments, and comments
maintaining that employers lack adequate alternatives to non-competes
because the commenter views just one of these mechanisms as inadequate
are unpersuasive.
A commenter argued the final rule may implicate the ability of
Federal contractors to provide letters of commitment, which are often
required by government agencies and require contractors to identify key
personnel who will work on an awarded contract, sometimes for years in
the future. In response, the Commission notes that contractors have
alternatives to non-competes to retain key personnel, including by
using fixed-term employment contracts or providing the key personnel a
better job than competitors.
A commenter stated that fixed-duration employment contracts are not
necessarily effective at protecting human capital investments because
employers may not know at the time of hiring when they will be
providing training to a worker. This commenter also stated that
improving the pay, benefits, and working conditions of workers is not
necessarily an effective means for protecting human capital
investments. In response, the Commission notes employers may enter into
fixed-duration employment contracts with their workers at any time, not
just at the outset of the employment relationship. It further notes
competing to retain a trained worker will not work in every instance,
but it is an important option available to employers and the provision
of training can itself be a competitive differentiator for an employer.
A commenter also asserted California has the highest cost of living
and, if this is attributable to the absence of non-competes, the
proposed rule could risk increasing the cost of living nationwide. The
commenter did not provide evidence to support the existence of an
inverse relationship between non-compete enforceability and cost of
living, and the Commission is aware of no such evidence. The Commission
thus does not believe that there is a basis to conclude the final rule
would increase the cost of living nationwide.
iii. Comments Regarding Alternatives to Non-Competes for Senior
Executives
Commenters offered the same justifications for non-competes with
senior executives: that they increase employers' incentive to make
productive investments. However, many commenters argued senior
executives are more likely than other workers to have knowledge of
trade secrets and other competitively sensitive information or to have
customer relationships and thus non-competes for senior executives are
necessary, and other tools such as trade secret law and NDAs are not
viable alternatives.
In response, the Commission finds that these tools--trade secret
law, NDAs, patents, and invention assignment agreements--provide viable
means of protecting valuable investments against disclosure by senior
executives, just as they do for all other workers. Commenters do not
identify any reasons why senior executives are uniquely situated with
respect to these less restrictive alternatives--i.e., why trade secret
law or NDAs may not adequately protect firm investments from disclosure
by senior executives specifically--and the Commission is not aware of
any such reasons.
Some commenters argued non-competes with executives and high-wage
workers promote competition because they encourage innovation in
businesses by providing investors with more confidence that executives
will not share trade secrets with competitors, decreasing competition.
An industry organization asserted that non-competes allow executives to
share ideas and business decisions with other workers within the
business and collaborate to make strategic decisions. A commenter
stated that an executive leaving to start a competing product could
also delay the timeline for both the former employer's product and the
competing product. As noted previously, the Commission does not believe
there is reliable empirical data on the relationship between non-
competes and disclosure of confidential information, but employers have
alternatives to protect such information. Further, the empirical
evidence shows non-competes overall inhibit innovation on the output
side; therefore, to the extent any of these effects are occurring, they
are more than outweighed by the negative effects of non-competes on
innovation.\818\
---------------------------------------------------------------------------

\818\ See Part IV.B.3.b.ii.
---------------------------------------------------------------------------

According to some commenters, an executive moving to a competitor
could unfairly advantage the competitor and irreparably harm the former
employer. In response, the Commission notes that there is nothing
inherently unfair about an executive moving to a competitor,
particularly if this results from competition on the merits (such as
the competitor paying more or otherwise making a more attractive
offer). If companies seek to retain their executives, they have other
means for doing so--such as increasing the executives' compensation or
entering fixed-duration contracts--that do not impose significant
negative externalities on other workers and on consumers, as non-
competes do.\819\
---------------------------------------------------------------------------

\819\ See Part IV.C.2 (describing the negative externalities of
non-competes for senior executives).
---------------------------------------------------------------------------

Some commenters also said senior executives may have more client,
business partner, and customer relationships than other employees and
may contribute substantially to a firm's goodwill. The Commission
believes that employers have alternatives for protecting goodwill and
client/customer relationships. For example, if a firm wants to keep a
worker from departing and taking goodwill or clients or customers with
them, it can enter a fixed-duration contract with the worker, otherwise
seek to retain the worker through competition on the merits, or seek to
retain the client/customer through competition on the merits.
An accountant with experience analyzing executive non-competes for
business valuations said such valuations are calculated based on the
potential harm if the executive violated the non-compete. In addition,
some commenters argued non-competes for senior executives and other
important workers increase the value of firms in mergers and
acquisitions because they ensure such valuable workers stay after the
sale. An investment industry organization said investors seek to ensure
the right workers who know the business stay and run the newly acquired
business. In addition, that organization said some institutional
investors may require contracts retaining key workers.
In response, the Commission notes that valuation of senior
executive non-competes in such contexts is part of the reason the
Commission is allowing such existing senior executive non-competes to
remain in force.\820\ In future

[[Page 38432]]

transactions, businesses and investors have other methods of
incentivizing senior executives and other workers to remain, including
fixed duration contracts and competing to retain workers on the merits,
and thereby enhancing the value of firms and transactions--methods that
do not impose such significant externalities on other workers and
consumers.
---------------------------------------------------------------------------

\820\ See Part IV.C.3.
---------------------------------------------------------------------------

Some industry organizations said non-competes increase employer
investment in management and leadership training for executives. An
investment industry organization said non-competes allow senior
executives to access training and experience for their own benefit and
the benefit of investors in the firm. In response, the Commission notes
that employers have alternative mechanisms to protect their investments
in worker training, including fixed-duration contracts and improved
compensation.
Some commenters argued that non-competes may improve executive
performance, as some executives have non-competes tied to deferred
compensation and other future benefits, which encourages long-term
value creation by incentivizing executives to focus on long-term rather
than short-term gains. A law firm said that forfeiture-for-competition
clauses are an important component of deferred compensation agreements,
and deferred compensation incentivizes long-term value-building and
penalizes, via reduction or forfeiture, harm to the business, which the
commenter said includes working for a competitor. The commenter claimed
that if forfeiture-for-competition clauses are banned, firms would
shift some of the deferred compensation to more short-term awards,
which would in turn increase risk-taking and decrease overall wealth
accumulation. The commenter cited a review by the Federal Reserve after
the 2008 financial crisis which found that deferred compensation can
mitigate executive risk-taking activities.\821\ It also cited other
Federal agencies and court decisions recognizing the value of deferred
compensation to mitigate risk. Separately, the firm argued that without
forfeiture-for-competition clauses, an executive who moves to a
competitor will compete less against their former employer so as not to
devalue their equity award, thus degrading competition. Commenters also
contended that State courts have recognized forfeiture-for-competition
clauses to be reasonable and that some State statutes governing non-
competes carve them out.
---------------------------------------------------------------------------

\821\ See Bd. of Govs. of the Fed. Reserve Sys., Incentive
Compensation Practices: A Report on the Horizontal Review of
Practices at Large Banking Organizations (Oct. 2011), https://www.federalreserve.gov/publications/other-reports//incentive-compensation-practices-report-201110.pdf.
---------------------------------------------------------------------------

In response, the Commission recognizes that many existing deferred
compensation contracts may have been negotiated to include non-competes
or forfeiture-for-competition clauses that may not be easily separated,
and the final rule allows existing senior executive non-competes to
remain in force.\822\ However, the Commission is not persuaded that
non-competes are necessary for future deferred compensation agreements.
The Federal Reserve study on the value of deferred compensation does
not mention non-competes or forfeiture-for-competition clauses. While
the study states that clawback provisions may discourage specific types
of behavior, it notes that they do not affect most risk-related
decisions.\823\ The commenter did not explain why non-competes are
necessary for deferred compensation to reduce risk-taking or how post-
employment competition could impact performance while at the firm. The
commenter also did not explain why firms would forgo the benefits of
deferred compensation even without a forfeiture-for-competition clause.
The commenter separately argued that an executive who moves to a
competitor will be conflicted and compete less against their former
employer so as not to devalue their equity award. The comment framed
this as an anticompetitive problem akin to interlocking directorates
under the Clayton Act, as it could increase collusion (though the
commenter provided no support for this argument). The commenter did
not, however, explain why an executive would move to a competitor if
doing so would devalue their own equity. The Commission also does not
believe that the solution to this type of anticompetitive behavior,
even if it were to occur, is to further restrict competition by
blocking the executive from moving to the competitor in the first
place.
---------------------------------------------------------------------------

\822\ See Part IV.C.3.
\823\ Federal Reserve Report on Incentive Compensation
Practices, supra note 821 at 16-17.
---------------------------------------------------------------------------

Some commenters argued that forfeiture-for-competition clauses,
which are sometimes attached to deferred compensation arrangements,
were also justified. Some commenters contended that workers subject to
forfeiture-for-competition clauses who choose to work for a competitor
are likely to be compensated by the competitor for whom they will be
working. Separately, a law firm and an investment industry organization
stated that it would be unfair for companies to continue making
deferred compensation or other payments to former workers who now work
for a competitor if forfeiture-for-competition clauses were banned. A
law firm also stated that forfeiture-for-competition clauses allow
senior executives to retire without losing their deferred compensation,
which in turn clears a path for younger workers to move up, while
protecting senior executives' retirement benefits. In response, the
Commission notes that pre-existing agreements for senior executives are
not banned under the final rule.\824\ The Commission also sees no
reason why deferred compensation, including for retiring workers,
cannot be used without forfeiture-for-competition clauses.
---------------------------------------------------------------------------

\824\ See Sec. 910.2(a)(2).
---------------------------------------------------------------------------

Some commenters stated that the study by Kini, Williams, and Yin,
discussed in the NPRM with respect to senior executive earnings,\825\
finds that CEOs with non-competes are more frequently forced to resign
their position. Commenters note that Kini, Williams, and Yin also find
that CEO contracts more closely align the incentives of executives
(with respect to stock prices and risk taking) with shareholders when
the executives have non-competes or when those non-competes are more
enforceable. In response, the Commission notes that, as indicated by
commenters, this study examines the use of non-competes in conjunction
with their enforceability. The Commission therefore finds that the
results may not reflect a causal relationship. For example, the use of
non-competes and the propensity of the board to force an executive to
resign may be jointly determined by the strength of the relationship or
the trust between management and the board, rather than the use of non-
competes causing forced turnover. The Commission also notes that--as
shown in the study--there are other methods by which boards may
encourage executives to perform, such as by structuring financial
incentives to encourage or discourage risk taking, according to the
preferences of the board. Boards can also fire poorly performing
executives even without non-competes.
---------------------------------------------------------------------------

\825\ See Kini, Williams, & Yin, supra note 83.
---------------------------------------------------------------------------

One commenter said that a ban on non-competes may encourage U.S.
companies to relocate their executive teams outside the U.S. in order
to continue using non-competes. The

[[Page 38433]]

commenter did not provide specific evidence to support this assertion.
The Commission believes that firms' decisions on where to locate their
executive teams are likely influenced by a multitude of factors other
than whether the firm may or may not use non-competes.
3. The Asserted Benefits From These Justifications Do Not Justify the
Harms From Non-Competes
a. The Commission's Final Findings
Based on the totality of the evidence, including its review of the
empirical literature, its review of the full comment record, and its
expertise in identifying practices that harm competition, the
Commission in this final rule finds that the claimed business
justifications for non-competes do not justify the harms from non-
competes--for either senior executives or for workers other than senior
executives, whether considered together or separately--because the
evidence indicates that increasing enforceability of non-competes has a
net negative impact along a variety of measures. Whether the benefits
from a practice outweigh the harms is not necessarily an element of
section 5,\826\ but, in any event, the benefits from the justifications
cited in Part IV.D.1 clearly do not justify the harms from non-
competes.
---------------------------------------------------------------------------

\826\ See Part II.F (stating that the inquiry as to whether
conduct tends to negatively affect competitive conditions focuses on
the nature and tendency of the conduct and does not require a
detailed economic analysis).
---------------------------------------------------------------------------

Not all the harms from non-competes are readily susceptible to
monetization.\827\ However, even the quantifiable harms from non-
competes are substantial and clearly not justified by the purported
benefits. Non-competes cause considerable harm to competition in labor
markets and product and service markets. Non-competes obstruct
competition in labor markets because they inhibit optimal matches from
being made between employers and workers across the labor force through
the process of competition on the merits for labor services. The
available evidence indicates that increased enforceability of non-
competes substantially suppresses workers' earnings, on average, across
the labor force generally and for specific types of workers.\828\
---------------------------------------------------------------------------

\827\ See, e.g., Parts IV.B.3.a.iii and IV.B.3.b.iv.
\828\ See Part IV.B.3.a.ii; Part IV.C.2.c.ii.
---------------------------------------------------------------------------

In addition to the evidence showing that non-competes reduce
earnings for workers across the labor force, there is also evidence
that non-competes reduce earnings specifically for workers who are not
subject to non-competes.\829\ These workers are harmed by non-competes,
because their wages are depressed, but they do not necessarily benefit
from any purported incentives for increased human capital investment
that non-competes may provide. Overall, these harms to labor markets
are significant. The Commission estimates the final rule will increase
workers' total earnings by an estimated $400 billion to $488 billion
over ten years, at the ten-year present discounted value.\830\
---------------------------------------------------------------------------

\829\ See Part IV.B.3.a.ii.
\830\ See Part X.F.6.
---------------------------------------------------------------------------

The available evidence also indicates non-competes negatively
affect competition in product and service markets. The weight of the
evidence indicates non-competes have a negative impact on new business
formation and innovation.\831\ There is evidence that non-competes
increase consumer prices and concentration in the health care
sector.\832\ There is also evidence non-competes foreclose the ability
of competitors to access talent.\833\ While available data do not allow
for precise quantification of some of these effects, they are
nonetheless substantial: the Commission estimates that the rule will
reduce spending on physician services over ten years by $74-194 billion
in present discounted value, will result in thousands to tens of
thousands of additional patents per year, and will increase in the rate
of new firm formation by 2.7%.\834\
---------------------------------------------------------------------------

\831\ See Part IV.B.3.b.i-ii; Part IV.C.2.c.i.
\832\ See Part IV.B.3.b.iii.
\833\ See Part IV.C.2.c.i.
\834\ See Part X.F.6.
---------------------------------------------------------------------------

In the Commission's view, the asserted benefits from non-competes
do not justify their harms. Even if the businesses using non-competes
benefit, pecuniary benefits to the party undertaking the unfair method
of competition are not a sufficient justification under section 5.\835\
As described in Part IV.D.1, the most commonly cited justifications for
non-competes are that they increase employers' incentive to make
productive investments in, for example, trade secrets, customer lists,
and human and physical capital investment. There is some evidence that
non-competes increase human and physical capital investment, as noted
previously.\836\ However, the empirical literature does not show the
extent to which human capital investment and other investment benefits
from non-competes accrue to any party besides the employer, and to the
extent it addresses this issue it suggests otherwise. For example, in
theory, if increased human capital investment from non-competes
benefited workers, they would likely have higher earnings when non-
competes are more readily available to firms (i.e., when legal
enforceability of non-competes increases). However, as explained in
Parts IV.B.3.a.ii and IV.C.2.c.ii, the empirical evidence indicates
that, on net, greater enforceability of non-competes reduces workers'
earnings. Likewise, in theory, if increased human capital investment
increased innovation that redounds to the benefit of the economy and
society as a whole, one would expect to see legal enforceability of
non-competes yield such benefits, but as elaborated in Part IV, the
empirical evidence on innovation effects indicates the opposite.
---------------------------------------------------------------------------

\835\ See Part II.F.
\836\ See Part IV.D.1.
---------------------------------------------------------------------------

Moreover, the Commission is also not aware of any evidence that
these potential benefits of non-competes lead to reduced prices.
Indeed, the only empirical study of the effects of non-competes on
consumer prices--in the health care sector--finds increased prices as
the enforceability of non-competes increases.\837\ That study, which
finds that non-compete enforceability increased physician pay, also
finds that labor cost pass-through is not driving price decreases.\838\
---------------------------------------------------------------------------

\837\ See Part IV.B.3.b.iii.
\838\ See Hausman & Lavetti, supra note 590 at 278.
---------------------------------------------------------------------------

Furthermore, there is no evidence that, in the three States in
which non-competes are generally void, the inability to enforce non-
competes has materially harmed employers, consumers, innovation (or
economic conditions more generally), or workers. As a result, the
Commission finds that the asserted benefits from non-competes do not
justify the harms they cause.
The Commission finds that the harms from non-competes are clearly
not justified by the purported benefits, regardless of whether one
considers senior executives or workers other than senior executives
together or separately. In this Part IV.D.3, the Commission explains
why, for workers overall, the asserted benefits from non-competes do
not justify the harms they cause. This is at least as true for senior
executives as for other workers. As described in Part IV.C.2.c.i, non-
competes with senior executives tend to negatively affect competitive
conditions in product and service markets at least as much as non-
competes with other workers--and likely to a greater extent--given the
outsized role of senior executives in forming new businesses, serving
on new

[[Page 38434]]

businesses' executive teams, and setting the strategic direction of
businesses with respect to innovation. At the same time, firms have the
same less restrictive alternatives available for senior executives as
they do for other workers, as described in Part IV.D.2.c.iii. For these
reasons, whether one considers non-competes with senior executives or
non-competes with other workers, the claimed business justifications
for non-competes do not justify the harms from non-competes.
b. Responses to Comments
Commenters focused on the question of whether employers have
adequate alternatives to non-competes and the analysis of costs and
benefits of the proposed rule in the preliminary regulatory impact
analysis, rather than the balancing analysis discussed in this Part
IV.D.3 specifically. These comments are addressed in Part IV.D.2 and in
Part X, respectively.

E. Section 910.2(b): Notice Requirement for Existing Non-Competes

The Commission proposed to require employers to rescind (i.e.,
legally modify) existing non-competes and provide notice to inform
workers that they are no longer bound by existing non-competes.\839\
Based on comments, the Commission is not adopting a rescission
requirement in the final rule. Rather than require employers to legally
modify existing non-competes, the final rule prohibits employers from
enforcing existing non-competes with workers other than senior
executives after the compliance date.
---------------------------------------------------------------------------

\839\ See NPRM, proposed Sec. 910.2(b).
---------------------------------------------------------------------------

The final rule adopts the notice requirement--for workers who are
not senior executives--with minor revisions to facilitate compliance
and to improve the likelihood of workers being meaningfully informed.
The revisions include an option for employers to make the notice more
accessible to workers who speak a language other than English. The
final rule also simplifies compliance and ensures that workers have
prompt notice that their non-competes are no longer in force by
requiring employers to provide notice by the effective date, rather
than 45 days thereafter.
1. The Proposed Rule
Proposed Sec. 910.2(b)(1) would have required employers to rescind
existing non-competes with all workers. Proposed Sec. 910.2(b)(2)
would have required employers that rescinded non-competes to provide
notice to the affected workers that their non-compete is no longer in
effect and may not be enforced.
As proposed, Sec. 910.2(b)(2) had three subparagraphs that imposed
various requirements related to the notice. Proposed Sec.
910.2(b)(2)(i) stated that an employer that rescinds a non-compete
pursuant to Sec. 910.2(b)(1) must provide notice in an individualized
communication to the worker that the worker's non-compete is no longer
in effect and may not be enforced. The Commission stated in the NPRM
that an employer could not satisfy the notice requirement by, for
example, posting a notice at the employer's workplace.\840\ Proposed
Sec. 910.2(b)(2)(i) also stated that the employer must provide the
notice in writing on paper or in a digital format such as an email or
text message within 45 days of rescinding the non-compete.
---------------------------------------------------------------------------

\840\ Id. at 3513.
---------------------------------------------------------------------------

Proposed Sec. 910.2(b)(2)(ii) stated that the employer must
provide the notice to both current workers and former workers when the
employer has the former worker's contact information readily available.
To ease the burden of compliance, proposed Sec. 910.2(b)(2)(iii)
provided model language that would satisfy the notice requirement.
Proposed Sec. 910.2(b)(2)(iii) and Sec. 910.2(b)(3) provided a safe
harbor for employers using the model language, while also permitting an
employer to use different language, provided that the language
communicates to the worker that the worker's non-compete is no longer
in effect and may not be enforced.\841\
---------------------------------------------------------------------------

\841\ Id. at 3514.
---------------------------------------------------------------------------

In the NPRM, the Commission stated that the purpose of the proposed
notice requirement was to ensure that workers are informed that their
existing non-competes are no longer in effect. The Commission cited
evidence indicating that many workers are not aware of the applicable
law governing non-competes or their rights under those laws, and stated
that it was therefore concerned that, absent a notice requirement,
workers may not know that their non-competes are no longer enforceable
as of the effective date.\842\
---------------------------------------------------------------------------

\842\ Id. at 3513.
---------------------------------------------------------------------------

2. The Final Rule
a. The Final Rule Does Not Require Rescission (Legal Modification) of
Existing Non-Competes
The Commission has eliminated the proposed rule's requirement that
employers rescind (i.e., legally modify) existing non-competes. The
Commission believes the proposed rescission requirement would have
imposed unnecessary burdens on employers, as other aspects of the final
rule provide less burdensome means of ensuring that workers other than
senior executives will not be bound or chilled from competitive
activity by non-competes after the effective date. Under Sec.
910.2(a)(1)(ii), it is an unfair method of competition for a person to
enforce or attempt to enforce a non-compete (except where, under Sec.
910.3 the person has a good-faith basis to believe that the final rule
is inapplicable). Further, under Sec. 910.2(b)(1), the person who
entered into the non-compete must provide clear and conspicuous notice
to the worker by the effective date that the worker's non-compete
clause is no longer in effect and will not be, and cannot legally be,
enforced against the worker. These provisions are sufficient to achieve
the purposes of the proposed rescission requirement without requiring
any affirmative conduct beyond the notice requirement.
The Commission has also eliminated the proposed rescission
requirement in response to comments expressing confusion about the
requirement and concern about its practical implications. Some comments
interpreted the proposed rescission requirement to mean that the worker
and employer must be returned to their original positions (i.e., on the
day they entered into the non-compete) and presumed to not have entered
into it or that it mandated wholly new contracts to replace any
existing agreements that contained non-competes. Some commenters
objected to what they considered the high compliance costs of
rescinding and revising every employment contract with a non-compete.
Some businesses said their contracts with senior executives and
potentially other workers would be unwound by a rescission requirement.
Other commenters said that if the Commission promulgated the proposed
rescission requirement, it would be disregarding the role non-competes
played in the overall value of the exchange for an employment contract.
An industry association said rescission would require assessment of
each contract's severability under relevant State law, and the answers
would vary widely.
The Commission does not intend for the final rule to have such
effect and has omitted the rescission requirement proposed in the NPRM.
The Commission also adopts Sec. 910.3(b), which provides an exception
for causes of action that accrued before the effective date, to be
clear that the final rule does not render any existing non-competes
unenforceable or invalid from the date of their origin. Instead, it is
an unfair method of competition to enforce

[[Page 38435]]

certain non-competes beginning on the effective date. Actions taken
before the effective date--for example, enforcing an existing non-
compete or making representations related to an existing non-compete--
are not unfair methods of competition under the final rule. As noted
elsewhere, the Commission also exempts from the rule future enforcement
of existing non-competes with senior executives.
Commenters also argued that a rescission requirement would be
impermissibly retroactive, present due process concerns, and/or
constitute an impermissible taking under the Fifth Amendment. The
Commission responds to these comments in Part V.B.
Numerous commenters opposed the proposed rescission requirement
based on perceived challenges presented by proposed Sec. 910.1(b)(2),
which addressed de facto non-competes, and its purported ambiguity with
respect to which contractual terms employers would be required to
rescind. The Commission has removed the rescission requirement for the
reasons described in this Part IV.E.2.a and has also revised the
proposed rule's language concerning de facto non-competes to clarify
the scope of the definition.
b. The Final Rule's Notice Requirement
While the final rule does not require rescission (i.e., legal
modification) of existing non-competes, the final rule does prohibit
enforcement of existing non-competes after the effective date and
requires the person who entered into the non-compete with the worker to
provide clear and conspicuous notice to the worker, by the effective
date, that the worker's non-compete will not be, and cannot legally be,
enforced against the worker.\843\ The notice must identify the person
who entered into the non-compete with the worker and must be on paper
delivered by hand to the worker, or by mail at the worker's last known
personal street address, or by email at an email address belonging to
the worker, including the worker's current work email address or last
known personal email address, or by text message at a mobile telephone
number belonging to the worker.\844\
---------------------------------------------------------------------------

\843\ Sec. 910.2(b)(1).
\844\ This language mirrors language in other Federal
regulations. See, e.g., 17 CFR 9.11 (notice of disciplinary action
must be made personally by mail at the person's last known address
or last known email address); 29 CFR 38.79 (written notice must be
sent to a ``complainant's last known address, email address (or
another known method of contacting the complainant in writing)'');
16 CFR 318.5 (providing for written notification at an individual's
last known address, or email if the individual chooses that option).
---------------------------------------------------------------------------

Several commenters emphasized the importance of notice, especially
for former workers who may be actively refraining from competitive
activity (in compliance with a non-compete), and who may continue to do
so if they are not informed that their non-compete is no longer in
effect. One commenter highlighted the importance of notice, because a
non-compete may be coercive regardless of its enforceability. Many
commenters emphasized the need for clear and concise language in the
notices, including in languages other than English. One commenter asked
the Commission to use concrete, lay-friendly terms to help reduce
workers' fears of being sued. A commenter that recommended notice in
languages other than English suggested that such a requirement apply to
medium and large businesses with a threshold percentage of workers
(such as 10%) who primarily speak a language other than English.
Commenters also suggested changes in notice procedures to improve
the chances of workers receiving and understanding the notice. One
commenter stated that text messages should not qualify as a primary
means of individual notice because they are too casual, may be
automatically deleted, and the sender may not be identifiable. However,
in this commenter's view, text messages could be a secondary form of
notice. Some commenters suggested that in addition to individual
notice, the final rule should require an employer to post a copy of the
notice in the workplace and/or online.
A number of commenters asserted that the requirement for employers
to provide notice to former workers when ``the employer has the
worker's contact information readily available'' was confusing or
burdensome. A commenter stated that employers do not update former
employees' contact information, so such information is likely
incomplete and might be inaccurate. One commenter asserted that a
requirement to provide notice within 45 days of the effective date is
too difficult for small businesses. Another commenter suggested that
the final rule should require contacting only former workers who left
the firm two years or less before the effective date, unless the non-
compete has elapsed.\845\ Some commenters expressed concern that former
workers might not be notified under the ``readily available'' standard.
A commenter stated that, to avoid confusion and evasion, employers
should be required to send notice to former workers at the worker's
last known home address, email address, or cell phone number.
Commenters also contended that the meaning of ``individualized
communication'' was not clear or that compliance with it would be too
difficult or burdensome.
---------------------------------------------------------------------------

\845\ Under the final rule, notice is only required for existing
non-competes, i.e., those that have not elapsed.
---------------------------------------------------------------------------

The Commission finalizes the proposed rule's notice requirement
largely as proposed, with minor revisions to facilitate compliance,
reduce burdens on employers, and improve accessibility for non-English
speakers.\846\ The final rule also requires covered businesses to
provide notice by the effective date, rather than 45 days thereafter,
to simplify the final rule and to secure its benefits for competition
in labor markets and product and service markets as soon as
practicable.
---------------------------------------------------------------------------

\846\ The Commission notes that this required notice is a
routine disclosure of valuable, factual information to workers that
does not implicate the First Amendment. See Milavetz, Gallop &
Milavetz, P.A. v. United States, 559 U.S. 229, 249-53 (2010) (citing
Zauderer v. Off. of Disciplinary Counsel, 471 U.S. 626, 651 (1985)).
As described in this Part IV.E, the Commission adopts this notice
requirement to ensure workers do not wrongly believe they remain
bound by unenforceable non-competes after the rule goes into effect.
The Commission's conclusion that such notice is necessary to achieve
the full benefits of the final rule is based on its expertise and on
empirical evidence supporting the Commission's finding of an in
terrorem effect related to non-competes.
---------------------------------------------------------------------------

The Commission finalizes a notice requirement because the available
evidence indicates that many workers are not aware of the applicable
law governing non-competes or their rights under those laws, or are
unable to enforce their rights--and are chilled from engaging in
competitive activity as a result. The evidence shows that even when
employers impose non-competes that are unenforceable under State law,
many workers believe they are bound by them (or are otherwise unable to
enforce their rights to be free of non-competes).\847\ As a result, the
Commission finds that even after the final rule is in effect, absent a
clear notice requirement, many workers may be unaware that, because of
the final rule, their employer cannot enforce a non-compete and that
the Commission has the authority to take action against employers who
violate the final rule. Accordingly, absent notice, these workers may
continue to be chilled from switching jobs or starting their own
business. This would tend to negatively affect competitive conditions
in the

[[Page 38436]]

same manner as if non-competes were in full force and effect.
---------------------------------------------------------------------------

\847\ See Prescott & Starr, supra note 413; see also Part
IV.B.2.b.ii (describing the Commission's finding that non-competes
are exploitative and coercive where they trap workers in jobs or
force them to bear significant harms or costs, even where workers
believe the non-compete is unenforceable).
---------------------------------------------------------------------------

A notice requirement helps address this concern by informing
individual workers, to the extent possible, that after the effective
date the employer will not enforce any non-compete against the worker.
The Commission believes that prompt and clear notice to workers other
than senior executives that non-competes are no longer enforceable is
essential to furthering the purposes of the final rule--to allow
workers to seek or accept another job or to leave to start and run a
business, and to allow other employers to compete freely for workers.
Indeed, the Commission has refined the model language to make it
shorter and clearer than the proposed model language.
While the proposed rule would have required employers to provide
the notice no later than 45 days after the compliance date, the final
rule requires notice no later than the effective date (i.e., no later
than 120 days after the final rule is published in the Federal
Register). The Commission believes that it is practicable and
reasonable for employers to provide the notice by the effective date.
The Commission has designed the notice requirement to make compliance
as easy as possible for employers. The final rule provides safe harbor
model language that satisfies the notice requirement; \848\ gives
employers several options for providing the notice--on paper, by mail,
by email, or by text; \849\ and exempts employers from the notice
requirement where the employer has no record of a street address, email
address, or mobile telephone number for the worker.\850\
---------------------------------------------------------------------------

\848\ Sec. 910.2(b)(4)-(5).
\849\ Sec. 910.2(b)(2)(ii).
\850\ Sec. 910.2(b)(3).
---------------------------------------------------------------------------

In addition, while the model language in the proposed rule used the
phrase ``the non-compete clause in your contract is no longer in
effect,'' \851\ the model language in the final rule uses the phrase
``[EMPLOYER NAME] will not enforce any non-compete clause against
you.'' \852\ Because this language does not identify the recipient as
having a non-compete, the employer does not need to determine which of
its workers have non-competes; instead, it can simply send a mass
communication such as a mass email to current and former workers.
---------------------------------------------------------------------------

\851\ NPRM, proposed Sec. 910.2(b)(2)(iii).
\852\ Sec. 910.2(b)(4).
---------------------------------------------------------------------------

Furthermore, requiring notice by the effective date simplifies the
final rule and allows its benefits to begin sooner. In response to
commenters that contended that they need more time to provide workers
notice, the Commission believes that providing notice should not be
time-consuming, even for small businesses, particularly given that the
final rule provides model language, allows use of the worker's last
known contact information for notice, allows digital notice, and
(unlike in the proposed rule) categorically exempts an employer who has
no such information from the notice requirement. Moreover, as described
in Part IV.B.2.b.ii, non-competes trap workers in jobs or force them to
bear other significant harms or costs--even where workers believe the
non-compete is unenforceable. Given the limited burdens associated with
providing notice only to workers whose last known contact information
is on file and employers' option to simply copy and paste the safe
harbor model notice, as well as the known and currently ongoing acute
harms of non-competes (including their in terrorem effects) and the
importance of workers knowing as soon as possible that their non-
compete is unenforceable, the Commission declines to extend the time to
provide notice.\853\ The Commission finds that 120 days is more than
adequate for employers to complete this task.
---------------------------------------------------------------------------

\853\ The Commission addresses the effective date in Part VIII.
---------------------------------------------------------------------------

In response to comments expressing concern that the NPRM's
``individualized communication'' requirement was unclear or burdensome,
the Commission has removed that language. Instead, the final rule
ensures each worker will receive notice while specifying several
permissible methods for providing the notice, which furthers compliance
certainty while giving employers a range of options and an efficient
means of complying. By allowing a number of formats for such
communications, including digital formats, employers are more likely to
be able to contact workers rapidly, individually, and have flexibility
to do so at low cost. Accordingly, Sec. 910.2(b)(2) of the final rule
allows for notice by text message, by email, as well as paper notice by
hand or by mail to the worker's last known street address. The final
rule gives employers flexibility to choose among these methods. In
responses to the concerns expressed by the commenter about text
messages, the Commission believes that text messages should be a
permissible method for providing the notice because they are widely
used, delivered quickly, low-cost for employers, and an effective means
of communication for workers who do not have email accounts.
In response to comments contending that notice to former workers is
too burdensome or difficult, the Commission believes that providing
notice to former workers is critical because former workers may be
refraining from competitive activity because they believe they are
subject to a non-compete. The Commission disagrees that providing
notice to former workers will be burdensome. The Commission believes
that most employers have contact information for former workers who may
be subject to non-competes.\854\ And under the final rule, in those
rare cases in which an employer has no record of a street address,
email address, mobile telephone number, or other method of contacting
the worker or former worker, Sec. 910.2(b)(3) exempts the employer
from the final rule's notice requirement with respect to the worker.
Furthermore, by specifying the circumstances under which notice may not
be provided, this exemption also addresses concerns expressed by some
commenters that ambiguity in the proposed rule's ``readily available''
standard for notifying former workers would lead to fewer former
workers being notified.
---------------------------------------------------------------------------

\854\ Employers have many record-keeping requirements under
State and Federal laws under which they may retain the contact
information described in Sec. 910.2(b)(2)(ii). See, e.g., IRS,
Circular E, Employer's Tax Guide, Pub. 15, 8 (2024) (``Keep all
records of employment taxes for at least 4 years,'' including
addresses of employees and recipients and forms with addresses.);
USCIS, Handbook for Employers M-274, Sec. 10.0, Retaining Form I-9
(requiring retention of I-9 form, which includes employees'
addresses, email addresses, and telephone numbers).
---------------------------------------------------------------------------

In response to comments contending that notice to former workers is
too burdensome or difficult, the Commission believes that providing
notice to former workers is critical because former workers may be
refraining from competitive activity because they believe they are
subject to a non-compete. In light of the comments about the proposed
``readily available'' contact information standard, the Commission in
this final rule does not adopt that language and instead requires that
the notice must be on paper delivered by hand to the worker, or by mail
at the worker's last known personal street address, or by email at an
email address belonging to the worker, including the worker's current
work email address or last known personal email address, or by text
message at a mobile telephone number belonging to the worker. The
Commission agrees with commenters that stated that most employers have
such contact information for both present and former workers. For those
rare cases in which

[[Page 38437]]

an employer has no record of a street address, email address, mobile
telephone number, or other method of contacting the worker or former
worker, Sec. 910.2(b)(3) exempts the employer from the final rule's
notice requirement.
The Commission agrees with comments that notices in other languages
spoken by workers would help achieve the goal of informing workers that
their non-competes are no longer enforceable and help employers to
comply with the final rule. However, to avoid imposing a burden of
translation on employers, Sec. 910.2(b)(6) makes it optional to
provide notices in languages other than English. The Commission
encourages employers to provide this notice to workers who speak
languages other than English. To facilitate the provision of notices in
other languages, the final rule provides a model notice in English and
links to translations of other languages that are commonly spoken in
U.S. homes, including Spanish, Chinese, Arabic, Vietnamese, Tagalog,
and Korean.\855\
---------------------------------------------------------------------------

\855\ See Sandy Dietrich & Erik Hernandez, Census Bureau, Nearly
68 Million People Spoke a Language Other Than English at Home in
2019 (Dec. 6, 2022) at Table 1, https://www.census.gov/library/stories/2022/12/languages-we-speak-in-united-states.html.
---------------------------------------------------------------------------

V. Section 910.3: Exceptions

A. Section 910.3(a): Exception for Persons Selling a Business Entity

In the NPRM, the Commission proposed an exception for certain non-
competes between the seller and the buyer of a business that applied
only to a substantial owner, member, or partner, defined as an owner,
member, or partner with at least 25% ownership interest in the business
entity being sold. Based on comments, the Commission adopts an
exception for the bona fide sale of a business without requiring that
the seller have at least a 25% ownership interest.
1. The Proposed Rule
Proposed Sec. 910.3 allowed non-competes where the restricted
party is ``a person who is selling a business entity or otherwise
disposing of all of the person's ownership interest in the business
entity, or . . . selling all or substantially all of a business
entity's operating assets,'' and is also ``a substantial owner of, or
substantial member or substantial partner in, the business entity at
the time the person enters into the non-compete.'' \856\ The Commission
proposed to define ``substantial owner, substantial member, and
substantial partner'' as ``an owner, member, or partner holding at
least a 25 percent ownership interest in a business entity.'' \857\ The
text of proposed Sec. 910.3 stated that non-competes allowed under the
proposed exception would remain subject to Federal antitrust law and
all other applicable law.
---------------------------------------------------------------------------

\856\ NPRM, proposed Sec. 910.3.
\857\ Id., proposed Sec. 910.1(e).
---------------------------------------------------------------------------

The Commission stated in the NPRM that its proposal to exempt from
the rule non-competes between the seller and the buyer of a business
did not reflect a finding that such non-competes are beneficial to
competition.\858\ Rather, the Commission explained that such non-
competes may implicate unique interests and have unique effects, and
the evidentiary record did not permit the Commission to thoroughly
assess the full implications of restricting their enforceability.\859\
The Commission noted that because all States permit non-competes
between the seller and the buyer of a business to some degree, and
because the laws that apply to these types of non-competes have seen
fewer changes recently than the laws applicable to non-competes that
arise solely out of employment, there have not been natural experiments
allowing researchers to assess this type of non-compete's effect on
competition.\860\
---------------------------------------------------------------------------

\858\ Id. at 3515.
\859\ Id. at 3514-15.
\860\ Id.
---------------------------------------------------------------------------

2. Comments Received
A few commenters suggested eliminating the proposed exception.
These commenters contended that non-competes between the seller and the
buyer of a business may still be exploitative and coercive,
particularly in the case of small business owners in transactions with
larger, better-resourced corporations. However, most commenters who
addressed the issue supported an exception that would allow certain
non-competes between the seller and the buyer of a business. These
commenters agreed with the NPRM that State common law generally applies
less-intensive scrutiny to non-competes ancillary to the sale of a
business and that every State statute banning non-competes has an
exception which allows some or all non-competes between the seller and
the buyer of a business. Most of the commenters who supported some form
of exception for non-competes between the seller and the buyer of a
business contended that they are necessary to protect the value of the
sale by ensuring the effective transfer of the business's goodwill.
According to these commenters, a buyer will be less willing to pay for
a business if they cannot obtain assurance that they will be protected
from future competition by the seller, and so a failure to exempt
related non-competes may chill acquisitions. Commenters stated that
sellers of a business have more bargaining power than workers do and
generally receive a portion of the sales price, making exploitation and
coercion less likely. They also noted that non-competes between the
seller and the buyer of a business remain subject to State limitations
on scope, duration, and reasonableness.
Some commenters supported the proposed 25% ownership threshold.
However, most commenters who otherwise supported the exception stated
that the proposed 25% ownership threshold is too high. They argued that
the 25% threshold does not account for the reality of most
transactions, in which owners with less than 25% interest in a business
may have significant goodwill and receive significant proceeds from a
sale. Some commenters focused on the tax costs of the threshold,
pointing to IRS provisions that currently allow taxpayers to deduct
from their taxable income the portion of the sales price made in
exchange for non-competes. Others argued that the 25% threshold would
disincentivize equity-based consideration. To avoid these harms, these
commenters suggested a variety of other thresholds, including the 5%
ownership threshold used in SEC regulations.\861\ Some commenters
contended that the Commission failed to provide evidence justifying the
proposed 25% ownership threshold. Others questioned the effectiveness
of ownership as a proxy for goodwill or the likelihood of exploitation
and coercion. As examples, these commenters pointed to passive
investors who may have significant ownership stakes in a business but
none of its goodwill, and owners whose interests may be purchased for
less than fair market value or who are excluded from sales
negotiations.
---------------------------------------------------------------------------

\861\ See, e.g., 17 CFR 240.13d-1 (requiring reporting by
beneficial owners holding more than 5% interest in an equity
security).
---------------------------------------------------------------------------

A few commenters argued that the proposed 25% threshold would
preempt the laws of California and other States which ban non-competes
except in the sale of a business, none of which require that the seller
have a substantial ownership stake. They pointed to cases in which
California courts applied the exception and allowed enforcement of non-
competes against shareholders holding as little as a 3% ownership
interest. In light of these statutes, some of these commenters urged
the Commission to adopt an exception for

[[Page 38438]]

agreements that involve the sale of a business or equity in a company
without a threshold ownership requirement.
Some commenters urged the Commission to adopt a case-by-case
assessment of business sales based on State law, such as a ``totality
of the circumstances'' or ``reasonableness'' test. Others proposed
replacing the ownership-based exception with an exception for founders,
key workers with IP access, and/or those with goodwill. At least one
commenter asked the Commission to use a bright-line rule rather than a
functional or definitional test that would require adjudication and
interpretation by courts.
Some commenters presented empirical evidence to justify a lower
ownership threshold. A few commenters pointed to data suggesting that
more than 96% of CEOs of the 3,000 largest publicly traded companies
own less than 25% of their company. One commenter pointed to data
suggesting that the average duration of a startup's life from
fundraising to acquisition is 6.1 years, arguing that it is unlikely
for venture-capital backed businesses to operate and grow for that
period of time without accepting funding that dilutes founders' and key
employees' equity stake in the business. Other commenters supporting a
lower threshold provided anecdotal evidence that businesses cede large
shares to financial backers, resulting in many owner-operators holding
significantly less than a 25% share in their business.
Finally, some commenters focused on eliminating potential loopholes
to the proposed exception. Some commenters expressed concern that
employers may set up sham transactions with wholly owned subsidiaries
in order to impose non-competes that would otherwise be prohibited
under the rule, urging the Commission to clarify that the exception
applies only to bona fide transfers to an independent third party. Some
commenters contended that firms may use ``springing'' non-competes (in
which a worker must agree at the time of hiring to a non-compete in the
event of some future sale) and repurchase rights, mandatory stock
redemption programs, or similar stock-transfer schemes (pursuant to
which a worker may be required to sell their shares if a certain event
occurs) to impose non-competes on their workers which would otherwise
be prohibited. They urged the Commission to address those instances
specifically, including by defining the exception by the percentage of
total equity value received in liquid proceeds at the time of the
relevant transaction.
3. The Final Rule
The Commission adopts a sale of business exception for
substantially the same reasons articulated in the NPRM. However, in
response to comments concerning the ownership percentage threshold, the
Commission modifies Sec. 910.3(a) so that it no longer includes the
proposed requirement that the restricted party be ``a substantial owner
of, or substantial member or substantial partner in, the business
entity'' to fall under the exception. The Commission otherwise adopts
this provision largely as proposed. To address commenters' concerns
that employers will use sham transactions, stock-transfer schemes or
other mechanisms designed to evade the rule, Sec. 910.3(a) requires
that, to fall under the exemption, a non-compete must be entered into
pursuant to a bona fide sale.
The Commission reiterates that Sec. 910.3(a) does not reflect a
finding that non-competes between the seller and the buyer of a
business are beneficial to competition or that they are not restrictive
and exclusionary or exploitative and coercive. Indeed, the Commission
acknowledges that some non-competes between the seller and buyer of a
business may be exploitative and coercive due to an imbalance in
bargaining power and/or may tend to harm competitive conditions.
However, commenters did not present empirical research on the
prevalence of non-competes between the seller and the buyer of a
business or on the aggregate economic effects of applying additional
legal restrictions to non-competes between the seller and buyer of a
business. The Commission's decision to adopt Sec. 910.3(a) reflects
the view of the Commission and most commenters that, compared to non-
competes arising solely out of an employment relationship, non-competes
between the sellers and buyers of businesses may implicate unique
interests and have unique effects that this rulemaking record does not
address.\862\
---------------------------------------------------------------------------

\862\ See NPRM at 3514-15.
---------------------------------------------------------------------------

The proposed requirement that an excepted non-compete bind only a
``substantial'' owner, member or partner of the business entity being
sold was designed to allow those non-competes between the seller and
the buyer of a business which are critical to effectively transfer
goodwill while prohibiting those which are more likely to be
exploitative and coercive due to an imbalance of bargaining power
between the seller and the buyer. However, commenters persuasively
argued that the proposed 25% ownership threshold was too high because
it failed to reflect the relatively low ownership interest held by many
owners, members, and partners with significant goodwill in their
business. The Commission declines to maintain the ``substantial''
interest requirement with a lower percentage threshold for the same
reason.
The Commission also declines to adopt a threshold of $1 million,
$250,000, or some other dollar limit on the proceeds received by the
seller. On the current record, these thresholds were not sufficiently
correlated to sellers' goodwill or bargaining power for a broadly
generalizable approach. The Commission declines to adopt a ``totality
of the circumstances'' or ``reasonableness'' test in the text of Sec.
910.3(a) because they would provide little meaningful guidance to
buyers and sellers and would be difficult to administer. For the same
reasons, the Commission declines to replace the ownership-based
exception with an exception for founders, key workers, workers with
access to intellectual property, and/or workers with goodwill.
Furthermore, non-competes allowed under the exception will continue to
be governed by State law, which generally requires a showing that a
non-compete is necessary to protect the value of the business being
sold, as well as Federal antitrust law.\863\
---------------------------------------------------------------------------

\863\ See, e.g., U.S. v. Addyston Pipe & Steel Co., 85 F. 271,
281 (6th Cir. 1898) (``For the reasons given, then, covenants in
partial restraint of trade are generally upheld as valid when they
are agreements [inter alia] by the seller of property or business
not to compete with the buyer in such a way as to derogate from the
value of the property or business sold . . . . Before such
agreements are upheld, however, the court must find that the
restraints attempted thereby are reasonably necessary . . . to the
enjoyment by the buyer of the property, good will, or interest in
the partnership bought. . . .'').
---------------------------------------------------------------------------

Finally, the Commission agrees with commenters' concerns about the
risks that firms may abuse the exception through sham transactions with
wholly owned subsidiaries, ``springing'' non-competes, repurchase
rights, mandatory stock redemption programs, or similar evasion
schemes. The Commission adds the term ``bona fide'' and makes changes
clarifying that any excepted non-compete must be made ``pursuant to a
bona fide sale'' to ensure that such schemes are prohibited under the
rule. A bona fide sale is one made in good faith as opposed to, for
example, a transaction whose sole purpose is to evade the final
rule.\864\ In general, the Commission considers a bona fide sale to be
one that is made between two

[[Page 38439]]

independent parties at arm's length, and in which the seller has a
reasonable opportunity to negotiate the terms of the sale. So-called
``springing'' non-competes and non-competes arising out of repurchase
rights or mandatory stock redemption programs are not entered into
pursuant to a bona fide sale because, in each case, the worker has no
good will that they are exchanging for the non-compete or knowledge of
or ability to negotiate the terms or conditions of the sale at the time
of contracting. Similarly, sham transactions between wholly owned
subsidiaries are not bona fide sales because they are not made between
two independent parties.
---------------------------------------------------------------------------

\864\ Black's Law Dictionary defines bona fide as ``[m]ade in
good faith; without fraud or deceit,'' and ``[s]incere; genuine.''
(11th ed. 2019).
---------------------------------------------------------------------------

The Commission declines to specifically delineate each kind of
sales transaction which is not a bona fide sale under the exception to
avoid the appearance that any arrangement not listed is allowed under
the exception. Courts have effectively identified and prohibited such
schemes pursuant to State statutes prohibiting non-competes.\865\ In
addition, non-competes allowed under the sale-of-business exception
remain subject to Federal and State antitrust laws, including section 5
of the FTC Act.
---------------------------------------------------------------------------

\865\ See, e.g., Bosley Med. Grp. v. Abramson, 161 Cal. App. 3d
284, 291 (Cal. Ct. App. 1984) (refusing to enforce non-compete
imposed on physician under agreement requiring physician to purchase
9% of stock at hiring and resell to corporation upon termination
because agreement ``was devised to permit plaintiffs to accomplish
that which the law otherwise prohibited: an agreement to prevent
defendant from leaving plaintiff medical group and opening a
competitive practice'').
---------------------------------------------------------------------------

B. Section 910.3(b): Exception for Existing Causes of Action

Proposed Sec. 910.2(a) would have prohibited employers from
maintaining an existing non-compete with a worker. The proposed rule
also would have required employers to rescind existing non-
competes.\866\ Commenters argued that any invalidation or rescission
required of existing non-competes would be impermissibly retroactive,
present due process concerns, and/or constitute an impermissible taking
under the Fifth Amendment.
---------------------------------------------------------------------------

\866\ See proposed Sec. 910.2(b)(1).
---------------------------------------------------------------------------

As described in Part IV.C.5, the Commission adopts a modified Sec.
910.2(a) under which existing non-competes for workers who are not
senior executives are no longer enforceable. The Commission adds an
exception in Sec. 910.3(b) in response to comments raising concerns
related to retroactivity. Section 910.3(b) specifies that the final
rule does not apply if a cause of action related to a non-compete
provision accrued prior to the effective date. This includes, for
example, where an employer alleges that a worker accepted employment in
breach of a non-compete if the alleged breach occurred prior to the
effective date. This provision responds to concerns that the final rule
would apply retroactively by extinguishing or impairing vested rights
acquired under existing law prior to the effective date.\867\ In this
Part V.B, the Commission addresses commenters' arguments regarding
retroactivity, due process, and impermissible taking under the Fifth
Amendment.
---------------------------------------------------------------------------

\867\ As discussed in Part V.B.1, courts have explained that an
``administrative . . . rule is retroactive [only] if it takes away
or impairs vested rights acquired under existing law, or creates a
new obligation, imposes a new duty, or attaches a new disability in
respect to transactions or considerations already passed.'' Regents
of the Univ. of Cal. v. Burwell, 155 F. Supp. 3d 31, 44 (D.D.C.
2016) (alteration in original) (quoting Nat'l Min. Ass'n v. DOL, 292
F.3d 849, 859 (D.C. Cir. 2002)). But a regulation is not retroactive
simply because it ``impair[s] the future value of past bargains'' if
it does not also ``render[ ] past actions illegal or otherwise
sanctionable.'' Nat'l Cable & Telecomms. Ass'n v. FCC, 567 F.3d 659,
670 (D.C. Cir. 2009).
---------------------------------------------------------------------------

1. Retroactivity
A number of commenters asserted that applying the final rule to
prohibit the enforcement of existing non-competes would render the
final rule impermissibly retroactive. The Commission disagrees. A rule
``does not operate `retrospectively' merely because it is applied in a
case arising from conduct antedating the [rule's] enactment, or upsets
expectations based in prior law.'' \868\ Rather, courts have explained
that an ``administrative . . . rule is retroactive [only] if it takes
away or impairs vested rights acquired under existing law, or creates a
new obligation, imposes a new duty, or attaches a new disability in
respect to transactions or considerations already passed.'' \869\ ``A
rule that `alter[s]' the past legal consequences of `past action' is
retroactive,'' while a rule that ```alter[s] only the `future effect'
of past actions, in contrast, is not.'' \870\ Agency action ``that only
upsets expectations based on prior law is not retroactive.'' \871\
---------------------------------------------------------------------------

\868\ Landgraf v. USI Film Prods., 511 U.S. 244, 269 (1994).
\869\ Burwell, 155 F. Supp. 3d at 44 (alteration in original)
(quoting Nat'l Min. Ass'n, 292 F.3d at 859).
\870\ Id. (alterations in original) (quoting Ne. Hosp. Corp. v.
Sebelius, 657 F.3d 1, 14 (D.C. Cir. 2011)).
\871\ Nat'l Cable, 567 F.3d at 670 (internal quotation omitted)
(quoting Mobile Relay Assocs. v. FCC, 457 F.3d 1, 11 (D.C. Cir.
2006)).
---------------------------------------------------------------------------

The final rule is not impermissibly retroactive because it does not
impose any legal consequences on conduct predating the effective date.
The Commission is not creating any new obligations, imposing any new
duties, or attaching any new disabilities for past conduct.\872\ And to
minimize concerns about retroactivity, the Commission adopts Sec.
910.3(b), which states that the final rule does not apply where a cause
of action related to a non-compete accrues before the effective date.
The notice requirement in Sec. 910.2(b) likewise does not render the
final rule impermissibly retroactive because that requirement merely
requires notice that non-competes that exist after the effective date
will not be enforced in the future with respect to workers other than
senior executives. No penalties attach to persons who entered non-
competes before the effective date.
---------------------------------------------------------------------------

\872\ For instance, the D.C. Circuit found that agency action
impermissibly attached a ``new disability'' when a Department of
Interior rule made mine operators ineligible for a surface mining
permit based on ``pre-rule violations.'' Nat'l Min. Ass'n v. U.S.
DOI, 177 F.3d 1, 8 (D.C. Cir. 1999). Here, the final rule imposes no
penalties or other disabilities on persons who entered into non-
competes before the effective date.
---------------------------------------------------------------------------

This final rule is analogous to the FCC rulemaking upheld in
National Cable & Telecommunications Ass'n v. FCC. There, the agency
promulgated a rule that ``forbade cable operators not only from
entering into new exclusivity contracts, but also from enforcing old
ones.'' \873\ The court upheld the rule against a retroactivity
challenge because the FCC had ``impaired the future value of past
bargains but ha[d] not rendered past actions illegal or otherwise
sanctionable.'' \874\ This final rule does the same with existing non-
competes. The final rule does not render it illegal or otherwise
sanctionable for parties to have entered into non-competes before the
effective date; it merely provides that persons cannot enforce or
attempt to enforce such agreements with workers other than senior
executives or represent to such workers that they are bound by an
enforceable non-compete after the effective date. It is thus not
impermissibly retroactive.
---------------------------------------------------------------------------

\873\ Nat'l Cable, 567 F.3d at 661.
\874\ Id. at 670.
---------------------------------------------------------------------------

In National Cable, the court also considered whether the agency had
``balance[d] the harmful `secondary retroactivity' of upsetting prior
expectations or existing investments against the benefits of applying
[its] rules to those preexisting interests.'' \875\ While commenters
did not frame their objection as one of ``secondary retroactivity,''
some did object that the final rule would upset the benefits of pre-
existing bargains. As in National Cable, however, the Commission has
``expressly consider[ed] the relative benefits and burdens of applying
its rule

[[Page 38440]]

to existing contracts.'' \876\ This consideration led the Commission to
adopt the various exceptions described in the final rule, including the
decision not to apply the final rule to non-competes entered into with
senior executives before the effective date. As explained in Part IV.B,
however, the Commission has determined that, for workers other than
senior executives, there are substantial benefits to applying the rule
to prohibit the future enforcement of non-competes entered into before
the effective date. These benefits include the anticipated increase in
worker earnings, new business formation, and innovation.\877\
Additionally, the Commission finds such agreements are generally
coercive and exploitative, so prohibiting their future enforcement is
also a benefit.\878\
---------------------------------------------------------------------------

\875\ Id. at 670.
\876\ Id. at 671.
\877\ See Part IV.B.
\878\ See Part IV.B.2.b.
---------------------------------------------------------------------------

In the Commission's view, these significant benefits justify any
burdens of applying the final rule to the future enforcement of pre-
existing agreements with workers other than senior executives. Having
balanced the burdens and benefits of so applying the final rule, the
Commission has satisfied its obligation to consider the secondary
retroactivity effects of the final rule. Moreover, the Commission notes
that non-competes were already subject to case-by-case adjudication
under section 5.\879\ Employers were thus already responsible, even
before the final rule, for ensuring their non-competes are not unfair
methods of competition.
---------------------------------------------------------------------------

\879\ Part I.B.1.
---------------------------------------------------------------------------

2. Takings
The Commission also disagrees with commenters who contended that
applying the final rule to non-competes entered into before the
effective date would violate the Fifth Amendment by effecting a taking
without due compensation. Some comments interpreted the proposed
rescission requirement to mean that the worker and employer must be
returned to their original positions (i.e., on the day they entered
into the non-compete) and presumed to not have entered the agreement,
or that the rule would mandate wholly new contracts to replace any
existing agreements that contained non-competes. The Commission does
not intend the final rule to have such effect and has omitted the
rescission requirement proposed in the NPRM. The Commission also adopts
Sec. 910.3(b), which provides an exception for causes of action that
accrued before the effective date, to clarify that the final rule is
purely prospective. The final rule does not render any existing non-
competes unenforceable or invalid from the date of their origin.
Instead, under the final rule, it is an unfair method of competition to
enforce certain non-competes beginning on the effective date. Action
taken before the effective date to enforce an existing non-compete or
representations made before the effective date related to an existing
non-compete are not an unfair method of competition under the final
rule. The final rule does not effectuate a taking.
The Takings Clause provides that ``private property'' shall not
``be taken for public use, without just compensation.'' \880\ When, as
here, ``the government, rather than appropriating private property for
itself or a third party, imposes regulations that restrict an owner's
ability to use his own property,'' courts consider whether the
regulation ``goes too far'' and constitutes a ``regulatory taking.''
\881\ Consistent with the Supreme Court's decision in Penn Central
Transportation Co. v. City of New York (``Penn Central''), this is
necessarily an ``ad hoc, factual inquir[y]'' and focuses on three
factors: ``the economic impact of the regulation on the claimant'';
``the extent to which the regulation has interfered with distinct
investment-backed expectations''; and ``the character of the
governmental action.'' \882\ ``[T]he Penn Central inquiry turns in
large part, albeit not exclusively, upon the magnitude of a
regulation's economic impact and the degree to which it interferes with
legitimate property interests.'' \883\ As a general matter, ``the fact
that legislation disregards or destroys existing contractual rights
does not always transform the regulation into an illegal taking.''
\884\
---------------------------------------------------------------------------

\880\ U.S. Const. amend. V.
\881\ Cedar Point Nursery v. Hassid, 594 U.S. 139, 148 (2021).
\882\ Penn Cent. Transp. Co. v. City of N.Y., 438 U.S. 104
(1978).
\883\ Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 540 (2005).
\884\ Connolly v. Pension Ben. Guar. Corp., 475 U.S. 211, 224
(1986); see also Nat'l Min. Ass'n v. Babbitt, 172 F.3d 906, 917
(D.C. Cir. 1999) (applying Connolly to a Takings challenge to an
administrative rule).
---------------------------------------------------------------------------

Under the Penn Central test, the final rule does not effect a
taking as a matter of law. First, the economic impact of the regulation
on employers with existing non-competes with workers who are not senior
executives is insufficient to constitute a taking.\885\ The Commission
has found that such agreements are rarely the product of bargaining,
and that little to nothing is offered in exchange for them. And
research has confirmed that for many such agreements, employers do not
value the ability to enforce the agreements.\886\ The final rule also
includes provisions that allow employers and workers to ``moderate and
mitigate the economic impact'' of the final rule.\887\ The Commission
has made clear that employers may continue to use reasonable NDAs and
trade secrets law to protect their interests, including customer
goodwill.\888\ In fact, one study finds that 97.5% of workers with non-
competes are also subject to a non-solicitation agreement, NDA, or a
non-recruitment agreement, and 74.7% of workers with non-competes are
subject to all three provisions.\889\ And in cases where non-competes
with workers other than senior executives were tied to benefits like
cash or equity, the Commission has provided time for those agreements
to be renegotiated if necessary.\890\ For senior executives, the
Commission allows existing agreements to continue to be enforced.
---------------------------------------------------------------------------

\885\ Murr v. Wis., 582 U.S. 383, 405 (2017); see also Connolly,
475 U.S. at 225.
\886\ See Hiraiwa, Lipsitz, & Starr (2023) (showing that firms
do not value the ability to enforce non-competes for workers earning
up to $100,000 per year and potentially more).
\887\ Connolly, 475 U.S. at 225-26.
\888\ See Part IV.D.2.
\889\ Balasubramanian, Starr, & Yamaguchi, supra note 74 at 35.
\890\ See Sec. 910.6.
---------------------------------------------------------------------------

The character of the governmental action here also counsels against
viewing the final rule as a taking. ``A `taking' may more readily be
found when the interference with property can be characterized as a
physical invasion by government . . . than when interference arises
from some public program adjusting the benefits and burdens of economic
life to promote the common good.'' \891\ There is no physical invasion
here, and the final rule is promulgated under the Commission's
authority to identify and prohibit unfair methods of competition.\892\
Among other economic benefits described in Part IV.B, the Commission
finds economy-wide benefits, including increases in new business
formation and innovation. The Commission also finds that the final rule
will increase earnings for workers by preventing enforcement of
agreements that suppress their earnings. Moreover, non-competes have
long been subject to government regulation, including not only section
5 of the FTC Act, but also State common

[[Page 38441]]

law, State enactments, and other Federal antitrust laws.
---------------------------------------------------------------------------

\891\ Penn Cent. Transp. Co. v. City of N.Y., 438 U.S. 104, 124
(1978) (internal citation omitted).
\892\ See 15 U.S.C. 45(a); see also Parts IV.B and C (the
Commission's findings outlining the public benefits of the final
rule and the public harm from the use of non-competes).
---------------------------------------------------------------------------

Finally, the final rule does not upset investment-backed
expectations to the extent necessary to constitute a taking. Even in
States that prohibit some or all non-competes, employers make many
investments in workers that they would continue to make regardless of
their ability to use non-competes, such as training, or that would be
protected by other mechanisms, such as reasonable NDAs, trade secret
law, and/or fixed term contracts. In other words, non-competes are not
a prerequisite to employers' productivity and output, in large part
because (as described in Part IV.D) employers have reasonable
alternatives to protecting the investments they make. The Commission
has also lessened the economic burden of the final rule by creating an
exception for situations where a cause of action accrued before the
effective date.\893\ Furthermore, States and the Federal government
have regulated and considered further regulating non-competes for
years, and the Commission issued the NPRM more than 18 months before
the effective date--and began exploring whether to regulate non-compete
agreements more than five years ago.\894\ There has thus been ample
notice that non-competes may become unenforceable by rule,\895\ and
prior to this rule non-competes were already subject to case-by-case
adjudication under section 5. For all these reasons, the Commission
does not believe the final rule constitutes a taking.
---------------------------------------------------------------------------

\893\ See Sec. 910.3(b).
\894\ See Part I.B.
\895\ Connolly v. Pension Ben. Guar. Corp., 475 U.S. 211, 226
(1986).
---------------------------------------------------------------------------

3. Due Process
Similarly, the Commission disagrees with commenters who argued that
applying the final rule to existing non-competes would present due
process concerns. Assuming that these due process concerns are
independent of other constitutional concerns like the alleged
retroactive application of the final rule,\896\ which are addressed in
Parts V.B.1 and V.B.2, the Commission disagrees that there is any due
process infirmity. Due process requires the government, at a minimum,
to provide notice and an opportunity to be heard before depriving any
person of property.\897\ By issuing the NPRM and engaging in notice-
and-comment rulemaking, the Commission has provided sufficient due
process. And on top of the notice-and-comment process, there will be
further process in an administrative adjudication or in court before
any person is found to have violated the rule.
---------------------------------------------------------------------------

\896\ Commenters invoking a due process concern outside the
retroactivity context provided little contextual detail on the
precise substance of the concern, nor did they explain what further
process would be due before the Commission could promulgate the
rule.
\897\ See, e.g., N. Am. Butterfly Ass'n v. Wolf, 977 F.3d 1244,
1265 (D.C. Cir. 2020) (citing Mathews v. Eldridge, 424 U.S. 319,
333-34 (1976)).
---------------------------------------------------------------------------

C. Section 910.3(c): Good Faith Exception

The Commission adds an exception in Sec. 910.3(c) in an abundance
of caution to ensure the final rule does not infringe on activity that
is protected by the First Amendment \898\ and to improve clarity in
Sec. 910.2(a). The exception states: ``It is not an unfair method of
competition to enforce or attempt to enforce a non-compete clause or to
make representations about a non-compete clause where a person has a
good-faith basis to believe that this part 910 is inapplicable.'' A
similar ``good-faith basis'' clause was in proposed Sec. 910.2(a).
---------------------------------------------------------------------------

\898\ The Commission adopts Sec. 910.3(b)(3) out of an
abundance of caution and does not believe that any of the
requirements in the final rule run afoul of the First Amendment
because the Commission finds that the use of certain existing non-
competes is an unlawful unfair method of competition.
---------------------------------------------------------------------------

As described in Parts IV.B.4 and IV.C.5, the final rule includes a
prohibition on enforcing or attempting to enforce non-competes in both
Sec. 910.2(a)(1) and (2). Under the Noerr-Pennington doctrine, filing
a lawsuit--even if the suit may tend to restrict competition and is
ultimately unsuccessful--is typically protected under the First
Amendment right to petition and immune from antitrust scrutiny.\899\
However, courts have recognized that where a lawsuit is a ``sham,''
i.e., objectively baseless and subjectively designed solely to prevent
competition, it is not protected.\900\ For a non-compete covered by the
final rule, enforcing or attempting to enforce the non-compete would
likely be considered a ``sham'' lawsuit. Accordingly, such a lawsuit
would not enjoy protection under the First Amendment. Section 910.3(b)
ensures, however, that if a circumstance arises under which an
employer's enforcement of or attempt to enforce a non-compete is
protected by the First Amendment, the final rule does not run afoul of
it.
---------------------------------------------------------------------------

\899\ See E.R.R. Presidents' Conference v. Noerr Motor Freight,
Inc., 365 U.S. 127 (1961); United Mine Workers of Am. v. Pennington,
381 U.S. 657 (1965).
\900\ Pro. Real Est. Invs., Inc. v. Columbia Pictures Indus.,
Inc., 508 U.S. 49, 60 (1993).
---------------------------------------------------------------------------

As explained in Parts IV.B.4 and IV.C.5, the Commission adopts a
prohibition on ``representing'' that a worker is subject to a non-
compete in Sec. Sec. 910.2(a)(1)(iii) and 910.2(a)(2)(iii). In Sec.
910.3(c), the Commission incorporates a ``good-faith'' exception that
applies to the prohibition on ``representing'' the worker is subject to
a non-compete. Taken together, these provisions of the final rule
prohibit an employer from representing to a worker that the worker is
subject to a non-compete unless the employer has a good-faith basis to
believe the worker is subject to an enforceable non-compete.
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.'' \901\
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.'' \902\ The final rule does not
cover protected speech because it prohibits only misrepresentations
about whether a non-compete covered by the rule is enforceable. The
good-faith exception in Sec. 910.3(b) ensures, however, that the final
rule does not run afoul of the First Amendment if a circumstance arises
under which an employer's representation that a worker is subject to a
non-compete is protected by that Amendment.
---------------------------------------------------------------------------

\901\ Cent. Hudson Gas & Elec. v. Pub. Serv. Comm'n of N.Y., 447
U.S. 557, 563 (1980).
\902\ Id. at 563-64.
---------------------------------------------------------------------------

In the NPRM, the Commission stated that an employer would have no
good faith basis to believe that a worker is subject to an enforceable
non-compete ``where the validity of the rule . . . has been adjudicated
and upheld.'' Some commenters stated that legal challenges to the final
rule will create uncertainty and unpredictability related to
compliance. The Commission believes the foregoing statement in the NPRM
would contribute to this confusion and does not adopt it in this final
rule. The Commission clarifies that the absence of a judicial ruling on
the validity of the final rule does not create a good-faith basis for
non-compliance. If the rule is in effect, employers must comply.

D. Requests To Expand Final Rule Coverage or To Provide an Exception
From Coverage Under the Final Rule

In the NPRM, the Commission preliminarily concluded that applying
the rule uniformly to all employers and workers would advance the
proposed

[[Page 38442]]

rule's objectives to a greater degree than differentiating among
workers on the basis of industry or occupation, earnings, another
factor, or some combination of factors, and that it would better ensure
workers are aware of their rights under the rule.\903\ The Commission
sought comment on this topic, including what specific parameters or
thresholds, if any, should apply in a rule differentiating among
workers.\904\
---------------------------------------------------------------------------

\903\ NPRM at 3518. The NPRM's proposed definition of ``worker''
excluded franchisees in the context of franchisee-franchisor
relationships. Id. at 3520. The NPRM also proposed an exception for
certain non-competes between the seller and the buyer of a business.
\904\ NPRM at 3519.
---------------------------------------------------------------------------

The vast majority of commenters supported the Commission's proposal
to ban non-competes categorically for all workers.\905\ Commenters from
a broad spectrum of job types and industries stated that non-competes
harm competition in a way that hurts workers and employers.
---------------------------------------------------------------------------

\905\ The Commission received over 26,000 public comments from a
wide range of stakeholders. Among these comments, over 25,000
expressed support for the Commission's proposal to categorically ban
non-competes.
---------------------------------------------------------------------------

Commenters also supported the rule with perspectives specific to
particular industries. In response to the Commission's request for
comment on the issue, some commenters argued that the Commission should
further expand the rule to cover non-competes between franchisors and
franchisees.
Other commenters argued the Commission should differentiate among
workers and employers along different parameters. They stated that
workers with higher earnings, higher skills, specific job titles, or
access to specific types of information should be excluded. Some stated
that particular industries should be excluded wholesale, including all
workers in an industry regardless of their job duties, while some
stated that only certain workers in particular industries should be
excluded.
In adopting the final rule, the Commission considered each request
for exclusion from or expansion of coverage under the final rule and
concludes that the use of covered non-competes is an unfair method of
competition. The Commission also concludes that applying the final rule
as adopted in part 910 to the full extent of the Commission's
jurisdiction with respect to covered workers advances the final rule's
objectives to a greater degree than differentiating among workers. In
response to, inter alia, comments regarding the potential costs and
difficulties that may result from invalidating existing non-competes
for certain senior executives, however, the final rule differentiates
between senior executives and other workers by allowing existing non-
competes for senior executives to remain in force. The final rule
adopts a uniform rule categorically banning new non-competes for all
workers. The Commission substantiates its finding that the use of non-
competes with workers is an unfair method of competition in Parts IV.B
and IV.C.
In this Part V.D, the Commission addresses comments related to
differentiation or exclusion of certain workers, employers, or
industries. Comments related to expanding or limiting the definition of
worker or employer are addressed in Parts III.C and III.G. Comments
related to the Commission's jurisdiction and exclusions from the
Commission's jurisdiction in the FTC Act are addressed in Part II.E.
Comments related to the prevalence of non-competes within and across
industries are addressed in Part I.B.2.
Overall, the Commission is committed to stopping unlawful conduct
related to the use of certain non-competes to the full extent of its
authority and jurisdiction. The Commission finds every use of a non-
compete covered by the final rule to be an unfair method of competition
under section 5 of the FTC Act for the reasons in Parts IV.B and IV.C.
The use of an unfair method of competition cannot be justified on the
basis that it provides a firm with pecuniary benefits.\906\ To the
extent commenters argue for an exception based on this justification,
the Commission declines to create any exception on that basis.
Moreover, a uniform rule carries significant benefits, which many
commenters who otherwise opposed the NPRM acknowledged.\907\ Among
those benefits is the certainty for both workers and employers from a
uniform rule, which also lessens the likelihood of litigation over
uncertain applications. Exceptions for certain industries or types of
workers would likely increase uncertainty and litigation costs, as
parties would dispute whether a specific business falls within an
industry-wide exception. Most importantly, exceptions would fail to
remedy the tendency of non-competes to negatively affect competitive
conditions in the excepted industries or for excepted types of workers
and would likely have in terrorem effects.
---------------------------------------------------------------------------

\906\ See, e.g., Atl. Refin. Co. v. FTC, 381 U.S. 357, 371
(1965) (``Upon considering the destructive effect on commerce that
would result from the widespread use of these contracts by major oil
companies and suppliers, we conclude that the Commission was clearly
justified in refusing the participants an opportunity to offset
these evils by a showing of economic benefit to themselves.''); see
also Part II.F.
\907\ See Part IX.C.
---------------------------------------------------------------------------

1. Differentiation by Worker Compensation or Skills
Many commenters sought an exception for highly paid or highly
skilled workers, often alongside requests for an exception for senior
executives, while many others asked the Commission to keep these
workers within the scope of the final rule. Commenters seeking an
exception argued that highly paid and highly skilled workers in
particular did not experience exploitation and coercion and were more
likely to have access to confidential information or client or customer
relationships, along with the other justifications for non-competes
discussed in Part IV.D. Commenters' specific arguments on the evidence
concerning highly paid or highly skilled workers are considered in the
relevant subsections of Part IV.B. Many commenters proposed using a
compensation threshold to differentiate highly paid workers and senior
executives, discussed in IV.C.4.b. Other commenters suggested an
exception based on the FLSA exemptions or the worker's level of access
to confidential information, discussed in Parts IV.C.4. and V.D.2.
The Commission finds that non-competes have a tendency to
negatively affect competitive conditions in labor markets and product
and service markets, including non-competes binding highly paid and
highly skilled workers. The evidence shows that, among the other
effects described in Part IV.B, non-competes for highly paid and highly
skilled workers suppress wages for these workers,\908\ restrict
competitors' access to highly skilled workers,\909\ and restrict
entrepreneurship.\910\ Notably, as described in Parts IV.B.2 and
IV.C.1, the Commission concludes that non-competes for highly paid or
highly skilled workers who are not senior executives are generally
exploitative and coercive. The Commission finds that highly paid and
highly skilled workers who are not senior executives only rarely
negotiate meaningful consideration in exchange for a non-compete. As
the Commission finds, the overwhelming response from commenters,
particularly workers, was that non-competes are exploitative and

[[Page 38443]]

coercive for many workers in highly paid professions other than senior
executives.\911\ While there may be highly paid or highly skilled
workers who do not meet the definition of ``senior executive'' and who
are not exploited or coerced, including workers above the definition's
total compensation threshold, the Commission explains in Part IV.C.4
why a compensation threshold is necessary--but not sufficient--for
purposes of defining senior executives whose existing non-competes may
remain in force under the final rule. Further, the Commission finds
that employers have sufficient alternatives to non-competes for highly
paid and highly skilled workers.\912\ The Commission also explains why
it is not exempting all non-competes that were exchanged for
consideration in Part IV.C.3. Accordingly, the final rule does not
include any workers other than highly paid senior executives in the
exception from the ban on enforcing existing non-competes. To ensure
that only workers for whom there is insufficient evidence of
exploitation and coercion are included in the exception, the final rule
narrowly defines senior executive in Sec. 910.1.\913\
---------------------------------------------------------------------------

\908\ See Part IV.B.3.a.ii.
\909\ See Part IV.C.2.c.i.
\910\ See Part IV.B.3.b.i.
\911\ See Part IV.B.2.b.
\912\ See Part IV.D.2.
\913\ For a more detailed discussion of proposed Sec. 910.1(i),
see Part IV.C.4.a.
---------------------------------------------------------------------------

2. Differentiation by Worker Access to Information
Some commenters suggested excluding workers with access to trade
secrets, confidential business information, or other intellectual
capital. Commenters contended these workers are uniquely situated
because of their access to valuable employer information. Many
commenters responded to these arguments and disagreed with them. Some
commenters stated that employers overstate the proportion of workers
who have access to such information. Commenters also stated that
employers exaggerate the amount or quality of information that should
be appropriately considered a trade secret, confidential business
information, or other intellectual capital, and therefore exaggerate
the purported cost to the firm of not being able to use non-competes.
Commenters also stated that employers have alternatives to non-competes
that generate less harm to competition, to workers, to the economy, and
to rival firms, including NDAs and fixed-term employment contracts.
The Commission declines to adopt an exclusion based on workers'
access to trade secrets, confidential business information, or other
intellectual capital because it finds such an exclusion would be
unnecessary, unjustified, unworkable, and prone to evasion. The
Commission finds the use of non-competes to be an unfair method of
competition and addresses claimed justifications related to trade
secrets, confidential business information, or other intellectual
capital in Part IV.D. The Commission finds that protecting trade
secrets, confidential information, and other intellectual capital is an
insufficient justification for non-competes because employers have less
restrictive alternatives for protecting such information. Moreover, if
the Commission were to exempt workers with access to confidential
information, employers could argue that most or all workers fall under
the exception, requiring workers to engage in complex and fact-specific
litigation over the protected status of the underlying information. As
explained in Part IX.C, such case-by-case adjudication of the
enforceability of non-competes has an in terrorem effect that would
significantly undermine the Commission's objective to address non-
competes' tendency to negatively affect competitive conditions in a
final rule.
3. Differentiation by Industry Other Than Healthcare
Some businesses and organizations argued that specific industries
should be exempt from the final rule. The Commission carefully
considered these comments and declines to adopt any industry-based
exceptions. The Commission notes that while some commenters
characterized purported justifications for an exclusion from the final
rule as unique to a particular industry, the purported justifications
were in fact the same as the those addressed in Part IV.D, namely, the
need to protect investments in labor, trade secrets, confidential
business information, or other intellectual capital. The Commission
addresses those arguments in full in Part IV.D, but in this Part V.C.3
further discusses examples of comments seeking industry-based
exceptions.
a. Client- and Sales-Based Industries
Some commenters in client- or sales-based industries, including
real estate and insurance, argued they are unique and should be
excluded from any rule. A real estate commenter argued that job
switching by real estate employees is similar to the sale of a business
where the goodwill and book of business generated by the departing
employee must remain with the business. A timeshare industry commenter
claimed the industry had unique features justifying the use of non-
competes with highly paid workers, such as the cost of marketing and
cultivation of relationships to bring in and maintain customers as well
as the need to protect proprietary targets and strategies for resort
development, due in part to the limited number of available resort
contracts. A commenter representing insurance marketing organizations
(IMOs), which serve as facilitators between insurance carriers, agents,
and consumers similarly argued for an exclusion, citing client
goodwill, purported trade secrets in sales methods, sales leads, unique
compensation structures, and company analyses, and consumer harm from
potential agent misconduct if the agent moves to a new IMO and changes
the consumer's policy. Some businesses stated that non-competes rarely
impact a worker's ability to find other work in their industry,
sometimes because the new employer ``buys out'' the non-compete.
The majority of commenters from the real estate and insurance
industry workers and small, independent insurance agencies, supported a
comprehensive ban. These comments painted a picture consistent with the
Commission's findings in Part IV.B regarding indicia of unfairness,
including facial unfairness, and the tendency of non-competes to
negatively affect competitive conditions in the labor and product and
service markets. A worker from the real estate industry stated that
non-competes are standard in the industry for all workers, regardless
of their position in a company. Commenters stated that they were asked
to sign after starting their job, with one worker stating that they
faced the option of either signing the non-compete or leaving and
losing future commissions for work they had done. Workers noted that
they were terminated without cause and still required to comply with a
non-compete, and that they had no bargaining power for promotion or
wage increases. The following examples are illustrative of the comments
the Commission received:

As an aspiring entrepreneur in the real estate space, I
am in a relatively small market where one company dominates. I
recently ended my employment with them. They use non-competes to
restrict competition and trap employees. The abolition of non-
competes is paramount as small towns/cities grow. . . .\914\
---------------------------------------------------------------------------

\914\ Individual commenter, FTC-2023-0007-10710.
---------------------------------------------------------------------------

I signed a non-compete after working at a Real Estate
Brokerage for several months. I

[[Page 38444]]

was told I had to sign it or I would not be paid on the transactions
I had pending. The non-compete was so overreaching--there was no
geographical scope, the penalty was more than prohibitive. I was
told that no one really enforces them or attempts to. I signed it,
collected my outstanding pay and left the company within 90 days.
Fast forward 4 years, I have been defending myself in litigation
over this non-compete for over 3 years. Unable to afford qualified
representation.\915\
---------------------------------------------------------------------------

\915\ Individual commenter, FTC-2023-0007-5502.
---------------------------------------------------------------------------

I am a business owner and have had 40 independent
contractors under my business at my peak. They were all under non-
compete, and if I could go back, I would eliminate the non-compete.
It doesn't help the employee or contractor, and it doesn't help the
business either. It spurs an unhealthy work environment. Clogs up
the judicial system with frivolous cases where they try and scare
people from earning a living. . . . I 100% support this ban, and it
should go into effect immediately.\916\
---------------------------------------------------------------------------

\916\ Individual commenter, FTC-2023-0007-6782.

Commenters stated that non-competes are standard in the insurance
industry and that the industry is facing significant consolidation,
fueled in part by private equity firms. These commenters argued that
workers in the insurance industry are prohibited from seeking jobs with
higher pay and better benefits in their specialty. Commenters stated
that they were not able to negotiate better conditions at their current
job and that employers can change the employment terms at will, so
workers face reduced commissions and pay while still being held to a
non-compete. Commenters stated that insurance agents are highly trained
and specialized, and non-competes force them to leave their specialty
and start over in a new specialty for less pay. Commenters also argued
that non-competes thwart consumer choice because insurance agents
create relationships with their customers, and customers lose the
ability to choose the same agent if the agent is bound by a non-
compete. Commenters also noted that standard employment agreements in
the insurance industry require workers to pay their own costs to defend
against noncompete litigation even if the worker is successful in the
challenge such that even if a worker does not violate the terms of a
noncompete, or the noncompete is not enforceable, workers who change
jobs or start a new agency are often faced with significant legal
bills. Commenters noted that although independent licensing agents are
meant to be able to contract with multiple insurance companies, they
are heavily restricted by non-competes, creating regional monopolies.
The following examples are illustrative of the comments the Commission
---------------------------------------------------------------------------
received:

As a captive ``Independent Contractor'' for a large
insurance company, this rule would be a lifeline should I decide to
pursue an independent agent opportunity. The insurance company I
represent, has gradually cut commissions over the past few years . .
. that makes it extremely uncompetitive compared to peers. There is
absolutely no reason why I should be held prisoner and not be able
to pursue far more favorable, and beneficial opportunities, for both
myself and my family.\917\
---------------------------------------------------------------------------

\917\ Individual commenter, FTC-2023-0007-10919.
---------------------------------------------------------------------------

Ideally I would like to start my own insurance agency
but am currently prevented from doing so due to a non-compete
clause. We are already somewhat limited in employment opportunities
here in rural West Texas . . . . I'm finding it difficult to find a
path to provide for my family during the two year period [of the
non-compete], and therefore am considering scrapping the new
business idea and remaining at my current job. . . . In a sense, I
feel trapped at my current job, and ultimately I feel hobbled from
achieving my full potential as a future small business owner.\918\
---------------------------------------------------------------------------

\918\ Individual commenter, FTC-2023-0007-19441.

The Commission declines to adopt an exclusion for client- or sales-
based industries such as real estate and insurance. The use of non-
competes is an unfair method of competition and the purported
justifications raised by commenters do not change the Commission's
finding. The Commission also notes that, to the extent commenters
seeking an exception are referencing different restrictive covenants,
including some garden variety non-solicitation agreements, which do not
prohibit or function to prevent a worker from switching jobs or
starting a new business as described in Part III.D, the final rule does
not apply to them. Thus, the Commission focuses on commenters'
purported need for an exclusion based on non-competes alone.
In response to commenters arguing that information and techniques
related to sales, including strategy on developing business, is
confidential or proprietary and that workers' ability to move to
another job or start a business would thus harm them, the Commission
notes that any specific information or truly proprietary techniques can
be protected by much less restrictive alternatives, such as trade
secret law and NDAs. For example, proprietary targets and strategies
for timeshares or unique compensation structures or company analyses
cited by IMOs can be otherwise protected. Moreover, companies can
compete on the merits to retain their customers by offering better
products and services. Requiring workers to leave the industry or the
workforce is an overbroad restriction that tends to negatively affect--
and actually harms--competition with attendant harm to workers and
rivals, as outlined in Part IV.B.
With respect to commenter arguments that non-competes are needed to
protect specialization related to particular products and skills
related to sales, as the Commission finds in Part IV.D, preventing
workers from using their general trade knowledge and skills, including
their gains in the same through experience with a particular employer,
is not a legally cognizable justification for non-competes. That a real
estate, insurance, or any other sales agent inherently learns skills
and gains knowledge in the performance of their job, becoming a more
effective salesperson over time, is not itself a cognizable
justification for preventing the worker from re-entering the labor
market as a worker or business owner. Employers' efforts to use non-
competes to prevent workers from using general trade knowledge and
skills is an unfair method of competition under section 5 because it is
an attempt to avoid competition on the merits.\919\ To the extent
employers seek to protect legitimate investments in training, the
Commission finds employers have less restrictive alternatives,
including fixed duration contracts and better pay or other terms and
conditions of employment to retain the worker. Finally, the Commission
notes that because all covered employers can no longer maintain or
enforce non-competes with workers who are not senior executives,
employers may also have a larger pool of trained and experienced
workers to hire from.
---------------------------------------------------------------------------

\919\ See Nat'l Soc'y of Prof. Engrs. v. United States, 435 U.S.
679 (1978) (confirming that limiting competition, even if based on
the specific advantages of doing so because of the particular nature
of an industry, is not a cognizable justification).
---------------------------------------------------------------------------

The Commission disagrees with commenters arguing that a worker
leaving a sales position is akin to the sale of a business. Unlike the
seller of a business, a worker is in an unequal bargaining position and
does not receive compensation when leaving the firm. The fact that a
worker generates goodwill for an employer is not a cognizable
justification for non-competes. First, it not clear that the employer
would lose goodwill associated with their business if a particular
worker leaves. Moreover, commenters do not specify the extent to which
their legitimate investment in the worker--separate from employing the

[[Page 38445]]

worker to use their general skills and knowledge to successfully
perform the job--generates such goodwill. To the extent employers do
seek to protect investments in goodwill, the employer has less
restrictive alternatives to attract and retain workers and customers or
clients.
b. Industries With Apprenticeships or Other Required Training
Some commenters representing industries with apprenticeships or
that require training as a part of employment, such as real estate
appraisers, plumbers, and veterinarians, argued their industry should
be excluded from the final rule. These commenters contended that a
significant investment is needed to make workers productive in their
industries and that they need to use non-competes to protect that
investment. Each commenter cited an apprenticeship or training period
during which they are not able to bill or must bill a lower amount for
a worker's labor.
Worker commenters from these industries stated that non-competes
leave them unable to launch or progress in their career because non-
competes tie them to their first employer. Some appraiser commenters
noted that, while their share of the appraisal fee rises to some extent
after completing their apprenticeship, they cannot negotiate higher
shares of the fee or other better working conditions because of non-
competes. A union commenter representing plumbers noted that plumbers
with non-competes are not able to accept better offers of employment,
with better pay and benefits, including union positions. Other worker
commenters mentioned geographic overbreadth and excessively long non-
competes of two years. Many veterinarian commenters supported the
proposed rule, stating that non-competes artificially held down their
compensation and did not allow them to start new practices in areas
where the need for more veterinary services is great, with some
commenters stating that this contributed to consolidation.
The Commission declines to exclude industries, such as real estate
appraisal, plumbing, and veterinary medicine, in which an industry must
purportedly invest in significant training or apprenticeship of workers
before the employer considers them to be productive. The Commission
finds that these employers have less restrictive alternatives--namely
fixed duration contracts--to protect their investment in worker
training. A return on investment in the training does not require that
the worker be unable to work for a period after leaving employment.
Moreover, employers stand to benefit from the final rule through having
access to a broader labor supply--including incoming experienced
workers--with fewer frictions in matching with the best worker for the
job.
c. Financial Services
Some commenters representing financial services companies opposed
the rule, arguing non-competes are necessary for the industry and their
industry is unique because non-competes have been used for decades,
while numerous firms have entered the market, workers are mobile, and
there is no evidence of blocked or curbed entry, lack of access to
talent, lower innovation, or other negative impacts in that market.
These commenters mention that mobility and access to talent is possible
because new employers often ``buy out'' a worker's non-compete to hire
a worker who may be otherwise bound by a non-compete. Several
commenters also contend that non-competes are especially vital to firms
that focus on securities or commodities trading because disclosure of
commercially sensitive information to competitors can be extremely
damaging to their former employers' profitability.
Commenters identified three studies which they contend suggest that
non-competes improve worker productivity. First, commenters identified
two studies on the Broker Protocol, an agreement among financial
advisory firms which ostensibly limited the use of NDAs, non-
solicitation agreements, and non-competes simultaneously. One study by
Gurun, Stoffman, and Yonker finds that firms that joined the Protocol
experienced higher rates of employee misconduct and earned increased
fees.\920\ The other study, by Clifford and Gerken, finds that firms
which joined the Protocol invested more heavily in licensure and
experienced fewer customer complaints.\921\ Commenters noted that these
two studies have conflicting findings on advisor misconduct. The
authors themselves discuss these findings, with each criticizing the
approach of the other. One commenter stated that, from a technical
standpoint, the Clifford and Gerken study has a superior approach due
to its substantially larger sample size and its analysis of the
assumptions underlying the methodologies used in both studies. A third
study--a study of the mutual fund industry by Cici, Hendriock, and
Kempf--finds that mutual fund managers increase their firms' revenue
when non-competes are more enforceable by investing in higher
performing funds, attracting new clients, and increasing revenue from
fees.\922\ This study uses three changes in non-compete enforceability,
measured in a binary fashion.
---------------------------------------------------------------------------

\920\ Umit G. Gurun, Noah Stoffman, & Scott E. Yonker, Unlocking
Clients: The Importance of Relationships in the Financial Advisory
Industry, 141 J. of Fin. Econ. 1218-43 (2021).
\921\ Christopher P. Clifford & William C. Gerken, Property
Rights to Client Relationships and Financial Advisor Incentives, 76
J. of Fin. 2409-45 (2021).
\922\ Gjergji Cici, Mario Hendriock, & Alexander Kempf, The
Impact of Labor Mobility Restrictions on Managerial Actions:
Evidence from the Mutual Fund Industry, 122 J. of Banking & Fin.
105994 (2021).
---------------------------------------------------------------------------

A commenter representing a large group of public equity investors
supported the rule, stating that a comprehensive ban would create an
inclusive labor market, which is integral to long-term corporate value
and a dynamic, innovative, and equitable economy. Financial services
worker commenters also supported the rule, citing to their failure to
be paid for their skills over time, the threat of litigation in seeking
new employment, and the overbroad nature of non-competes in the
industry. The following example is illustrative of the comments the
Commission received:

I am a female finance professional with strong
qualifications and experience. I am subject to an extremely long and
comprehensive non compete contract which I was induced to sign at a
young age. I have been offered many positions at other firms who
would be more willing to provide me with leadership opportunities
and a path to further advancement, but I am unable to consider them
and I am essentially trapped at my firm. . . .\923\
---------------------------------------------------------------------------

\923\ Individual commenter, FTC-2023-0007-0953.

The Commission declines to exclude financial services companies
over which it has jurisdiction from the final rule. The Commission
finds in Part IV.C that non-competes are restrictive, exclusionary, and
also exploitative and coercive for higher wage and highly skilled
workers, including workers in finance. The Commission also finds in
Part IV.B and IV.C that non-competes tend to negatively affect
competitive conditions in labor market through reduced labor mobility
and in the product and services market through reduced innovation and
new business formation. Evidence that new employers sometimes buy out
non-competes also suggests that such clauses harm competition by
raising the cost to compete and creating deadweight economic loss for
the new employer.\924\
---------------------------------------------------------------------------

\924\ See Part IV.C.2.c.i.
---------------------------------------------------------------------------

The empirical evidence provided by commenters arguing for
differentiation

[[Page 38446]]

for the finance industry does not support their claims. The Commission
finds that it is difficult to weigh the evidence in the two studies of
the Broker Protocol because they reach conflicting results, though the
Commission agrees that the technical approach in the Clifford and
Gerken study is superior due to its larger sample size. More
importantly, both studies primarily concerned non-solicitation
agreements, and do not isolate any effects of non-competes. So even if
the studies did not reach conflicting results, the Commission believes
they still would yield little reliable information about the effects of
non-competes specifically. With respect to the study of the mutual fund
industry, the Commission notes that under section 5, firms may not
justify unfair methods of competition based on pecuniary benefit to
themselves.\925\ The study does not establish that there were societal
benefits from the attraction of new clients or the increased fee
revenue--just that the firms benefited. Therefore, this study does not
establish a business justification that the Commission considers
cognizable under section 5.
---------------------------------------------------------------------------

\925\ Id.
---------------------------------------------------------------------------

d. On-Air Talent
Some commenters opposing the rule stated that investment in on-air
talent would be considerably reduced without non-competes. Commenters
argued that on-air talent becomes well-known because of employers'
investment and reputation and that employers must be able to use non-
competes to protect this investment. The Commission also received a
number of comments from and on behalf of on-air talent. Those
commenters stated that non-competes are ubiquitous for on-air talent,
that they are often localized geographically, that they suppress
compensation, and that they force workers seeking a better match to
move out of their localities. The following example is illustrative of
the comments the Commission received:

I am a professional broadcast journalist subject to a
non-compete agreement with every employment contract I have ever
signed, which is the industry standard. I understand the need for
contractual agreements with on-air talent and some off-air talent,
but non-compete agreements have historically offered nothing to
employees besides restricting where they work, and how much money
they are able to earn . . . [while] knowing that employees would
have to completely relocate if they wanted to seek or accept another
opportunity.\926\
---------------------------------------------------------------------------

\926\ Individual commenter, FTC-2023-0007-12779.

The Commission declines to exclude on-air talent from the final
rule. The Commission finds the use of non-compete agreements is an
unfair method of competition as outlined in Part IV.B, and commenters
do not provide evidence that a purported reduction in investment in on-
air talent would be so great as to overcome that finding. Specifically,
the success of on-air talent is a combination of the employer's
investment and the talent of the worker, both of which benefit the
employer. As noted in Part IV.D, other less restrictive alternatives,
including fixed duration contracts and competing on the merits to
retain the talent, allow employers to make a return on their own
investments. Moreover, as stated in Part II.F, firms may not justify
unfair methods of competition based on pecuniary benefit to themselves.
Employers in this context do not establish that there are societal
benefits from their investment in on-air talent, but only that the
firms benefited.
e. Construction
A commenter representing companies who provide skilled workers in
construction stated that the Commission should exclude the industry
from the rule because non-competes are necessary to the industry's
success. The commenter states that non-competes are necessary for
investment in innovation and productivity in the industry. The comment
cites to three studies. Two of the studies find a general reduction in
productivity in construction and conclude, inter alia, further study is
warranted to better understand the trend--Goolsbee and Syverson \927\
and Huang, Chapman, and Burty (``NIST study'' \928\). The third study
is a McKinsey & Company report published in 2020 predicting innovation
in the construction industry in the coming years.\929\
---------------------------------------------------------------------------

\927\ Austan Goolsbee & Chad Syverson, The Strange and Awful
Path of Productivity in the U.S. Construction Sector (NBER Working
Paper 30845, Jan. 2023).
\928\ Allison L. Huang, Robert E. Chapman, & David Burty,
Metrics and Tools for Measuring Construction Productivity: Technical
and Empirical Considerations, Nat'l Inst. of Standards and Tech.,
Bldg. and Fire Rsch. Lab., NIST Special Publication 110
(September 2009).
\929\ McKinsey & Co., The Next Normal in Construction: How
Disruption is Reshaping the World's Largest Ecosystem (June 2020).
---------------------------------------------------------------------------

The evidence cited by this commenter is exclusively about broad
trends in productivity in the industry, and what may impact those
trends. None of the studies explicitly examines non-competes, and they
do not support inferences on the effects of non-competes in this
particular industry. Indeed, the Commission finds that the final rule
addresses issues raised by the commenter. For example, the commenter
notes that productivity in the industry has been broadly declining for
years. Notably, this downward trend exists with non-competes in use in
the industry. The Commission notes that, under its analysis of the
effect of the final rule, productivity will benefit because the final
rule frees up labor and allows for greater innovation. The NIST study
raises ``skilled labor availability'' as the very first factor that
affects productivity. The Commission finds in Part IV that non-competes
suppress labor mobility and the Commission believes the final rule will
result in firms having access to workers who are a better, more
productive fit. The McKinsey & Company report notes that changes in the
industry will require adaptation by firms. The Commission believes the
final rule will facilitate this adaptation by sharing non-confidential
know-how across firms through increased mobility of workers. The rule
may also help mitigate, and certainly will not exacerbate, concerns
over increased concentration in the industry raised in the McKinsey &
Company report, as the Commission finds that non-competes inhibit new
business formation in Part IV.B.3.b.i. Moreover, the Commission
believes non-competes may increase concentration, as discussed in Part
IV.B.3.b.iii.
Additionally, the Commission finds that less restrictive
alternatives, including appropriately tailored NDAs and non-
solicitation agreements, are sufficient to address disclosure of
confidential information and concerns related to client business. With
respect to concerns that the construction industry as a whole is
suffering from under-investment in capital and that the final rule may
further disincentivize capital investment, as the Commission finds in
Part IV.B.3.b.i, non-competes inhibit new business formation. The
increase in new business formation from the final rule will bring new
capital to bear in the industry. The Commission addresses the empirical
literature and comments related to capital investment in detail Part
IV.D.1. The Commission notes here that it is not clear any purported
capital investment associated with non-competes is entirely beneficial
because it may be the result of firms over-investing in capital because
they do not face competition on the merits. Even if there is some net
decrease in capital investment due to the final rule, commenters
provide no reason to believe it would be a material amount.

[[Page 38447]]

4. Exclusion for Covered Market Participants That Have Competitors
Outside the FTC's Jurisdiction
The Commission explained in the NPRM that some entities that would
otherwise be employers may not be subject to the final rule to the
extent they are exempted from coverage under the FTC Act.\930\ As
described in Part II.E.1, the Act exempts, inter alia, ``banks,''
``persons, partnerships, or corporations insofar as they are subject to
the Packers and Stockyards Act of 1921'' \931\ as well as an entity
that is not ``organized to carry on business for its own profit or that
of its members.'' \932\ A few business and trade organization
commenters argued the Commission should rescind the proposal or should
not promulgate the rule because limits on the Commission's jurisdiction
mean that the rule will distort competitive conditions where coverage
by the final rule may not be universal. These commenters identified
industries where employers excluded from the Commission's jurisdiction
compete with covered persons, including livestock and meatpacking
industries, and areas where government or private employers subject to
the State action doctrine compete with covered employers. They
contended that excluded employers will be able to use non-competes
while their covered competitors are legally prohibited from doing so,
advantaging excluded employers.
---------------------------------------------------------------------------

\930\ NPRM at 3510.
\931\ Id. (citing 15 U.S.C. 45(a)(2)).
\932\ Id. (citing 15 U.S.C. 44).
---------------------------------------------------------------------------

The Commission declines to rescind the proposal or otherwise
refrain from promulgating a rule simply because the rule would not
cover firms outside the Commission's jurisdiction. As an initial
matter, jurisdictional limits are not unique to the Commission. All
agencies have limits on their jurisdiction--many of which do not neatly
map to all competitors in a particular market. Moreover, as explained
in Parts IV and X, the final rule will have substantial benefits
notwithstanding the FTC Act's jurisdictional limits, including
increases in worker earnings, new firm formation, competition,
innovation, and a decrease in health care prices (and potentially other
prices). Furthermore, the Commission finds the risk of material
disparate impact in markets where some but not all employers are
covered by the final rule is minimal and, in any event, the final
rule's overall benefits justify any such potential impact. As
commenters acknowledged, excluded employers already compete with
covered employers in the same markets. That is, coverage under the FTC
Act--whether an employer is subject to the FTC Act and enforcement by
the FTC--differs across a range of topics and long predates this final
rule, which does not materially alter the status quo in that respect.
Moreover, even in the absence of the rule, firms within the
jurisdiction of the FTC Act are already subject to potential FTC
enforcement against unfair methods of competition, including against
non-competes, while firms outside the FTC's jurisdiction are not. The
final rule does not alter that basic landscape.
At least one financial services industry commenter stated that
national banks are outside of the Commission's jurisdiction and argued
the final rule should exclude bank holding companies, subsidiaries, and
other affiliates of Federally regulated banks to avoid disparate
treatment of workers employed by different affiliates within the same
organization, and because those entities are already heavily regulated.
The Commission declines to exclude bank holding companies,
subsidiaries, and other affiliates of Federally regulated banks that
fall within the Commission's jurisdiction. While these institutions may
be highly regulated, and depending on the corporate structure non-
competes may be allowed for some workers but not others, the Commission
finds that neither factor justifies excluding them from the final rule.
If Federally regulated banks are concerned about disparate treatment of
workers employed by their own different affiliates, they have the
option to stop using non-competes across all their affiliates.

A corporation wholly owned by an Indian tribe asserted that the
Commission should exclude Indian tribes and their wholly owned business
entities from the definition of ``employer.'' The commenter asserted
that the FTC Act does not explicitly grant jurisdiction over Indian
tribes and their corporate arms. The commenter further argued that
critical tribal revenue will be lost if tribal businesses' ability to
retain skilled workers is impacted. The Commission declines to
categorically exclude tribes or tribal businesses from coverage under
the final rule. The FTC Act is a law of general applicability that
applies to Indians, Indian Tribes, and tribal businesses.\933\ The
Commission recognizes, however, that in some instances these entities
may be organized in such a way that they are outside the Commission's
jurisdiction.\934\ Whether a given Tribe or tribal business is a
corporation within the FTC Act will be a fact-dependent inquiry. The
Commission is aware of no evidence suggesting the final rule would
disproportionately impact tribes or tribal businesses.\935\
---------------------------------------------------------------------------

\933\ See Fed. Power Comm'n v. Tuscarora Indian Nation, 362 U.S.
99, 116-17 (1960) (examining case law supporting the conclusion that
``a general statute in terms applying to all persons includes
Indians and their property interests''); FTC v. AMG Servs., Inc.,
No. 2:12-CV-00536-GMN, 2013 WL 7870795, at *16-*21 (D. Nev. July 16,
2013), report and recommendation adopted, No. 2:12-CV-00536-GMN,
2014 WL 910302 (D. Nev. Mar. 7, 2014) (discussing the FTC Act's
applicability to Indian Tribes and tribal businesses).
\934\ See, e.g., AMG Servs., 2013 WL 7870795, at *22 (finding
genuine dispute of material fact barring summary judgment on
question of whether tribal chartered corporations were corporations
under the FTC Act).
\935\ The commenter also asked the Commission to engage Indian
tribes about the proposed rule, citing Executive Order 13175.
However, the Commission notes that Executive Order 13175, which
requires consultation with Indian Tribes before promulgating certain
rules, does not apply to independent regulatory agencies such as the
Commission. E.O. No. 13175, 65 FR 67249 (Nov. 6, 2000) (stating that
the term ``agency,'' which governs the applicability of the
executive order, excludes agencies ``considered to be independent
regulatory agencies, as defined in 44 U.S.C. 3502(5)''); 44 U.S.C.
3502(5) (listing the Commission as an ``independent regulatory
agency''). The Commission did, however, provide extensive
opportunities for public input from any and all stakeholders,
including a 120-day comment period (extended from 90 days) and a
public forum held on February 16, 2023, that provided an opportunity
to directly share experiences with non-competes.
---------------------------------------------------------------------------

5. Coverage of Healthcare Industry
Many commenters representing healthcare organizations and industry
trade associations stated the Commission should exclude some or all of
the healthcare industry from the rule because they believe it is
uniquely situated in various ways. The Commission declines to adopt an
exception specifically for the healthcare industry. The Commission is
not persuaded that the healthcare industry is uniquely situated in a
way that justifies an exemption from the final rule. The Commission
finds use of non-competes to be an unfair method of competition that
tends to negatively affect labor and product and services markets,
including in this vital industry; the Commission also specifically
finds that non-competes increase healthcare costs. Moreover, the
Commission is unconvinced that prohibiting the use of non-competes in
the healthcare industry will have the claimed negative effects.
a. Comments Received
Many business and trade industry commenters from the healthcare
industry seeking an exception,

[[Page 38448]]

including, for example, hospitals, physician practices, and surgery
centers, focused on whether the Commission has jurisdiction to regulate
nonprofit entities registered under section 501(c) of the Internal
Revenue Code. The Commission addresses its jurisdiction in Part II.E
and considers comments related to requests for an industry-based
exclusion for all or part of the healthcare industry in this section.
As stated in Part II.E, entities claiming tax exempt status are not
categorically beyond the Commission's jurisdiction, but the Commission
recognizes that not all entities in the healthcare industry fall under
its jurisdiction.
Based on the assumption that entities claiming tax-exempt status as
nonprofits and publicly owned healthcare organizations would be exempt,
many industry commenters contended that for-profit healthcare
organizations must be also exempted from the rule as a matter of equal
treatment. Commenters cited data from the American Hospital Association
(AHA) indicating that as many as 58% of all U.S. hospital systems claim
tax-exempt status as nonprofits, 24% are for-profit hospitals, and 19%
are State and local government hospitals. One commenter cited AHA data
indicating that 78.8% of for-profit hospitals are located in the same
Hospital Referral Region (HRR) as at least one entity that claims tax-
exempt status as a nonprofit. Many commenters argued that for-profit
entities and entities that claim nonprofit status compete for patients,
physician and non-physician staff, and market share. These commenters
contended that a rule covering only for-profit healthcare entities will
distort the market in favor of entities claiming tax-exempt status as
nonprofits, which would continue using non-competes. One commenter
identifying as an entity claiming nonprofit tax-exempt status argued
that such entities need to rely on non-competes to compete with for-
profit competitors because, unlike for-profit health systems, they
invest significantly in specialized training and mentorship, and offer
a guaranteed minimum salary to recent graduates.
Some commenters contended that favoring entities claiming tax-
exempt status as nonprofits would have negative effects. Some
commenters argued that disparate coverage under the rule may exacerbate
consolidation in the healthcare industry by advantaging entities that
claim tax-exempt status as nonprofits. They stated that increased
consolidation would reduce the available supply of skilled labor for
for-profit hospitals, increasing labor costs and contributing to higher
prices paid by patients. Commenters noted a trend in physicians
increasingly leaving private practice to work at large hospital groups
claiming tax-exempt status as nonprofits, which, they contended, may
continue to lock those physicians up using non-competes. Industry
commenters also argued that insurance premiums will rise more than they
would absent the rule because of the greater market power and resulting
leverage of entities that claim tax-exempt status as nonprofits in
provider network negotiations. One manufacturing industry association
commenter argued that the burden of rising premiums will be passed on
to manufacturers who provide health insurance to their employees.
Commenters also argued that a rule covering for-profit healthcare
providers would cause independent, physician-owned practices, and small
community practices to suffer a competitive disadvantage compared to
larger entities that claim tax-exempt status as nonprofits and public
hospital groups, reducing the number of these practices and
interrupting continuity of care for their patients. Commenters stated
that such practices will suffer these consequences acutely in States or
localities that are particularly saturated with entities that claim
tax-exempt status as nonprofits or exempt State or local hospitals, and
cited New York and Mississippi as examples. A commenter claimed that
public hospitals regulated by the Commission will incur losses because
of their reduced ability to hire and retain physicians that perform
profitable procedures. One commenter cited a 1996 Commission study to
contend that, all else equal, hospitals that claim tax-exempt status as
nonprofits set higher prices when they have more market power. A
business commenter contended that, given what they considered a large-
scale exemption of certain physician employers from the Commission's
jurisdiction, the States are more appropriate regulators of non-
competes between physicians and employers. Other commenters claimed
that the Commission must further study the consequences of differential
treatment.
Conversely, many commenters vociferously opposed exempting entities
that claim tax-exempt status as nonprofits from coverage under the
final rule. Several commenters contended that, in practice, many
entities that claim tax-exempt status as nonprofits are in fact
``organized to carry on business for [their] own profit or that of
[their] members'' such that they are ``corporations'' under the FTC
Act. These commenters cited reports by investigative journalists to
contend that some hospitals claiming tax-exempt status as nonprofits
have excess revenue and operate like for-profit entities. A few
commenters stated that consolidation in the healthcare industry is
largely driven by entities that claim tax-exempt status as nonprofits
as opposed to their for-profit competitors, which are sometimes forced
to consolidate to compete with the larger hospital groups that claim
tax-exempt status as nonprofits. Commenters also contended that many
hospitals claiming tax-exempt status as nonprofits use self-serving
interpretations of the IRS's ``community benefit'' standard to fulfill
requirements for tax exemption, suggesting that the best way to address
unfairness and consolidation in the healthcare industry is to strictly
enforce the IRS's standards and to remove the tax-exempt status of
organizations that do not comply. An academic commenter argued that the
distinction between for-profit hospitals and nonprofit hospitals has
become less clear over time, and that the Commission should
presumptively treat hospitals claiming nonprofit tax-exempt status as
operating for profit unless they can establish that they fall outside
of the Commission's jurisdiction.
The Commission also received many comments about coverage of the
health care sector generally under the rule. Some commenters urged the
Commission to ensure that health care workers, including doctors and
physicians, were covered by the final rule. Several commenters stated
that eliminating non-competes would allow doctors wishing to change
jobs to stay in the same geographic area, fostering patient choice and
improving continuity of care. Other commenters urged the Commission to
create an exception for health care workers. Some argued that the
evidence does not support the Commission's conclusion that non-competes
depress earnings in health care. Other reasons commenters cited in
support of an exception included concerns about continuity and quality
of care for patients, the increased costs for employers of health care
workers, physicians' negotiating power with their employers, and the
effect on incentives for employers to train their health care
workers.\936\
---------------------------------------------------------------------------

\936\ Some commenters also contended that the health care
industry should be exempt from the rule because many health care
providers fall outside of the Commission's jurisdiction. The
Commission summarizes and responds to those commenters in Part
II.E.2.
---------------------------------------------------------------------------

Thousands of healthcare workers submitted comments supporting a ban
on non-competes. Worker commenters

[[Page 38449]]

did not always identify whether they were working at for-profit
organizations, entities that claim tax-exempt status as nonprofits, or
State or local healthcare organizations, but each category was
represented in the comments. These commenters detailed the negative
effects of non-competes on their families, their mental health, their
financial health, and their career advancement, as elaborated in Part
IV.B.2.b.ii. Specifically, healthcare workers commented that because
non-competes prohibited them from switching jobs or starting their own
businesses, they had to stay at jobs with unsafe and hostile working
conditions, to take jobs with long commutes, to relocate their
families, to give up training opportunities, and to abandon patients
who wanted to continue seeing them. Illustrative comments are
highlighted in Parts I and IV.
Additionally, commenters stated the hardship patients have suffered
because of non-competes when, for example, their physician was required
to move out of their area to work for a different employer. The
Commission highlights some of these comments in Part IV.B.2.b.ii and
includes two further illustrative comments here:

As a patient, non compete clauses are affecting mine
and my [family's] ability to receive medical care. Our pediatrician
left a practice and we aren't able to be informed where they are
going. When we find out, it is an hour away [because] of the non
compete. And when we look for other [doctors] closer they aren't
accepting new patients. So for an entire year we are driving 2
[hours] round trip to see our pediatrician until they can move back
to a local medical group. The non compete clause is not just
affecting the life of the [doctor], but is also impacting many of us
who rely on their services.\937\
---------------------------------------------------------------------------

\937\ Individual commenter, FTC-2023-0007-10085.
---------------------------------------------------------------------------

As a family physician this has caused much grief and
obstructs my desire to work and provide care for underserved
populations. I am a NHSC scholarship recipient and due to non
compete clauses was unable to continue working in the town I served
due to its rurality. This created a maternity desert in the region I
served. Now in a more metropolitan area, there has been an exodus of
physicians in the area due to non compete clauses that has caused
worsening access to primary care, specialty services, including
behavioral health and substance use disorder treatment.\938\
---------------------------------------------------------------------------

\938\ Individual commenter, FTC-2023-0007-0924.

A number of physician group commenters stated that nonprofit
healthcare organizations regularly impose non-competes on physicians,
and that the impact of the rule would be limited if nonprofits are not
required to comply. Some physician group commenters urged the
Commission to work with other agencies to fill in gaps in applying the
rule based on the Commission's jurisdiction, citing the importance of
banning non-competes as widely as possible because of the harms they
impose on physicians and patients irrespective of employer status.
Specifically, commenters suggested that the Commission use its
antitrust and referral authority to aggressively monitor nonprofit
organizations for antitrust violations, to collaborate with other
Federal agencies, including the IRS, and to provide incentives and
guidance to States, which can enact measures to ensure that a
prohibition on non-competes is implemented comprehensively. One
commenter also noted that a ban would bring scrutiny to non-competes
and would likely intensify pressure to eliminate them. A few commenters
also contended that entities claiming tax-exempt status as nonprofits
are subject to the Commission's jurisdiction as ``persons'' under the
FTC Act.
b. The Final Rule
After carefully considering commenters' arguments, the Commission
declines to exempt for-profit healthcare employers or to exempt the
healthcare industry altogether.
First, as described in Part IV, the Commission finds that certain
uses of non-competes are an unfair method of competition. The use of
unfair methods of competition cannot be justified on the basis that it
provides a firm with pecuniary benefits to help them compete with other
firms that use similar tactics.\939\ In this case, for-profit and other
covered entities have urged the Commission to allow them to continue to
employ an unfair method of competition (i.e., use non-competes) because
some competitors are not prohibited from doing so as they are beyond
the Commission's jurisdiction. The Commission is committed to stopping
unlawful conduct to the full extent of its jurisdiction. For example,
the Commission would not refrain from seeking to enjoin unlawful price
fixing by a for-profit within its jurisdiction because entities outside
its jurisdiction under the FTC Act would not be subject to the same FTC
action.
---------------------------------------------------------------------------

\939\ See Atl. Refin. Co. v. FTC, 381 U.S. 357, 371 (1965)
(``Upon considering the destructive effect on commerce that would
result from the widespread use of these contracts by major oil
companies and suppliers, we conclude that the Commission was clearly
justified in refusing the participants an opportunity to offset
these evils by a showing of economic benefit to themselves.'').
---------------------------------------------------------------------------

Second, the Commission disagrees with commenters' contention that
all hospitals and healthcare entities claiming tax-exempt status as
nonprofits necessarily fall outside the Commission's jurisdiction and,
thus, the final rule's purview. As explained in Part II.E.2, a
corporation's ``tax-exempt status is certainly one factor to be
considered,'' but that status is not coterminous with the FTC's
jurisdiction and therefore ``does not obviate the relevance of further
inquiry into a [corporation's] operations and goals.'' \940\
Accordingly, as noted by commenters, entities that claim tax-exempt
nonprofit status may in fact fall under the Commission's jurisdiction.
Similarly, whether the final rule would apply to quasi-public entities
or certain private entities that partner with States or localities,
such as hospitals affiliated with or run in collaboration with States
or localities, depends on whether the particular entity or action is an
act of the State itself under the State action doctrine, which is a
well-established, fact-specific inquiry.\941\ Thus, some portion of the
58% of hospitals that claim tax-exempt status as nonprofits and the 19%
of hospitals that are identified as State or local government hospitals
in the data cited by AHA likely fall under the Commission's
jurisdiction and the final rule's purview. Further, many States have
banned non-competes for a variety of healthcare professionals in both
for-profit and nonprofits entities by statute.\942\ Even if

[[Page 38450]]

the final rule's coverage extends only to hospitals that do not
identify as tax-exempt non-profits based on AHA data, as explained in
Part IV.A.1, the Commission finds every use of covered non-competes to
be an unfair method of competition and concludes that the evidence
supports the Commission's decision to promulgate this final rule, which
covers the healthcare industry to the full extent of the Commission's
authority.
---------------------------------------------------------------------------

\940\ In the Matter of the Am. Med. Assoc., 94 F.T.C. 701, 1979
WL 199033 (FTC Oct. 12, 1979).
\941\ In the Matter of Ky. Household Goods Carriers Ass'n, Inc.,
139 F.T.C. 404, 405 (2005) (``The Supreme Court has made clear that
the state action doctrine only applies when (1) the challenged
restraint is clearly articulated and affirmatively expressed as
state policy, and (2) the policy is actively supervised by the State
itself.'') (citation and alterations omitted); see also id. at 410-
13 (applying test); Elec. Inspectors, Inc. v. Vill. of East Hills,
320 F.3d 110, 117-19 (2d Cir. 2003).
\942\ Colo. Rev. Stat. sec. 8-2-113(5)(a) (Colorado statute
banning non-competes for physicians); D.C. Code sec. 32-581.01 (D.C.
statute banning non-competes for medical specialists earning less
than $250,000, compared to $150,000 for other workers); Fla. Stat.
sec. 542.336 (Florida statute banning non-competes for physician
specialists in certain circumstances); Ind. Code Ann. secs. 25-22.5-
5.5-2 and 2.5(b) (Indiana statute banning non-competes for primary
care physicians and restricting non-competes for other physicians);
Iowa Code sec. 135Q.2(3)(a) (banning non-competes for health care
employment agency workers who provide nursing services); Ky. Rev.
Stat. sec. 216.724(1)(a) (Kentucky statute banning non-competes for
temporary direct care staff of health care services agencies); N.M.
Stat. Ann. secs. 24-1I-1 and 2 (New Mexico statute banning non-
competes for several types of health care practitioners); S.D.
Codified Laws secs. 53-9-11.1-11.2 (South Dakota statute banning
non-competes for several types of healthcare practitioners); Tex.
Bus. & Com. Code secs. 15.50-.52 (Texas statute restricting the use
of non-competes for physicians).
---------------------------------------------------------------------------

Relatedly, in response to commenters' concern that large numbers of
healthcare workers will not benefit from the final rule because they
work for entities that the final rule does not cover, the Commission
notes many workers at hospitals, including those that claims tax-exempt
status as a nonprofit or government-owned hospital, contract with or
otherwise work for a for-profit entity, such as a staffing agency or
physician group. Although some of these individuals may work at an
excluded hospital, the final rule applies to their employer--the
staffing agency or for-profit physician group--because it is covered by
the final rule.
The Commission disagrees with commenters stating the ability to use
non-competes will provide a material competitive advantage to entities
claiming tax-exempt status as nonprofit or publicly owned entities that
are beyond the Commission's jurisdiction. To the contrary, those
entities outside FTC jurisdiction that continue to deploy non-competes
may be at a self-inflicted disadvantage in their ability to recruit
workers, even if they derive some short-term benefit from trapping
current workers in their employment. Furthermore, commenters' concern
that for-profit healthcare entities will be at a competitive
disadvantage is based on the false premise that entities outside the
jurisdiction of the FTC will not be otherwise regulated or scrutinized
with respect to the use of non-competes. States currently regulate non-
competes by statute, regulation, and common law. According to the AHA
data cited by commenters, over 12% (398/3,113) of nonprofit hospitals
and 13% of government hospitals (187/1,409) are in States that ban non-
competes for all employers. In any event, even if true, arguments that
for-profit and other covered entities could suffer competitive harm by
not being able to employ an unfair method of competition would not
change the Commission's finding that use of certain non-competes is an
unfair method of competition, as further discussed in Part IV.
While the Commission shares commenters' concerns about
consolidation in healthcare, it disagrees with commenters' contention
that the purported competitive disadvantage to for-profit entities
stemming from the final rule would exacerbate this problem. As some
commenters stated, the Commission notes that hospitals claiming tax-
exempt status as nonprofits are under increasing public scrutiny.
Public and private studies and reports reveal that some such hospitals
are operating to maximize profits, paying multi-million-dollar salaries
to executives, deploying aggressive collection tactics with low-income
patients, and spending less on community benefits than they receive in
tax exemptions.\943\ Economic studies by FTC staff demonstrate that
these hospitals can and do exercise market power and raise prices
similar to for-profit hospitals.\944\ Thus, as courts have recognized,
the tax-exempt status as nonprofits of merging hospitals does not
mitigate the potential for harm to competitive conditions.\945\
---------------------------------------------------------------------------

\943\ See, e.g., Press Release, Office of U.S. Sen. Chuck
Grassley, Bipartisan Senators Probe Potential Abuse Of Tax-Exempt
Status By Nonprofit Hospitals (Aug. 9, 2023), https://www.grassley.senate.gov/news/news-releases/bipartisan-senators-probe-potential-abuse-of-tax-exempt-status-by-nonprofit-hospitals;
Request for Information Regarding Medical Payment Products, 88 FR
44281 (July 12, 2023); U.S. Gov't Accountability Off., Testimony
Before the Subcommittee on Oversight, Committee on Ways and Means,
House of Representatives, Tax Administration: IRS Oversight of
Hospital's Tax-Exempt Status, GAO-23-106777 (Apr. 26, 2023), https://www.gao.gov/assets/gao-23-106777.pdf; Pottstown Sch. Dist. v.
Montgomery Cnty. Bd. of Assessment Appeals, 289 A.3d 1142 (Pa.
Commw. Ct. 2023) (holding that for-profit hospitals purchased by
nonprofit claiming tax exempt status under Federal law do not
qualify under State law for nonprofit tax exemption); Phoenixville
Hosp., LLC v. Cnty. of Chester Bd. of Assessment Appeals, 293 A.3d
1248 (Pa. Commw. Ct. 2023); Brandywine Hosp., LLC v. Cnty. of
Chester Bd. of Assessment Appeals, 291 A.3d 467 (Pa. Commw. Ct.
2023); Jennersville Hosp., LLC v. Cnty of Chester Bd. of Assessment
Appeals, 293 A.3d 1248 (Pa. Commw. Ct. 2023); The Daily, How
Nonprofit Hospitals Put Profits Over Patients (Jan. 5, 2023),
https://www.nytimes.com/2023/01/25/podcasts/the-daily/nonprofit-hospitals-investigation.html; Gov't Accountability Off., Tax
Administration: Opportunities Exist to Improve Oversight of
Hospitals' Tax-Exempt Status, GAO-20-679 (Sept. 17, 2020), https://www.gao.gov/products/gao-20-679; Danielle Ofri, Why Are Nonprofit
Hospitals So Highly Profitable?, N.Y. Times, Feb. 20, 2020, https://www.nytimes.com/2020/02/20/opinion/nonprofit-hospitals.html; Maya
Miller & Beena Raghavendran, Thousands of Poor Patients Face
Lawsuits From Nonprofit Hospitals That Trap Them in Debt, ProPublica
(Sept. 13, 2019), https://www.propublica.org/article/thousands-of-poor-patients-face-lawsuits-from-nonprofit-hospitals-that-trap-them-in-debt.
\944\ See, e.g., Michael G. Vita & Seth Sacher, The Competitive
Effects of Not-For-Profit Hospital Mergers: A Case Study, 49 J.
Indus. Econ. 63 (2001), http://onlinelibrary.wiley.com/doi/10.1111/1467-6451.00138/epdf (finding substantial price increases resulting
from a merger of nonprofit, community-based hospitals, and
determining that mergers involving nonprofit hospitals are a
legitimate focus of antitrust concern); Steven Tenn, The Price
Effects of Hospital Mergers: A Case Study of the Sutter-Summit
Transaction, 18 Int'l J. Econ. Bus. 65, 79 (2011), http://www.tandfonline.com/doi/full/10.1080/13571516.2011.542956 (finding
evidence of post-merger price increases ranging from 28%-44%, and
concluding that ``[o]ur results demonstrate that nonprofit hospitals
may still raise price quite substantially after they merge. This
suggests that mergers involving nonprofit hospitals should perhaps
attract as much antitrust scrutiny as other hospital mergers.'').
\945\ See, e.g., FTC v. OSF Healthcare Sys., 852 F. Supp. 2d
1069, 1081 (N.D. Ill. 2012) (``[T]he evidence in this case reflects
that nonprofit hospitals do seek to maximize the reimbursement rates
they receive.''); FTC v. ProMedica, No. 3:11 CV 47, 2011 WL 1219281
at *22 (N.D. Ohio Mar. 29, 2011) (finding that a nonprofit hospital
entity ``exercises its bargaining leverage to obtain the most
favorable reimbursement rates possible from commercial health
plans.''); United States v. Rockford Mem'l Corp., 898 F.2d 1278,
1284-87 (7th Cir. 1990) (rejecting the contention that nonprofit
hospitals would not seek to maximize profits by exercising their
market power); FTC v. Univ. Health, Inc., 938 F.2d 1206, 1213-14
(11th Cir. 1991) (``[T]he district court's assumption that
University Health, as a nonprofit entity, would not act
anticompetitively was improper.''); Hospital Corp. of America v.
FTC, 807 F.2d 1381, 1390-91 (7th Cir. 1986) (rejecting the
contention that nonprofit hospitals would not engage in
anticompetitive behavior). See also FTC & Dep't of Jusitce,
Improving Health Care: A Dose of Competition 29-33 (2004), https://www.ftc.gov/sites/default/files/documents/reports/improving-health-care-dose-competition-report-federal-trade-commission-and-department-justice/040723healthcarerpt.pdf (discussing the
significance of nonprofit status in hospital merger cases, and
concluding that the best available empirical evidence indicates that
nonprofit hospitals exploit market power when given the opportunity
and that ``the profit/nonprofit status of the merging hospitals
should not be considered a factor in predicting whether a hospital
merger is likely to be anticompetitive'').
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Commenters provide no empirical evidence, and the Commission is
unaware of any such evidence, to support the theory that prohibiting
non-competes would increase consolidation or raise prices. To the
contrary, as elaborated in Parts IV.B.3.a and IV.B.3.b, the empirical
literature suggests, and the Commission finds, that the final rule will
increase competition and efficiency in healthcare markets, as workers
at for-profit healthcare entities will be able to spin off new
practices or work for different employers where their productivity is
greater. This is true even if the Commission does not reach some
portion of healthcare entities. While the Commission's prior research
may indicate, as one commenter suggested, that nonprofit hospitals set
higher prices when they have more market power, the Commission finds
that the final rule is not likely to increase healthcare prices

[[Page 38451]]

through this same mechanism because it is unlikely to lead to
significant increases in healthcare nonprofits' market share, if at
all.
Moreover, the Commission has other tools to address consolidation
in healthcare markets and is committed to using them. The Clayton Act
grants the Commission authority to enforce compliance with, inter alia,
section 7 of the Clayton Act. The Clayton Act does not include any
carveout for entities that are nonprofit or otherwise do not operate
for profit--and the FTC's jurisdictional limit based on the definition
of ``corporation'' in the FTC Act does not apply in this context.\946\
Accordingly, the Commission has authority under the Clayton Act to
review and challenge mergers and acquisitions involving healthcare
entities or hospitals regardless of nonprofit status.\947\ Thus, even
if the jurisdictional limitations of the final rule were to somehow
incentivize some hospitals and other healthcare entities claiming non-
profit status to consolidate, the Commission will continue to
scrutinize those mergers and work with State partners to vigorously
defend competition.\948\ For the same reason, the Commission disagrees
with commenters who contended that the effects of consolidation and
staffing shortages will be worse in areas highly saturated with
nonprofits claiming tax-exempt status.
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\946\ 15 U.S.C. 18; 15 U.S.C. 45; Univ. Health, Inc., 938 F.2d
at 1214-16.
\947\ Id.
\948\ See, e.g., In the Matter of RWJ Barnabas Health and Saint
Peters Healthcare Sys., Docket No. 9409 (Jun. 2, 2022) (complaint);
FTC v. Advoc. Health Care, No. 15 C 11473, 2017 WL 1022015, at *1
(N.D. Ill. Mar. 16, 2017); FTC v. Penn State Hershey Med. Ctr., 838
F.3d 327, 332 (3d Cir. 2016).
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Finally, the Commission disagrees with commenters that stated the
Commission must further study the final rule's effect on healthcare
workers and entities. The Commission has specific, long-time expertise
in the healthcare market as anticompetitive mergers and conduct in
healthcare markets have long been a focus of FTC law enforcement,
research, and advocacy.\949\ This work includes economic analyses of
the effects of mergers involving nonprofit hospitals and studies of the
impacts of hospital mergers.\950\ Accordingly, given this expertise and
the extensive record in the rulemaking, the Commission finds it has
sufficient understanding of healthcare markets and that the evidence
supports the final rule's application to the healthcare industry.
---------------------------------------------------------------------------

\949\ See, e.g., FTC, Competition in the Health Care
Marketplace, https://www.ftc.gov/tips-advice/competition-guidance/industry-guidance/health-care; FTC, Overview of FTC Actions in
Health Care Services and Products (2022), https://www.ftc.gov/system/files/ftc_gov/pdf/2022.04.08%20Overview%20Healthcare%20%28final%29.pdf; Joseph Farrell
et al., Economics at the FTC: Retrospective Merger Analysis with a
Focus on Hospitals, 35 Rev. Indus. Org. 369 (2009), http://link.springer.com/content/pdf/10.1007%2Fs11151-009-9231-2.pdf; FTC,
Examining Health Care Competition (Mar. 20-21, 2014), https://www.ftc.gov/news-events/events-calendar/2014/03/examining-health-care-competition; FTC & Dep't of Justice, Examining Health Care
Competition (Feb. 24-25, 2015), https://www.ftc.gov/news-events/events-calendar/2015/02/examining-health-care-competition; Improving
Health Care: A Dose of Competition, supra note 945.
\950\ See, e.g., FTC, FTC Policy Perspectives on Certificates of
Public Advantage (Aug. 15, 2022), www.ftc.gov/copa; FTC, Physician
Group and Healthcare Facility Merger Study (ongoing, initiated Jan.
2020), https://www.ftc.gov/enforcement/competition-matters/2021/04/physician-group-healthcare-facility-merger-study; Christopher
Garmon, The Accuracy of Hospital Merger Screening Methods, 48 RAND
J. of Econ. 1068 (2017), https://www.ftc.gov/system/files/documents/reports/accuracy-hospital-merger-screening-methods/rwp_326.pdf;
Joseph Farrell, et al., Economics at the FTC: Hospital Mergers,
Authorized Generic Drugs, and Consumer Credit Markets, 39 Rev.
Indus. Org. 271 (2011), http://link.springer.com/content/pdf/10.1007%2Fs11151-011-9320-x.pdf; Devesh Raval, Ted Rosenbaum, &
Steve Tenn, A Semiparametric Discrete Choice Model: An Application
to Hospital Mergers, 55 Econ. Inquiry 1919 (2017).
---------------------------------------------------------------------------

6. Coverage of Franchisors Vis-[agrave]-Vis Franchisees
a. The Proposed Rule
The Commission proposed to exclude franchisees from the definition
of ``worker'' and requested comment on whether and to what extent the
rule should cover non-competes between franchisors and franchisees
(``franchisor/franchisee non-competes'').\951\ The Commission explained
that it proposed to exclude franchisees from the definition of
``worker'' because, 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.\952\ The Commission also noted that the evidentiary record
relates primarily to non-competes that arise out of employment.
However, the Commission stated that, in some cases, franchisor/
franchisee non-competes may present concerns under section 5 similar to
the concerns presented by non-competes between employers and workers
and sought comment on coverage of franchisor/franchisee non-
competes.\953\
---------------------------------------------------------------------------

\951\ NPRM at 3511, 3520.
\952\ Id. at 3511.
\953\ Id. at 3520.
---------------------------------------------------------------------------

b. Comments Received
Many commenters requested that the final rule cover franchisor/
franchisee non-competes. Numerous commenters contended the franchisee-
franchisor relationship is closer to a relationship between a worker
and an employer than a relationship between businesses. These
commenters argued that franchisees are often individual business owners
who, like workers, lack bargaining power to negotiate over non-
competes. One commenter stated that the Commission acknowledged in the
Franchise Rule that franchisees generally lack bargaining power.\954\
Several commenters, including industry commenters representing
franchisees, argued that franchisees tend to suffer even greater power
imbalances than workers because many risk significant personal assets
to start their franchises. According to these commenters, this risk
places acute strain on franchisees' bargaining leverage when
negotiating to renew franchise agreements because, if they choose to
reject a new agreement, they not only lose the opportunity to continue
working in the same field due to their non-compete, but also the value
of their investment.
---------------------------------------------------------------------------

\954\ Trade Regulation Rule on Franchising and Business
Opportunity Ventures, 43 FR 59614, 59625 (Dec. 21, 1978).
---------------------------------------------------------------------------

Commenters seeking coverage of franchisor/franchisee non-competes
also stated that these non-competes do not protect legitimate interests
because franchisors generally do not entrust franchisees with trade
secrets or details about their broader commercial strategy. These
commenters stated that, even if franchisees do receive such
information, franchisors have less restrictive alternatives for
protecting it, including NDAs and trade secret law. Some commenters
also stated that non-competes have anticompetitive effects because
franchisors may degrade the quality of inputs or raise input prices
without fearing that their existing franchisees will leave for a
competitor.
Many franchisee commenters also stated their desire to compete
after exiting their franchise relationships. Franchisees also stated
that their non-competes harm their negotiating position in bargaining
over franchise renewal terms. These franchisees stated that franchisors
can impose higher royalty rates or other less favorable terms over time
as the franchisees feel powerless to refuse or make effective
counteroffers, due to their non-competes. Many franchisees asserted
that their non-competes are overbroad because they restrain individual
owners' spouses and other close relatives from competing in the same
industry. Some franchisees stated that their non-competes include
penalties for choosing

[[Page 38452]]

not to renew their contracts even if they do not compete.
Other commenters, primarily franchisors and trade organizations,
stated that franchisor/franchisee non-competes should be excluded from
the final rule. Many of these commenters argued that franchisor/
franchisee non-competes are more similar to restrictive covenants
between businesses than non-competes between employers and workers.
Some of these commenters argued that franchisor/franchisee non-competes
are more justified than non-competes in the employment context because,
unlike employment relationships, entering into a franchise agreement is
completely voluntary. Some commenters argued that, unlike non-competes
in the employment context, franchisor/franchisee non-competes are only
entered into by individuals with access to substantial capital and who
therefore always have the option of starting their own businesses.
Many of these commenters argued that prohibiting non-competes for
franchisees would threaten to severely disrupt or destroy the franchise
business model, and that this would harm franchisors and franchisees
alike, as franchising offers a unique opportunity for working people to
become entrepreneurs with established brands. Commenters asserted non-
competes are critical to the franchise business model because they
offer both franchisors and franchisees confidence that existing
franchisees will likely stay with a brand and refrain from using a
franchise's trade secrets to unfairly compete against the franchisor.
Commenters also asserted that franchisees are often exposed to
proprietary information through training manuals and operational
support and that non-competes help protect this information. In
addition, commenters contended franchisor/franchisee non-competes
protect investments made by other franchisees and maintain a
franchise's goodwill.
Commenters supporting the exclusion of franchisor/franchisee non-
competes from the final rule also asserted that the Commission lacked
an evidentiary basis for covering such non-competes. These commenters
also claimed no State has prohibited non-competes for franchisees, and
the Commission would therefore lack data from natural experiments to
justify extending a final rule to the franchise context.
c. The Final Rule
The Commission continues to believe that, as many commenters
attested, franchisor/franchisee non-competes may in some cases present
concerns under section 5 similar to the concerns presented by non-
competes between employers and workers. The comments from franchisors,
franchisees, and others provide the Commission with further information
about non-competes in the context of the franchisor/franchisee
relationship, but the evidentiary record before the Commission
continues to relate primarily to non-competes that arise out of
employment. Accordingly, the final rule does not cover franchisor/
franchisee non-competes. Non-competes used in the context of
franchisor/franchisee relationships remain subject to State common law
and Federal and State antitrust laws, including section 5 of the FTC
Act.

VI. Section 910.4: Relation to State Laws and Preservation of State
Authority and Private Rights of Action

In proposed Sec. 910.4, the Commission addressed State laws and
preemption. Based on comments, the Commission adopts a modified
provision clarifying and explaining that States may continue to enforce
laws that restrict non-competes and do not conflict with the final
rule, even if the scope of the State restrictions is narrower than the
final rule.\955\
---------------------------------------------------------------------------

\955\ State statutes, regulations, orders, or interpretations,
including State common law, are referred to as ``State laws'' for
ease of reference.
---------------------------------------------------------------------------

A. The Proposed Rule

The NPRM contained an express preemption provision, proposed Sec.
910.4, that explained the proposed rule preempted State laws
inconsistent with the rule and did not preempt State laws that offer
greater protection than the rule. The NPRM explained that when a State
law offers greater protection than the rule, employers would be able to
comply with both the NPRM and the State law. Thus, the proposed rule
would have established a regulatory floor, but not a ceiling. The NPRM
provided two hypothetical examples, one of a State law that would be
inconsistent with, and therefore preempted by, proposed Sec. 910.2(a)
and one that would not because it satisfied the savings clause by
offering greater protection and was not inconsistent with proposed part
910.\956\
---------------------------------------------------------------------------

\956\ NPRM at 3515.
---------------------------------------------------------------------------

B. Authority for Preemption

Numerous commenters supported the preemption of inconsistent State
laws. Some commenters asserted the Commission lacks the legal authority
to preempt State laws, including State common law, on non-competes
because Congress allegedly did not confer the necessary authority to
the Commission or because of federalism principles. They argued there
must be clear Congressional intent to preempt State laws relating to
non-competes.\957\ Numerous commenters asserted the Commission lacks
clear authority from Congress to preempt State laws on non-competes,
arguing the FTC's statutory authority neither expressly nor impliedly
authorizes preemption of non-competes. Commenters made similar points
based on cases about the preemptive force of the Commission's UDAP
regulations. For example, one commenter asserted the FTC may not have
the authority to preempt less restrictive State laws, citing American
Optometric Association v. FTC, in which the court noted the need for
congressional authorization for the Commission to preempt an entire
field of State laws that arise from the State's police powers.\958\
---------------------------------------------------------------------------

\957\ Comments on the Commission's authority to promulgate this
final rule, separate from the issue of preemption of State law, are
summarized in Part II.
\958\ Am. Optometric Ass'n v. FTC, 626 F.2d 896, 910 (1980).
---------------------------------------------------------------------------

The Commission finds it has the authority to promulgate regulations
that preempt inconsistent State laws under section 6(g), together with
section 5, of the FTC Act. Even without an express preemption
provision, Federal statutes and regulations preempt conflicting State
laws. Under the Supreme Court's conflict preemption doctrine, a Federal
statute or regulation impliedly preempts State laws when it is
impossible for the regulated parties to comply with both the Federal
and the State law, or when a State law is an obstacle to achieving the
full purposes and objectives of the Federal law.\959\ ``Federal
regulations have no less pre-emptive effect than Federal statutes.''
\960\ Indeed, even commenters who questioned the FTC's authority to
preempt State laws agreed that if a Federal agency promulgates a rule
pursuant to its Congressionally conferred authority, the rule preempts
conflicting State laws.
---------------------------------------------------------------------------

\959\ See, e.g., Federal Preemption: A Legal Primer, Cong. Rsch.
Serv., 23 (May 18, 2023) (Report R45825), https://crsreports.congress.gov/product/pdf/R/R45825/3.
\960\ Fid. Fed. Sav. & Loan Ass'n v. de la Cuesta, 458 U.S. 141,
153 (1982).
---------------------------------------------------------------------------

As discussed in Parts II.A, II.B, and II.C, the Commission has the
authority to promulgate this final rule. Accordingly, the final rule
preempts conflicting State laws. To provide a clear explanation of the
Commission's intent and the scope of preemption effected by the final
rule, the final rule includes an express preemption

[[Page 38453]]

provision at Sec. 910.4.\961\ As discussed in Part VI.D, the
Commission has modified proposed Sec. 910.4 to make clear that even
when the scope of non-compete prohibitions under a State law is less
than that of the final rule, State authorities and persons may enforce
the State law by, for example, bringing actions against non-competes
that are illegal under the State law.
---------------------------------------------------------------------------

\961\ Many FTC regulations, including regulations promulgated
under section 6(g) of the FTC Act, include provisions addressing
State laws and preemption. See, e.g., Funeral Rule, 16 CFR 453.9
(exempting from preemption State laws that ``afford an overall level
of protection that is as great as, or greater than, the protection
afforded by'' the FTC's Rule) (emphasis added); Concerning Cooling
Off Period for Sales Made at Homes or at Certain Other Locations, 16
CFR 429.2(b) (exempting laws and ordinances that provide ``a right
to cancel a door-to-door sale that is substantially the same or
greater than that provided in this part'') (emphasis added);
Business Opportunity Rule, 16 CFR 437.9(b) (``The FTC does not
intend to preempt the business opportunity sales practices laws of
any [S]tate or local government, except to the extent of any
conflict with this part. A law is not in conflict with this Rule if
it affords prospective purchasers equal or greater protection[.]'')
(emphasis added); Mail, internet, or Telephone Order Merchandise
Rule, 16 CFR 435.3(b) (``This part does supersede those provisions
of any State law, municipal ordinance, or other local regulation
which are inconsistent with this part to the extent that those
provisions do not provide a buyer with rights which are equal to or
greater than those rights granted a buyer by this part.'') (emphasis
added); Franchise Rule, 16 CFR 436.10(b) (``The FTC does not intend
to preempt the franchise practices laws of any [S]tate or local
government, except to the extent of any inconsistency with part 436.
A law is not inconsistent with part 436 if it affords prospective
franchisees equal or greater protection[.]'') (emphasis added);
Labeling and Advertising of Home Insulation, 16 CFR 460.24(b)
(preemption of ``State and local laws and regulations that are
inconsistent with, or frustrate the purposes of this regulation'').
See also Part II.B.
---------------------------------------------------------------------------

C. The Benefits of Preemption

Numerous commenters stated that variations in State laws chill
worker mobility and expressed support for a uniform Federal standard.
Some commenters explained that a preemption clause could bring clarity
to the law's effect.
The U.S. Department of Justice commented that, due to the patchwork
of State laws, a worker may be free to switch jobs in one jurisdiction
but subject to a non-compete in another, creating uncertainty as to the
non-compete's enforceability for both firms and workers.\962\ In
another commenter's view, the variation in State non-compete laws
creates competitive disadvantages for companies in States that ban such
clauses, necessitating a Federal ban.
---------------------------------------------------------------------------

\962\ Comment of Dep't of Justice Antitrust Div., FTC-2023-0007-
20872 at 7.
---------------------------------------------------------------------------

Another commenter pointed out that most States have not passed
statutes that ban or restrict non-competes, and that existing statutes
cover different categories of workers and different wage levels, making
it difficult for workers to know whether employers can enforce a
particular non-compete. The commenter stated that variations in the
legal authority of State attorneys general to take action on the
public's behalf also limit the effectiveness of State restrictions on
non-competes. A number of commenters explained that the difficulties
arising from variations in State non-compete laws are exacerbated by
the increase in remote and hybrid work, and workers who travel to work
across State lines. Accordingly, many commenters favored a uniform
Federal standard that would promote certainty for employers and
workers. Even some commenters who generally opposed banning non-
competes favored preemption to eliminate the patchwork of State laws
that makes it difficult for workers to know the applicable law and
encourages forum shopping by employers who want to bring suits in
sympathetic jurisdictions.
Other commenters opposed preemption, asserting that State
legislatures and courts are best situated to address non-competes and
that the States have historically regulated this area. They contended
States should be allowed to continue adjusting the scope of
restrictions on non-competes including applicability to different types
of workers, time span, and geographic scope.
The Commission finds that preemption of State laws, including State
common law, that conflict with the final rule best mitigates the
negative effects of the patchwork of State laws, including chilling
worker mobility and undercutting competitive conditions in labor and
product and services markets.\963\ Preempting this patchwork with a
Federal floor is particularly important given the increase in work
across State lines, and remote and hybrid work, since the COVID-19
pandemic.
---------------------------------------------------------------------------

\963\ See Part IX.C.
---------------------------------------------------------------------------

Moreover, as discussed in Part IX.C, preemption furthers a primary
goal of the final rule: to provide a uniform, high level of protection
for competition that is easy for both employers and workers to
understand and makes it less likely that employers will subject workers
to illegal non-competes or forum shop. Indeed, some commenters who
otherwise opposed the proposed ban on non-competes regarded the
patchwork itself burdensome to employers as well as workers and noted
the rule would reduce burden by eliminating uncertainty and confusion
caused by State law variations.\964\ As described in Part IX.C, the
Commission has determined that declining to issue this final rule and
continuing to rely solely on State laws and case-by-case adjudication
would be less effective than issuing a clear national standard. The
Commission concludes, however, that supplementing the final rule with
additional State authority and resources, so long as the State laws are
not inconsistent with the final rule, will assist in protecting both
workers and competition.
---------------------------------------------------------------------------

\964\ See, e.g., Comment of Mech. Contractors Ass'n of Am., FTC-
2023-0007-18218 (although opposed to the proposed rule, MCCA's
position supports a single Federal rule and some level of
preemption).
---------------------------------------------------------------------------

D. The Extent of Preemption

Some commenters strongly supported the NPRM but expressed concern
that the preemption provision as proposed could undermine States'
efforts to curb non-competes and would thereby undercut the final
rule's effectiveness. These commenters stated that under one
interpretation, proposed Sec. 910.4 could preempt State laws that
prohibit non-competes for workers earning less than a specified income
because the law as a whole may not be deemed to provide greater
protection than the final rule. In their view, such an interpretation
would not further the final rule's goals, because States with income-
based restrictions on non-competes rather than complete bans may offer
covered workers protections against non-competes that the FTC's
proposed rule would not provide, such as State enforcement, private
rights of action, and certain financial penalties.\965\
---------------------------------------------------------------------------

\965\ See Comment of the Attys. Gen. of 17 States and DC, FTC-
2023-0007-21043, at 14-15 (``jurisdictions like Colorado, Illinois,
Washington, and the District of Columbia have passed laws that ban
non-competes for workers making under a specified income threshold
and also include remedies provisions that authorize [S]tate agencies
and residents to enforce the law''); id. at 9-11 (discussing State
enforcement, private action, and damages in several State non-
compete laws).
---------------------------------------------------------------------------

These commenters also asserted that in many cases, State agencies
and residents could be better positioned to respond to unlawful non-
compete use specific to a particular State, but they would be unable to
do so and dependent on the Commission if their laws were fully
preempted. To enable concurrent enforcement of State laws that restrict
the use of non-competes, thereby increasing the enforcement resources
devoted to the issue, they recommended a ``savings clause'' that would
exempt from preemption State laws that provide workers with protections
substantially similar to or greater than those afforded by the

[[Page 38454]]

rule.\966\ They also recommended that the rule not preempt State
antitrust and consumer protection laws that may protect workers against
non-competes and other restrictive employment arrangements as those
laws can provide another enforcement avenue for State agencies and
residents.
---------------------------------------------------------------------------

\966\ Another comment recommended a similar formulation, which
would exempt from preemption State laws that offer workers
protection that is equal to or greater than the protection provided
by the final rule. This commenter asserted that this formulation
would allow existing State law to stand.
---------------------------------------------------------------------------

Another commenter recommended including a narrow reverse preemption
provision so that relevant State laws in States that enact the Uniform
Restrictive Employment Agreement Act \967\ would not be preempted.\968\
The comment asserted that by doing so, a final rule would preserve a
role for the States and encourage their cooperation with the
Commission, and also provide greater protections for employees than the
proposed rule provided in several ways, such as allowing for greater
enforcement and including classes of employers that the final rule
would not cover.\969\ The uniform law would ban non-competes for
workers earning at or below the State's annual mean wage and would
allow non-competes for those earning more, but apply limits and require
disclosures for any non-compete.
---------------------------------------------------------------------------

\967\ See Uniform Restrictive Employment Agreement Act, supra
note 332 at sec. 5, sec. 8.
\968\ See Comment of ULC, FTC-2023-0007-20940.
\969\ See also Part II.E (discussing comments on the
Commission's jurisdiction under the FTC Act).
---------------------------------------------------------------------------

Based on comments, the Commission has modified the final rule's
preemption provision to clarify and explain that State laws that
restrict non-competes and do not conflict with the final rule are not
preempted. Section 910.4 also expressly references State common law,
antitrust law, and consumer protection law, so that the intended scope
of preemption is clear. State common law is expressly referenced
because many States do not have a general non-compete statute, and the
common law varies considerably.
Section 910.4(b) reflects the Commission's intent that States may
continue to enforce in parallel laws that restrict non-competes and do
not conflict with the final rule, even if the scope of the State
restrictions is narrower than that of the final rule. That is, State
laws cannot authorize non-competes that are prohibited under this final
rule, but States may, for example, continue to pursue enforcement
actions under their laws prohibiting non-competes even if the State
laws prohibit a narrower subset of non-competes than this rule
prohibits.
Accordingly, Sec. 910.4(a) states that the final rule will not be
construed to annul, or exempt any person from complying with, any State
statute, regulation, order, or interpretation applicable to a non-
compete, including, but not limited to, State antitrust and consumer
protection laws and State common law. Rather, the final rule supersedes
such laws to the extent, and only to the extent, that such laws would
otherwise permit or authorize a person to engage in conduct that is an
unfair method of competition under Sec. 910.2(a) or conflict with the
notice requirement in Sec. 910.2(b).\970\ These revisions provide that
when States have restricted non-competes and their laws do not conflict
with the final rule, employers must adhere to both provisions, and
workers are protected by both provisions (including State restrictions
and penalties that exceed those in Federal law).
---------------------------------------------------------------------------

\970\ The effect of part 910 is limited to non-competes. It
would not broadly preempt other uses of State antitrust and consumer
protection law.
---------------------------------------------------------------------------

For example, Sec. 910.4 makes clear that the final rule does not
preempt State law enforcement where a State bans non-competes only for
workers earning below a certain amount and thus has a ban that is
narrower than the final rule. Thus, if a State's law bars non-competes
only for workers who earn less than $150,000 per year, the final rule
and the law are different in scope of protection but not directly
inconsistent. The State may continue to enforce its ban for workers
earning less than $150,000, but all non-competes covered by the final
rule, regardless of a worker's earnings, remain an unfair method of
competition under the final rule and are therefore unlawful.
In response to concerns raised by commenters and to further bolster
the consistent use of State laws, the Commission expressly recognizes
State authority and the existence of private rights of action arising
under State laws that restrict non-competes or bar unfair methods of
competition. This is set forth in Sec. 910.4, now titled ``Relation to
State laws and preservation of State authority and private rights of
action,'' and is detailed in Sec. 910.4(b). That section provides that
unless a State law conflicts with the final rule and is superseded as
described in Sec. 910.4(a), part 910 does not limit or affect the
authority of State attorneys general and other State agencies or the
rights of a person to bring a claim or regulatory action arising under
State laws, including State antitrust and consumer protection laws and
State common law. Section 910.4(b) also explains that persons retain
the right to bring a claim or regulatory action under State laws unless
the laws conflict with the final rule and have been superseded as
described in Sec. 910.4(a).
These modifications are consistent with many commenters'
recommendations and recognize State-based enforcement as a potent force
that supplements Federal enforcement. In addition, the modifications,
particularly those that explain Sec. 910.4 does not exempt any person
from complying with State laws, are intended to curb the use of
preemption as a defense against State restrictions of non-
competes.\971\ Under the final rule, States may continue to play a
critical role in restricting the use of non-competes. In contrast to
the FTC Act, which cannot be enforced by private persons or State
authorities,\972\ the non-compete laws of numerous States provide for
such enforcement.\973\ Non-competes that are outside the FTC's
jurisdiction or otherwise outside the scope of the final rule may be
covered by State non-compete laws.\974\ State penalties can be
substantial and may be particularly important as a deterrent.
---------------------------------------------------------------------------

\971\ See, e.g., Sprietsma v. Mercury Marine, 537 U.S. 51, 62-70
(2002) (finding Federal Boat Safety Act did not relieve defendant
from liability for State common law tort claim because it did not
expressly nor impliedly preempt State common law).
\972\ See, e.g., FTC, A Brief Overview of the Federal Trade
Commission's Investigative, Law Enforcement, and Rulemaking
Authority App. A (May 2021), https://www.ftc.gov/about-ftc/mission/enforcement-authority; Holloway v. Bristol-Myers Corp., 485 F.2d
986, 997 (D.C. Cir. 1973).
\973\ Comment of the Attys. Gen. of 17 States and DC, FTC-2023-
0007-21043 at 7 (``jurisdictions like Colorado, Illinois,
Washington, and the District of Columbia have passed laws that ban
non-competes for workers making under a specified income threshold
and also include remedies provisions that authorize state agencies
and residents to enforce the law''). See also 2023 Cal. Legis. Serv.
Ch. 157 (S.B. 699) West (adding Cal. Bus. & Prof. Code sec. 16600.5,
Sept. 1, 2023) (providing for a private right of action in regard to
California's non-compete statute).
\974\ See Part II.E (discussing the Commission's jurisdiction
under the FTC Act). See, e.g., Cal. Bus. & Prof. Code secs. 16600-
16602 (broad coverage); Minn. Stat. Ann. sec. 181.988, subdiv. 1 (b)
(```Employer' means any individual, partnership, association,
corporation, business, trust, or any person or group of persons
acting directly or indirectly in the interest of an employer in
relation to an employee.'').
---------------------------------------------------------------------------

The modifications also reflect the Commission's long history of
working in concert with States and encouraging concurrent enforcement
of State laws to pursue common goals. While the Commission recognizes
this will leave some variation in the enforcement exposure covered
persons face among States, that variation will be greatly reduced by
the final rule, which sets a

[[Page 38455]]

floor that applies nationally.\975\ As it has done in the past, the
Commission will ``share the field'' with States and partner with them
in the battle against abusive non-competes.\976\ As set out in Part
IX.C, the Commission considered and rejected the alternative of relying
on existing State laws alone. Consistent with that determination, the
Commission declines to adopt the suggestion from a comment that
relevant State laws in States that enact the Uniform Restrictive
Employment Agreement Act not be preempted.
---------------------------------------------------------------------------

\975\ The Commission has taken this position in previous
regulations. See, e.g., Part 429--Cooling-Off Period for Door-to-
Door Sales, 37 FR 22934 (Oct. 26, 1972).
\976\ For a previous example, see Trade Regulation Rule; Funeral
Industry Practices, 47 FR 42260, 42287 (Sept 24, 1982) (noting the
purpose of the rule's provision addressing relation of the rule to
State law is ``to encourage [F]ederal-[S]tate cooperation by
permitting appropriate [S]tate agencies to enforce their own [S]tate
laws that are equal to or more stringent than the trade regulation
rule'').
---------------------------------------------------------------------------

VII. Section 910.5: Severability

The Commission stated in the NPRM that it may adopt a severability
clause \977\ and it received a comment stating the Commission should
adopt such a clause to protect the rights and securities of workers if
one part of the rule or one category of workers were invalidated. The
Commission adds Sec. 910.5, together with this section, to clarify the
Commission's intent.\978\
---------------------------------------------------------------------------

\977\ NPRM at 3518-19 & n.429.
\978\ In the NPRM, proposed Sec. 910.5 addressed the compliance
date.
---------------------------------------------------------------------------

Section 910.5 states that if any provision of the final rule is
held to be invalid or unenforceable either facially, or as applied to
any person or circumstance, or stayed pending further agency action,
such invalidity shall not affect the application of the provision to
other persons or circumstances or the validity or application of other
provisions. Section 910.5 also states that if any provision or
application of the final rule is held to be invalid or unenforceable,
the provision or application shall be severable from the final rule and
shall not affect the remainder thereof. This provision confirms the
Commission's intent that the remainder of the final rule remain in
effect in the event that a reviewing court stays or invalidates any
provision, any part of any provision, or any application of the rule--
including, for example, an aspect of the terms and conditions defined
as non-competes, one or more of the particular restrictions on non-
competes, or the standards for or application to one or more categories
of workers.
The Commission finds that each of the provisions, parts of the
provisions, and applications of the final rule operate independently
and that the evidence and findings supporting each provision, part of
each provision, and application of each provision stand independent of
one another. In this final rule, the Commission determines that certain
conduct is an unfair method of competition in Part IV.B and Part IV.C
and differentiates between senior executives and workers who are not
senior executives with respect to existing non-competes. The final rule
distinguishes between the two in both the final rule's operation and in
the bases for adopting the final rule. The difference in restrictions
among different workers, and the distinct bases for adopting the
restrictions, is described in detail in Parts IV.B and IV.C. The
Commission also estimates the effect of excluding senior executives
entirely from the rule in Part X.F.11 and finds that the benefits of
covering only those workers who are not senior executives justify the
costs.
The Commission promulgates each provision, part of each provision,
and application of each provision as a valid exercise of its legal
authority. Were any provision, part of any provision, or any
application of any provision of the final rule stayed or held
inapplicable to a particular category of workers, to particular
conduct, or to particular circumstances, the Commission intends the
remaining elements or applications of the final rule to prohibit a non-
compete between covered persons and covered workers as an unfair method
of competition.
In Parts IV.B and IV.C, the Commission finds that the use of non-
competes is an unlawful unfair method of competition under section 5 of
the FTC Act because it is restrictive and exclusionary conduct that
tends to negatively affect competitive conditions in several
independent ways. In support of its finding that the use of non-
competes is an unlawful unfair method of competition for workers who
are not senior executives, the Commission additionally finds that the
use of non-competes is exploitative and coercive in Part IV.B.2.b.
The Commission relies principally on empirical evidence regarding
the effects of changes in non-compete enforceability, both when finding
in Part IV.B.3.a and Part IV.C.2.c.ii that the use of non-competes
tends to negatively affect competitive conditions in labor markets, and
when finding in Part IV.B.3.b and Part IV.C.2.c.i that the use of non-
competes tends to negatively affect competitive conditions in product
and service markets. The Commission further analyzes and quantifies
these effects in Part X.F.6, including sensitivity analyses that
compare the estimated effects of smaller changes in enforceability and
larger changes in enforceability.
Based on this empirical evidence and analysis, the Commission
believes that more limited application of the rule--which might result
were a court to render the final rule inapplicable in some way--may be
equivalent to smaller changes in the enforceability of non-competes in
the empirical literature. As described in Part IV.B.3.a and IV.B.3.b,
smaller changes in enforceability change the magnitude, but not the
directional nature, of the labor market and product and service market
effects.\979\ Accordingly, consistent with the findings related to the
use of certain non-competes being an unfair method of competition in
Part IV, the empirical evidence on the use of non-competes, the
regulatory impact analysis in Part X, and its expertise, the Commission
finds that any smaller reduction in enforceability resulting from
circumstances in which a court stays or invalidates some application of
the final rule would not impair the function of the remaining parts of
the final rule nor would it undermine the justification or necessity
for the final rule as applied to other persons, conduct, or
circumstances. The Commission intends for any remaining application of
the final rule to be in force because it is committed to stopping any
and all unlawful conduct related to the use of certain non-competes and
the Commission finds every use of a non-compete covered by the final
rule to be an unlawful unfair method of competition under section 5 of
the FTC Act.\980\
---------------------------------------------------------------------------

\979\ See also Part X.F.6.
\980\ See NPRM at 3518-19.
---------------------------------------------------------------------------

In Part X, the Commission conducts a regulatory impact analysis for
the final rule as applied to all workers, as applied to all workers
other than senior executives, and as applied to senior executives. The
Commission finds that the asserted benefits of the use of non-competes
do not justify the harms from the use of non-competes for any category
of workers. The Commission's findings and differential analysis
demonstrate that the asserted benefits from the use of non-competes do
not justify the harms from the use of non-competes for higher- or
lower-wage earners, including, for example, lower-wage workers defined
as workers whose total annual compensation is less than $151,164.

[[Page 38456]]

For instance, if, for any reason, a reviewing court were to stay or
invalidate the final rule as applied to senior executives, the
Commission would intend for the remainder of the final rule to apply to
all workers other than senior executives. Likewise, if a reviewing
court were to stay or invalidate the final rule to apply to workers
other than senior executives, the Commission would intend for the
remainder of the final rule to apply to senior executives.
Additionally, if a reviewing court were to stay or invalidate the final
rule as applied to some other subset of workers, the Commission would
intend for the remainder of the final rule to apply to all but those
workers. So, for example, if a reviewing court were to stay or
invalidate the final rule as applied to workers other than lower-wage
workers--defined as workers whose total annual compensation is less
than $151,164--the Commission would intend for the remainder of the
final rule to apply to those workers, and further notes the evidentiary
record demonstrates that application of the rule to those remaining
workers would be beneficial and achieve lawful objectives. In the same
way, if a reviewing court were to stay or invalidate the provision of
the final rule regarding enforcing an existing non-compete or the
notice requirement, the Commission would intend for the remainder of
the final rule to apply. As described in Part IX.C, although the
Commission concludes that a national standard is most effective, a
number of States currently apply different standards to different
workers and States also apply a myriad of legal standards to non-
competes generally. Accordingly, were a reviewing court to stay or
invalidate a particular application of the final rule, a covered person
could simply comply with the provisions, parts of provisions, or
applications of the final rule that remain in effect.
The Commission's adoption of the final rule does not hinge on the
same restrictions applying to all non-competes, on the final rule
applying to all workers, or on joint adoption or operation of each
provision. Accordingly, the Commission considers each of the provisions
adopted in the final rule to be severable, both within each provision
and from other provisions in part 910. In the event of a stay or
invalidation of any provision, any part of any provision, or of any
provision as it applies to certain conduct or workers, the Commission's
intent is to otherwise preserve and enforce the final rule to the
fullest possible extent.

VIII. Section 910.6: Effective Date

The Commission adopts a uniform effective date of 120 days after
publication of the final rule in the Federal Register. The final rule
will go into effect, and compliance with the final rule will be
required, on that date. Based on comments urging the Commission to
reduce the compliance period from the 180-day period proposed in the
NPRM so that the benefits of the final rule may be obtained as soon as
possible, the Commission's findings that the use of non-competes is
exploitative and coercive for the vast majority of workers, and
modifications in the final rule that reduce covered entities'
compliance burden, the Commission modifies the date that compliance
with the final rule is required from 180 days to 120 days after
publication in the Federal Register.

A. The Proposed Rule

In the NPRM the Commission proposed a compliance date of 180 days
after publication of the final rule in the Federal Register. The
Commission stated that, during the compliance period, employers would
need to: (1) assess whether to implement replacements for existing non-
competes (such as NDAs), draft those covenants, and then negotiate and
enter into those covenants with the relevant workers; (2) remove any
non-competes from employment contracts that they provide to new
workers; and (3) rescind, no later than the date that compliance is
required, any non-competes that it entered into prior to the compliance
date.\981\ The Commission preliminarily found that 180 days would be
enough time for employers to accomplish all of these tasks.\982\ The
NPRM would have also required employers to provide the notice specified
in proposed Sec. 910.2(b)(2) within 45 days of rescinding the non-
compete.\983\
---------------------------------------------------------------------------

\981\ Id. at 3483, 3515-16. In the NPRM and herein, the
Commission refers to the period between the publication of the final
rule and the date on which compliance with the final rule is
required as the ``compliance period.'' See id. at 3515.
\982\ Id. at 3516.
\983\ Id. (addressing compliance with proposed Sec.
910.2(b)(2)).
---------------------------------------------------------------------------

The Commission also stated that it proposed to establish an
effective date of 60 days after the final rule is published in the
Federal Register even though compliance would not be required for 180
days.

B. Comments Received

Many worker commenters urged the Commission to act as quickly as
possible to bring the final rule into force, citing the current acute,
ongoing harms to their earnings, mobility, quality of life, and other
significant impacts and noting the final rule's potential for immediate
relief if their non-compete was no longer in force. Representatives of
many local governments from different States contended that the
negative effects of non-competes and the anticipated benefits of the
proposed rule justified allowing the Commission's rule to go into
effect as soon as possible. Other commenters supported the compliance
date as proposed or favored other measures to obtain the anticipated
benefits of the final rule as soon as practicable. Another commenter
contended that the 180-day compliance period was sufficient to allow
businesses to ensure compliance and suggested that the Commission move
the effective date back to the day or the day after the final rule is
published.\984\
---------------------------------------------------------------------------

\984\ The comment did not consider the limitations on the
effective date imposed by the CRA.
---------------------------------------------------------------------------

Several commenters suggested the Commission adopt a longer
compliance period of one year, 18 months, or two years. These
commenters generally stated that businesses need more time to adjust
their compensation packages, contracting practices, and employee
policies to comply with the rule and to protect their intellectual
property. At least one commenter also argued the Commission should
adopt a two-year compliance period to allow courts sufficient time to
hear and resolve challenges to the final rule. One commenter asserted
that the compliance period would be especially burdensome for smaller
business. Another industry commenter argued application of the rule
should be phased in over time.

C. The Final Rule

The Commission adopts a 120-day compliance period. As outlined in
Parts IV.B and IV.C, based on both voluminous comments from the public
as well as a significant body of empirical evidence, the Commission
finds that the use of non-competes is coercive and exploitative for the
vast majority of workers across different earnings levels and
occupations and that for all workers it tends to negatively affect
competitive conditions in labor markets and also tends to negatively
affect competitive conditions in product and service markets--and that
such actual harms are in fact currently ongoing. The Commission adopts
a 120-

[[Page 38457]]

day compliance period to stop these unfair methods of competition as
soon as practicable. The Commission finds that a 120-day period
appropriately balances the interests at hand.
The Commission has taken several steps in the final rule to make
compliance as simple as possible for employers. These steps make it
practicable and reasonable to require compliance within 120 days. The
final rule allows regulated entities to enforce existing non-competes
with senior executives, who commenters contended are most likely to
have complex compensation arrangements that include non-competes.
Accordingly, there is no need for a lengthy compliance period, as the
most complex existing arrangements are left in place. The Commission
also eliminated the rescission requirement for all workers. Under the
final rule, employers will not need to rescind (i.e., legally modify)
existing non-competes for any workers; rather, employers will simply be
prohibited from enforcing them after the effective date of the final
rule and will be required to provide the notice in Sec.
910.2(b)(1).\985\ While employers are required to provide notice to
workers with existing non-competes who are not senior executives, under
Sec. 910.2(b), the final rule provides model safe harbor language that
satisfies the notice requirement.\986\ The final rule gives employers
several options for providing the notice--on paper, by mail, by email,
or by text.\987\ And employers are exempt from the notice requirement
where the employer has no record of a street address, email address, or
mobile telephone number for the worker.\988\ Furthermore, as explained
in Part IV.E, the Commission has simplified the notice requirement to
facilitate employers' ability to comply by simply sending a mass
communication such as a mass email to current and former workers.
---------------------------------------------------------------------------

\985\ See Part IV.E (describing why the Commission is not
finalizing a rescission requirement).
\986\ Sec. 910.2(b)(4) and (5).
\987\ Sec. 910.2(b)(2)(ii).
\988\ Sec. 910.2(b)(3).
---------------------------------------------------------------------------

Starting on the effective date of the final rule, employers will be
prohibited from entering into new non-competes barred by this final
rule and from enforcing non-competes that the employer entered into
prior to that date with workers other than senior executives. Prior to
the effective date employers will need to identify each of their
workers with existing non-compete agreements and can assess which, if
any, are senior executives and determine if they wish to maintain those
non-competes. Employers will also need to assess and revise, if
necessary, any employment policies or handbooks that purport to bind
workers even after the effective date.
To the extent they have confidential business information, trade
secrets, or other investments to protect with respect to a particular
worker, employers will be able to assess their options to lawfully
protect that information. However, new protections will be unnecessary
in many cases, because, for example, 95.6% of workers subject to non-
competes are already subject to an NDA.\989\ In the rare case where
compensation might be tied to a non-compete that is not with a senior
executive, the employer and worker can determine whether to amend their
original employment agreement. The Commission concludes that the 120-
day compliance period gives employers more than sufficient time to
complete these tasks. For example, firms routinely complete entire
onboarding processes for new employees in much shorter timeframes than
120 days.
---------------------------------------------------------------------------

\989\ Balasubramanian, Starr, & Yamaguchi, supra note 74 at 44.
---------------------------------------------------------------------------

The Commission also finds that the 120-day compliance period gives
small businesses enough time to comply with the final rule. Although
small businesses may have limited staff and funds compared to larger
firms, they also have fewer workers, and the exclusion for existing
non-competes for senior executives will relieve the compliance burden
altogether for those small firms that use non-competes only with those
workers. Moreover, the steps the Commission has taken to reduce the
compliance burden of Sec. 910.2(b) will further simplify and
streamline compliance for small businesses.
The Commission has also determined it is not necessary to extend
the compliance period to give courts time to adjudicate pending non-
compete litigation because, as described in Part V.C.3, the Commission
has adopted Sec. 910.3(b), which provides that the final rule does not
apply where a cause of action related to a non-compete arose prior to
the effective date. The Commission also finds that a longer compliance
period is not needed to hear and resolve challenges to the final rule,
especially given the ability of a challenger to seek a preliminary
injunction.
In sum, the Commission finds that due to modifications reducing
covered entities' burden to comply with the final rule, a compliance
period of 120 days is sufficient time to comply with the final rule.
Given these changes the longer compliance period proposed in the NPRM
is no longer warranted and would allow the use of certain non-competes
that are an unfair method of competition--and their related harms and
costs--to continue for longer than necessary. The substantial benefits
to competition and to workers of the final rule taking effect as soon
as possible outweigh any concerns about potential difficulties in
meeting an earlier compliance date.
The Commission also adopts a 120-day effective date. The Commission
concludes that it would ease the burden of implementation and reduce
possible confusion by having a uniform date for when the final rule
goes into effect and when compliance under the final rule is required.
A 120-day effective date complies with the requirements of the
Congressional Review Act that a ``major rule'' may not take effect
fewer than 60 days after the rule is published in the Federal Register.

IX. Alternative Policy Options Considered

The Commission proposed to ban non-competes categorically, with a
limited exception for non-competes entered into by a person who is
selling a business entity. In the NPRM, the Commission discussed and
sought comment on potential alternatives to the proposed categorical
ban, including discrete alternatives that would implement a rebuttable
presumption of unlawfulness or apply different standards to different
categories of workers.\990\ The Commission also sought comment on
whether a rule should apply a different standard to senior executives,
and whether, in lieu of the proposed rule, the Commission should adopt
a disclosure rule or reporting rule.\991\ The Commission sought comment
on all aspects of potential alternatives, including whether the
Commission should adopt one of the identified alternatives or some
other alternative instead of the proposed rule.\992\ The Commission
also sought comment on the extent to which a uniform Federal standard
for non-competes would promote certainty for employers and
workers.\993\
---------------------------------------------------------------------------

\990\ NPRM at 3516.
\991\ Id. at 3519-21.
\992\ Id. at 3521.
\993\ Id. at 3497.
---------------------------------------------------------------------------

The Commission received many comments on these questions, as well
as on the question of whether the Commission should issue a Federal
standard for non-competes or continue relying on existing law and case-
by-case litigation to address harms from non-

[[Page 38458]]

competes. In this section, the Commission discusses the comments
received regarding these alternatives and the reasons it has decided
not to adopt them. This Part IX addresses these comments but does not
address alternatives related to the design of specific regulatory
provisions, which are discussed in the Part addressing the relevant
provision.

A. Categorical Ban vs. Rebuttable Presumption

1. The Rebuttable Presumption Alternative Generally
While preliminarily finding that a categorical ban would best
achieve the proposed rule's objectives, the Commission nevertheless
sought comment on the alternative of a rebuttable presumption, under
which it would be presumptively unlawful for an employer to use a non-
compete, but a non-compete would be permitted if the employer could
meet a certain evidentiary burden or standard.\994\ The Commission also
sought feedback on the form any rebuttable presumption should
take.\995\
---------------------------------------------------------------------------

\994\ Id. at 3517.
\995\ Id. at 3517-19.
---------------------------------------------------------------------------

Most commenters that addressed this issue, including those both
supporting and opposing the proposed rule, discouraged the Commission
from including a rebuttable presumption in the final rule. These
commenters contended that a rebuttable presumption would add complexity
and uncertainty to the rule.
Supporters of the proposed rule asserted that a rebuttable
presumption would undermine the rule's effectiveness, failing to deter
employers from imposing non-competes while making litigation too
uncertain and costly for most workers to pursue. Some of these
commenters contended that a rebuttable presumption would also do little
to reduce the chilling effects of non-competes. They argued that
employers would continue to impose non-competes that are unlikely to
survive a rebuttable presumption.
Many commenters critical of the proposed rule opposed a rebuttable
presumption for essentially the same reasons they opposed the rule in
general. They contended that, in States where non-competes are
generally enforceable, a rebuttable presumption would inappropriately
shift the burden of proof from workers to employers. Many of these
commenters specifically opposed a rebuttable presumption that would use
a test similar to antitrust law's ``quick look'' analysis, contending
that the Commission's analysis of empirical research on non-competes
cannot substitute for the lengthy experience courts usually have with a
particular restraint before giving it quick-look treatment. A few
commenters contended that a rebuttable presumption would increase
litigation and raise employers' compliance costs by complicating the
determination of whether a given non-compete is likely valid, requiring
more lawyer involvement in drafting clauses and more reliance on courts
to determine a non-compete's validity.
A few commenters supported a rebuttable presumption, arguing the
Commission's proposed ban on non-competes was too blunt an instrument.
Some also contended that a rebuttable presumption would offer a more
flexible approach akin to the majority of State law approaches. At
least one commenter stated a rebuttable presumption would make the
final rule more likely to survive judicial review. A few commenters
stated a rebuttable presumption would provide more protections than
most State laws by allowing only non-competes that the commenter
contended are not unfair to the worker, such as where highly paid
workers agree to narrow non-competes in exchange for bargained-for
consideration. One commenter argued a rebuttable presumption would
enable the Commission to accrue more experience adjudicating non-
competes and assessing their impact on competition.
Commenters advocating for a rebuttable presumption generally
preferred a test focusing on one or more factors, including: the non-
compete's geographic scope and duration; the presence and amount of any
liquidated damages or penalty provision; whether the clause is narrowly
tailored to prevent competition with actual competitors; the restrained
worker's duties and income; and the availability of less restrictive
alternatives. A few commenters supported a ``preponderance'' (as
opposed to a ``clear and convincing'') standard to permit as many non-
competes as possible but acknowledged that such a rule may be so
similar to the existing common law as to be redundant.
After carefully reviewing and considering the comments, the
Commission concludes that a rule implementing a rebuttable presumption
is not preferrable to the final rule as adopted. Based on the
Commission's expertise, including careful review and consideration of
the entire rulemaking record, the Commission finds that a rebuttable
presumption would be less effective than the final rule for achieving
the Commission's stated goals. A rebuttable presumption also presents
administrability concerns that the final rule does not.
Overall, the comments reinforced the Commission's concerns that a
rebuttable presumption would foster substantial uncertainty about the
validity of a given non-compete and would do little to reduce the in
terrorem effects of non-competes. Research demonstrates that employers
maintain non-competes even where they likely cannot enforce them,\996\
that many workers are not aware of the applicable law governing non-
competes or their rights under those laws,\997\ and that the degree to
which non-competes inhibit worker mobility is affected not only by
whether a non-compete is actually enforceable but also on whether a
worker believes their employer may enforce it.\998\ Accordingly, the
Commission concludes that a rule implementing a rebuttable presumption
would be inadequate to reduce the prevalence of non-competes, their
chilling effect on worker mobility, or their tendency to negatively
affect competitive conditions. Relatedly, the Commission believes a
rebuttable presumption would increase litigation costs for workers and
employers relative to the final rule as adopted.
---------------------------------------------------------------------------

\996\ See Part IV.B.2.b.
\997\ See Prescott & Starr, supra note 413.
\998\ Starr, Prescott, & Bishara, supra note 68 at 633, 652,
664.
---------------------------------------------------------------------------

The Commission also believes that, in important respects, a
rebuttable presumption for non-competes is inconsistent with the
Commission's findings in this final rule. As discussed in greater
detail in Part IX.C, a rule that provides for case-by-case,
individualized assessment of non-competes is unlikely to address the
negative effects of non-competes on competition in the aggregate. In
addition, by focusing on considerations specific to the worker and the
employer, a rebuttable presumption is unlikely to address the external
effects of non-competes (i.e., the effects on persons other than the
parties to the non-compete), including their negative effects on the
earnings of workers who are not covered by non-competes.
The Commission recognizes there may be some benefits to a
rebuttable presumption relative to the status quo. Because it puts the
burden of proof on employers, a rebuttable resumption would be stricter
than the current law in States where non-competes are allowed, and
research suggests even a small decrease in enforceability would
increase worker mobility, raise wages,

[[Page 38459]]

and promote innovation.\999\ But the categorical ban adopted in the
final rule would have greater benefits in these respects without the
drawbacks explained in this Part IX.A.1.
---------------------------------------------------------------------------

\999\ Johnson, Lavetti, & Lipsitz, supra note 388 (decreasing
enforceability increases worker mobility and earnings); Johnson,
Lipsitz, & Pei, supra note 526 at 2-5 (enforceability negatively
impacts patent quantity and quality).
---------------------------------------------------------------------------

2. Discrete Alternatives Related to Rebuttable Presumptions
In the NPRM, the Commission also sought comment on four discrete
alternatives to the proposed rule: Alternative #1 (categorical ban
below some threshold, rebuttable presumption above); Alternative #2
(categorical ban below some threshold, no requirements above);
Alternative #3 (rebuttable presumption for all workers); and
Alternative #4 (rebuttable presumption below some threshold, no
requirements above).\1000\
---------------------------------------------------------------------------

\1000\ NPRM at 3519.
---------------------------------------------------------------------------

As explained in Part IX.A.1, the Commission finds a rebuttable
presumption would be ineffective in addressing the harms to competitive
conditions caused by non-competes. For the same reasons, the Commission
declines to adopt Alternatives #1, #3, and #4, all of which
contemplated a rebuttable presumption for some or all workers.
While the vast majority of commenters supported the Commission's
proposal to ban non-competes categorically for all workers, a number of
commenters suggested that the Commission permit non-competes with
senior executives (or other highly skilled or highly paid workers) and
other workers. The Commission addresses these comments in Part IV.C and
V.D.1, where it finds that such non-competes tend to negatively affect
competitive conditions in labor markets and in product and service
markets, and that non-competes are also exploitative and coercive for
workers other than senior executives. For these reasons, the Commission
declines to adopt Alternative #2, which contemplated imposing no
requirements on workers above a certain wage or other threshold.

B. Other Discrete Alternatives

1. Disclosure Rule
In the NPRM, the Commission sought comment on the potential
alternative of adopting disclosure requirements related to non-
competes.\1001\ The Commission explained that the rule could, for
example, require an employer to disclose to a worker prior to making an
employment offer that the worker will be subject to a non-compete and/
or to explain the terms of the non-compete and how the worker would be
affected by signing it.\1002\ The Commission noted that a 2021 study by
Starr, Prescott, and Bishara finds that disclosure of non-competes to
workers prior to the acceptance of a job offer was associated with
increased earnings, rates of training, and job satisfaction.\1003\ The
authors of the study, however, cautioned that their analysis ``should
not be interpreted causally,'' a point the Commission noted in
explaining why it gave minimal weight to the study.\1004\ The
Commission preliminarily concluded in the NPRM that a disclosure
requirement would not achieve the objectives of the proposed
rule.\1005\
---------------------------------------------------------------------------

\1001\ Id. at 3521 n.446 (noting certain provisions in the
Commission's Franchise Rule (16 CFR part 436), such as Sec.
436.5(i) and (q), require non-competes to be disclosed to a
franchisee).
\1002\ Id. at 3521.
\1003\ Id., citing Starr, Prescott, & Bishara, supra note 68 at
75.
\1004\ Id. at 3487, citing Starr, Prescott, & Bishara, supra
note 68 at 73.
\1005\ Id. at 3521.
---------------------------------------------------------------------------

In general, commenters stated they agreed with the Commission's
preliminary view that, while there may be some benefits to a disclosure
rule, it would not achieve the objectives of the rule. Workers and
worker advocacy groups stated that non-competes are often presented to
workers on their first day on the job, or after they accept an
employment offer. Although these commenters generally supported a
comprehensive ban, they noted that if the Commission did not pursue a
ban, a disclosure requirement may help improve workers' awareness of
non-competes before accepting an offer. On the other hand, these
commenters contended that a disclosure rule would do little to reduce
the prevalence of non-competes, because workers have little choice but
to accept non-competes, which are typically presented as ``take-it-or-
leave-it'' terms and are ubiquitous in many fields.
Many trade organizations, advocacy groups, and academics who were
generally supportive of the rule stated that a disclosure rule would
fail to mitigate the competitive harms caused by non-competes in the
aggregate. While acknowledging a disclosure rule may ameliorate some
problems related to worker awareness of non-competes, these commenters
contended that non-competes are unfair and coercive because employees
generally lack adequate bargaining power to refuse to sign or bargain
over non-competes even when they are presented at the time of an
employment offer, and that a disclosure rule would therefore not have
the effect of making non-competes less unfair or coercive. A few
commenters opposed a disclosure rule generally but urged the Commission
to adopt a disclosure requirement for any non-competes permitted by the
final rule, including for any non-competes entered into by a person who
is selling a business.
On the other hand, some trade organizations, advocacy groups, and
businesses that generally opposed the rule advocated for the Commission
to adopt a disclosure rule in lieu of the proposed categorical ban.
These commenters contended that a disclosure rule would substantially
mitigate the unfairness of non-competes that are entered into without
adequate notice to the worker without drastically altering the legal
status quo, thereby maintaining the protections for trade secrets,
training expenditures, and intellectual property they contend that non-
competes provide. They stated that eight States and the District of
Columbia have statutory notice requirements for non-competes.
Most of the commenters who supported a disclosure rule also argued
that rather than demonstrating that non-competes tend to negatively
affect competitive conditions, the available evidence merely
demonstrates opportunistic behavior by employers (such as presenting
non-competes only after prospective workers have taken hard-to-reverse
steps towards accepting employment) and workers (such as seeking to be
excused from a non-compete after recognizing its impact on future job
prospects). These commenters asserted that a disclosure rule would be
better suited to address these types of opportunistic behaviors than a
categorical ban.
Some commenters based their support for a disclosure rule on their
contention that workers have sufficient bargaining power to negotiate
over non-competes when they are provided with notice of them. One such
commenter pointed to the cited research by Starr, Prescott, and Bishara
finding that disclosure of non-competes to workers prior to acceptance
of a job offer may increase earnings, increase rates of training, and
increase job satisfaction.\1006\ The commenter also referenced the
study's finding that of those workers who did not attempt to negotiate
a non-compete, 52% reported that they thought the terms were reasonable
and 41% reported that they assumed the terms to be non-

[[Page 38460]]

negotiable.\1007\ The commenter contended that a disclosure rule would
decrease the number of workers who assumed non-competes were non-
negotiable.
---------------------------------------------------------------------------

\1006\ Starr, Prescott, & Bishara, supra note 68 at 75.
\1007\ Id. at 72.
---------------------------------------------------------------------------

A few commenters contended a disclosure rule may be more likely to
withstand judicial review because the Commission could promulgate a
disclosure rule in this context under its UDAP authority pursuant to
the Magnuson-Moss Act. In addition, a few commenters requested the
Commission adopt timing rules for when the disclosure must be provided,
such as by requiring that employers disclose a non-compete in the job
advertisement, at the time of the job offer, or at least five business
days prior to the worker's deadline to sign an employment agreement.
The Commission declines to adopt a disclosure rule.\1008\ The
Commission finds that merely ensuring workers are informed about non-
competes would not address the negative externalities non-competes
impose on workers, rivals, and consumers. As described in Part
IV.B.3.a.ii, non-competes suppress wages for workers across the labor
force, including workers who are not subject to non-competes. Ensuring
that a worker who enters into a non-compete is informed about the non-
compete does not address the harm to these other workers. In addition,
it does not address the ways in which non-competes harm consumers and
the economy through reduced new business formation and innovation,
described in Part IV.B.3.b. In other words, non-competes have negative
spillover effects on workers, consumers, businesses, and the economy
that disclosure cannot remediate.
---------------------------------------------------------------------------

\1008\ The Commission notes that the Franchise Rule requires
franchisors to disclose any non-compete that franchisees must impose
on managers. 16 CFR 436.5(o)(3). These non-competes are prohibited
by the final rule. See Parts III.D and V.D.6.
---------------------------------------------------------------------------

The Commission also finds that a disclosure requirement would not
be as effective as a categorical ban in addressing the exploitation and
coercion of workers through non-competes. As described in Part
IV.B.2.b.i, there is a significant imbalance in bargaining power
between employers and most workers, which is particularly acute in the
context of negotiating employment terms such as non-competes. And, as
many comments from workers and worker advocacy groups attest, non-
competes are often included in standard-form contracts and offered on a
take-it-or-leave-it basis.\1009\ As a result, workers have limited
practical ability to negotiate non-competes even if they are notified
of such clauses prior to accepting their employment offer. Indeed, as
described in Part IV.B.2.b.i, the comment record reflects that very few
workers (other than senior executives) bargain over their non-
competes--whether the worker knew about the non-compete before the job
offer and understood its terms, or not.
---------------------------------------------------------------------------

\1009\ See Part IV.B.2.b.i.
---------------------------------------------------------------------------

The Commission gives the findings of the Starr, Prescott, and
Bishara study on the impacts of disclosure little weight because the
study reflects only correlation, not causation, with respect to the
effects of a disclosure rule (similar to the ``use'' studies the
Commission gives little weight to, as described in Part IV.A.2). The
study merely compares a set of workers whose firms disclosed the non-
compete and workers whose firms did not, and any correlation may thus
be attributable to confounding factors. This comparison--similar to
comparisons of workers with and without non-competes--may be polluted
by differences between firms that opt to disclose non-competes and
those that do not, or differences between workers who are the
beneficiaries of disclosure versus those who are not.\1010\ For
example, it is possible that firms that disclose non-competes are also
more responsible employers in general that tend to pay their workers
more, train their workers more, and have more satisfied workers. The
Commission therefore does not find that this evidence represents a
causal relationship between the disclosure of non-competes and earnings
and other outcomes. Moreover, the weight of the evidence discussed in
Parts IV.B and IV.C finding increased earnings, new business formation,
and innovation from the final rule significantly surpass the potential
effects of disclosing non-competes.
---------------------------------------------------------------------------

\1010\ Indeed, the authors of this study note that
``unobservables may more plausibly account for these estimates.''
See Starr, Prescott, & Bishara, supra note 68 at 77 n.35.
---------------------------------------------------------------------------

One commenter stated that the Starr, Prescott, and Bishara study
suggests that a disclosure rule would decrease the number of workers
who assume a non-compete with which they are presented is non-
negotiable. The study suggests that the potential effects of a
disclosure rule in this respect would be, at best, limited.\1011\ For
the reasons described in this Part IX.B.1, the Commission is skeptical
that a disclosure requirement would meaningfully increase the share of
workers who actually bargain over non-competes.
---------------------------------------------------------------------------

\1011\ Id. at 72. The study finds that 38% of workers asked to
sign a non-compete before accepting a job offer assumed they could
not negotiate, versus 48% of workers asked after accepting a job
offer.
---------------------------------------------------------------------------

A disclosure rule may address some deceptive or misleading
practices in connection with non-competes. However, considering that a
disclosure rule is not likely to significantly reduce the negative
competitive impacts of non-competes on labor markets and on product and
service markets, this benefit is significantly outweighed by the
limitations of a disclosure rule.\1012\
---------------------------------------------------------------------------

\1012\ The Commission considered whether a disclosure rule would
be appropriate for senior executives, but concludes that it is not
because it would fail to address many of the ways in which non-
competes are restrictive and exclusionary and tend to negatively
affect competitive conditions.
---------------------------------------------------------------------------

The Commission further concludes that a disclosure rule is not
necessary for non-competes in the context of sales of a business
entity. As described in Part V.A, persons selling a business entity
tend to have bargaining power in the context of the transaction, and
the Commission is unaware of evidence that deceptive and misleading
practices in connection with non-competes (such as waiting to disclose
a non-compete until after the job offer) are common with respect to
business sales.
2. Reporting Rule
In the NPRM, the Commission sought comment on a reporting rule as a
potential alternative to the proposed rule.\1013\ The Commission stated
that it could require employers to report certain information to the
Commission relating to their use of non-competes; for example,
employers that use non-competes could be required to submit a copy of
the non-compete to the Commission.\1014\ As the Commission explained, a
reporting rule might enable the Commission to monitor the use of non-
competes and could potentially discourage employers from using non-
competes that are not clearly justified under existing law.\1015\
---------------------------------------------------------------------------

\1013\ Id. at 3521.
\1014\ Id.
\1015\ Id.
---------------------------------------------------------------------------

The Commission stated in the NPRM that it did not believe a
reporting rule would achieve the objectives of the proposed rule. The
Commission stated that merely requiring employers to report their non-
competes to the Commission would not meaningfully reduce the prevalence
of non-competes and would therefore fail to reduce the negative effects
non-competes have on competitive conditions in labor markets and
product and service markets.\1016\ At the same time, the Commission
stated that a reporting rule would impose

[[Page 38461]]

significant and recurring compliance costs on employers.\1017\
---------------------------------------------------------------------------

\1016\ Id.
\1017\ Id.
---------------------------------------------------------------------------

Most commenters addressing this topic agreed with the Commission's
preliminary view that a reporting rule would not achieve the goals of
the proposed rule. At least one business opposed any reporting
requirement due to the cost of compliance and to avoid exposing any
confidential information contained in employment agreements. At the
same time, some commenters stated that a reporting rule may assist
enforcement and provide quantitative data sets to measure compliance,
while recognizing that such benefits would lose significance if the
Commission were to adopt the proposed rule. One commenter suggested
that, to improve the effectiveness of any reporting rule, any such rule
should include a provision stating that any non-competes which were not
properly disclosed to State and Federal authorities are null and void.
The Commission declines to adopt a reporting rule. A reporting rule
would impose recurring compliance costs on employers, compared with the
proposed rule, which largely imposes one-time costs. At the same time,
a reporting rule would be inadequate to address the negative effects of
non-competes on competitive conditions in labor markets and product and
service markets, or the Commission's concerns about exploitation and
coercion through the use of non-competes, since it would allow for the
continued use of non-competes.
3. Limitations on Scope and Duration
In addition to those alternatives listed in the NPRM, a few
commenters suggested adopting an alternative rule that allows non-
competes but sets a limitation on their geographic scope and/or
duration. Some commenters suggested a geographic limit of five, ten, or
thirty miles and/or a temporal limit of six months or one, two, or
three years, while others suggested a fact-specific requirement that
the geographic scope or duration of a non-compete be ``reasonable.''
Many of these commenters cited State laws that take a similar approach.
A few commenters opposed this alternative. One worker advocacy
group argued that any bright-line limit may end up serving as a
default, encouraging employers to impose non-competes of the maximum
allowable scope or duration even if that limit is longer or broader
than they otherwise would have imposed. At least one academic commenter
argued that setting geographic scope or duration limitations on non-
competes is unlikely to have a substantial impact, pointing to the
continued prevalence of overly broad non-competes despite State laws
designed to set upper limits on geographic scope and duration.
The Commission declines to adopt a standard providing that the
geographic scope or duration of non-competes must be ``reasonable.''
The Commission is concerned a reasonableness standard would foster
significant uncertainty among workers and businesses about the
enforceability of non-competes, for the same reasons a rebuttable
presumption would. In addition, as described in Part II.C.1 of the
NPRM, all States where non-competes are enforceable currently apply a
reasonableness standard, so a Federal reasonableness standard would not
mitigate the negative effects of non-competes that are presently
occurring.
The Commission also declines to adopt the alternative of imposing
limits on the scope and duration of non-competes. Such a rule would be
insufficient to address the negative effects of non-competes on
competitive conditions in labor markets or products and services
markets. Although a non-compete that lasts for a shorter duration or
within a smaller geographic area curtails job mobility for the
individual worker it binds to a lesser degree, it nonetheless curtails
the worker's job mobility and the ability of competing employers to
recruit and access talent. Non-competes limited in duration and scope
still tend to inhibit efficient matching between workers and employers,
with spillover effects on new business formation and innovation through
the mechanisms described in Parts IV.B and IV.C. Furthermore,
limitations on the scope and duration of non-competes would not address
the spillover effects from non-competes on other workers and consumers.
In short, even if a non-compete applies only to a relatively delimited
location or time period, it still--by design--cuts off free and fair
competition in labor and product and service markets.
In addition, most of the commenters who stated that they were
exploited and coerced by non-competes did not do so on the basis that
the non-compete was overbroad in scope or duration. Instead, most of
the commenters who described the terms of their non-competes described
limits on scope and duration that were within the bounds of what is
typically permissible under State law.\1018\ Some of these commenters
even stated expressly that they were subject to the non-compete that
was standard or typical in their field. Even these commenters, however,
explained how they were exploited and coerced in connection with non-
competes because the non-compete was unilaterally imposed and because
the non-compete trapped them in worse jobs or forced them to bear
significant harms or costs. For these reasons, the Commission declines
to adopt bright-line limits on the scope and duration of non-competes.
---------------------------------------------------------------------------

\1018\ See Part IV.B.2.b.
---------------------------------------------------------------------------

4. Compensation Requirement
Some commenters requested that the Commission adopt an alternative
that would permit non-competes so long as the worker is compensated.
Some commenters pointed to Massachusetts and Oregon law governing non-
competes under which, for certain workers, non-competes may be enforced
if, inter alia, they include a minimum level of compensation or
consideration to the worker separate from compensation for
employment.\1019\
---------------------------------------------------------------------------

\1019\ Mass. Gen. Laws Ann. ch. 149, sec. 24L; Or. Rev. Stat.
Ann. sec. 653.295.
---------------------------------------------------------------------------

The Commission declines to adopt a rule requiring compensation for
non-competes. First, such a rule would not address the harms to
competitive conditions that non-competes cause, which result in harm to
other workers, to rivals of employers, and to consumers. The Commission
finds in Parts IV.B.3.a.ii and IV.C.2.c.ii. that non-competes harm
workers other than the workers who sign them, by reducing the number of
job opportunities and thereby inhibiting efficient matching for all
workers. The Commission further finds in Parts IV.B.3.b and IV.C.2.c.i
that non-competes inhibit new business formation and innovation, which
affects consumers. Therefore, even if a worker were fully compensated
for a non-compete, the fact of that compensation would not redress
these negative externalities. Second, this alternative would be
ineffective or significantly less effective because of the in terrorem
effect of non-competes, which the Commission finds to be grounded in
empirical evidence and supported by the comment record described in
Part IV.B.2.b. Third, such a rule would be difficult to administer and
potentially easy to evade, as employers could suppress other wages or
job quality while labeling some compensation as attributable to the
non-compete.
5. Combination of Different Alternatives
Some commenters suggested the possibility of combining two or more
of the alternatives discussed in this Part IX

[[Page 38462]]

in place of a categorical ban. While a combination of these regulations
or limitations might modulate some of the ways in which non-competes
are exploitative and coercive, they would not be as effective as a
comprehensive ban. In particular, a combination approach would lack the
clarity of a comprehensive ban and thus would not be as effective as a
categorical ban in addressing the exploitation and coercion of workers
through non-competes. Moreover, as noted previously, the alternatives
discussed would do little to address the tendency of non-competes to
negatively affect competitive conditions and to cause spillover effects
on other workers and on consumers. Accordingly, a combination of these
alternative regulations or limitations would fail to remedy the
aggregate and spillover effects of non-competes and thus would not
achieve the Commission's stated goals.

C. The No-Action Alternative: Reliance on Existing Legal Frameworks
Instead of a Clear National Standard

The Commission sought comment on whether a Federal standard for
non-competes would promote certainty for employers and workers.\1020\
The Commission finds that a clear national standard for non-competes
will more effectively address non-competes' tendency to negatively
affect competitive conditions than case-by-case adjudication or relying
on existing law alone. The Commission also finds that declining to
adopt the final rule, and instead relying on case-by-case adjudication
or existing law alone, would not address the exploitation and coercion
of workers through non-competes.
---------------------------------------------------------------------------

\1020\ NPRM at 3497.
---------------------------------------------------------------------------

1. Comments Received
Many commenters expressed support for the NPRM because they viewed
current laws as insufficient to protect all workers, rivals, or
consumers, regardless of where they are located, from the negative
effects of non-competes on competitive conditions in labor markets and
markets for products and services. Numerous workers, businesses, and
other commenters said the patchwork of State laws and confusion about
those laws, particularly reasonableness tests, makes it difficult for
workers and businesses to understand the law and in turn contributes to
the use of unenforceable or overbroad non-competes and chills worker
mobility. Several commenters also said that case-by-case adjudication
and reasonableness tests make it difficult for parties to predict
outcomes, which in turn raises litigation costs. Even some
organizations opposed to the proposed rule or who supported a different
policy believed that a Federal rule could be beneficial, such as to
businesses operating in multiple jurisdictions.
In addition, according to commenters, case-by-case adjudication
under State law cannot address the harms caused by non-competes through
their use in the aggregate. Some commenters also asserted that the
patchwork of State laws is complicated by remote and hybrid workers.
Others argued that State laws are skewed in favor of employers or leave
workers vulnerable to unreasonable agreements. Some argued that many
workers, businesses, non-competes, and labor markets cross State lines,
demonstrating the need for one standard. Several State Attorneys
General also said that numerous complications arise when localities
span more than one State and those States have different laws on non-
competes; workers become confused and enforcement of non-competes can
have spillover effects in another State.\1021\
---------------------------------------------------------------------------

\1021\ Comment of the Attys. Gen. of 17 States and DC, FTC-2023-
0007-21043 at 11.
---------------------------------------------------------------------------

In contrast, many commenters stated that case-by-case adjudication
is preferable to a Federal rule because it allows individual facts to
be considered. In addition, many commenters argued that existing State
legislative and judicial decisions are sufficient to impose limitations
on non-competes while recognizing legitimate business interests.
Commenters also argued that States should be allowed to continue their
natural experiments with non-competes; that non-competes historically
have been and should remain an issue of State law; and that States are
best suited to make policy judgments for their citizens.
Some commenters argued that unenforceable or overly broad non-
competes are not a problem because courts can strike down or reform
them. Some employers asserted that they specifically, or employers more
generally, did not enter into unenforceable non-competes. Other
commenters argued that employers did not use choice of law clauses to
evade State laws, stating the clauses are the products of arms-length
bargaining and provide certainty and predictability.
2. Responses to Comments and the Commission's Findings
a. The Value of Rulemaking
The Commission has the authority to make rules and regulations to
carry out the FTC Act's prohibition on unfair methods of competition
under sections 5 and 6(g) of the FTC Act as described in Parts II.A
through II.C, and the Supreme Court has stated that agencies generally
have discretion to choose between rulemaking and adjudication.\1022\
Based on the empirical evidence, the comments, and the Commission's
expertise, the Commission finds that rulemaking is the appropriate
method of addressing non-competes.
---------------------------------------------------------------------------

\1022\ SEC v. Chenery Corp., 332 U.S. 194, 203 (1947); NLRB v.
Bell Aerospace Co. Div. of Textron, Inc., 416 U.S. 267, 293 (1974);
Wright & Miller, Federal Practice and Procedure sec. 8117 (2d ed.
2023).
---------------------------------------------------------------------------

The prevalence of non-competes across the economy, described in
Part I.B.2, and the scale of the harms they cause, described in Parts
IV.B and IV.C, show that it is more efficient to address the harms to
competition from non-competes via rulemaking compared to case-by-case
adjudication. As the D.C. Circuit stated in ruling that the Commission
had the authority to promulgate unfair methods of competition rules,
``the availability of substantive rule-making gives any agency an
invaluable resource-saving flexibility in carrying out its task of
regulating parties subject to its statutory mandate.'' \1023\ The
Commission estimates that there are 2.92 million firms using non-
competes in the U.S.\1024\ Adjudicating individual cases against even
just one-tenth of 1% of these employers would be slow, inefficient, and
costly for the Commission, employers, and workers. Rulemaking provides
notice of the application of section 5 to non-competes in a clearer and
more accessible way than piecemeal litigation and avoids compliance
delays.\1025\ The final rule will provide all market participants
greater clarity about their obligations under section 5 of the FTC Act,
facilitating compliance. Additionally,

[[Page 38463]]

the final rule will simplify enforcement proceedings by streamlining
the proof required.\1026\
---------------------------------------------------------------------------

\1023\ Nat'l Petroleum Refiners Ass'n v. FTC, 482 F.2d 672, 681-
82 (D.C. Cir. 1973); see also id. at 690 (stating that ``the
historic case-by-case purely adjudicatory method of elaborating the
Section 5 standard and applying it to discrete business practices
has not only produced considerable uncertainty'' but has also
spawned lengthy litigation).
\1024\ See Part X.F.6 (estimating that 49.4% of the 5.91 million
firms in the U.S. use non-competes).
\1025\ See Wright & Miller, Federal Practice and Procedure sec.
8117 (2d ed. 2023); Nat'l Petroleum Refiners, 482 F.2d at 690
(``[W]hen delay in agency proceedings is minimized by using rules,
those violating the statutory standard lose an opportunity to turn
litigation into a profitable and lengthy game of postponing the
effect of the rule on their current practice. As a result,
substantive rules will protect the companies which willingly comply
with the law against what amounts to the unfair competition of those
who would profit from delayed enforcement as to them.'') (citation
omitted).
\1026\ See Nat'l Petroleum Refiners, 482 F.2d at 690 (``With the
issues in Section 5 proceedings reduced by the existence of a rule
delineating what is a violation of the statute or what presumptions
the Commission proposes to rely upon, proceedings will be speeded
up.'').
---------------------------------------------------------------------------

In addition, the principal harms from non-competes arise from their
tendency to negatively affect competitive conditions in the aggregate.
A single non-compete with a single worker may not do much to inhibit
efficient matching between workers and employers across a labor market
or suppress new business formation or innovation (and what effects it
does have would be difficult to measure), but the Commission finds
based on empirical evidence that the use of many non-competes across
the labor market does have these aggregate net negative effects.\1027\
For this reason, rulemaking is preferable to individual litigation for
addressing the negative effects of non-competes. Past Commission
experience has also illustrated that case-by-case enforcement,
education, and other enforcement mechanisms are not always sufficient
to stop widespread harms.\1028\ A Federal rulemaking is the most
efficient method to address the scale of harm to competitive conditions
in labor, product, and service markets caused by non-competes.
---------------------------------------------------------------------------

\1027\ See Part IV.B.3.a-b.
\1028\ See, e.g., Combating Auto Retail Scams Trade Regulation
Rule, 89 FR 590, 600 (Jan. 4, 2024) (stating that rulemaking was
necessary because certain unfair and deceptive acts and practices
had persisted despite more than a decade of Federal and State
enforcement, education, and other action in the motor vehicle dealer
marketplace).
---------------------------------------------------------------------------

Finally, ``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.''
\1029\ Rulemaking is particularly beneficial when, as here, ``a vast
amount of data had to be compiled and analyzed, and the Commission,
armed with these data, had to weigh the conflicting policies.'' \1030\
Rulemaking also allows for more fulsome engagement from the public by
providing for public comment on a complete regulatory scheme. The
Commission greatly benefited from the submitted comments.
---------------------------------------------------------------------------

\1029\ Nat'l Petroleum Refiners, 482 F.2d at 683 (citations
omitted); see also Wright & Miller, Federal Practice and Procedure
sec. 8117 (2d ed. 2023).
\1030\ Nat'l Petroleum Refiners, 482 F.2d at 683 (citations
omitted).
---------------------------------------------------------------------------

b. Case-by-Case Litigation Alone Cannot Address the Negative Effects of
Non-Competes on Competition
The Commission finds that case-by-case litigation alone is
insufficient to address the harms to competition from non-competes due
to the cost of litigation, which deters many workers from challenging
non-competes, and the limited resources of public enforcement agencies.
In addition, individual litigation is not well-suited to redress the
negative externalities non-competes impose on other workers, other
employers, consumers, and the economy from their use in the aggregate.
Many commenters addressed the shortcomings of individual litigation
as a means for addressing the harms of non-competes. Numerous
commenters noted that litigation is costly and many workers cannot
afford to litigate their non-competes.\1031\ Many commenters, including
workers, entrepreneurs, and employment attorneys, shared examples of
five-figure and six-figure litigation costs related to non-compete
lawsuits. Numerous commenters reported that the fear of litigation
costs induced them to refrain from seeking or accepting other work or
starting a business, even though they thought the non-compete was
likely unenforceable. Many other commenters stated that they complied
with a non-compete after they were threatened with enforcement, even
though they were unsure about the non-compete's enforceability. One
study finds that 53% of workers subject to non-competes are hourly
workers,\1032\ who are particularly unlikely to be able to afford a
court challenge.
---------------------------------------------------------------------------

\1031\ See also Part IV.B.2.b.ii (describing exploitative and
coercive effects of the risk and cost of being subject to a non-
compete suit).
\1032\ Lipsitz & Starr, supra note 72 at 144 (analyzing data
from the Starr, Prescott, & Bishara survey).
---------------------------------------------------------------------------

Commenters also noted some non-competes include liquidated damages
clauses or fee-shifting provisions requiring the worker to pay the
employer's attorney and other costs if the employer wins, further
increasing the costs (and risks) of challenging a non-compete. In
addition, commenters stated that litigation is time-consuming and could
take as long or longer than the non-compete period. For example, one
commenter shared a decision in the commenter's own case where the
appellate court found the non-compete violated public policy by leaving
an area with only one surgeon in a specialty--but reached that decision
only after the two-year non-compete had already run its course.\1033\
Commenters also said workers who sued their employer could experience
reputational harm and difficulty finding work going forward.
---------------------------------------------------------------------------

\1033\ Graham v. Cirocco, 69 P.3d 194, 200 (Kan. App. 2003).
---------------------------------------------------------------------------

Litigation can be even riskier if a court might reform a non-
compete, which leaves the worker subject to some restrictions even if
the initial non-compete was impermissibly broad. Several commenters
cited a Harvard Law Review article that discusses the consequences of
allowing courts to sever or reform overbroad non-competes:

For every covenant that finds its way to court, there are
thousands which exercise an in terrorem effect on employees who
respect their contractual obligations and on competitors who fear
legal complications if they employ a covenantor, or who are anxious
to maintain gentlemanly relations with their competitors. Thus, the
mobility of untold numbers of employees is restricted by the
intimidation of restrictions whose severity no court would sanction.
If severance is generally applied, employers can fashion truly
ominous covenants with confidence that they will be pared down and
enforced when the facts of a particular case are not
unreasonable.\1034\
---------------------------------------------------------------------------

\1034\ Blake, supra note 22 at 682-83 (noting that this may not
be applicable if the worker has bargaining power and it may be
inefficient to tailor non-competes to each worker, and recommending
that courts only sever when they determine the employer acted
fairly).

If there is no penalty for drafting overbroad non-competes (as is
true in most States),\1035\ employers have little incentive to draft
non-competes narrowly, particularly if a court is likely to revise it
rather than strike it down, or if a worker is unlikely to be able to
litigate at all. An employment attorney commented it is particularly
difficult to advise workers about whether their specific non-compete is
enforceable when it is possible a court may modify the underlying non-
compete.
---------------------------------------------------------------------------

\1035\ See NPRM at 3495.
---------------------------------------------------------------------------

Case-by-case litigation under other antitrust laws alone is also
insufficient to address the harms from non-competes. Non-competes
restrain trade and therefore are subject to the Sherman Act.\1036\
While private litigants may bring private causes of action to enforce
the Sherman Act,\1037\ the Commission views private litigation under
the Sherman Act as an ineffectual response in the context of non-
competes based on the history of cases by private litigants arising
under that Act, as explained in the NPRM.\1038\ For an individual
litigant, proving harm to competition in the relevant geographic and
product markets is a resource-intensive task that

[[Page 38464]]

typically requires expert testimony.\1039\ This makes an already
expensive proposition even less palatable for most workers and further
tips the risk-versus-reward calculus away from litigation. In addition,
to succeed on a Sherman Act claim, a plaintiff must show harm to
competition as a whole, not just to themselves. It may be difficult or
impossible for a worker to establish that their individual non-
compete--or a single firm's use of a non-compete--adversely affected
competition in a labor market or product/service market sufficiently to
violate the Sherman Act.\1040\ Section 5, on the other hand, is more
inclusive than the Sherman Act.\1041\ As outlined in Part II.F, section
5 requires a showing of indicia of unfairness and a tendency to
negatively affect competitive conditions. It does not require a
separate showing of market power or market definition--nor does it
require proof of harm to competition by each non-compete.\1042\
---------------------------------------------------------------------------

\1036\ See Part I.B.1.
\1037\ See 15 U.S.C. 15.
\1038\ NPRM at 3496.
\1039\ See, e.g., U.S. Healthcare, Inc. v. Healthsource, Inc.,
986 F.2d 589, 599 (1st Cir. 1993) (``In practice, the frustrating
but routine question how to define the product market is answered in
antitrust cases by asking expert economists to testify.'').
\1040\ See NPRM at 3496-97 (discussing non-compete cases that
have been brought under the antitrust laws).
\1041\ See Part II.A.
\1042\ See Part II.F.
---------------------------------------------------------------------------

Case-by-case litigation by public enforcers, such as the Commission
or State attorneys general, is a potential alternative or supplement to
private litigation under other antitrust laws. But the ability of
public enforcers to engage in effective case-by-case litigation related
to non-competes, absent a rule, is limited.
As cited in Parts I.B. and II.C.2, the FTC has previously secured
consent orders premised on the use of non-competes being an unfair
method of competition under section 5, and the Commission has the
authority to determine that non-competes are unfair methods of
competition through adjudication. However, FTC resource constraints
limit the potential effectiveness of enforcement of section 5 on a
purely case-by-case basis. The Commission is an independent agency that
works to promote fair and open markets and protect the entire American
public from unfair and deceptive business practices. The Commission has
fewer than 1,500 employees for its entire body of work related to this
mission,\1043\ which includes investigating, challenging, and
litigating anticompetitive mergers and conduct; processing and
reviewing merger filings; and investigating and challenging a wide
range of consumer protection issues.\1044\
---------------------------------------------------------------------------

\1043\ FTC, Congressional Budget Justification--Fiscal Year
2025, at 8 (2024), https://www.ftc.gov/system/files/ftc_gov/pdf/fy25-cbj.pdf.
\1044\ Id.
---------------------------------------------------------------------------

Similarly, several State Attorneys General commented that the
multi-factor common law approaches to non-compete law result in
piecemeal decisions that do not address the non-compete problem in a
uniform manner.\1045\ These State Attorneys General also noted that
some State enforcement agencies lack straightforward authority to
enforce existing common law protections related to non-competes and
argued that the challenges associated with common law enforcement
underscore the need for a Federal rule.\1046\ And the resource
limitations to pursue non-competes comprehensively through enforcement
limit States equally--if not more.
---------------------------------------------------------------------------

\1045\ Comment of the Attys. Gen. of 17 States and DC, FTC-2023-
0007-21043 at 7.
\1046\ Id.
---------------------------------------------------------------------------

The Commission estimates that there are approximately 30 million
individual non-competes in the U.S.\1047\ In contrast to the large
volume of non-competes, the resources of public enforcement agencies
are limited. Public enforcers must balance competing demands for
resources and priorities when they bring public enforcement actions.
Public enforcers cannot conceivably investigate the specific details of
every non-compete or initiate litigation concerning more than a small
fraction of unlawful non-competes. A Federal rule provides clarity to
market participants, engages all stakeholders in the development of the
rule, and more effectively ceases an unfair method of competition.
---------------------------------------------------------------------------

\1047\ See Part I.B.2.
---------------------------------------------------------------------------

The significant limitations on the ability of private and public
litigants to challenge unlawful non-competes have practical
implications. Courts cannot strike down an unenforceable non-compete
that they never had the opportunity to review. Moreover, as detailed in
Part IV.B.2.b, non-compete restrictions may still have significant in
terrorem effects when workers are uncertain about the enforceability of
their non-competes or lack the ability to challenge their use.
Furthermore, case-by-case litigation is insufficient to address
negative externalities from non-competes (i.e., harms non-competes
cause to persons other than the parties to the non-compete). As
described in Parts IV.B and IV.C, non-competes impose significant
negative externalities on other workers, other firms, consumers, and
the economy. Individual non-compete cases are not well-suited for
redressing these harms. For example, while the precise reasonability
test for non-competes differs from State to State, the test typically
considers the business interest asserted by the employer; the harm to
the worker; and the injury to the public from the loss of the worker's
services.\1048\ This test does not generally account for the harms
experienced by other workers, other firms, consumers, and the economy
resulting from the negative effects of non-competes on competition.
---------------------------------------------------------------------------

\1048\ See NPRM at 3494-95.
---------------------------------------------------------------------------

Furthermore, because the significant harms of non-competes result
from their aggregate use, they are unlikely to be captured by an
assessment of an individual worker's non-compete or an individual
firm's use of non-competes. This is true regardless of whether those
non-competes are challenged under State non-compete laws or under other
antitrust laws. It is likewise true regardless of whether non-competes
are challenged by private litigants or public enforcers. Accordingly,
the Commission finds that case-by-case litigation alone is insufficient
to address the negative externalities of non-competes.
The Commission, by contrast, is well-positioned to evaluate non-
competes holistically. The Commission is an expert agency and has used
its expertise to assess the weight of the empirical evidence and
comment record to evaluate the aggregate effects of non-competes. The
Commission here implements a clear national standard through notice-
and-comment rulemaking to protect competition, based on the evidence
that the use of non-competes in the aggregate negatively affects
competition and harms workers and consumers.
For all these reasons, the Commission finds that case-by-case
litigation is not a viable alternative to the final rule.\1049\
---------------------------------------------------------------------------

\1049\ A few commenters suggested that the Commission could
create guidelines instead of a rule to explain what factors the
agency would look at in an enforcement action. By definition,
however, a guidance document would ``not have the force and effect
of law.'' Perez v. Mortg. Bankers Ass'n, 575 U.S. 92, 97 (2015)
(quoting Shalala v. Guernsey Mem'l Hosp., 514 U.S. 87, 99 (1995)).
Guidelines would not bind employers or courts and would not provide
workers with the same clarity about the enforceability of their non-
competes. Moreover, case-by-case litigation itself is not suited to
address the negative externalities of non-competes, a concern the
issuance of guidelines would not address. The Commission finds that
the issuance of guidelines is not a viable alternative to the final
rule for the same reasons that it finds that the no-action
alternative generally is not a viable alternative to the final rule.

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

[[Page 38465]]

c. State Law Alone Cannot Address the Negative Effects of Non-Competes
on Competition
The Commission appreciates that States have enacted legislation in
recent years to ban or restrict non-competes and ameliorate their
negative effects.\1050\ The Commission has long recognized the value of
concurrent enforcement of Federal and State law and believes States
have an important role to play in restricting the use of non-competes.
Indeed, in this final rule, the Commission has revised Sec. 910.4 to
ensure that States may continue to enforce laws that restrict non-
competes and do not conflict with the final rule. However, the
Commission believes that reliance on State law alone is insufficient to
address the negative effects of non-competes on competition. The
practical ability of States to address the harms to their residents
from non-competes is limited by various factors, including employers'
use of choice-of-law, forum-selection, and arbitration clauses;
significant confusion among both employers and workers resulting from
the patchwork of State law, which chills workers from engaging in
competitive activity even where non-competes are likely unenforceable
under State law and also increases employers' compliance costs,
particularly given the increase in interstate remote work; spillover
effects from other States' laws; and incentives for States to adopt
permissive non-compete policies.
---------------------------------------------------------------------------

\1050\ See NPRM at 3494 (summarizing recent State non-compete
legislation).
---------------------------------------------------------------------------

Many States have adopted statutory restrictions or compete bans on
non-competes. Four States--California, Minnesota, North Dakota, and
Oklahoma--have adopted statutes rendering non-competes void for nearly
all workers.\1051\ The majority of the remaining 46 States have
statutory provisions or case law that ban or limit the enforceability
of non-competes for workers in certain specified occupations.\1052\ The
general language of the test for whether a non-compete is reasonable is
fairly consistent from State to State.\1053\ However, the specifics of
the application of the standard differ from State to State. For
example, States vary in how narrowly or broadly they define legitimate
business interests and the extent to which courts are permitted to
modify an unenforceable non-compete. States also differ with respect to
statutory restrictions on non-competes.\1054\ As a result, among the 46
States where non-competes may be enforced, variation exists with
respect to the enforceability of non-competes.\1055\
---------------------------------------------------------------------------

\1051\ See Cal. Bus. & Prof. Code sec. 16600; N.D. Cent. Code
sec. 9-08-06; Okla. Stat. Ann. tit. 15, sec. 219A. Minnesota banned
non-competes signed on or after July 1, 2023, after the comment
period closed. Minn. Stat. Ann. sec. 181.988.
\1052\ In most States, those limits apply to just one or two
occupations (most commonly, physicians). See Beck Reed Riden LLP,
Employee Noncompetes: A State-by-State Survey (Feb. 19, 2024),
https://beckreedriden.com/wp-content/uploads/2024/02/BRR-Noncompetes-20240219-50-State-Noncompete-Survey-Chart.pdf
(hereinafter ``Beck Reed Riden Chart'').
\1053\ See NPRM at 3494-95.
\1054\ See, e.g., Beck Reed Riden Chart, supra note 1052.
\1055\ NPRM at 3495.
---------------------------------------------------------------------------

State law also differs with respect to the steps courts take when
they conclude that a non-compete is unenforceable as drafted. As noted
in the NPRM, the majority of States have adopted the ``reformation'' or
``equitable reform'' doctrines, which allow courts to revise the text
of an unenforceable non-compete to make it enforceable.\1056\
---------------------------------------------------------------------------

\1056\ Id.
---------------------------------------------------------------------------

Because the enforceability of non-competes and courts' positions
with respect to unenforceable non-competes vary from State to State,
the question of which State's law applies in a legal dispute can
determine the outcome of a non-compete case. Non-competes often contain
choice-of-law provisions designating a particular State's law for
resolution of any future dispute.\1057\ Furthermore, some non-competes
include forum-selection provisions specifying the court and location
where a dispute may be heard.\1058\ The default rule under conflict-of-
laws principles is that the court honors the parties' choice of law,
meaning that the burden is typically on the worker--the vast majority
of whom the Commission finds are exploited and coerced when entering
into a non-compete--to negotiate for the law of a different forum to
apply.\1059\
---------------------------------------------------------------------------

\1057\ Gillian Lester & Elizabeth Ryan, Choice of Law and
Employee Restrictive Covenants: An American Perspective, 31 Comp.
Lab. & Pol'y J. 389, 396-402 (2010).
\1058\ Id. at 402-04.
\1059\ Id. at 397 (``In general, courts defer to choice of law
clauses because they are presumed to represent the express intention
of the parties.''). 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).
---------------------------------------------------------------------------

There is significant variation, however, in how courts apply choice
of law rules in disputes over non-competes.\1060\ As a result, it can
be difficult for employers and workers to predict how disputes over
choice of law (and, in turn, the enforceability of the non-compete)
will be resolved.\1061\ Several commenters agreed that a Federal rule
would alleviate these problems.
---------------------------------------------------------------------------

\1060\ Lester & Ryan, supra note 1057 at 394-95.
\1061\ Id. at 395 (``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).
---------------------------------------------------------------------------

Choice of law provisions may also mean that workers lose their own
State's protections. For example, workers from States where non-
competes are banned commented that they faced enforcement of non-
competes that selected the law of another State. This raises the
concern that choice of law clauses can be used to evade State bans or
restrictions by forum shopping.\1062\ As two scholars note, when ``the
parties or issues involved have connections to multiple
jurisdictions,'' the law ``confounds lawyers and commentators because
of its complexity and unpredictability.'' \1063\
---------------------------------------------------------------------------

\1062\ See generally Timothy P. Glynn, Interjurisdictional
Competition in Enforcing Non-Compete Agreements: Regulatory Risk
Management and the Race to the Bottom, 65 Wash. & Lee L. Rev. 1381,
1386 (2008) (noting ``judicial attempts to preempt other courts from
disregarding the parties' choice of law''). Some States have
attempted to defend against this by enacting statutes banning
selection of a different State's law for a non-compete. See Minn.
Stat. Ann. sec. 181.988(3)(a) (Minnesota); Cal. Lab. Code sec. 925
(California); Colo. Rev. Stat. sec. 8-2-113(6) (Colorado); Mass.
Gen. Laws ch. 149, sec. 24L(e) (Massachusetts); La. Rev. Stats.
23:921(2) (Louisiana). Many of these statutes are relatively recent,
however, and it remains to be seen how effective they will be.
\1063\ Lester & Ryan, supra note 1057 at 389.
---------------------------------------------------------------------------

Employers may also impose arbitration clauses, which require that
legal disputes with the employer--including disputes related to non-
competes--be resolved through binding arbitration rather than in
court.\1064\ Where such clauses are valid, the Federal Arbitration Act
requires that courts enforce them.\1065\ Choice of law, forum
selection, and arbitration clauses create opportunities for employers
to forum-shop in ways that undermine any given State's ability to
effectively regulate non-competes.
---------------------------------------------------------------------------

\1064\ See, e.g., Alexander J.S. Colvin, Econ. Pol'y Inst.,
Report, The Growing Use of Mandatory Arbitration (Apr. 6, 2018).
\1065\ See, e.g., Nitro-Lift Techs. v. Howard, 568 U.S. 17, 20-
22 (2012).
---------------------------------------------------------------------------

Numerous workers, businesses, and other commenters said the
patchwork of State laws and confusion about those laws makes it
difficult for workers and businesses to understand whether a particular
non-compete would be enforceable. The lack of a clear national
standard, and resulting confusion,

[[Page 38466]]

contributes to non-competes being used in jurisdictions where they are
unenforceable. Starr, Prescott, and Bishara find that employers
frequently use non-competes even when they are unenforceable under
State law.\1066\ Similarly, Colvin and Shierholz find that 45.1% of
workplaces in California use non-competes even though they are
unenforceable there.\1067\ Anecdotally, an economist commented that the
Commission's Prudential Security case, in which the employer continued
using non-competes after they were held unenforceable by a court, was
an example of employers enforcing unenforceable non-competes.\1068\
---------------------------------------------------------------------------

\1066\ Starr, Prescott, & Bishara, supra note 68 at 53, 81.
\1067\ Colvin & Shierholz, supra note 65 at 5-6.
\1068\ See FTC, 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 (Dec. 28, 2022).
---------------------------------------------------------------------------

While the Commission has no doubt that many employers aim to ensure
their contracts comply with applicable law, the empirical evidence
indicates that at least some employers are using unenforceable non-
competes, and some workers are turning down jobs where their non-
competes are likely unenforceable. Some commenters referenced Starr,
Prescott, and Bishara's finding that workers frequently cite non-
competes as a factor in turning down job offers in both States that
enforce non-competes and in those that do not.\1069\ The study also
finds that workers are more likely to report that they would be willing
to leave for a competitor when they did not believe their employer
would attempt to enforce a non-compete in court.\1070\ The study
suggests that whether a worker's non-compete is enforceable may matter
less than whether the employer is willing to try to enforce it.\1071\
The Commission notes that this study does not necessarily indicate a
causal relationship, but it does indicate that for many workers, the in
terrorem effect of non-competes may outweigh any State protections.
---------------------------------------------------------------------------

\1069\ Starr, Prescott, & Bishara, supra note 68 at 633, 663.
\1070\ Id. at 633, 652, 664.
\1071\ Id.
---------------------------------------------------------------------------

Furthermore, the ability of States to address harms to their
residents from non-competes is limited by spillover effects from other
States. The economies of States are closely interconnected. Therefore,
even where a State adopts a law that strictly regulates non-competes,
such a law can be undermined by permissive non-compete laws in a nearby
State.\1072\
---------------------------------------------------------------------------

\1072\ See, e.g., Johnson, Lavetti, & Lipsitz, supra note 388
(finding that increases in non-compete 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, but taper off as the distance to the
bordering State increases).
---------------------------------------------------------------------------

Finally, several comments argued that State regulation of non-
competes should continue by quoting Justice Brandeis's dissent in New
State Ice Co. v. Leibmann: ``[i]t is one of the happy incidents of the
[F]ederal 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.'' \1073\ The
Commission disagrees that further laboratory testing by States is
needed. States have been experimenting with non-compete regulation for
more than a century, with laws ranging from full bans to notice
requirements, compensation thresholds, bans for specific professions,
reasonableness tests, and more.\1074\ Past State experimentation and
legal changes yielded a considerable body of empirical research, which
as described in Parts IV.B and IV.C, demonstrates that non-competes
negatively affect competitive conditions in labor markets and in
product and service markets. This evidence supports the Commission's
finding that non-competes are an unfair method of competition.
---------------------------------------------------------------------------

\1073\ New State Ice Co. v. Leibmann, 285 U.S. 262, 311 (1932)
(Brandeis, dissenting).
\1074\ See Beck Reed Riden Chart, supra note 1052.
---------------------------------------------------------------------------

Individual States' non-compete policies can cause spillover effects
that negatively affect competitive conditions in other States.
Individual States' non-compete policies can also affect the operation
of legal regimes in other States. Choice of law provisions cause
confusion for workers even in States where non-competes are
unenforceable. There are incentives for some States to adopt extremely
permissive non-compete policies to attract employers that favor non-
competes, and potentially even to enable employers to ``export'' those
permissive policies to other States through choice-of-law
provisions.\1075\ In short, States are interconnected with respect to
non-competes. Without a uniform standard through the final rule, States
are forced to balance the benefit to their residents of laws regulating
non-competes against the fear that some employers may shift jobs to
States where non-competes are more enforceable. One benefit of the
Commission's rulemaking is it resolves this problem. The rulemaking
record shows banning non-competes will improve competitive conditions
in all States and will benefit workers in all States.
---------------------------------------------------------------------------

\1075\ See, e.g., Glynn, supra note 1062 at 1385-86 (stating
that ``because employers typically are the first movers in [non-
compete] litigation, they often can litigate in a hospitable
judicial forum,'' and noting a rise in interjurisdictional disputes
related to non-compete enforcement and ``judicial attempts to
preempt other courts from disregarding the parties' choice of
law'').
---------------------------------------------------------------------------

X. Regulatory Analysis

A. Introduction

The Commission has examined the economic impacts of the final rule
as required by section 22 of the FTC Act (15 U.S.C. 57b-3). Section 22
directs the Commission to issue a final regulatory analysis that
analyzes the projected benefits and any adverse economic effects and
any other effects of the final rule. The final regulatory analysis must
also summarize and assess any significant issues raised by comments
submitted during the public comment period in response to the
preliminary regulatory analysis.\1076\
---------------------------------------------------------------------------

\1076\ 15 U.S.C. 57b-3(b)(2)(C), (E).
---------------------------------------------------------------------------

B. Preliminary Analysis

Pursuant to section 22 of the FTC Act, the Commission issued a
preliminary regulatory analysis of its proposed rule.\1077\ The
preliminary regulatory analysis contained (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 that may accomplish
the stated objective of the final rule in a manner consistent with
applicable law; and (3) for the proposed rule and for each of the
alternatives described, a preliminary analysis of the projected
benefits and any adverse economic effects and any other effects.\1078\
---------------------------------------------------------------------------

\1077\ NPRM at 3521-31.
\1078\ See 15 U.S.C. 57b-3(b)(1)(A) through (C).
---------------------------------------------------------------------------

In the preliminary regulatory analysis, the Commission described
the anticipated effects of the proposed rule and quantified the
benefits and costs to the extent possible. For each benefit or cost
quantified, the analysis identified the data sources relied upon and,
where relevant, the quantitative assumptions made. The preliminary
analysis measured the benefits and costs of the proposed rule against a
baseline in which the Commission did not promulgate a rule regarding
non-competes and included in the scope of the analysis the broadest set
of economic actors possible. Several of the benefits and costs were
quantifiable, but not monetizable--especially with respect to
differentiating between transfers, benefits, and costs. The Commission
preliminarily found that others were not quantifiable. The

[[Page 38467]]

preliminary analysis discussed any bases for uncertainty in the
estimates.
The Commission preliminarily found substantial positive effects of
the proposed rule: an increase in workers' earnings by $250-$296
billion annually (with some portion representing an economic transfer
from firms to workers); an increase in new firm formation and
competition; a reduction in health care prices (and prices in other
markets may also fall); and an increase in innovation. The Commission
noted that 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 preliminarily found 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 human capital and capital assets would fall.
The Commission preliminarily concluded that the substantial labor
market and product and service market benefits of the proposed rule
would exceed the costs. Furthermore, the Commission preliminarily found
the benefits would persist over a substantially longer time horizon
than most costs of compliance and contract updating.

C. Public Comments on the Preliminary Regulatory Impact Analysis

Based on the comments received, the final regulatory analysis
reflects greater quantification where possible and includes sensitivity
analyses to reflect different assumptions, including assumptions
commenters suggested. The final regulatory analysis concludes,
consistent with the preliminary analysis, that the benefits of the
final rule justify the costs.
Some commenters urged the Commission to quantify the costs and
benefits to a greater degree. In the final analysis, the Commission
incorporates greater quantification where possible. That some effects
cannot be quantified or monetized does not, however, undermine the
Commission's conclusion that the benefits justify the costs.
Some commenters focused on the methodology used to estimate
earnings effects in the preliminary analysis, stating that
extrapolating estimated effects on earnings based on linear predictions
may result in incorrect estimates. These commenters stated that linear
predictions might be particularly unreliable outside the range observed
in the data. While as a general matter, linear extrapolation may not be
appropriate in all circumstances, especially in the absence of data
supporting such an approach, the Commission notes the linear effect of
non-compete enforceability on earnings was statistically tested in the
economic literature.\1079\
---------------------------------------------------------------------------

\1079\ Johnson, Lavetti, & Lipsitz, supra note 388 at 17.
---------------------------------------------------------------------------

Nevertheless, to test and confirm the robustness of the conclusions
drawn in the preliminary analysis from the linear approach, in this
final analysis, the Commission uses several estimation approaches. For
its primary analysis, the Commission adopts an approach that does not
rely on extrapolation. Specifically, the Commission assumes that the
historical average change \1080\ in non-compete enforceability observed
at the State level represents the total change in enforceability that
results from the rule. This approach is hereafter referred to as the
``average enforceability change approach.'' It likely underestimates
the effects of the rule because the State-level changes that would
occur under the rule (which adopts a near comprehensive ban) would be
substantially larger than the changes observed historically. The
Commission also conducted sensitivity analyses with two other
approaches--described further in Parts X.C and X.F.6.a--that use linear
extrapolation to scale up the effects estimated in the literature to
estimate the effects of the final rule (i.e., a near comprehensive
ban).
---------------------------------------------------------------------------

\1080\ In other words, taking all changes in non-compete
enforceability between 1991 and 2014 (the range studied in the
relevant literature) into account, the Commission considers a change
whose magnitude is equal to the average of the magnitudes of all
those changes. See Johnson, Lavetti, & Lipsitz, supra note 388 for
more details.
---------------------------------------------------------------------------

Some commenters alleged the proposed rule would increase inflation.
Some commenters also stated the proposed rule would harm shareholders
by decreasing corporate profits. In response, the Commission notes that
the regulatory analysis attempts to quantify and monetize real costs
and benefits of the final rule as opposed to nominal costs and
benefits. Therefore, net benefits are benefits that represent increased
economic efficiency resulting from the final rule rather than increases
in the dollar value of output that may be due to inflation.
Additionally, earnings increases are due, at least in part, to
increased economic efficiency, which would likely lower prices.
Accordingly, the Commission does not expect that prices will rise
because of the rule. Indeed, empirical evidence shows that in physician
clinics, prices fall with decreased non-compete enforceability.\1081\
Similarly, while the effect of the final rule on corporate profits is
unclear,\1082\ the Commission's analysis is focused on overall gains or
losses in economic surplus--i.e., the net benefits to society, not to
individual corporations.
---------------------------------------------------------------------------

\1081\ Hausman & Lavetti, supra note 590.
\1082\ The evidence in the empirical literature is mixed. Younge
& Marx (supra note 755) find an increase in firm value when non-
competes became enforceable in Michigan. Hiraiwa, Lipsitz, & Starr
(supra note 502) find no effect on firm value when non-competes were
prohibited for the majority of workers in Washington.
---------------------------------------------------------------------------

Some commenters stated that certain costs may be missing from the
preliminary analysis, including costs related to worker misconduct and
litigation over the validity of the final rule. The Commission finds no
evidence or compelling arguments directly linking non-competes to
worker misconduct and therefore does not consider such costs.\1083\
Costs related to litigation over the validity of the rule are outside
the scope of the regulatory analysis under section 22, which is
concerned with costs and benefits should the final rule be implemented.
---------------------------------------------------------------------------

\1083\ See Part V.D.3.
---------------------------------------------------------------------------

Some commenters stated the rule may have beneficial tax
ramifications for businesses and workers with non-competes that are no
longer enforceable, including based on changes in amortization
schedules. In response, the Commission notes that any tax savings under
the final rule represent transfers from the government to firms that
previously used non-competes. Significantly, the Commission is allowing
existing non-competes with senior executives, who may be most likely to
have non-competes with tax implications, to remain in effect. This will
mitigate the need for tax-related administrative work. In response to
comments on the tax ramifications of clawed back pay, the final rule
does not encourage or require firms to ``claw back'' compensation and
given the exclusion for senior executives' existing non-competes in the
final rule, situations in which a firm would be in a position to
consider clawing back pay are likely to be extremely limited, if any.
Some commenters stated workers may be harmed if firms claw back
workers' earnings, if workers lose long-term incentive payments,
retention bonuses, and severance payments, or if workers must pay for
training out of pocket in response to the rule. First, in Parts
IV.B.3.a.iiv and X.F.6.a, the Commission finds earnings increases
overall associated with decreases in non-compete enforceability. With
respect to existing non-competes, non-competes

[[Page 38468]]

with senior executives, which are most likely to be structured with
incentive payments, bonuses, and severance, may remain in effect under
the final rule. To the extent any other existing non-competes with such
structures are not excluded from the final rule, as noted in Parts
III.D and IV.D, deferred compensation and other structured payments
generally have many material contingencies other than a non-compete,
which means incentive payments and retention bonuses will continue to
retain value for the employer. Going forward, under the final rule,
agreements for deferred compensation and other structured payments may
be permissible as long as they do not fall within the definition of
non-compete clause in Sec. 910.1. With respect to payments for
training, the Commission notes evidence that worker-sponsored training
is unaffected by legal enforceability of non-competes,\1084\ and it is
therefore unlikely that workers will incur costs related to training as
a result of the final rule.
---------------------------------------------------------------------------

\1084\ Starr, supra note 445.
---------------------------------------------------------------------------

Some commenters disagreed with the Commission's use of patenting
activity as a proxy for innovation in the preliminary analysis, stating
that the value of innovation may not be captured in patenting, in part
because employers may use patents as a substitute for non-competes.
First, the Commission agrees that innovation likely has value above and
beyond patenting. That patenting does not capture the full value of
innovation is not a basis for dismissing its value as a proxy
altogether. Second, while it is theoretically possible firms may
substitute from the use of non-competes to the use of patents to
protect intellectual property, the empirical literature shows increases
in innovation do not follow from the simple substitution of protections
between non-competes and patents. Specifically, the empirical
literature confirms the innovations prompted by decreased non-compete
enforceability are qualitatively valuable, and--examining the
relationship between non-compete enforceability and patenting for drugs
and medical devices, where patenting is ubiquitous \1085\--it shows the
patents reflect true net increases in innovation (as opposed to
substitutions). One commenter stated there can be difficulty
ascertaining the value of patenting. The Commission finds that there
are several estimates of the private value of a patent (e.g., the value
to the patenting firm) in the literature, but no estimates of the
social value of a patent, as further discussed in Part X.F.6.b. The
Commission therefore stops short of monetizing this benefit. The final
analysis addresses effects on innovation in greater detail in Part
X.F.6.b.
---------------------------------------------------------------------------

\1085\ See Part IV.B.3.b.ii, discussing Johnson, Lipsitz, & Pei,
supra note 526.
---------------------------------------------------------------------------

Some commenters asserted the research related to investment in
human capital does not distinguish between two different types of
training: core training, i.e., training required to perform job duties,
and advanced training, i.e., training with potential to increase
productivity beyond the baseline requirements for job
performance.\1086\ Commenters stated that when non-competes are more
enforceable, workers may receive additional core training rather than
advanced training. In other words, when non-competes are more
enforceable, labor mobility decreases and workers may also move to new
industries to avoid potentially triggering non-compete clause
violations (as discussed in Part IV.B.3.b.ii), both of which make
experienced workers less often available for hire. Firms therefore may
need to train workers at a greater rate because they will hire
inexperienced workers who require more core training. Research finding
increases in training associated with increases in non-compete
enforceability therefore may not imply increases in advanced training--
i.e., the kind of training that increases productivity of workers
already able to perform job duties, with net benefits for society as a
whole. In response, the Commission agrees that decreases in training
under the final rule may represent decreases in core, rather than
advanced, training. It is not possible to discern whether the observed
effects on training in the literature represent core versus advanced
training because evidence that would facilitate such an analysis does
not exist. Importantly, a decrease in core training would be
economically beneficial because it would reflect a more efficient use
of the labor force. Therefore, to the extent a decrease in training
reflects a change in core training, this would be a net benefit of the
final rule--not a cost. On the other hand, to the extent a decrease in
training is due to a change in advanced training, this would represent
a net cost of the final rule. The Commission further discusses
investment in human capital in Part X.F.7.a.
---------------------------------------------------------------------------

\1086\ Commenters used the words ``requisite'' and
``discretionary'' in lieu of ``core'' and ``advanced,''
respectively.
---------------------------------------------------------------------------

Some commenters stated that costs associated with rescinding
existing non-competes and updating contractual practices may be greater
than estimated in the NPRM and attributed the greater cost to the need
for high-cost outside counsel. In response, the Commission finds it
likely that many firms will not need to use costly outside counsel (or
indeed, any counsel) to comply with the final rule. This is especially
true since the final rule allows non-competes for senior executives to
remain in effect, since it does not require rescission of any existing
contracts, and since it provides a model safe harbor notice for other
workers and makes other adjustments to simplify the notice process. In
response to commenters stating that firms will need more time to
implement than estimated in the NPRM, the Commission conducts an
updated analysis in Part X.F.7.b. The Commission notes that the model
language provided in the final rule and allowing employers to use the
last known address, mail or electronic, will significantly simplify the
notice process for employers. Additionally, the Commission performs two
sensitivity analyses in Part X.F.7.b. The first assumes an attorney's
time is more costly--it replaces the primary estimate of the average
hourly productivity of an attorney ($134.62 per hour, based on BLS
earnings data) with an estimated rate of the cost of outside counsel
who is a tenth-year attorney ($483 per hour).\1087\ The second makes
different assumptions about the time spent by employers related to
existing non-competes that will be no longer be enforceable and
updating contractual practices. Finally, the Commission clarifies the
definition of ``non-compete clause'' in Part III.D to reduce confusion
and give employers and workers a clearer understanding of what is
prohibited. This, in turn, will reduce compliance costs and potential
litigation costs over what constitutes a non-compete.
---------------------------------------------------------------------------

\1087\ This estimate is drawn from the Fitzpatrick Matrix, which
is a fee schedule used by many U.S. courts for determining the
reasonable hourly rates in the District of Columbia for attorneys'
fee awards under Federal fee-shifting statutes. It is used here as a
proxy for market rates for litigation counsel in the Washington, DC
area, which likely represent the high end of rates for litigation
counsel in the U.S. The estimate is therefore adjusted to reflect a
national rate by multiplying by the ratio of the hourly wage of
attorneys nationwide to the hourly wage of attorneys in the
Washington, DC metro area, based on BLS Occupational Employment and
Wage Statistics data. The Commission conservatively uses the rates
of a tenth-year attorney--a much more experienced attorney than is
likely to be needed (and indeed no attorney at all may be needed).
See Fitzpatrick Matrix, https://www.justice.gov/usao-dc/page/file/1504361/dl?inline. See BLS Occupational Employment and Wage
Statistics, https://www.bls.gov/oes/data.htm.
---------------------------------------------------------------------------

One commenter from the retail industry claimed the cost of
implementing the proposed rule could

[[Page 38469]]

be $100,000 to $200,000 per firm but did not support this assertion
with any evidence. The Commission disagrees with this assertion, which
does not align with its careful estimates based on empirical evidence
and significant expertise presented in Part X.F.7.b.ii. The
Commission's estimates also acknowledge and account for potentially
heterogeneous costs across firms.
Some commenters stated that employers would need to spend
substantial resources to litigate trade secret disputes and violations
of post-employment restrictions other than non-competes. One commenter
stated that the cost of a trade secret case may range from $550,000 to
$7.4 million, depending on the monetary value of the trade secret
claim. The Commission analyzes costs of litigation in Part X.F.7.c. The
Commission agrees with commenters that trade secret litigation, and
litigation over post-employment restrictions other than non-competes,
may be costly. However, the Commission notes that no evidence exists to
support the hypothesis that litigation on these fronts will increase
because of the final rule. Indeed, recent evidence suggests that trade
secret litigation does not increase following bans on non-
competes.\1088\ Moreover, the final rule, with its clear and bright-
line standard (as compared to the current patchwork of State laws),
would likely decrease litigation attempting to enforce non-competes,
including litigation initiated by former employers against workers who
start their own business or who find a new employer. While the
Commission does not have evidence on the frequency of these different
types of litigation, it expects the decrease in non-compete litigation
would likely offset potential increases in other litigation.
---------------------------------------------------------------------------

\1088\ Greenwood, Kobayashi & Starr, supra note 757. The
Commission notes that this study supplements--but is not necessary
to support--its finding that no evidence supports the conclusion
that litigation costs will increase under the final rule. That
finding is based on the Commission's expertise and the rulemaking
record, including relevant comments. This study was published after
the close of the comment period.
---------------------------------------------------------------------------

Positing that firms will be reluctant to share trade secrets with
workers under the rule, some commenters also stated that the costs of
lessened sharing of trade secrets should be taken into account. Since
no data exists on the effect of non-competes on the monetary value of
shared trade secrets, the Commission does not quantify or monetize this
effect. Moreover, there is no evidence that employers will lessen the
extent to which they share trade secrets under the final rule, much
less that any change would be material. As detailed in Part IV.D,
employers have less restrictive alternatives to non-competes that
mitigate these concerns.
Some commenters reference the Starr, Balasubramanian, and
Sakakibara study \1089\ and the Commission's interpretation of it in
the NPRM to assert that firms founded because of the rule may be of
lower quality than existing firms in terms of average employment and
survival rates, and adjustments should be made to the Commission's
analysis to account for these differences. Upon further review, the
Commission interprets the authors' findings to show that within-
industry spinouts resulting from lessened non-compete enforceability
tend to be lower quality than non-within industry spinouts resulting
from lessened non-compete enforceability. However, both types of
spinouts are better, on average, than spinouts that form under stricter
non-compete enforceability. The study's results therefore suggest that,
if anything, the Commission underestimates the final rule's benefits
from new business formation, because the estimates do not adjust for
quality.
---------------------------------------------------------------------------

\1089\ Starr, Balasubramanian, & Sakakibara, supra note 518.
---------------------------------------------------------------------------

Some commenters asserted that, because of the positive effects of
the proposed rule on labor mobility, firms may face greater costs
associated with turnover (especially firms that currently use non-
competes) due to the cost of finding a replacement, the cost of
training a replacement, and the cost of lost productivity. Based on
Pivateau (2011),\1090\ one commenter estimated that turnover costs 25%
of the annual salary of a worker. Some commenters also argued that some
firms may face decreased costs of turnover, because more plentiful
availability of labor can reduce the cost of hiring. The Commission
finds that there may be distributional effects of increased turnover--
benefits for firms that face a lower cost of hiring and costs for firms
losing workers who had been bound by non-competes--and assesses the
same in Part X.F.9.c.
---------------------------------------------------------------------------

\1090\ Griffin Toronjo Pivateau, Preserving Human Capital: Using
the Noncompete Agreement to Achieve Competitive Advantage, 4 J. Bus.
Entrepreneurship & L. 319 (2010).
---------------------------------------------------------------------------

Some commenters offered additional empirical evidence not discussed
in the NPRM that was not specific to the proposed regulatory analysis.
The Commission responds to those comments in Part IV.

D. Summary of Changes to the Regulatory Analysis

In the final regulatory analysis presented in Part X.F, the
Commission updates its analyses based on the parameters of the final
rule, comments received, supporting empirical evidence raised by
commenters, changes in the status quo regarding regulation of non-
competes, and reanalysis of evidence presented in the NPRM.\1091\ This
includes the Commission's attempt to quantify and monetize, to the
extent feasible, all costs and benefits of the final rule, as well as
transfers and distributional effects. The Commission additionally
analyzes hypothetical scenarios to assess what otherwise unmonetized
benefits and costs would lead to a final rule that is net beneficial.
Finally, the Commission elects to include an analysis of an alternative
the Commission considered, namely an analysis of fully excluding senior
executives.\1092\
---------------------------------------------------------------------------

\1091\ As described in detail in this Part X, the Commission's
final analysis, including its quantification and monetization of
effects, therefore is not precisely the same as its preliminary
analysis.
\1092\ The Commission is not required to analyze costs and
benefits of regulatory alternatives in its final regulatory
analysis. See 15 U.S.C. 57b-3(b)(2)(B).
---------------------------------------------------------------------------

Under the final rule, existing non-competes with senior executives
may remain in effect. While this change likely affects some costs and
benefits associated with the final rule temporarily, the Commission
does not specifically quantify or monetize those effects. The effect on
persistent costs and benefits would be temporary, as senior executives
will eventually move out of their jobs and retire or move into new
jobs, to which the final rule will apply. The Commission notes
throughout its analysis, however, how different estimates may be
affected by this differential treatment of senior executives even if it
cannot quantify the precise effect.

E. Summary of Benefits and Costs

The Commission considered several effects of the final rule on
economic outcomes: earnings, innovation, entrepreneurship,
distributional effects on workers, investment in human capital, capital
investment, legal and administrative costs, prices, labor mobility and
turnover, and litigation costs.
The Commission describes the primary estimates of benefits,
transfers, costs, and distributional effects associated with each of
these outcomes in Table 1. Table 1 also reports whether the outcome for
each effect is quantifiable or monetizable and

[[Page 38470]]

discusses important nuance or uncertainty.

Table 1
----------------------------------------------------------------------------------------------------------------
Extent of
Category characterization Description of estimate Discussion
----------------------------------------------------------------------------------------------------------------
Earnings............................ Quantified.............. The estimated ten-year The extent to which the
present discounted estimated increase in
value of increased worker earnings
worker earnings is represents a benefit
$400-$488 billion. versus a transfer is
Effect on earnings unclear, though there
partially represents a is evidence to suggest
transfer and partially that a substantial
represents a benefit portion is a benefit.
of the final rule.
Innovation.......................... Quantified.............. Annual count of new Estimates of the
patents estimated to societal value of
rise by 3,111-5,337 in innovation are not
the first year, rising available. The two
to 31,110-53,372 in effects on innovation
the tenth year. Annual together represent a
spending on R&D benefit because more
estimated to fall by output (amount of
$0-$47 billion. Effect innovation) is
on innovation produced with less
represents a benefit input (R&D spending).
of the final rule.
Prices.............................. Partially Quantified.... The estimated ten-year Price changes encompass
present discounted transfers (from firms
value of decreases in to consumers) and
spending on physician benefits (since price
and clinical services changes are likely due
is $74-$194 billion. to increased
Prices in other competition); however,
sectors may decrease the exact split is not
as well but are not clear. Increased
quantified. The effect competition may also
on prices partially increase consumer
represents a transfer quantity, choice, and
and partially quality. Prices
represents a benefit outside of physician
of the final rule. and clinical services
may fall due to
changes in competition
because of new
entrants; however, the
literature has not
quantified this
effect.
Investment in Human Capital......... Monetized............... The estimated ten-year The range in estimates
present discounted reflects uncertainty
value of the net over whether decreased
effect of the final investment in human
rule on investment in capital under the
human capital ranges final rule reflects
from a benefit of $32 reductions in advanced
billion to a cost of investment (which the
$41 billion. The firms opt into to
effect on investment increase productivity)
in human capital may or core investment
represent a cost or (which is no longer
benefit of the final necessary if more
rule. experienced workers
are hired) and
uncertainty over the
workers for whom
investment in human
capital (all workers
or workers in
occupations which use
non-competes at a high
rate) is affected.
Legal and Administrative Costs...... Monetized............... One-time legal and .......................
administrative costs
are estimated to total
$2.1-$3.7 billion.
Legal and
administrative costs
represent a cost of
the final rule.
Litigation Effects.................. Not quantified or The final rule may Estimates of the effect
monetized. increase or decrease of the final rule on
litigation costs. total litigation costs
Effects on litigation are not quantifiable.
costs may represent a Litigation costs may
cost or benefit of the rise or fall depending
final rule. on firms' subsequent
use of other
contractual provisions
and trade secret law
and how the costs of
such litigation
compare to the cost of
non-compete
litigation, as well as
the decreased
uncertainty associated
with a bright-line
rule on non-competes.

[[Page 38471]]

Firm Expansion and Formation........ Quantified.............. The final rule is New firm formation is
estimated to increase generally a benefit,
new firm formation by but may also crowd out
2.7-3.2% and decrease incumbent firms and is
capital investment at therefore not a pure
incumbent firms by 0- benefit. Decreased
7.9%. These effects capital investment at
represent a shift in incumbent firms may be
productive capacity counterbalanced by
from incumbent firms increased capital
to new firms. The investment at new
overall effect on firm firms or rebalancing
expansion and across industries, and
formation represents a therefore may or may
distributional effect not be a cost in net.
of the final rule.
Distributional Effects on Workers... Not quantified or The rule may reduce the .......................
monetized. gender and racial
earnings gap, may
disproportionately
encourage
entrepreneurship among
women, and may
mitigate legal
uncertainty for
workers, especially
relatively low-paid
workers. The
differential effect on
different groups of
workers represents a
distributional effect
of the final rule.
Labor Mobility...................... Partially Monetized..... Some firms may save on The estimate of the
turnover costs (due to increase in turnover
easier hiring as more costs for firms using
potential workers are non-competes is an
available), while some upper bound, since it
firms may have greater encompasses effects on
turnover costs (due to investment in workers'
lost workers newly human capital, hiring
free from non- workers, and lost
competes). The latter productivity of
is estimated to be no workers, all of which
more than $131 per are expected to
worker with a non- diminish under the
compete, while final rule.
estimates are not
available to monetize
the former. While it
is unclear whether
labor mobility costs
represent a net cost
or benefit of the
final rule, they
likely represent a
distributional effect
(costing firms which
use non-competes and
helping firms which do
not) of the final rule.
----------------------------------------------------------------------------------------------------------------

Note: Present values are calculated using discount rates of 2%,
3%, and 7%.

The Commission finds that, even in the absence of a full
monetization of all costs and benefits of the final rule, the final
rule has substantial benefits that clearly justify the costs. While
data limitations make it challenging to monetize all the expected
effects of the final rule, the Commission believes it has quantified
the effects of the final rule likely to be the most significant in
magnitude, and thus, potentially drive whether and the extent to which
the final rule is net beneficial. This includes both benefits and
costs. Based on those quantifications, the Commission is able to make
conservative assumptions, based on its expertise, under which the final
rule would be net beneficial. In this context, by conservative
assumption, the Commission means that it is presuming the benefits it
quantifies to be relatively low in value for purposes of this analysis,
i.e., lower than it believes is likely the case. With respect to costs,
the Commission assumes costs are on the higher end of the estimated
range, which is higher than the Commission believes is likely to be the
case. Through this analysis, provided in detail in Part X.F.10, the
Commission further bolsters its finding that the benefits of the final
rule justify the costs.\1093\
---------------------------------------------------------------------------

\1093\ The Commission notes that it does not believe there is a
likely scenario in which firm exit and lost capital investment,
especially when balanced against firm entry and gained capital
investment at new firms, would change this outcome. Firm exit and
lost capital investment, which are not quantified and are discussed
as distributional effects in Part X.F.9, would not, for example,
result in costs large enough to overcome the break-even analyses
(even if, for example, the value of earnings representing
productivity increases or the social value of patents had to be
marginally higher) or the finding that the benefits justify the
costs.
---------------------------------------------------------------------------

Specifically, the Commission finds that even if only 5.5% of the
estimated $400-$488 billion increase in worker earnings represents
increased productivity resulting from improved, more productive matches
between workers and employers, the benefits will outweigh the costs. In
Part X.F.6.a, the Commission explains that the economic literature does
not provide a way to separate increased productivity from the total
effect on earnings (i.e., transfers versus benefits in the regulatory
impact analysis sense). However, the Commission finds that based on the
literature, some part of the increase in worker earnings represents
increased productivity and believes that 5.5%, and likely more,
represents increased productivity. Similarly, even presuming that no
part of the effect on earnings is a benefit (as opposed to a transfer),
the Commission finds that if the social value of a patent were at least
$297,144, then the monetizable benefits will exceed monetized costs.
Notably, the literature finds that the average private value of a
patent may be as high

[[Page 38472]]

as $32,459,680, again making this assumption regarding the social value
of a patent quite conservative. Finally, even presuming none of the
earnings are benefits (rather than transfers) and that the social value
of a patent is zero (an implausibly low estimate), if all the lost
investment in human capital is core, the monetized benefits would also
exceed monetized costs. Notably, in conducting these analyses, in each
instance, the Commission further makes the very conservative assumption
that monetizable benefits other than the benefit being analyzed are
zero. That is, the Commission assumes that patents have no social value
and that no reduced investment in human capital is core when
considering how much of earnings must represent increased productivity
in order for the monetized benefits to exceed the monetized costs. This
break-even analysis shows that while data limitations making it
challenging to monetize all of the expected benefits of the rule, the
Commission finds that the final rule can be shown to be net beneficial
even under very conservative assumptions.

F. Final Regulatory Analysis

1. Background
As discussed in Part IV.B.3.a, non-competes inhibit worker
mobility, creating worse matches between workers and firms and
decreasing workers' productivity and therefore their earnings. Non-
competes also prevent firms from hiring talented and experienced
workers; inhibit new business formation; and reduce the flow of
innovative workers between firms, harming innovation. The final rule
increases competition in labor markets by allowing workers to move more
freely between jobs and increases competition in product and service
markets by ensuring that firms are able to hire appropriate workers,
that workers are able to create new entrepreneurial ventures, and that
worker flow between firms enhances innovation.
2. Economic Rationale for the Final Rule
The final rule addresses two primary economic problems. First, non-
competes tend to harm competitive conditions in labor markets. Non-
competes increase barriers to voluntary labor mobility and prevent
firms from competing for workers' services, thus creating frictions and
obstructing the functioning of labor markets. These frictions inhibit
the formation of optimal and efficient matches in the labor market,
resulting in diminished worker and firm productivity and in lower
wages.
The second economic problem is that non-competes tend to harm
competitive conditions in product and service markets. Non-competes
create a barrier to new business formation and entrepreneurial growth,
which negatively affects consumers by lessening competition in product
and service markets. Non-competes also make it difficult for
competitors to hire talented workers, which reduces these competitors'
ability to effectively compete in the marketplace. Additionally, non-
competes impede innovation by preventing the churn \1094\ of innovative
workers between firms, limiting the spread and recombination of novel
ideas, which may negatively affect technological growth rates.
---------------------------------------------------------------------------

\1094\ Churn in this context means turnover that is neither job
creation nor job destruction--essentially the movement of workers
among jobs.
---------------------------------------------------------------------------

3. Purpose of the Final Rule
The final rule provides that, with respect to a worker other than a
senior executive, it is an unfair method of competition--and thus a
violation of section 5 of the FTC Act--for a person to enter into or
attempt to enter into a non-compete; enforce or attempt to enforce a
non-compete; or represent that the worker is subject to a non-
compete.\1095\ The final rule also provides that, with respect to
senior executives, it is an unfair method of competition--and thus a
violation of section 5 of the FTC Act--for a person to enter into or
attempt to enter into a non-compete; enforce or attempt to enforce a
non-compete entered into after the effective date; or represent that
the worker is subject to a non-compete, where the non-compete was
entered into after the effective date.\1096\
---------------------------------------------------------------------------

\1095\ See Sec. 910.2(a)(1).
\1096\ See Sec. 910.2(a)(2).
---------------------------------------------------------------------------

4. Baseline Conditions
a. Estimate of the Affected Workforce
As described in Part II.E, some workers may not be subject to the
final rule to the extent they are employed by an entity or in a
capacity that is exempted from coverage under the FTC Act. The
Commission estimates the fraction of the workforce who would be covered
under the final rule (the ``coverage rate'') by applying conservative
assumptions to individual-level data on the characteristics of the
workforce from the American Community Survey (ACS) for 2017 to
2021.\1097\ Residents of four States (California, Minnesota, North
Dakota, and Oklahoma) are excluded from the sample used for the
computation, since these States already generally do not enforce non-
compete agreements.
---------------------------------------------------------------------------

\1097\ The preliminary analysis in the NPRM did not estimate or
apply a coverage rate based on jurisdiction.
---------------------------------------------------------------------------

To estimate the coverage rate, workers are classified according to
three criteria: (1) whether the individual is identified as working for
the government; (2) whether the individual is identified as working for
a non-profit organization; and (3) whether the individual works in an
industry or in a capacity that is likely to be outside the jurisdiction
of the FTC Act. Government employment consists of employment with
local, State, and Federal governments, in addition to individuals on
active duty in the U.S. Armed Forces or Commissioned Corps. Nonprofit
status is self-reported by survey respondents. Industries are defined
based on the North American Industry Classification System (NAICS).
Such a classification of workers is necessarily imperfect as the
FTC's jurisdiction does not exclude all workers that may be identified
in the data as government employees or map directly into the data on
non-profit status or the NAICS classifications that are available
within the ACS. For example, the FTC Act is likely to exempt some firms
that are classified as non-profits but not others, as described in Part
II.E. Also, in some instances, only a subset of a given NAICS category
(and not the entire category) appeared likely to fall outside the
jurisdiction of the FTC Act. When ambiguity arose, the Commission was
overinclusive in excluding workers. For example, the Commission
classified all nonprofits as outside the coverage of the final rule for
the purposes of estimating the coverage rate. Moreover, in estimating
the coverage rate, the Commission excluded entire industries in
calculating the coverage rate when some subset of that industry
appeared to be outside the Commission's jurisdiction. This over-
inclusiveness has the effect of underestimating the coverage rate of
the final rule, and thus the overall net effect of the final rule will
be conservative.
Using data from the ACS and the assumptions detailed in Part X.F.4,
the Commission estimates that the final rule is likely to cover 80% of
the private U.S. workforce.
b. Non-Compete Enforceability
For regulatory analyses, the effects of the final rule are measured
against a baseline representing conditions that would exist in the
absence of the rule. The extent of the final rule's costs and benefits
depends on the degree to which it will change the enforceability of
non-competes relative to what it would be in the baseline. Currently,
non-competes are broadly prohibited in four States:

[[Page 38473]]

California, North Dakota, Oklahoma, and Minnesota. In some other
States, non-competes are prohibited for some, but not all, workers. For
non-competes that are not prohibited expressly by statute, some version
of a reasonableness test is used under State law to determine whether a
given non-compete is enforceable or not. These reasonableness tests
examine whether the restraint is greater than needed to protect an
employer's purported business interest. Non-competes can also be found
unreasonable where the employer's need for the non-compete is
outweighed by the hardship to the worker or the likely injury to the
public. 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-competes on competition in the relevant market or
overall in the economy.\1098\
---------------------------------------------------------------------------

\1098\ See NPRM at 3493-97 (describing the law governing non-
competes at the time the NPRM was published). Minnesota prohibited
non-competes after the publication of the NPRM. See Minn. Stat. Ann.
sec. 181.988.
---------------------------------------------------------------------------

Researchers have used various scoring systems to capture the
enforceability of non-competes State by State over time. As described
in Part IV.A.2, the Commission gives greatest weight to studies that
measure enforceability granularly (i.e., not using a binary score but,
for example, an integer scale) and along various dimensions (e.g., the
employer's burden of proof in non-compete litigation and the extent to
which courts are permitted to modify unenforceable non-competes to make
them enforceable). The scoring system which fits these criteria best
\1099\ has been used to study the effect of non-compete enforceability
on several economic outcomes. This score, which varies across States
and across years, measures non-compete enforceability along a scale
which runs from zero to one.\1100\ A score of zero indicates
enforceability equal to that of the State which enforces non-competes
least (North Dakota). A score of one indicates enforceability equal to
that of the State which enforces non-competes most readily (Florida).
The final analysis relies on this score heavily as a granular and
reliable scoring system that allows the Commission to consider the
effect of non-compete enforceability on several economic outcomes. The
studies that use this score form much of the basis for the final
regulatory analysis.
---------------------------------------------------------------------------

\1099\ Bishara, supra note 501 at 751.
\1100\ Different researchers have rescaled this score in
different ways (e.g., from zero to 470, or scaled such that the mean
score is zero and the standard deviation of the score is one). The
Commission uses the scaling from zero to one because that is the way
it is used in the majority of the studies which are relied on in the
final analysis, as well as for easy interpretability and consistency
across the final analysis.
---------------------------------------------------------------------------

5. Estimating the Effect of the Rule on a State-Level Enforceability
Metric
In the absence of the rule, the average State enforceability
score--in States that do not broadly prohibit them--when measured on a
scale of 0 (lowest enforceability) to 1 (highest enforceability), is
0.78. The final rule will result in State-level enforceability of non-
competes falling from its level in the absence of the rule to zero
(i.e., an average decrease of 0.78, excluding States that broadly
prohibit non-competes).\1101\ Using data on scores from 1991 to 2014,
researchers report that the average magnitude of a change in the score
(i.e., the size of the change, regardless of whether it was a score
increase or decrease) from year to year was 0.081.\1102\ In other
words, when a State's score changed from one year to the next, the
average magnitude of that change was 0.081, on a scale of zero to one.
Since the decrease that will result from the final rule is
significantly larger than the average decrease considered in the
literature (0.78 v. 0.081), the Commission considered different methods
for the primary estimate in this final analysis. Consistent with the
NPRM, this final analysis could attempt to scale up, or extrapolate,
estimated effects to account for this larger decrease. As discussed in
Part X.C, some commenters criticized this approach, stating that it may
result in unreliable estimates absent evidence that the economic
effects the Commission is attempting to measure would scale up
linearly.
---------------------------------------------------------------------------

\1101\ Calculated using data from 2009, the most recent year
with publicly available data, and rescaled to a zero to one scale.
See Starr, supra note 445.
\1102\ Changes of zero (i.e., years in which the score in a
given State was the same as the prior year) were excluded from this
calculation. The Commission notes that the study which reports this
average (Johnson, Lipsitz, & Pei, supra note 526) was released after
publication of the NPRM. The Commission also notes that the data
underlying this calculation were used in other studies discussed in
the NPRM; Johnson, Lipsitz, & Pei report the average score in the
most accessible fashion and is therefore used here. The average they
report is the average change in the analysis sample they select,
which is chosen for analytical reasons to ensure accuracy of their
estimates. Use of the underlying data to re-calculate the average
score or use of scores provided by other researchers would not
change the overall outcomes, conditional on sample selection.
Moreover, the Commission reports the estimates resulting from a full
extrapolation in this final analysis, which does not use this
average score change in its sensitivity analysis, and is the method
used in the NPRM. As noted, the Commission believes that the full
extrapolation method is a valid, but potentially less precise
method. Accordingly, the use of this score supplements--but is not
necessary to support--the Commission's ultimate finding that the
benefits to the final rule justify the costs.
---------------------------------------------------------------------------

The Commission notes in X.C that empirical studies show a linear
extrapolation is appropriate for measuring earnings effects.\1103\
However, similar evidence supporting the use of linear extrapolation is
not available for all economic outcomes the Commission is measuring in
this final analysis. To maintain consistent reporting across economic
outcomes and to avoid extrapolation, the final analysis considers the
effect of a change equal to 0.081 when possible.\1104\ That is, for the
purposes of the final analysis, the Commission conservatively assumes
the projected effects on economic outcomes due to the final rule are
equal to the effects the economic literature associates with an average
magnitude change in the non-compete enforceability score from year to
year. The economic literature reports enforceability changes as simply
increases or decreases in some studies,\1105\ and the magnitude of
those legal changes in this final analysis is assumed to mirror the
average magnitude change of 0.081. The Commission makes these
assumptions to avoid the possibility of inadvertently inflating the
effects of changes in the enforceability score. The final rule will
result in greater changes in enforceability than the changes examined
in empirical studies. There is a possibility that the magnitude of
change for particular economic outcomes will not be the same in
response to every reduction in enforceability. For example, it is
possible that for some economic outcomes, as enforceability gets closer
to zero, the changes in the outcome being measured will be lower with
each change in enforceability.
---------------------------------------------------------------------------

\1103\ Johnson, Lavetti, & Lipsitz, supra note 388 at 17.
\1104\ When considering studies which do not report the
relationship between non-compete enforceability and economic
outcomes based on a numeric score, the Commission is unable to scale
the effect to reflect the average magnitude change of 0.081.
\1105\ See, e.g., Jeffers, supra note 450.
---------------------------------------------------------------------------

At the same time, the Commission notes that this may result in
underestimating benefits of the final rule--the average magnitude
change of 0.081 is much smaller than the average 0.78 change it would
take for enforceability to reflect the final rule. To reflect this
possibility, the final analysis includes sensitivity analyses which
extrapolate beyond an average magnitude change. In these sensitivity

[[Page 38474]]

analyses, the estimated effects from the empirical literature are
scaled up on a State-by-State basis (rather than taking the average) to
account for the estimated size of the decrease in each State's score.
The Commission notes that linear extrapolation provides a robust
estimate of earnings changes based on the empirical literature, but for
consistency, the Commission reports effects based on the average
magnitude change as its primary analysis.
6. Benefits of the Rule
The Commission finds several benefits attributable to the final
rule, as reflected in part by the effects of the rule on earnings and
prices, and all the effects on output and innovation, as summarized in
Table 1 in Part X.E.
a. Earnings
The Commission finds labor markets will function more efficiently
under the final rule, which will lead to an increase in earnings or
earnings growth. Specifically, in this regulatory analysis, the
Commission finds that the estimated ten-year present discounted value
of increased worker earnings is $400-$488 billion. The final rule will
result in additional earnings stemming from improvements in allocative
efficiency due to more productive matching between businesses, which
are economic benefits. In other words, the increase in worker mobility
will allow employers to hire workers who are a better, more productive
fit with the positions they are seeking to fill, which in turn will
increase productivity overall. A portion of the additional earnings are
transfers from firms to workers resulting from more plentiful
employment options outside the firm,\1106\ as workers who are not bound
by non-competes will be in a different bargaining position with their
employer. To the extent other better opportunities with different
employers exist for a given worker, their current employers will now be
competing with those other employers and may increase worker
compensation to keep those workers. The Commission finds that the
economic literature does not provide a way to separate the total effect
on workers' earnings into transfers and benefits.
---------------------------------------------------------------------------

\1106\ By transfers, the Commission refers to ``a gain for one
group and an equal-dollar-value loss for another group.'' See Off.
of Mgmt. & Budget, Circular A-4 (Nov. 9, 2023), 57, https://www.whitehouse.gov/wp-content/uploads/2023/11/CircularA-4.pdf.
---------------------------------------------------------------------------

The increase in worker earnings resulting from the final rule is
calculated as follows:

Increase in worker earnings = (% Increase in Earnings caused by the
change in enforceability of non-competes) * (Total Affected Earnings)

The primary approach in this analysis is to estimate the percentage
increase in earnings assuming that the effect of the final rule will be
the same as the effect of an average magnitude change in non-compete
enforceability, as discussed in Part X.F.5. The Commission estimates
the percentage increase in workers' earnings to be 0.86%.\1107\ The
Commission estimates total affected annual earnings to be $6.2 trillion
(in 2023 dollars).\1108\
---------------------------------------------------------------------------

\1107\ Calculated as -(e -0.107*0.081-1), where -0.107 is the
estimated coefficient of earnings on non-compete enforceability
score in Johnson, Lavetti, & Lipsitz (supra note 388), and 0.081
represents the size of an average magnitude change calculated in
Johnson, Lipsitz, & Pei (supra note 526) which scales the effect to
represent the effect of an average sized change in the non-compete
enforceability score.
\1108\ This figure represents total annual earnings in the U.S.
in the most recent year with data available (2022), adjusted to 2023
dollars: see https://data.bls.gov/cew/apps/table_maker/v4/table_maker.htm#type=0&year=2022&qtr=A&own=5&ind=10&supp=0. Earnings
from California, North Dakota, Oklahoma, and Minnesota (States which
broadly do not enforce non-competes) are subtracted out, since
enforceability in those States will be broadly unaffected by the
rule. The estimate is additionally adjusted to account for the
proportion of the workforce the Commission estimates are currently
covered by the Commission's jurisdiction (80%), as discussed in Part
X.F.4.a. Numerically, $6.2 trillion is calculated as ($9.1 trillion
- $1.6 trillion) * 80% = $6.0 trillion, adjusted to $6.2 trillion to
adjust to 2023 dollars. $9.1 trillion is total private earnings in
2022 in the U.S. (the most recent year with data available), and
$1.6 trillion is total private earnings in 2022 in CA, ND, OK, and
MN.
---------------------------------------------------------------------------

Multiplying the percentage effect (0.86%) by overall affected
annual earnings ($6.2 trillion) results in an annual earnings effect of
$53 billion. The ten-year effect on earnings, discounted separately by
2%, 3%, and 7%, is reported in the first row of Table 2.\1109\
---------------------------------------------------------------------------

\1109\ For illustrative purposes, State-specific estimates are
displayed in Appendix Table A.1. In this table, the estimated number
of covered workers is calculated as 80% * (total employed population
in the State); the estimated increase in total earnings is
calculated as 0.86% * (estimated total covered earnings), where
estimated total covered earnings is calculated as (estimated number
of covered workers) * (average annual earnings); and the estimated
increase in average earnings is calculated as 0.86% * (average
annual earnings). Total employed population and average annual
earnings are taken from the Census Bureau Quarterly Census of
Employment and Wages for 2022 (see https://www.bls.gov/cew/data.htm).
---------------------------------------------------------------------------

This primary approach requires no extrapolation (i.e., it does not
scale the effect on economic outcomes to account for the fact that the
effect of the rule on enforceability scores will be greater than the
changes studied in the economic literature). However, it may understate
the increase in workers' earnings resulting from the final rule. Thus,
the Commission conducts two sensitivity analyses to assess how the
estimated effect of the rule would change if effects are extrapolated
to represent changes in enforceability scores greater than those
examined in the literature.
The first sensitivity analysis, hereafter referred to as the ``full
extrapolation'' approach, calculates the effect on worker earnings in
an identical fashion to the primary analysis but relies on an estimate
of the percentage increase in worker earnings which extrapolates to the
effect of a complete prohibition on the use of non-competes. This
results in an effect on worker earnings equal to 3.2% (instead of 0.86%
in the primary analysis).\1110\ For this estimate, total affected
earnings are equal to $7.3 trillion in 2023 dollars.\1111\ The
estimated effect on earnings across the workforce for this first
sensitivity analysis is therefore given by the percentage effect on
earnings (3.2%) multiplied by the total annual wages in the U.S. for
the affected population ($7.3 trillion). This results in an annual

[[Page 38475]]

estimated earnings gain of $234 billion.\1112\ The ten-year effect,
discounted at 2%, 3%, and 7%, is displayed in the second row of Table
2.
---------------------------------------------------------------------------

\1110\ The percentage effect, 3.2%, is reported by Johnson,
Lavetti, & Lipsitz (supra note 388) as the lower end of a range of
possible effects of a ban on non-competes, relative to non-compete
enforceability in 2014. The estimate is constructed by calculating
the change in the enforceability score in each State which would
bring that State's score to zero (representing no enforceability of
non-competes) and scaling the estimated effect on worker earnings by
that amount. The Commission uses the low end of the reported range
in order to exercise caution against extrapolation, since the
estimate uses an out-of-sample approximation: the changes in most
States necessary to arrive at a score of zero are greater than the
changes examined in the study (though this approximation is
consistent with the results of a test in Johnson, Lavetti, and
Lipsitz which shows that the effect of enforceability on earnings is
roughly linear: namely, a change in enforceability that is twice as
large results in a change in earnings that is twice as large). The
Commission also notes that the estimated range is based on
enforceability in 2014. Since then, some changes in State law have
made non-competes more difficult to enforce for subsets of their
workforces so that a prohibition on non-competes today is likely to
have a slightly lesser effect than a prohibition would have had in
2014.
\1111\ This estimate differs from total affected earnings for
the primary analysis because the estimate of 3.2% takes into account
enforceability in California, North Dakota, and Oklahoma. Earnings
in those States is therefore added back into total affected
earnings. However, earnings in Minnesota are still omitted, since
the prohibition in that State was enacted after the conclusion of
the study period in Johnson, Lavetti, and Lipsitz (2023): see Minn.
Stat. sec. 181.988. Total annual earnings in the U.S. for the
affected population excluding MN are calculated as ($9.1 trillion -
$0.2 trillion) * 80%, updated to adjust to 2023 dollars. $9.1
trillion is earnings for all workers in the US in 2022 (the most
recent year with available data) and $0.2 trillion is earnings for
workers in MN. See https://data.bls.gov/cew/apps/table_maker/v4/table_maker.htm#type=0&year=2022&qtr=A&own=5&ind=10&supp=0.
\1112\ This estimate is comparable to the estimate of $250
billion per year reported in the NPRM. See NPRM at 3523. The
estimate in the NPRM was based on earnings in 2020 (as opposed to
2022 in this final regulatory analysis), included earnings in
Minnesota (which has since passed a bill prohibition non-competes),
and did not adjust for the estimate of the affected workforce
discussed in Part X.F.4.a.
---------------------------------------------------------------------------

The second sensitivity analysis, hereafter referred to as the
``partial extrapolation'' approach, uses the same formula as the other
two analyses (% effect on earnings * total affected earnings) but is
more conservative in its estimate of the percent effect on earnings
than the full extrapolation estimate. The full extrapolation approach
assumes that enforceability scores fall to zero. The partial
extrapolation approach instead assumes that enforceability scores fall
to the minimum observed enforceability score ignoring scores in States
that broadly prohibit non-competes (a more moderate extrapolation). The
minimum observed enforceability score excluding States that broadly
prohibit non-competes is 0.53 (on a scale of zero to one), which is the
enforceability score in New York.\1113\ This analysis calculates the
change in each State's score that would bring it to 0.53, and scales
the effect on worker earnings estimated in the empirical literature by
that amount.\1114\ For example, West Virginia's enforceability score is
0.59. To change to New York's enforceability score would imply a
decrease in West Virginia's score of 0.06 (calculated as 0.59--0.53).
This implies a percent effect on earnings in West Virginia of
0.64%.\1115\
---------------------------------------------------------------------------

\1113\ Enforceability score data come from Starr (2019), which
reports scores for 2009 (the most recent data available). Scores are
adjusted to a scale of zero to one.
\1114\ In particular, for each State, the Commission calculates
the percentage effect on earnings as e^{(0.107*[Delta]Enf)}-
1, where [Delta]Enf is equal to the enforceability score in that
State minus the lowest observed enforceability score, excluding CA,
ND, OK, and MN (0.53).
\1115\ Calculated as - (e -0.107*0.064-1), where -0.107 is the
estimated coefficient of earnings on non-compete enforceability
score in Johnson, Lavetti, & Lipsitz (supra note 388), and 0.064
represents the scaling factor due to West Virginia's score change.
---------------------------------------------------------------------------

Total affected earnings in each State are calculated by multiplying
total earnings in that State (adjusted to 2023 dollars) by the
estimated percentage of covered workers (80%). For example, in West
Virginia, total earnings are estimated to be $0.24 trillion.\1116\
---------------------------------------------------------------------------

\1116\ Calculated as $0.29 trillion * 80%, where $0.29 trillion
is earnings in WV in 2022 (the most recent year with data available)
adjusted to 2023 dollars. See https://data.bls.gov/cew/apps/table_maker/v4/table_maker.htm#type=0&year=2022&qtr=A&own=5&ind=10&supp=0.
---------------------------------------------------------------------------

Next, the percent increase in earnings in each State is multiplied
by total affected earnings in that State. In West Virginia, this
results in an earnings increase of 0.64% * $0.24 trillion = $152
million. Finally, the earnings increases are added across States. The
overall estimated effect is an annual increase in earnings of $161
billion. The ten-year effect, discounted at 2%, 3%, and 7%, is
displayed in the third row of Table 2.

Table 2
----------------------------------------------------------------------------------------------------------------
Estimated ten-year increase in earnings ($
billions), assuming:
-----------------------------------------------
2% Discount 3% Discount 7% Discount
rate rate rate
----------------------------------------------------------------------------------------------------------------
Primary estimate (average enforceability change)................ $488 $468 $400
Estimate (full extrapolation)................................... 2,148 2,060 1,762
Estimate (partial extrapolation)................................ 1,488 1,427 1,221
----------------------------------------------------------------------------------------------------------------

The estimated effects on earnings in Table 2 are based on estimates
of the percentage change in earnings from a study in the empirical
literature that aligns with the metrics outlined in Part IV.A.2.
Another study in the literature estimates earnings effects using a
comparison between workers in occupations that use non-competes at a
high rate versus a low rate.\1117\ After adjusting the finding from
that study to the average magnitude enforceability change, the
estimated effect on worker earnings is 0.5%,\1118\ or $31 billion
annually.\1119\
---------------------------------------------------------------------------

\1117\ For further discussion of this study, see the discussion
in Part IV.B.3.a.ii of Starr, supra note 445.
\1118\ The change in enforceability which generates the estimate
in Starr (supra note 445) is a one standard deviation change, as
measured using non-compete enforceability scores for all 50 States
and the District of Columbia in 1991, which is a change on a scale
of zero to one of approximately 0.17, calculated as 1/[1.60-(-
4.23)]. Scaling the estimate, a change equal to 0.081 would result
in an earnings effect of 0.5%, calculated as e
^{(0.0099*0.081/0.172)}-1.
\1119\ Calculated as $6.2 trillion * 0.5%.
---------------------------------------------------------------------------

The Commission notes that, as discussed in Part X.E, earnings of
senior executives who continue to work under non-competes are included
in the calculations in this Part X.F.6.a. If the Commission were able
to identify those senior executives, their omission from the
calculations would decrease the earnings effect of the final rule,
since the earnings effect for those senior executives (and others,
because of spillovers) would be pushed further into the future, causing
steeper discounting. However, while senior executives are paid
relatively highly, there are relatively few of them: for example, based
on BLS data on earnings by occupation, Chief Executives' earnings
comprise just 0.5% of all earnings.\1120\ Therefore, the impact on the
earnings calculations of omitting or pushing forward the earnings of
senior executives who would continue to work under a non-compete is
limited.
---------------------------------------------------------------------------

\1120\ Calculated as (199,240 * 246,440)/(147,886,000 * 61,900),
where 199,240 and 147,886,000 are employment for Chief Executives
and All Workers, respectively, and 246,440 and 61,900 are dollar
earnings for Chief Executives and All Workers, respectively, in
2022. See Occupation Employment and Wage Statistics, BLS, https://www.bls.gov/oes/tables.htm. The Commission notes that Chief
Executives are used as an illustrative example, and are an imperfect
proxy for senior executives: some Chief Executives (as classified by
BLS) may not be senior executives under the final rule, and some
senior executives under the rule may not be Chief Executives.
---------------------------------------------------------------------------

Discussion of Transfers Versus Benefits
It is difficult to determine the extent to which the earnings
effects represent transfers versus benefits. Transfers, in this
context, refer to ``a gain for one group and an equal-dollar-value loss
for another group.'' \1121\ Such transfers do not represent a net
benefit or cost to the economy as a whole for purposes of regulatory
impact analysis.
---------------------------------------------------------------------------

\1121\ Off. of Mgmt. & Budget, Circular A-4 (Nov. 9, 2023) at
57.
---------------------------------------------------------------------------

To the extent a prohibition on non-competes leads to greater
competition in the labor market and a more efficient allocation of
labor by allowing workers to sort into their most productive

[[Page 38476]]

matches with firms (including new firms that may be formed), then the
resulting earnings increases may reflect higher productivity and so
represent a net benefit to the economy. However, some increases in
earnings when non-competes 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).
Several pieces of evidence support the Commission's finding that at
least part of the increase in earnings represents a social benefit or
net benefit to the economy, rather than just a transfer. As described
in Part IV.B.3.a.ii, two studies have sought to estimate the external
effect of non-compete use or enforceability: that is, the effect of use
or enforceability on individuals other than those directly affected by
non-compete use or enforceability.
One study directly estimates the external effect of a change in
non-compete enforceability.\1122\ While use of non-competes is not
observed in the study, the effects 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
that workers in the neighboring State experience effects on their
earnings that are 76% as large as workers in the State in which
enforceability changed.\1123\ In other words, two workers who share a
labor market would experience nearly the same increase in their
earnings from a prohibition on non-competes, even if the prohibition
only affects 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-competes.
---------------------------------------------------------------------------

\1122\ Johnson, Lavetti, & Lipsitz, supra note 388.
\1123\ Id. (note: a new version of this paper, posted in 2023
after the NPRM was published, revised this estimate slightly).
---------------------------------------------------------------------------

A second study demonstrates that when the use of non-competes by
employers increases, wages decrease for workers who do not have non-
competes but who work in the same State and industry. This study also
finds that this effect is stronger where non-competes are more
enforceable.\1124\ Since the affected workers are not bound by non-
competes themselves, the differential in earnings likely does not
completely represent a transfer resulting from a change in bargaining
power between a worker bound by a non-compete and their employer.
---------------------------------------------------------------------------

\1124\ Starr, Frake, & Agarwal, supra note 469.
---------------------------------------------------------------------------

Overall, these studies suggest there are market-level dynamics
governing the relationship between earnings and the enforceability of
non-competes: specifically, restrictions on the enforceability of non-
competes affect competition in labor markets by alleviating frictions
and allowing for more productive matching. Changes in enforceability or
use of non-competes have spillover effects on the earnings of those
workers who should not be directly affected because they do not have
non-competes or they work in nearby labor markets that did not
experience changes in enforceability. If non-competes simply changed
the relative bargaining power of workers and firms, without affecting
market frictions or competition, then these patterns are less likely to
be observed. Additionally, new business formation when non-competes are
less enforceable (see Part IV.B.3.b.i for a discussion of the evidence)
may create new productive opportunities for workers.
Due to the uncertainty related to earnings as transfers versus
benefits, the Commission analyzes various scenarios that allocate the
percent of the earnings effect to a benefit at different levels in Part
X.F.10. This does not represent a finding that no part or only a small
part of the effect on earnings is a benefit; rather, it is to ensure
that the total estimated effect of the final rule is robust for the
purposes of the regulatory impact analysis to the possibility that a
small percentage of the effect on earnings represents a net
benefit.\1125\
---------------------------------------------------------------------------

\1125\ The Commission notes that Part IV.B.3.a.ii does not
measure or consider whether earnings are transfers or benefits
because to the extent that the earnings that are transfers represent
firms' ability to suppress earnings using an unfair method of
competition, the transfer of such earnings from firms to workers
through the use of non-competes still reflect the tendency of non-
competes to negatively affect competitive conditions in the labor
market.
---------------------------------------------------------------------------

b. Innovation
The Commission finds that an additional benefit of the rule would
be to increase the annual count of new patents by 3,111-5,337 in the
first year, rising to 31,110-53,372 in the tenth year. By alleviating
barriers to knowledge-sharing that inhibit innovation, and by allowing
workers greater opportunity to form innovative new businesses, the
final rule will increase innovation. Studies have sought to directly
quantify this effect, primarily focused on patenting activity. The
Commission therefore considers the effect on patenting in support of
its findings related to innovation. Lacking an estimate of the social
value of a patent, the Commission does not monetize this benefit. The
Commission also finds that the rule will reduce expenditure on R&D by
$0 to $47 billion per year. In light of the increase in overall
innovation, this reduction is a cost savings for firms, but may not
reflect a market-level effect because it does not measure potential
expenditure on R&D by new firms formed as a result of the final rule.
The change in patenting due to the rule for each year is calculated as
follows:

Increase in # of Patents = (% Increase in Patenting) * (Total # of
Affected Patents)

The Commission estimates the percentage increase in patenting to
average 10.9%-18.7% annually over a ten-year period,\1126\ which is the
percentage effect on patenting of an average magnitude change in non-
compete enforceability, as discussed in Part X.F.5. The Commission
assumes that the full effect on patenting phases in over the course of
a ten-year period, resulting in an effect of 2.0%-3.4% in the first
year, increasing to 19.8%-34.0% by the tenth year.\1127\ The total
number of affected patents in each year is 156,976.\1128\
---------------------------------------------------------------------------

\1126\ These values represent the range reported in Johnson,
Lipsitz, & Pei, supra note 526, considering both raw patent counts
and patent counts weighted by a measure of their quality: the number
of citations received in the five years after the patent is granted.
The findings by Johnson, Lipsitz, & Pei are qualitatively confirmed
in the literature, with similar estimates generated by He (supra
note 560)--a study discussed in the NPRM--and Rockall & Reinmuth
(supra note 564).
\1127\ This analysis assumes that the effect on patenting
increases by an identical amount each year (2.0-3.4%), ensuring that
the overall average annual change is equal to that reported in
Johnson, Lipsitz, & Pei (supra note 526).
\1128\ This is the number of granted utility patents, which are
patents for new or improved innovation and are the types of patents
studied by Johnson, Lipsitz, & Pei (Id.). The figure comes from
2020, which is the most recent data available from the U.S. Patent
and Trademark Office. It excludes States in which non-competes are
not enforceable (California, Oklahoma, North Dakota, and Minnesota).
Data available at https://www.uspto.gov/web/offices/ac/ido/oeip/taf/st_co_20.htm.
---------------------------------------------------------------------------

The results of the analysis, for the top and bottom end of the
reported range of percentage increases in patenting, are displayed in
Table 3.
As a sensitivity analysis, mirroring the analysis in Part X.F.6.a,
the Commission assumes that enforceability scores in each State will
fall to the lowest observed score among States which do not broadly
prohibit non-competes. The Commission calculates the percentage change
in patenting in each State by extrapolating the

[[Page 38477]]

percentage increase in patenting to reflect the size of the change in
that State's enforceability score. For example, as noted in Part
X.F.6.a, West Virginia's score would fall from 0.59 to 0.53 as a result
of this analysis. The percentage change in patenting in West Virginia
would therefore average 9.0%-16.6%,\1129\ resulting in an increase of
1.9%-3.6% in the first year, rising to 19.2%-35.6% by the tenth year.
---------------------------------------------------------------------------

\1129\ Calculated as e ^(1.43*0.06)-1 and
e^(2.56*0.06)-1, where 1.43 and 2.56 represent the
coefficients reported in Johnson, Lipsitz, & Pei (Id.) as the lower
and upper bounds of the reported coefficient range, and 0.06 is the
decline in the enforceability score in West Virginia.
---------------------------------------------------------------------------

The annual State-specific percentage changes are multiplied by the
number of annual patents granted in each State.\1130\ Finally, the
changes in patenting across States are combined across States for a
national estimate. The results are reported in Table 3. As States have
broadly decreased legal enforceability of non-competes in recent years,
the changes necessary to move to lower enforceability are likely
overestimated in this sensitivity analysis. This causes the values
estimated by this method to likely overestimate the true extent of the
benefit.
---------------------------------------------------------------------------

\1130\ Data available at https://www.uspto.gov/web/offices/ac/ido/oeip/taf/st_co_20.htm.

Table 3
----------------------------------------------------------------------------------------------------------------
Estimated annual Estimated annual
Estimated annual Estimated annual count of count of
count of count of additional additional
Year relative to publication of the additional additional patents using low patents using
rule patents using low patents using estimate of high estimate of
estimate of high estimate of innovation effect innovation effect
innovation effect innovation effect and extrapolation and extrapolation
approach approach
----------------------------------------------------------------------------------------------------------------
1................................... 3,111 5,337 8,927 19,306
2................................... 6,222 10,674 17,853 38,611
3................................... 9,333 16,012 26,780 57,917
4................................... 12,444 21,349 35,706 77,222
5................................... 15,555 26,686 44,633 96,528
6................................... 18,666 32,023 53,560 115,833
7................................... 21,777 37,360 62,486 135,139
8................................... 24,888 42,697 71,413 154,444
9................................... 27,999 48,035 80,339 173,750
10.................................. 31,110 53,372 89,266 193,055
----------------------------------------------------------------------------------------------------------------

The Commission is not aware of estimates that assess the overall
social value of a patent and therefore the Commission does not monetize
the estimated effects on innovative output. Estimates of the effect of
a patent on a firm's value in the stock market exist in the empirical
literature,\1131\ as do estimates of the sale value of a patent at
auction.\1132\ However, those estimates do not include the effects on
follow-on innovation, consumers (who may benefit from more innovative
products), competitors, or the rents that are shared with workers, and
instead reflect solely the private effect of a patent to the relevant
firms.
---------------------------------------------------------------------------

\1131\ Leonid Kogan, Dimitris Papanikolaou, Amit Seru, & Noah
Stoffman, Technological Innovation, Resource Allocation, and Growth,
132 The Quarterly J. of Econ. 665 (2017).
\1132\ Ariel Pakes, Patents as Options: Some Estimates of the
Value of Holding European Patent Stocks, 54 Econometrica 755 (1986).
---------------------------------------------------------------------------

The Commission notes that patent counts may not perfectly proxy for
innovation. However, by using citation-weighted patents, as well as
other measures of quality, the study by Johnson, Lipsitz, and Pei shows
that patent quality, not just patent quantity, increase when non-
competes become less enforceable.\1133\ Similarly, the study by He
shows that the value of patents also increases when non-competes become
less enforceable.\1134\
---------------------------------------------------------------------------

\1133\ Johnson, Lipsitz, & Pei, supra note 526.
\1134\ He, supra note 560.
---------------------------------------------------------------------------

The second effect of the final rule associated with innovation is a
possible change in spending on R&D. The change in R&D spending due to
the final rule is calculated as follows:

Reduction in R&D Spending = (% Reduction in Spending) * (Total Affected
Spending)

The Commission estimates that the percentage reduction in spending
is 0-8.1%, with the broad range reflecting disagreement in the
empirical literature.\1135\ Total affected spending is $575 billion (in
2023 dollars).\1136\ Multiplying the percentage effect by total
affected spending, the overall annual effect is a reduction of $0-$47
billion in R&D spending in 2023 dollars.
---------------------------------------------------------------------------

\1135\ Johnson, Lipsitz, & Pei (supra note 526) find a negative
effect on R&D spending of 8.1% due to an average magnitude change in
non-compete enforceability, while Jeffers (supra note 450) finds no
economically or statistically significant effect on R&D spending.
\1136\ Total U.S. R&D spending was estimated by the NSF in 2019,
the most recent available year with finalized estimates, excluding
nonprofits, higher education, and nonfederal and Federal government.
Nat'l Ctr. for Sci. and Engrg. Stats., New Data on U.S. R&D: Summary
Statistics from the 2019-20 Edition of National Patterns of R&D
Resources (Dec. 27, 2021), https://ncses.nsf.gov/pubs/nsf22314;
Nat'l Ctr. for Sci. and Engrg. Stats., U.S. R&D Increased by $51
Billion in 2020 to $717 Billion; Estimate for 2021 Indicates Further
Increase to $792 Billion (Jan. 4, 2023), https://ncses.nsf.gov/pubs/nsf23320. Note that the data are not broken out by State, and
therefore the final analysis cannot exclude CA, ND, OK, and MN.
---------------------------------------------------------------------------

The Commission notes that, in light of the increases in innovation
identified in this Part X.F.6.b, reductions in R&D spending represent a
cost savings for firms. Put differently, reductions in R&D spending may
cause commensurate reductions in innovative output. Insofar as
reductions in R&D spending resulting from the rule could have
countervailing effects on innovation, the estimated increase in
innovative output represents the net effect, which would otherwise be
even larger, if R&D spending were held constant.
Notably, empirical estimates of R&D spending are based on observed
changes among incumbent firms and therefore may not reflect market-
level effects. Decreased investment at the firm level (the level of
estimation in the studies that report effects of enforceability on R&D
spending) does not necessarily mean that investment would decrease at
the market level, since new firms entering the market may contribute
additional R&D spending not captured in the referenced studies. For
these reasons, the Commission stops short of classifying the effect on
R&D spending as a benefit of the final rule.
The Commission notes that, as discussed in Part X.E, the estimated
effects on innovation do not take into account that some senior
executives

[[Page 38478]]

may continue to work under non-competes under the rule. The Commission
is unable to separate the effects of senior executives' non-competes
from other workers' non-competes on innovation. Some effects estimated
in this Part X.F.6.b may occur further in the future than assumed in
this analysis, based on the extent of continued use of non-competes for
senior executives.
Overall, the Commission finds that the final rule will
significantly increase innovation. Furthermore, the increase in
innovation may be accompanied by a decrease in spending on R&D that
would, thus, be a cost saving to firms.
c. Prices
The Commission finds that consumer prices may fall under the final
rule because of increased competition. The only empirical study of this
effect concerns physician practice prices. Based on this study, the
Commission estimates the ten-year present value reduction in spending
for physician and clinical services from the decrease in prices is $74-
$194 billion. The Commission finds some of the price effects may
represent transfers from firms to consumers and some may represent
benefits due to increased economic efficiency. Some of the benefits may
overlap with benefits otherwise categorized, such as benefits related
to innovation.
The decrease in prices for physician services because of the final
rule is calculated as follows:

Decrease in Prices = (% Decrease in Prices) * (Total Affected Spending)

The Commission estimates the percentage decrease in prices for
physician services to be 3.5%.\1137\ Total spending on physician and
clinical services was $801 billion in 2023 dollars, excluding States
that broadly do not enforce non-competes.\1138\ The Commission
separately multiplies spending by 35%, 61.9%, and 75% (estimates of the
proportion of hospitals covered by the Commission's jurisdiction as a
proxy for total physician and clinical services spending covered by the
Commission's jurisdiction) to arrive at total affected spending.\1139\
The ten-year sum of discounted spending decreases for these analyses
are presented in Table 4.
---------------------------------------------------------------------------

\1137\ 3.5% is calculated as -(e(^{0.427 * 0.081}) -1),
where 0.427 is the coefficient relating non-compete enforceability
and physician prices in Hausman & Lavetti (supra note 590), and
0.081 represents the average magnitude non-compete enforceability
score, as described in Part X.F.5.
\1138\ See https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsStateHealthAccountsProvider. Spending in 2020,
the most recent year with available data, was $679 billion, which is
$801 billion adjusted to 2023 dollars. CA, ND, OK, and MN are
omitted.
\1139\ In the absence of data on the percentage of physician
practices that are non-profit, the Commission uses a range of three
different assumptions on the share of covered hospitals. In the
first two scenarios, the Commission assumes that the set of covered
hospitals is all hospitals that are not non-profit. The first
scenario uses 2020 data from the American Hospital Association
indicating that 65% of hospitals report that they are non-profits
(based on data available at https://www.ahadata.com/aha-dataquery).
The second scenario uses 2017-2021 data from the American Community
Survey indicating that 38.1% of hospital employment is at non-
profits (see https://www.washingtonpost.com/business/2023/05/12/force-behind-americas-fast-growing-nonprofit-sector-more). Finally,
consistent with the Commission's findings in Part V.D.4, the
percentages of firms that report themselves as nonprofit in the
data, which reflects registered tax-exempt status under IRS
regulations, does not equate to the Commission's jurisdiction. It is
likely the Commission may have jurisdiction over some hospitals and
other healthcare organizations identified as nonprofits. Therefore,
the third scenario assumes that 75% are covered.
---------------------------------------------------------------------------

As a sensitivity analysis, mirroring the analysis in Part X.F.6.a,
the Commission assumes that enforceability scores in each State will
fall to the lowest observed score among States which do not broadly
prohibit non-competes. The Commission calculates the percentage change
in prices in each State by extrapolating the percentage decrease in
prices to reflect the size of the change in that State's enforceability
score. As noted in Part X.F.6.a, West Virginia's score would fall from
0.59 to 0.53 as a result of this analysis. The percentage decrease in
prices in West Virginia would therefore be 2.5%.\1140\ This percentage
decrease is multiplied by State-specific physician spending, adjusted
by the relevant multiplier to account for the Commission's
jurisdiction, and summed over States.
---------------------------------------------------------------------------

\1140\ Calculated as e(^{0.427 * 0.06}) -1, where 0.427
is the coefficient reported in Hausman and Lavetti (supra note 590),
and 0.06 is the decline in the enforceability score in West
Virginia.
---------------------------------------------------------------------------

The ten-year present discounted value of the spending decreases
estimated by this analysis are presented in Table 4.

Table 4
----------------------------------------------------------------------------------------------------------------
Estimated spending reduction over ten years
Assumed (billions of dollars) assuming:
percent of -----------------------------------------------
physicians 2% Discount 3% Discount 7% Discount
covered (%) rate rate rate
----------------------------------------------------------------------------------------------------------------
Primary estimate (average magnitude 35 $90 $87 $74
enforceability change)......................... 61.9 160 153 131
75 194 186 159
Sensitivity analysis (partial extrapolation 35 257 247 211
approach)...................................... 61.9 455 437 373
75 552 529 459
----------------------------------------------------------------------------------------------------------------

Several effects of the final rule, including changes in capital
investment, new firm formation, and innovation, may possibly filter
through to consumer prices. Prices, therefore, may act as a summary
metric for the effects on consumers. The Commission notes, however,
that prices are an imperfect measure for the effect on consumers. For
example, increased innovation catalyzed by the final rule could result
in quality increases in products, which might increase prices (all else
equal), but nevertheless, consumers may be better off. New firm
formation may result in a broader set of product offerings, even if
prices are unaffected. Finally, some portion of this effect may
represent a transfer from physician practices to consumers. For all
these reasons, as well as to avoid double-counting (since prices may
reflect changes in innovation, investment, market structure, wages, and
other outcomes that are measured elsewhere), the Commission considers
evidence on prices to be corroborating evidence, rather than a unique
cost or benefit, though some portion of the total effect likely
represents a standalone benefit of the rule. The Commission also notes
increased competition brought about by the final rule will likely
increase

[[Page 38479]]

consumer quantity, choice, and quality. These effects are not
quantified in the literature.
To draw inferences to other industries, the Commission notes that
if the relationship between non-compete enforceability and prices
observed in healthcare markets holds in other industries, then under
the final rule prices would likely decrease, and product and service
quality would likely increase. Insofar as such effects may be driven by
increases in competition, as discussed in Part IV.B.3.b.iii, e.g.,
because of new firm formation, it is likely output would also increase.
However, the evidence in the literature addresses only healthcare
markets and therefore the Commission cannot say with certainty that
similar price effects would be present for other products and services.
In many settings, it is possible that increases in worker earnings
from restricting non-competes may increase consumer prices because of
higher firms' costs.\1141\ There is no empirical evidence that
enforceability of non-competes increase prices due to increased labor
costs. Additionally, greater wages for workers freed from non-competes
may result from better worker-firm matching, which could simultaneously
increase wages and increase productivity, leading to lower prices.
---------------------------------------------------------------------------

\1141\ 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).
---------------------------------------------------------------------------

The Commission notes that, as discussed in Part X.E, the estimates
of the effect of the rule on prices do not separately account for the
effect of senior executives who may continue to have non-competes under
the rule. The Commission is unable to monetize or quantify these
effects separately because there is no accounting in the applicable
literature of why, nor to which groups of workers, the observed price
effects occur. If such non-competes have a large impact, some of the
effects estimated in this section may occur further in the future than
described in this Part X.F.6.c.
7. Costs of the Final Rule
The Commission finds costs associated with the final rule,
including legal and administrative costs, and possibly costs related to
investment in human capital and litigation, as summarized in Table 1 in
Part X.E. The Commission notes the final analysis includes effects on
investment in human capital and litigation costs in this Part X.F.7
discussing costs associated with the final rule, though it is not clear
whether effects associated with investment in human capital are costs
or benefits, and it is not clear whether litigation costs would rise or
fall under the final rule.
a. Investment in Human Capital
The Commission estimates the ten-year present discounted value of
the net effect of the final rule on investment in human capital (i.e.,
worker training) ranges from a benefit of $32 billion to a cost of $41
billion. The Commission notes that this wide range represents
substantial uncertainty in the interpretation of the estimates that
exist in the economic literature. The estimates contained in this Part
X.F.7.a are separated along lines created by that uncertainty.
There are two primary sources of uncertainty. The first pertains to
the extent to which lost investment in human capital is ``core'' versus
``advanced.'' As discussed in Part IV.B.3.b.ii, when non-competes are
enforceable, fewer workers will be available due to decreased labor
mobility, including workers who would be a good skills match for a
particular job, as well as workers moving to new industries to avoid
triggering a potential non-compete clause violation. This may require
retraining of workers forced into a new field that would not otherwise
be necessary for an experienced worker within the same industry. The
departure of experienced workers from the industry also means firms
will be required to invest in the human capital of inexperienced
workers who replace them. This type of investment in training to
address a skills mismatch--which is referred to as the ``core''
training scenario--contrasts with what is referred to as the
``advanced'' training scenario, which is investment in training that
builds upon the productivity of workers who may already be experienced
in an industry. Insofar as reductions in investment in human capital
due to the final rule represent reductions in core investment, the rule
will save firms money and will additionally not require workers to
forgo time spent producing goods and services to train. Therefore, such
reductions would represent a benefit of the final rule. However,
insofar as reductions in investment in human capital from the final
rule represent reductions in advanced investment, there may be
productivity losses for workers. The estimates in the literature do not
allow the Commission to distinguish between the types of forgone human
capital investment in the final analysis. This final analysis therefore
separately estimates the effects assuming lost investment in human
capital is core and assuming it is advanced.
The second source of uncertainty pertains to the specific estimates
of the effect of non-compete enforceability on investment of human
capital. Starr (2019) estimates the differential effect of non-compete
enforceability on training in occupations which use non-competes at a
high rate versus those that use non-competes at a low rate but does not
estimate the absolute effect on investment across the workforce.
Therefore, this final analysis separately estimates the effects on
training under two different assumptions--that the increase in training
due to greater non-compete enforceability affects all workers, or only
workers in high-use occupations--to demonstrate how this uncertainty
affects the estimates.\1142\
---------------------------------------------------------------------------

\1142\ Whether this assumption yields an overestimate or
underestimate depends on what happens to training of workers in
occupations with a low-rate of non-competes use when the
enforceability of non-competes changes. If the effect of a change in
non-compete enforceability on workers in occupations that use non-
competes at a low rate is small, this assumption yields an
overestimate of the overall effect on training. If the effect on
those workers is large, it results in an underestimate.
---------------------------------------------------------------------------

The Commission notes that some of the estimates described in this
Part X.F.7 may overlap with estimates reported in other sections of the
regulatory analysis. For example, if decreased enforceability of non-
competes decreases investment in workers' human capital, and this
decreased investment would be reflected in lower wages for workers,
then the estimate of the wage increase resulting from the final rule
will already account for the extent to which decreased investment
decreases wages. That is, if investment were held constant, the
earnings increase associated with the final rule may be even larger.
i. Estimates Assuming Lost Investment in Human Capital Is Core Training
The first set of estimates assumes that all lost training is core.
This results in estimated effects of the final rule that represent
upper bounds on the benefits associated with the final rule's effect on
investment in human capital. In these scenarios, the final rule will
allow firms to hire experienced workers instead of needing to provide
costly training to workers new to the industry or a position. The
change in investment in core training brought about by the rule is
calculated as follows:

Effect of Decreased Investment in Core Training = Additional Output of

[[Page 38480]]

Workers Resulting From Less Time Spent Training + Reduced Direct
Outlays on Training
Additional Output of Workers Resulting From Less Time Spent Training
The first component is additional output of workers resulting from
less time spent on otherwise unnecessary training if they were better
matched with firm and industry. The change in the output of workers
from less time spent training because of the final rule is calculated
as follows:

Additional Output of Workers Resulting From Less Time Spent Training =
(Total # of Affected Workers) * (Percentage Point Decrease in Trained
Workers) * (Average Hours Spent Training Per Worker) * (Average Hourly
Output of Workers)

The Commission estimates the total number of affected workers as
101.1 million workers, assuming all workers are affected, and 45.3
million workers, assuming only workers in high-use occupations are
affected.\1143\ The percentage point decrease in trained workers is
estimated to be 0.4.\1144\ Average hours spent training per worker is
estimated to be 85 hours per year.\1145\ Average hourly output of
workers is estimated to be $60.77.\1146\
---------------------------------------------------------------------------

\1143\ Excluding States which broadly prohibit non-competes (CA,
ND, OK, and MN), the BLS reports employment of 126.4 million
individuals in May 2022 (the most recent year with occupation-
specific data available), 56.6 million of whom work in occupations
that use non-competes at a high rate, as defined in Starr, supra
note 445; see https://www.bls.gov/oes/tables.htm. The Commission
estimates that 80% of employed individuals are covered by the
Commission's jurisdiction (see Part X.F.4.a), resulting in 101.1
million covered workers, 45.3 million of whom work in high-use
occupations. The Commission notes that these estimates include
public employment, as data on occupation-specific employment at the
State level are not available by firm ownership. Occupation-specific
employment data are necessary to split workers into low- and high-
use occupations. Workers including those estimated to be bound by
non-competes and those who are not are included in this estimate,
since the empirical estimate of the increase in training reflects a
sample representative of the full workforce, not just those bound by
non-competes.
\1144\ The coefficient reported by Starr (supra note 445),
0.77%, corresponds to a one standard deviation increase on Starr's
scale, and represents the percentage point effect on the percentage
of workers trained (rather than the amount of training they
receive). Rescaling to a scale of zero to one, a one standard
deviation increase is equal to a change in the enforceability
measure of 0.17. Since estimates for earnings and innovation use a
mean enforceability change of 0.081 on a scale of zero to one, the
coefficient in Starr is rescaled to 0.77 * (0.081/0.17) = 0.364%,
which represents the change in the fraction of covered workers
receiving training due to an average magnitude change of 0.081.
\1145\ 85 hours per year is calculated as 5.7 weeks per year *
20.1 hours per week * 73.9%, where 73.9% is the percentage of
training that is firm-sponsored (the type of training likely to be
affected by the final rule). These three estimates (5.7 weeks per
year, 20.1 hours per week, and 73.9% of training being firm
sponsored) are estimated in Harley J. Frazis & James R. Spletzer,
Worker Training: What We've Learned from the NLSY79, 128 Monthly
Lab. Rev. 48 (2005).
\1146\ The Commission assumes that the average hourly output of
workers is twice their average earnings and estimates average
earnings to be $30.38 per hour, which is the average hourly earnings
for workers in training ages 22-64 currently holding one job in the
Survey of Income and Program Participation for all waves from 1996
to 2008. The dollar value is adjusted to 2023 dollars.
---------------------------------------------------------------------------

The total additional output due to forgone training time is
therefore calculated as $1.9 billion per year when all workers are
assumed to be affected, or $0.8 billion per year when only workers in
high-use occupations are assumed to be affected.
Reduced Direct Outlays on Human Capital Investment
The second component of the economic effect calculated in the final
analysis is reduced direct outlays on human capital investment--or the
out-of-pocket cost to firms for training. The change in direct outlays
on human capital investment resulting from the rule is calculated as
follows:

Reduced Direct Outlays = [(Total Direct Outlays)/(# of Workers
Receiving Training)] * [(Total # of Affected Workers) * (Percentage
Point Decrease in Trained Workers)]

Total direct outlays on human capital investment are estimated to
be $105 billion in 2023 dollars.\1147\ The estimated number of workers
receiving training is 23.5 million workers.\1148\ The Commission
estimates the total number of affected workers as 101.1 million
workers, assuming all workers are affected, and 45.3 million workers,
assuming only workers in high-use occupations are affected.\1149\ The
percentage point decrease in trained workers is estimated to be
0.4.\1150\
---------------------------------------------------------------------------

\1147\ 2022 Training Industry Report, Training Magazine (Nov.
2022) at 17.
\1148\ Calculated as 15.8% * 148.9 million, where 15.8% is the
percentage of workers who receive training, according to Frazis &
Spletzer supra note 1145 at 48. 148.9 million is the estimated
number of workers in the U.S. in May 2022 according to https://www.bls.gov/oes/tables.htm. Note that all workers are included in
this estimate (not just workers in States which enforce non-
competes) because the estimate of training expenditures also covers
all workers.
\1149\ Excluding States which broadly prohibit non-competes (CA,
ND, OK, and MN), the BLS reports employment of 126.4 million
individuals in May 2022 (the most recent year with occupation-
specific data available), 56.6 million of whom work in occupations
that use non-competes at a high rate, as defined in Starr (supra
note 445) (see https://www.bls.gov/oes/tables.htm). The Commission
estimates that 80% of employed individuals are covered by the
Commission's jurisdiction (see Part X.F.4.a), resulting in 101.1
million covered workers, 45.3 million of whom work in high-use
occupations. See supra note 1143.
\1150\ As discussed in Part X.F.7.a.i.
---------------------------------------------------------------------------

This calculation results in annual cost savings of $1.6 billion,
assuming the training rates of workers in all occupations are affected
and $0.7 billion assuming the training rates of workers only in high-
use occupations are affected. The ten-year present value effects of the
final rule on investment in human capital, assuming that lost
investment is core investment, discounted at 2%, 3%, and 7% and
separately assuming effects on workers in all occupations versus just
workers in occupations that use non-competes at a high rate, are
presented in the first two rows of Table 5.
ii. Estimates Assuming Lost Investment in Human Capital Is Advanced
Training
The second set of estimates of the effects on human capital
investment in the final analysis assumes all training is advanced. The
Commission begins with the same approach (calculated in Part X.F.7.a.i)
to estimate the direct gain in output of workers and reduced direct
outlays from foregone advanced human capital investment because such
investment is costly for firms and results in decreased time spent on
productive activities by workers, regardless of whether the investment
is core or advanced. The major difference is that the Commission nets
out an additional component which represents lost long-term
productivity of workers caused by lost investment in their human
capital. The Commission nets out this additional component based on the
assumption that advanced human capital investment results in some
increased long-term productivity in workers (because it assumes that
firms would not otherwise make such a costly investment). This results
in estimated effects of the final rule that represent upper bounds on
the costs associated with changes in investment in human capital.
Therefore, the estimated effect of the rule on advanced human capital
investment is calculated as follows:

Effect of Decreased Investment in Advanced Training = Additional Output
of Workers Resulting from Less Time Spent Training + Reduced Direct
Outlays on Training-Lost Output Resulting from Foregone Advanced
Training

The first two components--additional output of workers due to less
time spent training and reduced direct outlays on training--are
calculated in Part X.F.7.a.i. The lost output of workers due to lost
investment in their human

[[Page 38481]]

capital due to the rule in each year is calculated as follows:

Lost Output from Lost Investment in Human Capital = (Total # of
Affected Workers) * (Percentage Point Decrease in Trained Workers) *
(Average Hourly Output of Workers) * (Average Hours Worked per Year) *
(% Productivity Loss)

The Commission estimates the total number of affected workers as
101.1 million workers, assuming all workers are affected, and 45.3
million workers, assuming only workers in high-use occupations are
affected.\1151\ The percentage point decrease in trained workers is
estimated to be 0.4.\1152\ Average hourly output of workers is
estimated to be $60.77.\1153\ The average number of hours worked per
year is 1,784.\1154\ The Commission assumes the percent productivity
loss to be 6.4%.\1155\
---------------------------------------------------------------------------

\1151\ Excluding States which broadly prohibit non-competes (CA,
ND, OK, and MN), the BLS reports employment of 126.4 million
individuals in May, 2022 (the most recent year with occupation-
specific data available), 56.6 million of whom work in occupations
that use non-competes at a high rate, as defined in Starr (Id.) (see
https://www.bls.gov/oes/tables.htm). The Commission estimates that
80% of employed individuals are covered by the Commission's
jurisdiction (see Part X.F.4.a), resulting in 101.1 million covered
workers, 45.3 million of whom work in high-use occupations. See
supra note 1143.
\1152\ As discussed in Part X.F.7.a.i.
\1153\ The Commission assumes that the average hourly output of
workers is twice their average earnings and estimates average
earnings to be $30.38 per hour, which is the average hourly earnings
for workers in training ages 22-64 currently holding one job in the
Survey of Income and Program Participation for all waves from 1996
to 2008. The dollar value is adjusted to November 2023 dollars using
https://www.bls.gov/data/inflation_calculator.htm.
\1154\ See https://fred.stlouisfed.org/release/tables?rid=50&eid=6462#snid=6449, which reports average weekly hours
and overtime of all employees on private nonfarm payrolls by
industry sector, seasonally adjusted. The reported value, 34.3, is
multiplied by 52 to get annual hours worked.
\1155\ This figure is the midpoint of two estimates in the
literature: Harley Frazis & Mark A. Loewenstein, Reexamining the
Returns to Training: Functional Form, Magnitude, and Interpretation,
40 J. Hum. Res. 453 (2005) [3.7%] and Gueorgui Kambourov, Iourii
Manovskii, & Miana Plesca, Occupational Mobility and the Returns to
Training, 53 Can. J. of Econ. 174 (2020) [9.1%].
---------------------------------------------------------------------------

In the first year, this yields a total estimate of lost output from
lost investment in human capital of $1.5 billion or $0.7 billion (under
the separate assumptions of all workers being affected and only high-
use occupation workers being affected). Since the returns to advanced
training persist to some extent over time, in the second year, returns
to advanced training from the first year are assumed to depreciate by
20%,\1156\ and the calculation is redone according to the depreciated
return to advanced training. In the third year, training from the first
year again depreciates, and so on until the tenth year (the end of the
horizon considered).
---------------------------------------------------------------------------

\1156\ There is no perfect estimate of the rate of human capital
depreciation in the economic literature. Studies typically make
assumptions they deem reasonable to estimate this rate, with 20%
representing neither the low end nor the high end of the range of
such assumptions. See, e.g., Rita Almeida & Pedro Carneiro, The
Return to Firm Investments in Human Capital, 16 Lab. Econs. 97
(2009), who assume that the human capital depreciation rate may
range from 5% to 100%.
---------------------------------------------------------------------------

Additionally, in the second year, a new round of advanced training
is forgone. An additional $1.5 billion or $0.7 billion in lost output
is therefore incurred in the second year under the final rule, and the
depreciation calculations are again repeated for the new round of
advanced training until year ten. New rounds of advanced training are
forgone in each year through the tenth. Lost output from lost advanced
training in the tenth year is therefore the sum of a depreciated return
to training from each of the prior nine years plus lost output from
lost training in the tenth year itself.
To arrive at estimates of overall lost productivity due to lost
advanced training, lost productivity in each year (separately due to
lost training in each prior year) is added together. Finally, lost
productivity due to lost advanced training is subtracted from the two
components calculated in Part X.F.7.a.i (additional output of workers
from less time spent training and reduced direct outlays). The ten-year
discounted effects of the final rule on investment in human capital,
assuming lost investment is advanced training investment, discounted at
2%, 3%, and 7%, and separately assuming workers in all occupations
versus just workers in occupations that use non-competes at a high
rate, are presented in the last two rows of Table 5.

Table 5
----------------------------------------------------------------------------------------------------------------
2% Discount 3% Discount 7% Discount
rate rate rate
----------------------------------------------------------------------------------------------------------------
Estimated discounted ten-year effect assuming lost training is $32 $31 $27
core and workers in all occupations are affected...............
Estimated discounted ten-year effect assuming lost training is 14 14 12
core and workers in high-use occupations are affected..........
Estimated discounted ten-year effect assuming lost training is -41 -39 -31
advanced and workers in all occupations are affected...........
Estimated discounted ten-year effect assuming lost training is -19 -17 -14
advanced and workers in high-use occupations are affected......
----------------------------------------------------------------------------------------------------------------

Note: All values in billions of 2023 dollars. Negative values
represent net cost estimates, while positive values represent net
benefit estimates.

As discussed in Part X.E, the Commission notes that the estimates
in this Part X.F do not account for senior executives who continue to
work under non-competes under the rule. If the effects on training are
due to effects on such senior executives, then the effects discussed
herein would occur further into the future than discussed.
b. Legal and Administrative Costs Related to Compliance
The Commission finds that firms with existing non-competes will
have related legal and administrative compliance costs as a result of
the final rule. The Commission quantifies and monetizes these costs and
conducts related sensitivity analyses.
i. Legal Costs
The Commission finds one-time legal costs related to firms'
compliance with the final rule are estimated to total $2.1-$3.7
billion. The Commission estimates two main components of legal costs:
(1) updating existing employment agreements or terms to ensure new hire
employment terms comply with the final rule; and (2) advising employers
about potential operational or contractual changes for workers who will
no longer have enforceable non-competes. The latter includes
determination of workers whose non-competes are no longer enforceable

[[Page 38482]]

under the rule, as opposed to those that fall under the exemption for
senior executives.
For the first component, firms must consider what changes to their
contractual practices are needed to ensure that incoming workers are
not offered or subject to non-competes and what revisions to human
resources materials and manuals are needed to ensure they are not
misused on a forward-going basis. Firms may respond by removing
specific non-compete language from standard contracts and human
resources (H.R.) materials and manuals used for future employees. The
second component involves strategic decisions and changes in response
to the final rule. For example, firms may adjust other contractual
provisions such as NDAs. This legal work is not mandated or required by
the rule; it would be undertaken only by the subset of firms and
workers for whom firms conclude that such alternatives would be
desirable. Additionally, such adjustments are likely unnecessary for
senior executives whose non-competes continue to be enforceable under
the rule. Therefore, this component additionally involves identifying
senior executives whose existing non-competes are unaffected. For any
such legal work, firms may use in-house counsel or outside counsel.
Legal costs are therefore calculated as follows:

Legal Costs = Modify Standard Contract Language/H.R. Materials and
Manuals Costs + Revise Contractual Practices Costs

One component of the legal cost will be due to the modification of
standard contracts to remove prohibited language regarding non-competes
which is calculated as follows:

Modify Standard Contract Language/H.R. Materials and Manuals = (Average
Hours Necessary for Modification) * (Cost per Hour) * (# of Affected
Businesses)

The Commission estimates that, on average, modifying standard
contract language and H.R. materials and manuals would take the
equivalent of one hour of a lawyer's time.\1157\ The estimated cost per
hour is $134.62 in 2023 dollars,\1158\ and the number of affected
businesses is 3.4 million.\1159\ This results in a total one-time
modification cost of $457 million.
---------------------------------------------------------------------------

\1157\ This process would likely be straightforward for most
firms (i.e., simply not using non-competes or removing one section
from a boilerplate contract). There may be firms for which it is
more difficult and requires more time. This analysis uses an average
time spent of one hour, which conservatively represents the average
time spent to do so, and accounts for variation across firms.
\1158\ According to BLS, the median wage for a lawyer was $65.26
per hour in 2022, or $67.31 in 2023 dollars. See https://www.bls.gov/ooh/legal/lawyers.htm. As in Part X.F.7.a, the
Commission doubles this number to reflect the lost productivity of
the worker.
\1159\ Calculated as 6.88 million * 0.494. Here, 6.88 million is
the number of establishments in the U.S. (excluding California,
North Dakota, Oklahoma, and Minnesota, where non-competes are
broadly unenforceable) in 2021 (the most recent year with data
available): see https://www.census.gov/data/tables/2021/econ/susb/2021-susb-annual.html. This value is multiplied by 49.4%, the
percentage of firms using non-competes in the U.S. according to
Colvin & Shierholz (supra note 65).
---------------------------------------------------------------------------

Another component of legal costs relates to any firm-level revision
to their contractual practices, including identification of senior
executives, which is calculated as follows:

Revise Contractual Practices Costs = (Average Hours Necessary to Update
Contractual Practices) * (Cost per Hour) * (# of Affected Businesses)
The Commission estimates the average firm employs the equivalent of
four to eight hours of a lawyer's time to update its contractual
practices and determine which employees may fall under the final rule's
exemption.\1160\ The Commission estimates the cost of a lawyer's time
to be $134.62 as discussed in this Part X.F.7.b.i. The number of
affected businesses is estimated to be 2.9 million.\1161\
---------------------------------------------------------------------------

\1160\ The Commission emphasizes that this is an average to
underscore there would likely be large differences in the extent to
which firms update their contractual practices. Many firms,
including those that use non-competes 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
sensitive information, may opt to do nothing. There is evidence
indicating firms that use non-competes are already using other types
of restrictive employment provisions: Balasubramanian et al. (2024)
find that 95.6% of workers with non-competes are also subject to an
NDA, 97.5% of workers with non-competes are also subject to a non-
solicitation agreement, NDA, or a non-recruitment agreement, and
that 74.7% of workers with non-competes are also subject to all
three other types of provisions. See Balasubramanian, Starr, &
Yamaguchi (supra note 74). Other firms may employ several hours or
multiple days of lawyers' time to arrive at a new contract. The
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-competes 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-competes 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.
\1161\ Calculated as 5.91 million * 0.494. Here, 5.91 million is
the number of firms in the U.S. (excluding California, North Dakota,
Oklahoma, and Minnesota, where non-competes are broadly
unenforceable) in 2021 (the most recent year with data available):
see https://www.census.gov/data/tables/2021/econ/susb/2021-susb-annual.html. This value is multiplied by 49.4%, the percentage of
firms using non-competes in the U.S. according to Colvin & Shierholz
(supra note 65). The Commission notes that this analysis assumes
that decisions regarding protection of sensitive information and
contract updating are made at the firm (a collection of
establishments under shared ownership and operational control),
rather than establishment, level, since sensitive information is
likely shared across business establishments of a firm. This
explains the difference between the number of businesses used here
(2.9 million) versus the number used to calculate the cost of
contract revision (3.4 million).
---------------------------------------------------------------------------

Under the assumption that the average firm that uses a non-compete
employs the equivalent of four to eight hours of a lawyer's time, the
total one-time expenditure on revising contractual practices would
range from $1.6 billion (assuming four hours are necessary) to $3.1
billion (assuming eight hours are necessary).
Some commenters indicated that some firms may use outside counsel,
which is more costly to firms, to remove non-competes from contracts of
incoming workers and to update contractual practices. While commenters
did not provide data to support this assertion, as a sensitivity
analysis, the Commission replaces the estimate of the hourly earnings
of a lawyer with an estimate of the cost of outside counsel ($483 per
hour), conservatively overestimating costs by using the estimated rate
of a tenth-year lawyer.\1162\ Under this sensitivity analysis, the
Commission estimates the total cost of ensuring that incoming workers'
contracts do not contain non-competes would be $1.6 billion and the
cost of updating contractual practices would be $5.6-$11.3 billion.
Some commenters stated that the hourly cost of lawyers' time may be
even greater than the value assumed in the sensitivity analysis ($483
per hour). The Commission finds that the sensitivity analysis assuming
a rate of $438 per hour provides a reasonable estimate of the costs
under the assumption that outside counsel would be used, and that
higher rates (e.g., $749 per hour, as stated by one commenter) are
unreasonably high, especially as an average across many firms.
---------------------------------------------------------------------------

\1162\ This estimate is drawn from the Fitzpatrick Matrix. See
supra note 1087 and accompanying text. Note that the Commission does
not double this number to reflect productivity, since the cost of
outside counsel's time likely already reflects the productivity of
that worker.
---------------------------------------------------------------------------

The Commission believes the exclusion of existing non-competes with
senior executives could result in lower net legal costs than the
Commission's estimate. First, for senior executives who currently work
under a non-compete, firms will have a longer time period during which
they may update

[[Page 38483]]

contractual practices. For example, for a senior executive who does not
change jobs for 5 years after the compliance date of the final rule,
the firm will have 5 years to determine how it wants to update
contractual practices for an incoming senior executive who replaces the
current one. Delaying costs in this way reduces their economic effect
due to discounting. Additionally, if a senior executive remains in
their job for over ten years, then the cost of updating contractual
practices would fall outside the scope of the Commission's estimates
altogether.
At the same time, when the final rule goes into effect, firms will
need to identify senior executives whose existing non-competes are not
covered by the final rule in order to determine which contractual
practices they may need to update immediately. The Commission does not
include a separate legal cost for identifying senior executives and
estimates the range of attorney time for revising contractual practices
under the final rule, which encompasses identifying senior executives,
to be the same as the estimate for the proposed rule--4 to 8 hours.
This is in part because the strategic considerations involved in
revision of contractual practices will likely include such
identification. Moreover, the Commission believes the identification of
such workers will not be difficult or time consuming. Firms can use the
compensation threshold to rule out the vast majority of workers from
the exemption and the definition of senior executive in Sec. 910.1
includes clear duties to determine whether any executives who meet the
compensation threshold are senior executives under the final rule. It
also provides that the CEO and/or president of a firm is a senior
executive without the need to conduct any duties analysis.
Another reason the Commission does not add to its estimate of 4 to
8 hours to account for identification of senior executives is that
excluding existing non-competes with senior executives would otherwise
decrease this estimate, likely to a greater degree than the cost of
identifying senior executives. As noted, a significant amount of time
spent by attorneys as estimated in the NPRM was intended to account for
revising contractual practices for more complex agreements. Commenters
noted that employment terms with senior executives are often
individualized so that attorney and firm time would be spent on their
agreements regardless of whether a non-compete may be included. Since
firms use non-competes for senior executives at a high rate,\1163\
revising contractual practices for senior executives may constitute a
significant portion of the overall estimate of the cost of revising
contractual practices, and given their exclusion, the Commission finds
that the cost estimate for revising contractual practices likely
represents an overestimate overall. The Commission does not, however,
reduce its final cost estimates to account for this change. As noted in
Part X.D, this final analysis generally does not account for the
temporal difference in coverage of non-competes for senior executives.
The same is true here and, to be consistent across the estimates in
this final regulatory analysis, the Commission does not estimate a
reduction in legal cost but notes potential bases for differences in
estimates where relevant.
---------------------------------------------------------------------------

\1163\ More than 60%; see Part I.B.2.
---------------------------------------------------------------------------

Overall, the Commission acknowledges that there may be substantial
heterogeneity in the costs for individual firms; however, these numbers
may be overestimates. For firms whose costs of removing non-competes
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.
ii. Administrative Costs for Notification Requirement
The Commission finds the total one-time costs for implementing the
notification requirement are estimated to be $94 million. These costs
relate to the provision of notice to workers other than senior
executives as required by Sec. 910.2(b). Notably, firms may use the
model notice language provided by the Commission, and the form of this
model notice enables firms to choose to send the notice to workers
regardless of whether they have non-competes as described in Part IV.E.
The notice provision cost is calculated as follows:

Notice Provision Cost = Digital Notice Provision Costs + Mailed Notice
Provision Costs

The first component, digital notice provision costs, are calculated
as follows:

Digital Notice Provision Costs = (Average Hours Necessary to Compose
and Send Notice) * (Cost per Hour) * (# of Affected Businesses)

The Commission estimates that 20 minutes (\1/3\ of one hour) are
necessary for a human resources specialist to compose and send this
notice in a digital format to all of a firm's workers who are not
senior executives \1164\ and applicable former workers, on
average.\1165\ The cost per hour is estimated to be $63.70.\1166\ The
estimated number of affected businesses is 3.4 million.\1167\ The
digital notice provision cost is therefore estimated to be $72 million.
---------------------------------------------------------------------------

\1164\ The Commission notes that identification of such workers
is accounted for in revision of contract costs calculated in Part
X.F.7.b.i.
\1165\ See, e.g., the supporting statement for the Notice of
Rescission of Coverage and Disclosure Requirements for Patient
Protection under the Affordable Care Act (CMS-10330/OMB Control No.
0938-1094) at 5, which estimates time spent customizing and sending
similar notice. Available at https://www.reginfo.gov/public/do/DownloadDocument?objectID=119319401.
\1166\ According to BLS, the median wage for a human resources
specialist was $30.88 per hour in 2022, which is equivalent to
$31.85 in November 2023 dollars, updated for inflation using https://www.bls.gov/data/inflation_calculator.htm. See https://www.bls.gov/ooh/business-and-financial/human-resources-specialists.htm. As in
Part X.F.7.a, the Commission doubles this number to reflect the lost
productivity of the worker.
\1167\ As calculated in Part X.F.7.b.i., the Commission
conservatively assumes that each establishment--a physical location
of a business--must engage in its own communication, and that each
establishment has digital contact information for at least one
worker, and will therefore engage in digital notice provision.
---------------------------------------------------------------------------

Businesses may not have digital contact information for some
workers. The cost of mailed notice provision would include the cost of
postage and the cost of a human resource professional's time. Mailed
notice provision costs are therefore calculated as follows:

Cost of Mailed Notice Provision = Number of Workers with Non-competes
Receiving Physical Notice * (Cost of One Printed Page + Mailing Cost +
Cost of Human Resource Professional's Time)

The number of workers with non-competes receiving physical notice
is the total number of covered workers (101.1 million; see Part
X.F.7.a.i) times the percentage of workers who have non-competes
(18.1%) times the percentage of workers who require mailed notice
(assumed to be 66% of workers \1168\), for a total of 12.3 million
workers. The Commission notes that the percentage of workers who
require mailed notice is likely a substantial overestimate, since it is
estimated based on the percentage of individuals who receive health
information digitally. The Commission believes employers are more
likely to have digital means of providing the notice to their current
workers especially, but also to their

[[Page 38484]]

former workers. The Commission adopts this estimate as an upper bound.
---------------------------------------------------------------------------

\1168\ See infra note 1165 (CMS Supporting Statement assumes 66%
of workers require mailed notice from their health insurance
companies).
---------------------------------------------------------------------------

The cost per worker is estimated as 5 cents for one printed page
plus mailing cost of 70 cents plus one minute of an HR professional's
time, at $63.70 per hour, for a total of $1.81 per notice. The overall
cost of mailed notice provision is therefore estimated to be $22
million. The total cost of the notice provision is therefore $94
million.
Commenters stated that it may take two hours of a legal
professional's time to provide notice. The Commission finds this
estimated time to be a substantial overestimate and reiterates that
this analysis incorporates a legal professional's time necessary to
identify senior executives and to strategize updates to firm
contractual practices into its estimate of legal costs in X.F.7.b.i.
The model notice language alleviates the need for a legal
professional's time and the Commission finds it unreasonable to assume
such a notice would need to actually be sent by a legal professional.
While firms may opt to use original language drafted by an attorney to
notify workers, the Commission notes that the model language satisfies
the notification requirement and therefore does not include the cost of
original language as a regulatory cost estimate in the final analysis.
However, under these assumptions, the cost of providing the notice is
estimated at $5.2 billion.
The Commission notes that communication is conducted at the
establishment level and time costs do not vary based on the number of
existing senior executives with non-competes that the final rule does
not cover. While establishments with only senior executives with non-
competes would not incur any notification costs because the final rule
does not cover existing non-competes with senior executives, without an
estimate of the percentage of firms for which this is true, the
Commission conservatively assumes that all establishments estimated to
use non-competes engage in this notification.
Legal and administrative costs are summarized in Table 6. The
Commission notes that, since all costs are assumed to be borne in the
first year, there is no discounting applied and therefore only one
estimate for each analysis is presented.

Table 6
------------------------------------------------------------------------
$ billions
------------------------------------------------------------------------
Cost of modifying standard contract language/H.R. materials and manuals
------------------------------------------------------------------------
Primary............................................. $0.5
Sensitivity analysis (outside counsel cost of $483). 1.6
------------------------------------------------------------------------
Cost of reviewing and revising contractual practices
------------------------------------------------------------------------
Primary, four hours................................. 1.6
Primary, eight hours................................ 3.1
Sensitivity analysis (four hours, outside counsel 5.6
cost of $483)......................................
Sensitivity analysis (eight hours, outside counsel 11.3
cost of $483)......................................
------------------------------------------------------------------------
Administrative Costs for Notification Requirement
------------------------------------------------------------------------
Primary............................................. 0.09
------------------------------------------------------------------------

c. Litigation Effects
Theoretically, under the final rule, certain litigation costs may
fall. Litigation related to non-competes may decrease because the final
rule creates bright line rules, reducing uncertainty about the
enforceability of non-competes. On the other hand, litigation costs may
rise if firms turn to litigation to protect trade secrets and if that
litigation is more expensive than enforcing (or threatening to enforce)
non-competes, and/or if firms elect to litigate over what constitutes a
non-compete.
The Commission finds there are plausible but directionally opposite
theoretical outcomes for the different types of litigation that may be
affected by the final rule. In fact, some recent evidence suggests
trade secret litigation falls as a result of bans on non-competes
taking effect.\1169\ The Commission finds no evidence increased
litigation will result in increased costs associated with the final
rule. The Commission cannot quantify or monetize the overall effect as
a cost or benefit, but estimates the magnitude of any change would be
sufficiently small as to be immaterial to the Commission's assessment
of whether the benefits of the rule justify its costs.
---------------------------------------------------------------------------

\1169\ Greenwood, Kobayashi, & Starr, supra note 757. The
Commission notes that this study supplements--but is not necessary
to support--its finding that no evidence supports the conclusion
that litigation costs will increase under the final rule. That
finding is based on the Commission's expertise and the rulemaking
record, including relevant comments. This study was published after
the close of the comment period.
---------------------------------------------------------------------------

8. Transfers
As discussed in Part X.F.6.a, some portion of the earnings effect
associated with the final rule represents a transfer: while workers may
earn more with greater productivity resulting from the rule, some of
their earnings increase may result from enhanced bargaining power,
which constitutes a transfer from firms to workers.
Similarly, some portion of the price effects associated with the
final rule represents a transfer: while consumers may achieve greater
surplus with increased competition, the price decrease itself is
partially a transfer from firms to consumers.
9. Distributional Effects
The Commission finds several distributional effects associated with
the final rule, including those associated with firm expansion and
formation, distributional effects on workers, and labor mobility, as
summarized in Table 1 in Part X.E.
a. Firm Expansion and Formation
When non-competes are prohibited, new firms may enter the market
but incumbent firms may opt to invest less in capital, leaving the
overall effect on total capital investment unclear. Similarly, while
new firms may enter the market, it is theoretically possible that
incumbent firms may exit the market without the ability to use non-
competes (though no evidence of this

[[Page 38485]]

effect exists) or contract. Research finds that decreased non-compete
enforceability increases new firm formation by 2.7% and may have no
effect on capital investment or may decrease capital investment at
incumbent firms by up to 7.9%. To the extent there may be a decrease in
capital investment at incumbent firms as a result of the final rule, it
may represent a shift in productive capacity from incumbent firms to
new firms. As discussed in Part IV.D, another purported justification
for non-competes is that they allow firms to protect trade secrets,
which in theory might allow firms to share those trade secrets more
freely with workers, and so improve productivity. However, no empirical
evidence substantiates this claim or would allow quantification or
monetization of this effect.
Empirical evidence has studied parts, but not all, of the
contrasting effects on capital investment and new firm formation.
Studies have examined effects of non-competes on capital investment by
large, publicly traded firms, who are likely incumbents.\1170\ However,
no study examines the effect of capital investment economy-wide, nor
does any study specifically examine capital investment for new firms.
Similarly, studies have examined new firm formation, but no studies
look at firm exit among incumbents.
---------------------------------------------------------------------------

\1170\ Jeffers, supra note 450; Johnson, Lipsitz, & Pei, supra
note 526.
---------------------------------------------------------------------------

It is thus not possible to measure the benefit and costs of the
full economy-wide effects on firm expansion and formation. The
calculations that may be performed using available data will
necessarily omit components of the tradeoff. The final analysis
therefore quantifies the effects that the literature has examined but
does not monetize those effects.
i. Capital Investment
Research finds that capital investment for incumbent firms at the
firm level may decrease under the final rule for the economy as a
whole, though effects for high-tech industries may be positive,
negative, or close to zero. The Commission notes that the capital
investment discussed in this Part X.F.9 relates to tangible capital,
does not reflect capital investment by newly-formed firms, and is
distinct from R&D spending, which is discussed in Part X.F.6.b.
One estimate of the overall effect of non-compete enforceability on
capital investment by incumbent firms, which some commenters pointed
to, is estimated with substantial uncertainty and is statistically
indistinguishable from zero (i.e., statistically insignificant): a
decline in capital investment of 7.9% for the average incumbent
publicly-traded firm.\1171\ Another study finds no effect on capital
investment, but includes the use of non-competes in its estimating
procedure, leading to concerns that the finding does not support a
causal interpretation, as explained in Part IV.A.2.\1172\
---------------------------------------------------------------------------

\1171\ The increase, 7.9%, is calculated as 0.00317/0.04, where
0.00317 is the reported coefficient (Table 4, Panel A, Column 1),
and 0.04 is the mean investment per million dollars of assets ratio,
across all firms (Table 2, Panel C). Due to statistical uncertainty,
the estimate cannot rule out (with 95% confidence) values ranging
from a gain in capital investment equal to 6.7% to a loss in capital
investment equal to 22.5% for the average firm. See Jeffers, supra
note 450.
\1172\ Shi, supra note 84.
---------------------------------------------------------------------------

The Commission notes two additional estimates specific to high-tech
or knowledge firms: a decline in capital investment among incumbent
publicly-traded firms of 34%-39% (an estimate which corresponds to the
estimate of a decline of 7.9% when all publicly traded firms are
examined),\1173\ and an increase in capital investment of 3.1% for the
average publicly-traded high-tech firm (an estimate that is
statistically insignificant).\1174\ The Commission notes the study
finding an increase in capital investment of 3.1% uses a more granular
measure of non-compete enforceability than the study finding a decrease
of 34%-39%, and the Commission therefore gives it more weight.\1175\
---------------------------------------------------------------------------

\1173\ Jeffers, supra note 450. The estimate pertains to firms
in Technology and Professional, Scientific, and Technical Services.
\1174\ Johnson, Lipsitz, & Pei, supra note 526. The estimate
pertains to firms classified as high-technology by the National
Science Foundation: see https://nsf.gov/statistics/seind14/index.cfm/chapter-8/tt08-a.htm.
\1175\ The two studies are otherwise identical in the extent to
which they satisfy the criteria for assessing empirical research
laid out in Part IV.A.2.
---------------------------------------------------------------------------

The Commission reiterates that any change in investment at the firm
level does not necessarily mean investment would change at the market
level, since increased firm entry may also increase the employed
capital stock and investment in that capital stock, which may offset
any possible decreases in investment for incumbent firms. These
potential positive offsetting effects are not captured in the estimates
herein.
ii. New Firm Formation
Research finds that new firm formation increases by 2.7% across the
economy due to decreases in non-compete enforceability.\1176\ The
Commission also notes an estimate specific to high-tech industries:
that decreases in non-compete enforceability led to a 3.2% increase in
the establishment entry rate.\1177\
---------------------------------------------------------------------------

\1176\ Jeffers (supra note 450) does not report an effect for
the economy as a whole. However, Jeffers reports coefficients of -
0.103 for the effect of increased non-compete enforceability on
firms founded per million people in knowledge-sector industries and
0.008 for non-knowledge sector industries, with respective sample
sizes of 78,273 and 190,665 (Table 9, Panel A, Columns 1 and 2).
Using the sample sizes as weights, the Commission estimates a
weighted average of these coefficients of -0.024. Applying this
estimate to the average number of firms founded per million people
(Table 2, Panel B) results in an estimated increase in new firm
formation of 2.7%. The Commission did not calculate the effect for
the economy as a whole in the NPRM. The NPRM reported that increases
in non-compete enforceability decreased new firm entry by ``0.06
firms per million people (against a mean of 0.38) for firms in the
knowledge sector,'' NPRM at 3526, which was consistent with the
version of the Jeffers study cited in the NPRM. The final rule cites
the updated version of the Jeffers study, published in 2024. The
Commission notes that estimation of the uncertainty in the combined
estimate requires information on the covariance of the estimated
coefficients, which is not reported in Jeffers' study. See Jeffers,
supra note 450.
\1177\ Johnson, Lipsitz, & Pei, supra note 526. The estimate
pertains to firms classified as high-technology by the National
Science Foundation: see https://nsf.gov/statistics/seind14/index.cfm/chapter-8/tt08-a.htm.
---------------------------------------------------------------------------

The benefits associated with new firm entry may include added
surplus for consumers (e.g., from increased competition) or workers
(from expanded labor demand). However, the Commission is unable to
quantify those beneficial effects, though some may be captured by the
effect on prices discussed in Part X.F.6.c. Nor is it able to quantify
whether existing firms might exit or contract in response to this new
firm entry (i.e., whether the new firms' output would be wholly
additive or crowd out some amount of existing firms' output). New firm
entry may also drive some of the innovative effects of the final rule
if new firms are engaging in substantial innovation.
Overall, the Commission finds that the rule will likely result in a
2.7% increase in new firm formation and is unable to quantify the net
effects of this on the productive capacity of the economy. Benefits
from new firm entry and possible costs from decreased capital
investment may offset each other but the degree to which this happens
is not quantifiable. The effect of the final rule on firm expansion and
formation likely results in productive capacity shifting from incumbent
firms to new firms. Consistent with findings in Part IV.B.3.b.iii,
productive capacity shifting from incumbent to new firms may decrease
concentration, possibly contributing to decreases in prices, as
discussed in Part X.F.6.c.

[[Page 38486]]

b. Distributional Effects on Workers
The Commission finds that the final rule may reduce gender and
racial earnings gaps, may especially encourage entrepreneurship among
women, and may mitigate legal uncertainty for workers, especially
relatively low-paid workers.
Specifically, the Commission finds gender and racial wage gaps may
close significantly under a nationwide prohibition on non-competes,
according to economic estimates.\1178\ Another estimate indicates that
the negative effect of non-compete enforceability on within-industry
entrepreneurship is significantly greater for women than for men.\1179\
---------------------------------------------------------------------------

\1178\ Johnson, Lavetti, & Lipsitz, supra note 388 at 38.
\1179\ Marx (2022), supra note 524 at 8.
---------------------------------------------------------------------------

The Commission finds the rule may be especially helpful for
relatively low-paid workers, for whom access to legal services may be
prohibitively expensive. Workers generally may not be willing to file
lawsuits against deep-pocketed employers to challenge their non-
competes, even if they predict a high probability of success. The
Commission finds that the bright-line prohibition in the final rule,
which the Commission could enforce, may mitigate uncertainty for
workers.\1180\
---------------------------------------------------------------------------

\1180\ NPRM at 3531.
---------------------------------------------------------------------------

c. Labor Mobility
The Commission finds the overall effect of the final rule on
turnover costs due to increased labor mobility is ambiguous and
represents a distributional effect of the rule. The Commission finds
turnover costs for firms seeking new workers may fall with a greater
availability of experienced labor. For firms losing workers newly freed
from non-competes, the Commission estimates the effect of the final
rule to be $131 per worker with a non-compete. The Commission therefore
finds the effect on turnover costs represents a distributional effect
of the final rule because it costs firms that use non-competes to
constrain workers and benefits firms that do not.
To calculate the potential $131 increase in turnover costs for
workers whose non-competes are no longer enforceable after the rule,
this final analysis calculates:

Additional Turnover Cost per Worker with a Non-compete = (Baseline
Turnover Rate) * (% Increase in Turnover) * (Rate of Use of Non-
competes in Affected Industries) * (Overall Earnings of Affected
Workers) * (Cost of Turnover as % of Earnings)/(Number of Workers in
Affected Industries with Non-competes)

The Commission estimates the baseline turnover rate, i.e., the
turnover rate in the status quo, to be 47% annually.\1181\ The
estimated percent increase in turnover from the final rule is
1.0%.\1182\ The estimated rate of use of non-competes in affected
industries is 23.9%.\1183\ Estimated overall earnings of affected
workers is $5.25 trillion.\1184\ The estimated cost of turnover as a
percentage of earnings is 25%.\1185\ Finally, the estimated number of
workers in affected industries with non-competes is 11.8 million.\1186\
---------------------------------------------------------------------------

\1181\ Based on annual worker mobility rates (separations
divided by employment) in 2022 as calculated using the Job Openings
and Labor Turnover Survey, conducted by BLS.
\1182\ Calculated as -e((^{-0.241+0.112)*0.081)} -1),
where -0.241+0.112 represents the estimated effect in Johnson,
Lavetti, and Lipsitz (supra note 388) on workers in high use
industries. The corresponding estimate for other industries is
statistically indistinguishable from zero and those industries are
therefore omitted from calculations. The multiplier 0.081 is the
average magnitude change in non-compete enforceability, as discussed
in Part X.F.5.
\1183\ Calculated as the average usage rate in high-use
industries in Starr, Prescott & Bishara (supra note 68).
\1184\ Based on data from BLS for industries classified as high-
use in Starr, Prescott & Bishara (supra note 68), excluding CA, ND,
OK, and MN. See https://data.bls.gov/cew/apps/data_views/data_views.htm#tab=Tables.
\1185\ See Pivateau, supra note 1090.
\1186\ Calculated as 49.4 million * 23.9%. 49.4 million is equal
to 0.8 * 61.8 million, where 0.8 is the coverage rate (see Part
X.F.4.a) and 61.8 million is the number of workers in high-use
industries (https://data.bls.gov/cew/apps/data_views/data_views.htm#tab=Tables). 23.9% is the average usage rate in high-
use industries in Starr, Prescott, & Bishara (supra note 68).
---------------------------------------------------------------------------

The annual estimated increase in turnover costs per worker with a
non-compete is $131.
The Commission notes the actual costs of turnover to businesses may
be substantially lower under the final rule than this estimate
reflects. This is because the specific components of turnover costs--
finding a replacement, training, and productivity--are likely to be
affected by the final rule. An increased availability of experienced
workers results when non-competes no longer constrain those workers,
and finding replacements will be less costly to firms. Additionally,
training should not be counted in the costs of turnover presented in
this Part X.F.9.c, since it is separately accounted for in Part
X.F.7.a, but is nevertheless included in the 25% estimate used to
arrive at the estimate of $131 per worker with a non-compete, since
there is no reliable way to remove training costs from that estimate;
it is thus double-counted. Finally, because the Commission finds
increased labor mobility will likely increase worker productivity due
to better matching between workers and firms, the cost of lost
productivity will be lower. The cost of lost productivity will also be
lessened because the pool of workers available to firms may be more
talented or experienced, since such workers would no longer be bound by
non-competes (relative to new entrants to the workforce, who are not
experienced and also are not bound by non-competes). This would allow
firms to recruit workers who are more likely to be highly productive
upon entry at a new job.
The Commission reiterates its finding that the costs of turnover
for many firms may diminish due to a more plentiful supply of available
labor. Without estimates of the effect of the final rule on the cost of
recruiting a worker, the net effect of the final rule on turnover costs
is not quantified.
10. Break-Even Analysis
The Commission believes it has quantified the effects of the final
rule that are likely to be the most significant in magnitude, but data
limitations make it challenging to monetize all the expected effects of
the final rule, i.e., to numerically estimate the impact of particular
effects on the economy as a whole. Most of the estimated costs of the
final rule are monetized in Part X.F.7. However, the Commission is
unable to monetize the estimated benefits of the final rule without
additional assumptions. Two of the major benefits--innovation and
earnings--are quantified but they are not monetized because a
particular parameter or data point that would allow the Commission to
estimate their effect in dollars is unavailable. For earnings, this
parameter is an estimate of the percentage of the effect on earnings
that represents a benefit versus a transfer.\1187\ For innovation, this
parameter is an estimate of the social value of a patent. Making an
assumption about these parameters allows the Commission to monetize the
benefits associated with the effect on earnings and innovation. A
break-even analysis based on such assumptions confirms the Commission's
finding that the benefits of the rule clearly justify the costs.
---------------------------------------------------------------------------

\1187\ Though the estimated effect on earnings is presented in
dollars, the Commission considers this value to be quantified, but
not monetized, since some part of the estimate may represent a
transfer and not a benefit.
---------------------------------------------------------------------------

The analysis in this Part X.F.10 calculates the sum of the
monetizable costs of the rule, separately under the assumption that
lost investment in human capital is core training (in which case
monetizable costs are direct

[[Page 38487]]

compliance costs and the cost of updating contractual practices), and
under the assumption that lost investment in human capital is advanced
training (in which case monetizable costs are the net cost of lost
productivity from decreased human capital investment, direct compliance
costs, and the cost of updating contractual practices). The analysis
conservatively assumes that training for all workers is affected
(versus just those in high-use occupations, as described in Part
X.F.7.a).
If the Commission assumes the decrease in human capital investment
is a decrease in core training, the final rule results in net benefits
without monetizing or counting any positive effects on the economy from
earnings or innovation. The savings or benefit to the economy from
reduced core training would be greater than the combined monetized
costs of the final rule in X.F.7.b. In other words, even if the benefit
to the economy from earnings and innovation were assumed to be zero (an
implausible and extremely conservative assumption), the final rule
would be net beneficial under the assumption that estimates of reduced
training reflect better matching of workers and firms and therefore a
reduced need to provide workers with core training.
Under the assumption that lost human capital investment is
advanced, the Commission calculates values of the social value of a
patent and the benefit percentage of the earnings effect that would
fully offset the net monetizable costs of the final rule.
a. Estimate of Net Benefit Assuming Lost Human Capital Investment Is
Core Training
Under the assumption that lost human capital investment is core,
the sum of the present discounted value of direct compliance costs and
the cost of contractual updating (the monetizable costs of the rule),
using a 3% discount rate, is $3.7 billion. In this case, the final rule
is net beneficial even ignoring the benefits associated with innovation
and earnings. This is because the net monetized cost ($3.7 billion) is
less than the monetized benefit associated with investment in human
capital ($31 billion or $13.9 billion, when all occupations are assumed
to be affected versus just high-use occupations, respectively). The net
monetizable benefit of the final rule--even ignoring benefits
associated with innovation and earnings--is therefore $27.3 billion or
$10.2 billion, respectively.
b. Estimate of Net Benefit Assuming Lost Human Capital Investment Is
Advanced Training
In this Part X.F.10.b, the Commission calculates the net
monetizable costs and benefits of the final rule assuming that lost
human capital investment is advanced training, and under varying
assumptions about the values of the two monetization parameters
identified (the social value of a patent and the percentage of the
earnings effect that represents a benefit). Then, the Commission
calculates break-even points: values for the monetization parameters
which would fully offset the net monetizable costs of the final rule.
Break even points are calculated by finding the values of the
social value of a patent and the benefit percent of the earnings
increase such that:

(Net Costs Associated with Investment in Human Capital) + (Direct
Compliance Costs) + (Costs of Updating Contracts) = (Earnings Increase)
* (Benefit % of Earnings Increase) + (Patent Increase) * (Social Value
of Patent)

As calculated in Part X.F.7, assuming a 3% discount rate, the net
cost associated with investment in human capital is $39.0
billion.\1188\ Direct compliance costs plus the cost of updating
contracts are estimated to be $3.7 billion.\1189\ Net monetizable costs
therefore total $42.7 billion.
---------------------------------------------------------------------------

\1188\ Note that this calculation considers the net cost of lost
investment in human capital (i.e., the cost of lost productivity,
minus the savings on direct outlays and gained output due to less
time spent training). The Commission reiterates that this
calculation assumes that lost human capital investment is advanced,
rather than core.
\1189\ This calculation assumes that updating contractual
practices takes, on average, eight hours per firm.
---------------------------------------------------------------------------

The estimated earnings increase of the final rule over ten years,
discounted at 3% is $468 billion. The estimated effect of the rule on
innovation (using the low end of the primary estimate) ranges from an
additional 3,111 patents per year to 31,110 patents per year,
increasing as time goes on.\1190\
---------------------------------------------------------------------------

\1190\ The estimates presented here conservatively assume zero
effect on R&D spending.
---------------------------------------------------------------------------

The Commission presents estimates that demonstrate break-even
points by making an assumption for the value of one of the two
monetization parameters, and calculating the value of the other which
implies equal monetized costs and benefits. Based on estimates of the
private value of a patent, the Commission separately assumes that the
social value of a patent is $94,886, $234,399, $5,865,833, or
$32,459,680.\1191\ In addition to spanning a wide range of possible
valuations, these values all represent the private value of a patent to
certain actors (e.g., the purchaser or seller of a patent, or
shareholders of a patenting company). These values do not account for
innovative spillovers (e.g., follow-on innovation) or product market
spillovers to competitors (who may lose business to innovating firms),
and therefore do not necessarily represent the social value of a
patent. However, they serve as benchmarks against which to assess the
breakeven points of the analysis of the final rule.
---------------------------------------------------------------------------

\1191\ The Commission points out that the economic literature
has not explored the social value of a patent, but has explored the
private value of a patent, with highly varied conclusions (all
reported here adjusted to 2023 dollars). Serrano estimates the
average value of a patent (in terms of its sale price at auction) to
be between $234,399 and $289,022. Pakes estimates the average value
of a patent (in terms of stock market reactions to announcements) to
be $5,865,833. Kogan et al. estimate the average value of a patent
(also in terms of stock market reactions to announcements) to be
$32,459,680. Outside of the academic literature, a Richardson Oliver
Insights report notes that the average sale price of U.S. issued
patents on a brokered market was $94,886. See Carlos J. Serrano,
Estimating the Gains from Trade in the Market for Patent Rights, 59
Int'l Econ. Rev. 1877 (2018); Pakes, supra note 1132; Kogan, et al.,
supra note 1131; Richardson Oliver Insights Report (2022): https://www.roipatents.com/secondary-market-report.
---------------------------------------------------------------------------

No studies have assessed what percentage of the earnings effect of
non-compete enforceability is a benefit versus a transfer. The
Commission separately assumes that the percentage is equal to 0%, 5%,
10%, and 25%.
The computed breakeven points are reported in Table 7, under the
assumption that lost investment in human capital is advanced. Panel A
reports necessary benefit percentages, under each of the four assumed
social values of a patent, that would cause the rule to result in zero
net monetized benefit. A reported value of 0% indicates that the
assumed value of a patent itself covers the net monetized costs of the
final rule. Panel B reports the necessary social value of a patent,
under each of the four assumed benefit percentages, that would cause
the rule to result in zero net monetized benefit. A reported value of
$0 indicates that the benefits associated with earnings cover the net
monetized costs of the final rule on their own.

Table 7
------------------------------------------------------------------------
Necessary benefit
Assumed social value of a patent percentage on
earnings
------------------------------------------------------------------------
Panel A
------------------------------------------------------------------------
$94,886.............................................. 5.5
$234,399............................................. 1.7
$5,865,833........................................... 0.0

[[Page 38488]]

$32,459,680.......................................... 0.0
------------------------------------------------------------------------
Assumed benefit percentage on earnings Necessary patent
value
------------------------------------------------------------------------
Panel B
------------------------------------------------------------------------
0%................................................... $297,144
5%................................................... 134,202
10%.................................................. 0
25%.................................................. 0
------------------------------------------------------------------------

Panel A shows that, even assuming a value of patenting ($94,886)
that is substantially lower than the estimates in the economic
literature, only 5.5% of the earnings effect must be an economic
benefit (as opposed to a transfer) for the benefits associated with
innovation and earnings to outweigh the monetized costs of the rule.
Panel B shows that, even if no part of the earnings effect of the final
rule reflects an economic benefit (which the Commission finds to be
unlikely, in light of the evidence discussed in Part IV.B.3.a.ii), the
social value of a patent would need to be only $297,144 in order to
cover the monetized costs of the rule--well within the range of
(private) values of a patent found in the literature.
The Commission additionally notes that Table 7 omits other benefits
of the rule. The estimated benefits do not include the benefits arising
from decreased consumer prices or increased workforce output. The
estimates also omit possible changes in litigation costs associated
with the rule. The Commission finds it likely that the omitted benefits
substantially exceed the omitted costs, and additionally reiterates
that the estimated values in Table 7 assume that lost investment in
human capital is fully advanced. Therefore, the Commission views the
values reported in Table 7 as conservative estimates of the breakeven
points of the rule under those scenarios.
11. Analysis of Alternative Related to Senior Executives
The Commission elects to provide an analysis of the effects of an
alternative with more limited coverage. Specifically, the Commission
provides an analysis of a rule that would cover--and therefore ban--
non-competes with all workers except senior executives. As compared to
the final rule, under this alternative, it would not be an unfair
method of competition to enter into non-competes with senior executives
after the effective date. The Commission finds that excluding all non-
competes with senior executives from coverage under the rule (as
opposed to the final rule, which excludes only existing non-competes
with senior executives) would diminish both costs and benefits, but
would still result in substantial benefits on net.
a. Analysis of Lost Benefits and Costs if Senior Executives Are
Excluded
Several costs and benefits may be affected if senior executives are
excluded from coverage by the final rule. The Commission now discusses
each of those costs and benefits relative to the final rule.
The Commission finds that some benefits related to labor market
competition and workers' earnings would be lost if senior executives
were entirely excluded from the final rule. This is especially true
because those workers have high earnings, meaning that a given
percentage increase in their earnings yields a greater overall effect
compared with relatively lower earning individuals. However, those
workers make up a small portion of the workforce--approximately 0.75%
of the workforce, based on data from the American Community
Survey.\1192\ The overall change in the earnings benefit is therefore
limited, but would exceed senior executives' share of the workforce.
Support for this finding is discussed in Part IV.C. Garmaise (2011)
finds that earnings of senior executives are negatively affected by
non-competes. Countervailing evidence exists, but it is based on
evaluation of the use of non-competes, which the Commission gives less
weight.\1193\ The Commission notes the definition of senior executive
used in Garmaise (2011) does not map perfectly to the definition of
senior executives in this final rule, though there is likely
substantial overlap.
---------------------------------------------------------------------------

\1192\ In particular, 0.75% represents the percentage of
employed individuals from 2017-21 ages 22-64, excluding residents of
CA, ND, OK, and MN, and excluding workers reporting working for non-
profits or the government, whose earnings are above the inflation-
adjusted threshold and who are coded as having occupation ``Top
Executive.'' The Commission notes that this estimate may not exactly
match the definition in the final rule but the Commission believes
that this provides a reasonable estimate.
\1193\ See Part IV.A.2 (explaining the Commission's concerns
with these types of studies).
---------------------------------------------------------------------------

The Commission is unable to quantify the lost benefits related to
innovation if senior executives were excluded from coverage under the
final rule but finds their exclusion would diminish the innovation
benefits of the final rule. Senior executives are involved in
determination of the strategic path of the firm and its execution,
which likely has a substantial effect on innovation. The Commission
cannot quantify what percentage of the innovation effect is due to
senior executives versus other workers, though it is likely shared by
both groups.
The Commission finds that benefits related to consumer prices would
fall significantly if senior executives were excluded from coverage. By
increasing competition, increases in new firm formation and increased
ability to hire talented workers may be key drivers of the effect of
the final rule on consumer prices. As discussed in Part IV.C, senior
executives have the knowledge and skills necessary to found new firms,
or to be key members of other firms. Therefore, if senior executives
are excluded from the final rule, some benefits associated with new
firm foundation and innovation would be lost, though the exact
proportion cannot be estimated. The Commission notes that benefits
associated with lower prices through increased competition might also
be lost but cannot be quantified.
Turning to costs, the Commission finds that costs associated with
investment in human capital may fall if senior executives were excluded
from the rule. The productivity of senior executives may benefit from
investment in their human capital.\1194\ The precise monetary
contribution of investment in senior executives' human capital to the
productivity of firms has not been estimated, nor has the empirical
literature separately assessed the effect of non-competes on human
capital investment for senior executives. If senior executives benefit
from advanced, rather than core, training investment (as described in
Part X.F.7.a), their exclusion will reduce costs. Because senior
executives are a small part of the workforce and must be highly
skilled, locking them up with non-competes could theoretically mean
that firms would need to invest in relatively more core training for
senior executives if they were excluded from the final rule.
---------------------------------------------------------------------------

\1194\ Solomon Akrofi, Evaluating the Effects of Executive
Learning and Development on Organisational Performance: Implications
for Developing Senior Manager and Executive Capabilities, 20 Int'l.
J. of Training and Dev. 177 (2016).
---------------------------------------------------------------------------

The Commission finds that the direct costs of compliance with the
final rule may be partially affected if senior executives were
categorically excluded. The final rule allows employers to enforce
existing non-competes for senior executives, so there are no notice and
re-negotiation costs for senior executives. However, in this scenario,
costs associated with ensuring incoming

[[Page 38489]]

senior executives' contracts do not have non-competes would be
substantially reduced. Because senior executives' contracts are
generally more complex than other workers' contracts, this reduction
may be relatively large, even though there are relatively few senior
executives in the workforce (approximately 0.75%). With respect to the
costs of updating contractual practices, commenters noted the costs of
updating senior executives' contracts may be greater than for other
workers because of the complexity of their contracts. Therefore,
excluding senior executives categorically might reduce costs associated
with updating contractual practices substantially. At the same time,
senior executives' contracts may already be bespoke and individualized
to such an extent that removing a non-compete would not considerably
raise the costs associated with revising contractual practices.
Moreover, these contracts may be even more likely than other workers to
already include NDAs and other similar provisions.
Finally, the Commission finds exclusion of senior executives may
reduce litigation costs from the final rule, though the overall effect
is unclear. Senior executives are highly likely to have access to
sensitive business information. To the extent costs associated with
trade secret litigation or litigation over other restrictive covenants
increase under the final rule, though no evidence supports this
possibility, then exclusion of senior executives may substantially
reduce these costs. Litigation related to whether a worker meets the
definition of a senior executive may also increase if senior executives
are categorically excluded.
Overall, excluding senior executives from the final rule would
substantially reduce the benefits of the rule--especially those
associated with new firm formation, innovation, and prices--but would
also likely reduce costs, especially those associated with investment
in human capital and updating contractual practices. The Commission
finds that the benefits of a rule excluding senior executives would
justify the costs of such a rule.
b. Analysis of Benefits and Costs to Workers Other Than Senior
Executives
Now, the Commission turns to an analysis of the benefits and costs
that remain if senior executives are excluded from the rule.
The Commission finds there would be substantial benefits to labor
market competition and workers' earnings even if senior executives were
categorically excluded. The evidence on earnings discussed in Part
IV.B.3.a.ii does not exclude senior executives, but based on the
percentage of the population that represents senior executives, the
evidence largely pertains to workers other than senior executives.
Therefore, while studies focused on senior executives (largely) do not
apply, studies of the entire workforce mostly reflect the effects of
non-competes on other workers. In addition to the broader evidence on
earnings discussed in Part IV.B.3.a.ii, one study analyzes a population
exclusively comprised of hourly workers, nearly all of whom are highly
likely not to be senior executives, supporting the finding that even
with senior executives excluded from a rule, there would be substantial
benefits to labor market competition and workers' earnings.\1195\
---------------------------------------------------------------------------

\1195\ Lipsitz & Starr, supra note 72.
---------------------------------------------------------------------------

The Commission is unable to quantify to what extent the estimated
effects on innovation are driven by senior executives versus other
workers, but still finds that a final rule excluding these senior
executives would result in substantial benefits to innovation. First,
there is evidence that productivity of inventors decreases when they
take career detours because of non-competes.\1196\ Second, insofar as
effects on innovation are driven by increased idea recombination,
having access to those ideas (which innovators actively engaged in R&D
must) implies that moving to new firms would increase innovation.
Empirical studies have not quantified the size of these effects
relative to the overall effect of banning non-competes for workers
including senior executives on innovation, however.
---------------------------------------------------------------------------

\1196\ Mueller, supra note 569.
---------------------------------------------------------------------------

The Commission finds that a rule excluding senior executives would
still yield substantial benefits with respect to consumer prices. Many
entrepreneurs were not formerly senior executives, meaning that
encouraging entrepreneurship among workers who are not senior
executives by prohibiting non-competes will yield more business
formation. That business formation increases competition, which may
lead to lower prices. Additionally, firms will not be foreclosed access
to talent (which is likely important across the spectrum of workers,
though evidence only specifically exists for senior executives), which
may also lead to lower prices. In the absence of empirical evidence
demonstrating which workers' non-competes affect consumer prices, the
Commission cannot estimate how much of the effect is due to coverage of
which workers.
The Commission finds that a rule excluding senior executives would
result in decreased levels of investment in workers' human capital. The
empirical literature has not separately assessed the effect of non-
competes on investment in human capital for senior executives versus
other workers, though the study finding that training decreases with
greater non-compete enforceability includes both workers who are and
are not senior executives. The Commission therefore believes that some
or much of any cost or benefit of the rule from changing investment in
human capital would pertain to workers who are not senior executives.
However, the Commission notes that, as discussed in Part X.F.7.a, if
lost training under the rule is lost ``core'' (as opposed to
``advanced'') training, then the final rule will cause a cost savings
for firms, which will have greater access to experienced workers and
will therefore spend less on ``core'' training.
The Commission finds that the direct costs of compliance with the
final rule may be partially diminished if senior executives were
excluded. First, the Commission reiterates that notice is not required
for senior executives under the final rule. Therefore, that component
of the direct costs of compliance would not be affected. However, even
with those senior executives excluded, costs associated with ensuring
incoming workers' contracts do not have non-competes would still be
present. Insofar as senior executives' contracts may be more complex
than other workers' contracts, this cost may be substantially
diminished, however. Similarly, with respect to the costs of updating
contractual practices, as noted by commenters, these costs may be
substantially greater for the contracts of senior executives due to the
complexity of their contracts and the sensitivity of the information
they possess. Therefore, while some costs associated with updating
contractual practices would survive if senior executives were excluded,
their exclusion may reduce costs associated with the rule
disproportionately to their (relatively low) share of the workforce.
Finally, some litigation costs may still be present if senior
executives are excluded. Litigation costs associated with non-competes
would still likely fall for workers other than senior executives due to
the bright-line coverage in the rule. Costs associated with litigation
other than non-compete litigation may rise if firms turn to those
methods, though no evidence suggests they will.
Overall, a rule that excludes senior executives will likely result
in

[[Page 38490]]

substantial benefits, as well as some costs. While the Commission
largely cannot quantify the extent to which benefits and costs would
fall if senior executives were excluded from coverage under the rule,
the Commission finds that the benefits quantified and monetized
elsewhere in this impact analysis would likely be diminished relative
to the final rule as adopted, especially those associated with
innovation and prices, but costs would also be diminished, especially
those associated with investment in human capital and updating
contractual practices. The Commission finds that, even in the absence
of a full monetization of all costs and benefits of the final rule, the
final rule has substantial benefits that clearly justify the costs,
which remains true even if senior executives were excluded from
coverage.

XI. Regulatory Flexibility Act

The Regulatory Flexibility Act (``RFA''), as amended by the Small
Business Regulatory Enforcement Fairness Act of 1996, requires an
agency to provide an Initial Regulatory Flexibility Analysis (``IRFA'')
and Final Regulatory Flexibility Analysis (``FRFA'') of any final rule
subject to notice-and-comment requirements, unless the agency head
certifies that the regulatory action will not have a significant
economic impact on a substantial number of small entities.\1197\ In the
NPRM, the Commission provided an IRFA, stated its belief that the
proposal will not have a significant economic impact on small entities,
and solicited comments on the burden on any small entities that would
be covered.\1198\ In addition to publishing the NPRM in the Federal
Register, the Commission announced the proposed rule through press and
other releases,\1199\ as well as through other outreach including
hosting a public forum on the proposed rule \1200\ and attending the
U.S. Small Business Administration Office of Advocacy's (``SBA
Advocacy'') roundtable on the proposed rule with small entities,\1201\
in keeping with the Commission's history of small business guidance and
outreach.\1202\
---------------------------------------------------------------------------

\1197\ 5 U.S.C. 603-605.
\1198\ NPRM at 3531.
\1199\ FTC, Press Release, FTC Proposes Rule to Ban Noncompete
Clauses, Which Hurt Workers and Harm Competition (Jan. 5, 2023),
https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition.
\1200\ FTC, FTC Forum Examining Proposed Rule to Ban Noncompete
Clauses (Feb. 16, 2023), https://www.ftc.gov/news-events/events/2023/02/ftc-forum-examining-proposed-rule-ban-noncompete-clauses.
\1201\ Commission staff attended the February 28, 2023,
roundtable. See also Comment from SBA Off. of Advocacy, FTC-2023-
0007-21110 at 2.
\1202\ Each year since FY2002, the Small Business Administration
(SBA) Office of the National Ombudsman has rated the Federal Trade
Commission an ``A'' on its small business compliance assistance
work. See, e.g., SBA Office of the Nat'l Ombudsman, 2021 Annual
Report to Congress at 47.
---------------------------------------------------------------------------

The Commission thereafter received over 26,000 public comments,
many of which identified themselves as being from small businesses,
industry associations that represent small businesses, and workers at
small businesses.\1203\ The Commission greatly appreciates and
thoroughly considered the feedback it received from such stakeholders
in developing the final rule. The Commission made changes from the
proposed rule in response to such feedback and will continue to engage
with small business stakeholders to facilitate implementation of the
final rule. Further, the Commission is publishing compliance material
to assist small entities in complying with the final rule.
---------------------------------------------------------------------------

\1203\ The Commission received over 26,000 comment submissions
in response to its NPRM. See Regulations.gov, Non-Compete Clause
Rule (Jan. 9, 2023), https://www.regulations.gov/document/FTC-2023-0007-0001. To facilitate public access, 20,697 such comments have
been posted publicly at www.regulations.gov. Id. (noting posted
comments). Posted comment counts reflect the number of comments that
the agency has posted to Regulations.gov to be publicly viewable.
Agencies may redact or withhold certain submissions (or portions
thereof) such as those containing private or proprietary
information, inappropriate language, or duplicate/near duplicate
examples of a mass-mail campaign. Gen. Servs. Admin.,
Regulations.gov Frequently Asked Questions, https://regulations.gov/faq.
---------------------------------------------------------------------------

Specifically, based on the Commission's expertise and after careful
review and consideration of the entire rulemaking record--including
empirical research on how non-competes affect competition and over
26,000 public comments--the Commission adopts this final rule,
including with changes relative to the proposal to reduce compliance
burdens on small business and other entities. For example, the
Commission allows existing non-competes with senior executives to
remain in force,\1204\ amends the safe harbor notice requirement to
ease compliance,\1205\ removes the requirement to rescind existing non-
competes, and removes the ownership threshold from the sale of business
exception.\1206\ In light of the comments, the Commission has carefully
considered whether to certify that the final rule will not have a
significant impact on a substantial number of small entities. The
Commission continues to believe the final rule's impact will not be
substantial in the case of most small entities, and in many cases the
final rule will likely have a positive impact on small businesses.
However, the Commission cannot fully quantify the impact the final rule
will have on such entities. Therefore, in the interest of thoroughness
and an abundance of caution, the Commission has prepared the following
FRFA with this final rule.
---------------------------------------------------------------------------

\1204\ See Part IV.C.3.
\1205\ See Part IV.E.
\1206\ See Part V.A.
---------------------------------------------------------------------------

Although small entities across all industrial classes--i.e., all
NAICS codes--would likely 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 rule could
be significant if the cost of the 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.\1207\ As calculated in Part XI.F, the
Commission estimates that legal and administrative costs would result
in costs on average of $712.45 to $1,250.93 for single-establishment
firms with 10 workers.\1208\ These costs would exceed the SBA's
recommended thresholds for significant impact only if the average
profit of regulated entities with 10 workers is $7,125 to $12,509,
average revenue is $71,245 to $125,093, or average labor costs are
$14,249 to $25,019, respectively. Furthermore, while there are
additional nonmonetizable costs associated with the final rule, there
are also nonmonetizable benefits which would at least partially offset
those costs, as explained in Part X.F.6.
---------------------------------------------------------------------------

\1207\ SBA, A Guide for Government Agencies: How to Comply With
the Regulatory Flexibility Act, at 19 (Aug. 2017) https://advocacy.sba.gov/resources/the-regulatory-flexibility-act/a-guide-for-government-agencies-how-to-comply-with-the-regulatory-flexibility-act/ (hereinafter ``RFA Compliance Guide'').
\1208\ Ten workers is chosen as an illustrative example. For
this example, the Commission calculates the cost of notification
based on 10 workers and applies legal costs consistent with the
average per establishment cost calculated in X.F.7.
---------------------------------------------------------------------------

A. Reasons for the Rule

The Commission describes the reasons for the final rule in Parts
IV.B and IV.C.

B. Statement of Objectives and Legal Basis

The Commission describes the objectives and legal basis for the
final rule in Part IV.B and IV.C and the legal authority for the final
rule in Part II.

[[Page 38491]]

C. Issues Raised by Comments, the Commission's Assessment and Response,
and Any Changes Made as a Result

1. Comments ¹²⁰⁹ on Benefits to Small Businesses and the
Commission's Findings ¹²¹⁰
---------------------------------------------------------------------------

\1209\ The U.S. SBA publishes a Table of Small Business Size
Standards based on the North American Industry Classification System
(NAICS), determining the maximum number of employees or annual
receipts allowed for a concern and its affiliates to be considered
small. 13 CFR 121.201; see also Small Bus. Admin., Table of Size
Standards, https://www.sba.gov/document/support-table-size-standards. Because commenters did not provide their NAICS number or
annual receipts, and many did not provide the number of workers, the
Commission is unable to determine whether each individual commenter
meets the SBA's definition of a small business. Instead, for
purposes of considering comments from small businesses, the
Commission relies on the commenter's self-description of being a
small business or start-up.
\1210\ This section captures comments related to the potential
benefits of the final rule for small businesses. These comments do
not directly address the IRFA. Comments on the IRFA are captured in
Part XI.G. Many comments and issues concerning small businesses are
also discussed in Part IV.B.3.b.i.
---------------------------------------------------------------------------

a. Comments
Numerous small businesses and small business owners generally
supported the proposed rule and shared two primary reasons, among
others, that the rule may uniquely benefit small business owners.
First, because non-competes are expressly designed to prevent workers
from starting new businesses within the industry and geographic market
that worker is experienced in, commenters said non-competes prevent new
business formation and threaten new small businesses. Thus, consistent
with the empirical evidence,\1211\ commenters said a ban on non-
competes will drive small business creation as entrepreneurial
employees will be free to compete against their former employers.
Second, commenters said non-competes harm small businesses by
preventing them from hiring experienced workers. The Commission
considered all comments related to small businesses and addresses many
of them in Parts IV.B and IV.C and throughout this document.
---------------------------------------------------------------------------

\1211\ See Part IV.B.3.b.i.
---------------------------------------------------------------------------

Many comments from small businesses align with the findings in Part
IV.B.3.b.i, namely that non-competes inhibit new business formation. A
vast majority of such new businesses will be small businesses. For
example, Kang and Fleming find that when Florida made non-competes more
enforceable, larger businesses entered the State and increased
employment while small businesses entered less frequently, and
employment for them did not change.\1212\ An economist stated the
NPRM's findings show that non-competes harm small business formation
and that firms struggle to hire and grow in States that are more likely
to enforce non-competes. Another commenter identified an additional
study showing that Hawaii's ban on non-competes in the technology
industry increased the number of technology startups.\1213\
---------------------------------------------------------------------------

\1212\ Kang & Fleming, supra note 536.
\1213\ See Glasner, supra note 528.
---------------------------------------------------------------------------

Some commenters cited the Small Business Majority's polling data on
non-competes. The survey finds that 67% of small businesses that
currently use non-competes support the proposed ban \1214\ and 46% of
small business owners have been subject to a non-compete that prevented
them from starting or expanding their own businesses.\1215\
Additionally, 35% of small business respondents reported that they have
been prevented from hiring an employee because of a non-compete.\1216\
The survey also finds that of the 312 small businesses that responded,
59% expressed agreement that NDAs could likely protect confidential
information or trade secrets as effectively as a non-compete.\1217\ The
online survey had a small sample size of 312 small business owners and
decision-makers, and had a margin of error of +/-6%.\1218\ An economist
commented that these survey findings provide specific evidence
underlying the mechanisms identified in the empirical studies finding
that non-competes decrease new business formation and prevent new firms
from hiring and growing. While the survey has too small of a sample
size to be fully representative of small businesses, the survey
illustrates that non-competes have prevented or delayed small
businesses from starting or expanding.
---------------------------------------------------------------------------

\1214\ Sm. Bus. Majority, Opinion Poll, Small Business Owners
Support Banning Non-Compete Agreements 2 (Apr. 13, 2023). The survey
also finds that 51% of small businesses that do not use non-competes
support the proposed ban.
\1215\ Id.
\1216\ Id.
\1217\ Id. at 3 (finding that 24% strongly agreed and 35%
somewhat agreed).
\1218\ Id. at 2.
---------------------------------------------------------------------------

Small businesses stated non-competes hindered their small business,
including through costly lawsuits from former employers. Many
commenters said non-competes were preventing them from starting a
business.\1219\ One technology startup organization cited the thousands
of startups formed by alumni of five leading tech companies as well as
key within-industry spinoffs in the aerospace industry and suggested
the number of spinoffs could be greater with a nationwide ban on non-
competes. The commenter stated that even delays in founding a startup
slow innovation. The commenter looked at the employment history of
these aerospace startup founders and stated that, while it could not
determine whether they had non-competes, their work history suggested
they were not constrained in the labor market.
---------------------------------------------------------------------------

\1219\ See Part IV.B.3.b.i (summarizing these comments).
---------------------------------------------------------------------------

Many small businesses commented that non-competes prevented them
from hiring the right talent and harmed their businesses, often because
small businesses could not afford a lawsuit or even the legal costs of
determining whether a non-compete with a perspective employee was
unenforceable.\1220\ A technology startup organization stated that
startups are much more likely to survive with experienced counselors
and mentors.\1221\ A policy organization stated that non-competes favor
established and large companies, because they can use non-compete
litigation strategically to chill movement of experienced executives to
startups and smaller firms that lack the resources to contest the non-
competes in court. The policy organization also stated workers with
non-competes often go to an established competitor that has the
resources to protect them in case of a suit rather than a small firm,
meaning small firms are disadvantaged in hiring. Similarly, a law firm
commenter stated that small firms are less able to compensate new hires
who have forfeiture-for-competition clauses compared to larger firms.
---------------------------------------------------------------------------

\1220\ Id.
\1221\ Id.
---------------------------------------------------------------------------

Commenters made several other arguments in favor of the rule
covering small businesses. Several commenters pointed out that small
businesses have not struggled to thrive in States where non-competes
have long been prohibited, including California, Oklahoma, and North
Dakota. A startup organization agreed with data cited in the NPRM
indicating non-competes disproportionately reduce entrepreneurship for
women, and argued that disproportionate financial challenges for women
mean women entrepreneurs have fewer resources to withstand other harms
from non-competes, including lack of access to talent.\1222\ A law firm
stated that a small business exception to the rule would lead to an
inefficient ``cliff'' effect, where small businesses who previously
fell within the exception would need to

[[Page 38492]]

rescind their existing non-competes after surpassing a threshold.
Finally, and importantly, numerous workers at small businesses reported
substantial harms from non-competes consistent with the harms cited in
Part IV.B.2 and IV.B.3.a, just as workers for large employers did.
---------------------------------------------------------------------------

\1222\ See also Marx (2022), supra note 519.
---------------------------------------------------------------------------

b. Responses to Comments
As the Commission explained in Parts IV.B.3.b and IV.C.2.c, the
weight of the empirical evidence supports the conclusion that non-
competes inhibit new business formation and foreclose small and other
businesses from accessing the talent they need to grow and succeed.
Most new businesses are small, and non-competes are expressly designed
to prevent workers from starting new businesses in the fields they know
best. The Commission appreciates the small businesses and entrepreneurs
who shared their experiences in the comments. These comments and the
many comments discussed in Parts IV.B.2 and IV.B.3 from small
businesses align with and bolster the empirical evidence. The comments
illustrate the real-world impacts of non-competes on entrepreneurs and
would-be entrepreneurs, both before and after formation of a business.
Moreover, the labor market effects--including reducing labor mobility
and artificially suppressing wages and job quality--are not different
or mitigated when a worker works for a small business rather than a
large one. Studies finding harm from non-competes examined both large
and small businesses, and the Commission believes that small
businesses' use of non-competes causes the same harms set forth in
Parts IV.B and IV.C, including harm to other small businesses.
Based on these and other comments, the Commission believes that
many small businesses are blocked from hiring workers that could help
their business grow and have fewer resources than larger businesses to
evaluate the risk of hiring a worker subject to a non-compete, to pay
to ``release'' a worker they want to hire from a non-compete, such as a
forfeiture-for-competition clause, and defend themselves from a non-
compete suit.
In response to the comments on small business successes in States
where non-competes are banned, the Commission notes that it recognizes
that there are many successful small businesses in States that ban non-
competes, but is not aware of any empirical evidence considering
success rates of small businesses based on enforceability of non-
competes.
In response to the comment discussing startups in the aerospace
industry, the Commission notes that the conclusions of the commenter
align with the empirical evidence that the most successful startups are
within-industry spinoffs.\1223\ However, the Commission notes that
according to the data presented in the comment, some of the founders
the comment described as being unrestrained in the labor market have
significant gaps in their work history, though the Commission cannot
determine the cause of any gaps.
---------------------------------------------------------------------------

\1223\ See Part IV.B.3.b.i.
---------------------------------------------------------------------------

As explained in Part IV.C, the Commission adopts a partial
exception in Sec. 910.2(a)(2) for senior executives under which their
existing non-competes--non-competes entered into before the effective
date--are not covered by the final rule. Employers cannot, however,
enter into new non-competes with senior executives as of the effective
date. The evidence and comments describing the importance of freeing
senior executives from non-competes with respect to founding and
supporting new and small businesses contributed to the Commission's
decision to ban future non-competes for senior executives instead of
excepting senior executives entirely from the final rule. The
Commission is aware that existing non-competes with senior executives
will reduce some of the benefits for new and small businesses as fewer
senior executives will be free to join or found those businesses
beginning on September 4, 2024. However, senior executives are a small,
narrowly defined group, meaning there will still be numerous
experienced workers freed from non-competes that can found or support
small businesses, and senior executive non-competes will eventually
become phased out. In addition, the Commission expects small businesses
to receive the other anticipated benefits of the final rule.
2. Comments Arguing the Rule Will Harm Small Businesses and the
Commission's Findings \1224\
---------------------------------------------------------------------------

\1224\ This section captures comments that do not directly
address the IRFA but that are related to the potential costs of the
final rule for small businesses. Comments directly addressing the
IRFA are captured in Part XI.G. Many comments concerning small
businesses are also discussed in Part IV.B.3.b.i.
---------------------------------------------------------------------------

a. Comments
Some small businesses and industry groups stated they believe a ban
on non-competes would harm small businesses. Several commenters
requested an exception for small businesses or certain types of small
businesses, such as independent medical practices. The Commission
addresses these comments in this Part XI.C.2 and addresses direct
potential costs in Part XI.E. The Commission appreciates the small
businesses and entrepreneurs who shared their experiences in the
comments.
Commenters raised concerns that eliminating non-competes for all
businesses would allow larger businesses and incumbents to easily hire
away talent from smaller competitors and startups. Other small
businesses said they had been harmed in the past by former workers
competing against them, including by recruiting clients and other
workers, or by large competitors hiring their workers. Similarly, some
industry associations and small businesses said non-competes protect
independent businesses, including medical practices, from dominant
consolidators, as high recruitment, retention, and other costs may
induce small businesses to sell their business to consolidators.
Relatedly, some healthcare organizations argued a ban that does not
cover nonprofit hospitals and health systems would provide those large
nonprofits with an unfair advantage over independent medical practices.
Some small businesses offered the same justifications as other
businesses for using non-competes but emphasized the heightened
potential damage to smaller businesses less able to bear costs,
including being forced to close or sell.\1225\ Many of these comments
asserted that small businesses relying on legitimate trade secrets
would be especially harmed if a worker took that information to a
competitor or new business, particularly because they would be least
equipped to detect theft or retain sophisticated legal counsel to
litigate potential trade secrets or NDA claims, thus reducing
investment and innovation.\1226\ A law firm argued that trade secrets
litigation often costs millions, and few attorneys are willing to work
on contingency, so startups would struggle to litigate against larger
well-financed firms, especially as large firms can drive costs up to
force the startup out of the litigation. SBA Advocacy asserted that if
competitive information is not protected, some small businesses could
face a serious risk of loss or potential closure and could not afford
alternative means of protection.
---------------------------------------------------------------------------

\1225\ See, e.g., SBA Off. of Advocacy, FTC-2023-0007-21110 at
3.
\1226\ Id.
---------------------------------------------------------------------------

One industry organization stated more generally that protecting
information is a high priority for emerging growth companies. Some
small businesses

[[Page 38493]]

stated if non-competes are banned, they might silo workers and
information to limit the potential harm from a worker leaving for a
larger competitor and would harm the business. One business stated that
while banning non-competes might allow more market entrants, those new
entrants will be more likely to fail without the protection of non-
competes for worker retention and confidential information. Some
business associations stated small business owners often rely on
independent contractors and sole proprietors such as marketers to build
their businesses and share proprietary information with them (meaning
contractors may have access to information from multiple competitors)
and covering such groups under the rule would harm their growth.
Small businesses also stated they use non-competes to protect
investments, including in training, to prevent workers from taking
clients or customers, and to increase retention and stability. For
example, some small businesses shared that they started using non-
competes after workers they had trained extensively went to a larger
competitor or started their own business. One small business
organization stated the proposed requirement to relate ``costs
incurred'' to TRAPs would be harder for small businesses who are more
likely to train on the job. A physician practice stated a partner
leaving for a hospital would destabilize and increase costs for the
practice, but a non-compete that is bought out helps practices afford
those extra costs or otherwise prevents destabilization.
Commenters provided additional reasons small businesses use non-
competes. A business stated that they could not afford to pay workers
as much as larger businesses, so will be unable to find workers. A
small business association stated that banning non-competes would
exacerbate the labor shortage for small businesses by decreasing
investment in training, when there are already insufficient qualified
applicants. A commenter stated that the NPRM did not provide any
examples of small businesses using non-competes in an unfair way. SBA
Advocacy also stated that some small business employment contracts
compensate workers for non-competes. One business stated small
businesses may not be able to afford to fight larger businesses using
borderline de facto non-competes.
A banking association stated new businesses that cannot protect
their business would be less able to attract capital than more
established businesses, while a community bank similarly said it may be
unable to lend to small businesses that cannot protect their workers,
customers, and proprietary information with non-competes. A small
business stated that NDAs and non-solicitation clauses were too
difficult to enforce, as it was told by judges that in order to win a
non-solicitation suit against a former worker who purportedly took
clients, the business would need to subpoena its own former clients to
testify, which would damage the business's reputation.
A physician said they were able to start an independent practice
while complying with a non-compete and hire others in compliance with
their non-competes. One small business said they were able to work out
solutions when hiring a worker subject to a non-compete to avoid
violating it.
SBA Advocacy relayed the concern of one 8(a) \1227\ small business
that feared if entities in the 8(a) business development program cannot
control their talent, the money the Federal government has spent
helping these companies would be wasted. Accordingly, SBA Advocacy
asserted that the proposed rule conflicted with the Congressional law
creating the 8(a) program.\1228\
---------------------------------------------------------------------------

\1227\ Sections 7(j)(10) and 8(a) of the Small Business Act (15
U.S.C. 636(j)(10) and 637(a)) authorize the SBA to establish a
business development program, which is known as the 8(a) Business
Development program. The 8(a) program is a robust nine-year program
created to help firms owned and controlled by socially and
economically disadvantaged individuals. SBA, 8(a) Business
Development Program (last updated Jan. 25, 2024), https://www.sba.gov/federal-contracting/contracting-assistance-programs/8a-business-development-program.
\1228\ SBA Off. of Advocacy, FTC-2023-0007-21110 at 3.
---------------------------------------------------------------------------

A small Federal contractor stated that larger companies could poach
workers who are skilled and/or who are already cleared by the
government to work on projects from small businesses, potentially
putting them out of business, and would damage contractors' ability to
provide stability to the agencies.
Some commenters expressed concern that the proposed 25% threshold
\1229\ for the sale of business exception would cause small businesses
to lose value when acquired because owners and key workers are critical
contributors to the business and non-competes are intangible assets,
making buyers less likely to buy. Some commenters requesting a small
business exception suggested various definitions of ``small business,''
including based on the number of employees.
---------------------------------------------------------------------------

\1229\ NPRM, proposed Sec. 910.1(e).
---------------------------------------------------------------------------

Finally, SBA Advocacy encouraged the Commission to adopt an
approach addressing the different concerns of small entities and
consider, analyze, and tailor alternatives to the size and type of
entity to minimize adverse impacts to small entities.\1230\ It stated
that a categorical ban was inappropriate given the range of industries
and nature of economic impacts.\1231\ One business requested an
exception for highly paid workers at small businesses, to create a
predictable bright-line rule while leveling the playing field for small
businesses. An industry association asked for an exception for newly
formed businesses to encourage capital formation among start-up
entities.
---------------------------------------------------------------------------

\1230\ SBA Off. of Advocacy, FTC-2023-0007-21110 at 3.
\1231\ Id.
---------------------------------------------------------------------------

b. Responses to Comments
First and foremost, the Commission finds, based on its expertise,
the empirical evidence, and the record before it, that non-competes
tend to negatively affect competitive conditions in both labor and
product and service markets, including by inhibiting new business
formation.\1232\ The Commission is not aware of any empirical research
on existing firm closures--including small business closures--being
correlated with decreased non-compete enforceability. The Commission is
also not aware of empirical research on specific business closure
patterns. Rather, the empirical evidence shows that non-competes
overall increase new business formation and decrease concentration,
indicating that the final rule will likely increase the overall number
of small businesses. The Commission is focused on the aggregate effects
of non-competes on competitive conditions and here considers the
overall effect on small businesses. While an individual small business
may benefit from prohibiting one of its workers from joining a
competitor or from keeping a competitor from entering the market, non-
competes have a substantial net negative aggregate impact on
competitive conditions in both labor markets and product and services
markets, including negative spillover effects on other small businesses
that do not use non-competes.\1233\
---------------------------------------------------------------------------

\1232\ See Parts IV.B and IV.C.
\1233\ See id.
---------------------------------------------------------------------------

The Commission has assessed the evidence on protection of trade
secrets and proprietary information in Part IV.D and finds that
businesses have sufficient, less restrictive alternatives to protect
such information. These options, such as NDAs, protection under trade
secrets law, and importantly, competing

[[Page 38494]]

on the merits to retain workers, are also accessible to small
businesses. On the latter, small businesses have potentially distinct
options from larger firms because of their greater ability to be
flexible and responsive to their workers' preferences. Moreover, the
Commission notes that no evidence exists to support the hypothesis that
trade secret litigation will increase after the final rule takes
effect. Recent evidence suggests trade secret litigation does not
increase following bans on non-competes.\1234\ With a bright-line rule
banning non-competes, small businesses, like other business, will not
face or have to undertake litigation related to non-competes, which may
partially offset other litigation costs if firms do substitute other
litigation. In fact, the purported dynamic where small firms are
outspent and outmatched by large firms that drive up the cost of trade
secrets litigation, is the exact dynamic many small businesses face
when sued over a non-compete, which can also force small businesses to
close.\1235\ While the Commission does not have data on the frequency
of each type of litigation or how often it forces small businesses to
close, these comments indicate that this alleged legal threat is
already present in a different form. Moreover, the overbreadth of non-
competes that employers cite as the source of their benefits for
reducing litigation costs is also the source of the negative effects of
non-competes on competitive conditions, and pecuniary benefits to a
firm engaged in an anticompetitive practice are not a cognizable
justification for an anticompetitive practice.\1236\
---------------------------------------------------------------------------

\1234\ Greenwood, Kobayashi, & Starr, supra note 757. The
Commission notes that this study supplements--but is not necessary
to support--its finding that no evidence supports the conclusion
that litigation costs will increase under the final rule. That
finding is based on the Commission's expertise and the rulemaking
record, including relevant comments. This study was published after
the close of the comment period.
\1235\ See Parts IV.D and X.F.7.c.
\1236\ See Part II.F.
---------------------------------------------------------------------------

Additionally, the Commission is unaware of any evidence that small
businesses in States where non-competes are less enforceable are more
likely to experience trade secret misappropriation, or evidence that
small businesses are at a distinct disadvantage in these States.
Finally, the Commission notes that despite claims that using non-
competes to protect trade secrets supports innovation, the empirical
evidence shows increased enforceability of non-competes on net in the
aggregate harms innovation. Again, the Commission considers the overall
effect on all business, including small businesses, and finds that the
final rule will not reduce innovation by small business.
In response to the comments that businesses would limit sharing
confidential information with their workers or that a small business's
inability to protect confidential information would cause new
businesses to fail, the Commission notes that use of less restrictive
alternatives, including, for example, NDAs, fixed term contracts, and
worker retention policies, would allow small businesses to maintain the
same or near same level of protection for the confidential information
they might share and want to protect. Accordingly, to the extent it is
productive for a small business to protect such information or share it
with a worker, the firm would adopt these alternatives and be able to
continue to operate with the same or similar use of confidential
information. Moreover, the Commission is not aware of any empirical
evidence supporting the conclusion that firms would share less
confidential information or be less able to protect it. In fact, the
evidence shows that both within-industry and non-within industry
spinouts are better quality, on average, when non-competes are less
enforceable, which reinforces the conclusion that small businesses do
not rely on non-competes to thrive.\1237\ Indeed, no empirical evidence
shows new businesses fail at a higher rate when (or because) non-
competes are less enforceable. To the extent some businesses may choose
to limit information sharing (as some individual comments suggest), the
Commission concludes that the benefits of the final rule with respect
to earnings, new business formation, and innovation justify any limited
resulting negative effect.
---------------------------------------------------------------------------

\1237\ See Part X.F.9.a.
---------------------------------------------------------------------------

In Parts IV.D.1 and X.F.7.a, the Commission examines the evidence
on human capital investment and other investment and finds uncertainty
regarding whether the effects on training and other investment will be
benefits or costs under the final rule. The Commission distinguishes
between core training and advanced training, finding that businesses
may be able to spend less on core training under the final rule to the
extent businesses are able to better match workers with their needs.
The Commission similarly finds that new business formation under the
final rule could result in an increase in overall capital investment or
serve to offset any decreased capital investment in incumbent firms. As
noted in comments from small businesses, non-competes limit their
ability to hire experienced, productive workers. While it may be true
in some cases that large businesses will be able to ``poach'' workers
from smaller business, smaller businesses would also be better able to
hire talent from large (or other) businesses under the final rule. In
fact, theoretically, the final rule would be more beneficial to smaller
businesses because they would no longer be hamstrung by the threat of
non-compete litigation by large firms when hiring experienced workers
from those firms. To the extent large firms can afford to pay out a
worker non-compete or to litigate or threaten litigation to secure
talent they want from a small firm, a ban on non-competes will better
level the playing field between small and large firms competing for
talent. While as stated by one commenter, some small businesses may be
successful if they are able to use non-competes, the empirical evidence
supports the conclusion that new business formation will increase
overall under the final rule, and the Commission is not aware of any
evidence of small business closure patterns. Businesses also have other
alternatives to retain workers.\1238\ Finally, the empirical evidence
demonstrates ways in which non-competes advantage large businesses
against smaller ones.\1239\
---------------------------------------------------------------------------

\1238\ See Part IV.D.2.
\1239\ See Part IV.B.3.b.
---------------------------------------------------------------------------

In response to comments that argued non-competes were needed to
promote stability and worker retention, the Commission notes there is
no evidence that stability and worker retention are economically
productive in and of themselves. The overall evidence on the harms from
non-competes demonstrates that retention of workers through non-
competes has considerable costs to both labor markets and product and
service markets. Importantly, businesses also have other, less
restrictive alternatives--that do not tend to negatively affect
competitive conditions--to retain workers as discussed in this Part and
in Part IV.D.2. In response to the comment that small businesses will
be less likely to afford retaining workers than large businesses that
can pay more, the Commission notes that increases in innovation are
likely to make small businesses more productive and successful,
allowing them to better compete with their larger competitors.
Moreover, the Commission notes that, in addition to those retention
alternatives, many workers commented that their non-competes prevented
them from seeking jobs with better working

[[Page 38495]]

conditions, shorter commutes, more flexible hours, or more career
advancement opportunities, among others.\1240\ Small businesses have
ways to compete for workers beyond wages alone.
---------------------------------------------------------------------------

\1240\ See Part IV.B.3.a.iii.
---------------------------------------------------------------------------

Many of the comments from small businesses, as well as from other
commenters, appear to confuse non-competes with other types of
agreements, such as non-solicitation agreements or NDAs, and argue that
non-competes are needed to prevent former workers from taking the
employer's customers or clients or disclosing confidential information.
The final rule does not ban non-solicitation clauses unless they meet
the definition of non-compete clause.\1241\ While one commenter argued
that non-solicitation clauses may be more difficult to enforce than
non-competes, the Commission weighs the cost of this potential
increased difficulty against the harms from non-competes and finds that
any marginal benefit compared to a non-solicitation clause does not
justify the costs of non-competes. And as explained previously,
pecuniary benefits to a firm from an anticompetitive practice are not a
cognizable defense.\1242\
---------------------------------------------------------------------------

\1241\ See Part III.D.
\1242\ See Part II.F.
---------------------------------------------------------------------------

In response to comments that small businesses are more reliant on
independent contractors and without non-competes independent
contractors might have access to confidential information for multiple
competitors, the Commission first notes that the final rule does not
prohibit agreements preventing a worker from working for two firms
simultaneously.\1243\ Many alternatives to non-competes allow
businesses working with independent contracts to protect their
confidential information, including maintaining security of
confidential information as well as NDAs and other such agreements, as
described in Part IV.D. There is no evidence that independent
contractors are more likely to use or share confidential business
information and, in fact, they are likely to be working under an
agreement detailing their responsibilities and to be more familiar with
ways to assure clients that any confidential business information
shared with them will remain confidential.
---------------------------------------------------------------------------

\1243\ See Part III.D.
---------------------------------------------------------------------------

In response to comments that banks might decrease lending without
non-competes, the Commission notes that there is no indication that
small businesses in States that have banned or limited non-competes
have been unable to obtain financing and commenters provide no related
evidence. Again, small businesses will have less restrictive
alternatives as a means of protecting confidential information.
Moreover, with respect to new business formation, workers seeking to
start their own businesses will be able to reassure banks that their
business will not face the threat of litigation or a court enjoining
them from continuing with their business because of a non-compete.
In response to SBA Advocacy's comment on compensation for non-
competes, the Commission considered this issue in Part IV.C. and
decided to allow existing non-competes with senior executives, which
the Commission finds are most likely to have involved consideration, to
remain in force.
In response to the comment on the 8(a) business development
program, the Commission notes that there are likely program
participants in States where non-competes are banned or partially
banned and, thus, are not able to use non-competes. Moreover, the
program aims to help firms owned and controlled by socially and
economically disadvantaged individuals with various supports and
assistance to improve their success in securing government contracts.
There is no basis to believe such assistance hinges on these small
businesses being able to use non-competes with their workers. Like
other firms, program participants have viable, less restrictive
alternatives that do not tend to negatively affect competitive
conditions. The evidence presented in this Part shows that on the
whole, small businesses--including 8(a) participants--are expected to
benefit from the ban on non-competes by, for example, having a larger
pool of talent from which to hire workers.
In response to the comment that large businesses may use borderline
de facto non-competes, the Commission notes that it provides greater
clarity on the definition of non-compete clause in Part III.D, which
the Commission believes will reduce both confusion and evasion. To the
extent the commenter is raising the possibility that such other
restrictive employment terms may tend to negatively affect competitive
conditions, the Commission notes that section 5 and the other antitrust
laws apply to those terms and govern whether such terms might be
unlawful.
In response to comments on the proposed sale of business threshold,
as explained in Part V.A, the Commission is eliminating the 25%
threshold, meaning more small businesses will be able to utilize non-
competes for more owners when they are selling their business. While
individual businesses might see decreased value in a sale from being
unable to use non-competes for workers, any decrease is justified by
the net aggregate benefits of freeing labor markets and product and
service markets from non-competes. Again, pecuniary benefits to a firm
engaged in an anticompetitive practice is not a cognizable
defense.\1244\
---------------------------------------------------------------------------

\1244\ See Part II.F.
---------------------------------------------------------------------------

In response to the proposed definitions of ``small business,''
first, as explained in Part X.H, the Commission declines to create an
exception for small businesses. Second, the SBA already defines ``small
business'' based on size standards set forth in 13 CFR 121.201, and
agencies are prohibited from deviating from this definition without
following the procedures set out in 13 CFR 121.903.\1245\
---------------------------------------------------------------------------

\1245\ RFA Compliance Guide, supra note 1207 at 14. One business
suggested that the SBA definition is prone to confusion and
litigation but did not provide any additional information to explain
why or how.
---------------------------------------------------------------------------

In response to the comments arguing that the Commission's
jurisdiction does not extend to tax-exempt nonprofit hospitals and
healthcare organizations and that the final rule would, thus, give
large nonprofits an unfair advantage over small practices, the
Commission addresses this question in Parts II.E.2 and V.D.4. In
response to the comment on difficulties in using TRAPs under the
proposed rule, the Commission notes the final rule does not ban TRAPs,
but covers terms and conditions of employment that meet the definition
of non-compete clause as delineated in Sec. 910.1 and described in
Part III.D.
The commenter asserting that the final rule would exacerbate a
labor shortage for small businesses did not provide evidence to support
this claim. The Commission, however, finds that a ban on non-competes
will increase labor mobility and enable skilled workers who are
currently trapped by non-competes to work for others in the industry.
Finally, the Commission notes that numerous workers at small
businesses have shared how non-competes have harmed them.
The Commission has carefully considered all of SBA Advocacy's and
other stakeholders' comments, including those requesting a small
business exception. The Commission has made the following changes,
which the Commission believes will benefit small entities: adding an
exception for existing senior executive non-competes; amending the
notice requirement to ease compliance; and eliminating the sale of

[[Page 38496]]

business ownership threshold. The Commission believes that the final
rule will benefit small businesses overall. The Commission notes that
no State has exempted small businesses from any State statutes
regulating non-competes.\1246\ There is no empirical evidence that a
small business exception is necessary or appropriate. Further, the
evidence indicating that a ban on non-competes will benefit the economy
accounts for non-competes used by both large and small businesses. In
sum, the evidence indicates the final rule will, in the aggregate,
benefit both small businesses and workers who work for small
businesses--not to mention the consumers who in turn benefit. More
small businesses are expected to enter the market, and the final rule
will remove barriers to their growth.
---------------------------------------------------------------------------

\1246\ See generally Beck Reed Riden Chart, supra note 1052. In
2023, Maryland increased its non-compete compensation threshold to
$19.88 per hour and set a slightly lower threshold for small
employers at $19.20 per hour. Md. Lab. & Empl. Code sec. 3-716.
---------------------------------------------------------------------------

D. Comments by the Chief Counsel for Advocacy of the SBA, the
Commission's Assessment and Response, and Any Changes Made as a Result

The Commission received and carefully reviewed the comment from the
SBA.\1247\ The issues raised by the SBA and the Commission's responses
are included in Parts XI.C and XI.F.
---------------------------------------------------------------------------

\1247\ SBA Off. of Advocacy, FTC-2023-0007-21110.
---------------------------------------------------------------------------

E. Description and Estimated Number of Small Entities to Which the Rule
Will Apply

The final rule will impact all small businesses, across all
industry classes, that use non-competes. It may also impact some small
businesses that do not use non-competes but are impacted by other
businesses' use of non-competes. The Commission does not expect that
there are classes of businesses which will face disproportionate
impacts from the final rule.
For the vast majority of industries, there is no nationwide
granular data regarding the percentage of firms that use non-competes,
which would facilitate calculating the number of small entities in a
given industry using non-competes. Because of this data limitation and
given the relatively stable percentage of firms using non-competes
across the size distribution,\1248\ the Commission estimates the total
number of small firms across all industries in the U.S. economy. The
Commission then calculates the number of firms estimated to use non-
competes by applying an estimate of the percentage of firms using non-
competes to that total. Using the size standards set by the SBA,\1249\
the Commission calculates that there are 5.25 million small firms and
5.48 million small establishments in the U.S.\1250\ Assuming that 49.4%
of firms or establishments use non-competes,\1251\ an estimated 2.59
million small firms, comprising 2.71 million small establishments,
would be affected by the final rule. These calculations--the counts of
businesses and the percentage of businesses that use non-competes--are
based on small businesses with employees, since sole proprietorships
are unlikely to use non-competes. Since the estimate cannot account for
differential use of non-competes across industries, these firms span
all industries and various sizes below the standards set in the SBA's
size standards.
---------------------------------------------------------------------------

\1248\ See Colvin & Shierholz, supra note 65 at 5. The
Commission emphasizes that, since smaller firms generally use non-
competes at a lower rate, based on the numbers reported in Table 1,
the estimate of the number of affected small entities is likely
larger than is true in practice.
\1249\ See Small Bus. Admin., Table of Size Standards, https://www.sba.gov/document/support-table-size-standards.
\1250\ The Commission uses the latest data available from the
Census Bureau's Statistics of U.S. Businesses database, available
based on firm revenue and firm size. Census Bureau, Statistics of
U.S. Businesses (SUSB) (last revised Nov. 17, 2023), https://www.census.gov/programs-surveys/susb.html. Values are deflated to
current dollars using https://www.bls.gov/data/inflation_calculator.htm. As used in this analysis, per the 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 Census Bureau, Glossary, https://www.census.gov/programs-surveys/susb/about/glossary.html. The number of small firms
calculated here has decreased compared to the IRFA based on the
updated Census Bureau data and SBA size standards.
\1251\ See Colvin & Shierholz, supra note 65. The Commission
notes that the estimated percentage of firms which use non-competes
is based on a survey of businesses with employees. In addition, the
Small Business Majority's recent survey of small businesses finds
that 48% of respondents use non-competes. Sm. Bus. Majority Opinion
Poll, supra note 1214. The Commission does not find that this survey
has a sufficiently representative sample size to be considered
definitive but notes that it aligns with the Colvin & Shierholz
estimate.
---------------------------------------------------------------------------

The Commission sought comments on all aspects of the IRFA,
including the description and estimated number of small entities to
which the rule would apply. A business association claimed the IRFA
estimated the number of small businesses solely based on one incomplete
study, the Colvin and Shierholz study, which it argued counted only
firms with no union members who said all employees signed non-competes,
risking significantly undercounting the number of impacted businesses.
This comment misreads the study. The cited statement explained that
when tabulating the share of businesses where all employees sign non-
competes, the study counted only firms with no union members as it did
not have information on whether union members signed non-
competes.\1252\ That does not mean that only firms with no union
members where all employees signed non-competes were included in the
study. In fact, the study divided its results between the share of
workplaces where all employees and only some employees were subject to
non-competes.\1253\ The comment cites to only one component of the
study results. Moreover, the study states that anecdotal evidence
indicates it is rare for unions to agree to non-competes,\1254\ and
comments the Commission received align with that anecdotal evidence.
---------------------------------------------------------------------------

\1252\ See Colvin & Shierholz, supra note 65.
\1253\ See generally id.
\1254\ Id.
---------------------------------------------------------------------------

F. Projected Reporting, Recordkeeping, and Other Compliance
Requirements

To comply with the final rule, small entities must do three things.
First, to comply with Sec. Sec. 910.2(a)(1)(i) and 910.2(a)(2)(i),
which state it is an unfair method of competition to enter into a non-
compete with a worker, small entities can no longer enter into new non-
competes with incoming workers, including senior executives. This may
include revising human resources materials and manuals and template or
form contracts to ensure they are not misused on a forward-going basis,
and making strategic decisions regarding workers' employment terms.
Second, to comply with Sec. 910.2(a)(1)(ii) and (iii), small entities
cannot enforce (or make misrepresentations about) existing non-competes
for workers other than senior executives after the effective date. That
is, businesses must refrain from suing or threatening to sue workers
other than senior executives regarding a non-compete after the
effective date; but formal contract rescission is not required. Third,
businesses must provide notice to workers other than senior executives
that the worker's non-compete will not be enforced against the worker.
The Commission provides a safe harbor notice that must be provided only
to workers with known contact information. These foregoing steps entail
some potential legal and administrative costs.
As calculated in Parts X.D.1.a and X.D.2.a, the Commission
estimates the legal and administrative costs would

[[Page 38497]]

total $538.48 to $1,076.96 for each small firm, plus an additional
$155.85 for each establishment owned by that firm, plus an additional
$1.81 per worker. A single-establishment firm with 10 workers, for
example, would bear estimated costs of $712.45 to $1,250.93.\1255\ Only
a small portion of the average cost estimated for each small firm--
$155.85 per establishment, plus $1.81 per worker--is required under the
rule. The remainder of the estimated cost is attributable to legal
costs which firms may (but are not required to) undertake to revise
their contractual practices. The FRFA assumes that the value of human
resource professionals' times and legal professionals' time is equal to
twice their average wages, which results in updated estimates.\1256\ In
an abundance of caution, the Commission has erred on the side of
overestimating costs.
---------------------------------------------------------------------------

\1255\ ``Ten workers'' is chosen as an illustrative example.
\1256\ See Part X.F.7.b for a detailed description of the
calculation and assumptions. The Commission notes that a
typographical error in the IRFA resulted in the Commission reporting
preliminary figures that were substantially larger than the
comparable calculations in the preliminary section 22 analysis,
which accounts for some of the differential between the
preliminarily reported figures in the IRFA and the final estimates
here.
---------------------------------------------------------------------------

As described in greater detail in Part X.F.7.a, the Commission also
finds that firm investment in human capital may increase or decrease
under the final rule, depending on the type of training affected. Given
the evidence available, the Commission is unable to fully monetize the
estimates of firm investment in human capital. It concludes, however,
that even in the absence of a full monetization of all costs and
benefits of the final rule, the final rule has substantial benefits
that clearly justify the costs.
1. Legal Costs
To ensure that incoming workers' contracts do not include non-
competes and that they fully comply with the final rule, firms may
employ in-house counsel, outside counsel, or human resource specialists
(depending on the complexity of the relevant non-compete). For many
firms, this process would likely be straightforward (i.e., simply not
using non-competes or removing one section from a boilerplate
contract). Other firms may have more complex agreements or choose to
use more time. The Commission assumes that, on average, ensuring that
contracts for incoming workers do not have non-competes would take the
equivalent of one hour of a lawyer's time (valued at $134.62),\1257\
resulting in a total cost of $134.62*2.71 million = $364.8 million.
There may be substantial heterogeneity in the costs for individual
firms; however, the Commission believes this number is conservative.
For firms whose costs of removing non-competes 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 Part X.F.7.b.
---------------------------------------------------------------------------

\1257\ BLS, Occupational Outlook Handbook, Lawyers (last
modified Sept. 6, 2023), https://www.bls.gov/ooh/legal/lawyers.htm
(updated for inflation to 2023 dollars and based on updated BLS
data). Assumed lost productivity is twice the median wage.
---------------------------------------------------------------------------

For each establishment of each firm, estimated direct compliance
costs total $21.23 + $134.62 = $155.85, plus $1.81 per worker with a
non-compete.
Some business commenters have indicated that they may add or expand
the scope of NDAs or other contractual provisions. This legal work is
not mandated or required by the rule; it would be undertaken only by
the subset of firms and workers for whom firms conclude that such
alternatives would be desirable. Additionally, such adjustments are
likely unnecessary for senior executives whose non-competes continue to
be enforceable under the final rule. Therefore, this component
additionally involves identifying senior executives whose existing non-
competes are unaffected. For any such legal work, firms may use in-
house counsel or outside counsel. To do so, firms may use in-house
counsel or outside counsel to revise current contracts or enter into
new, different contracts with workers.
The Commission is not aware of empirical evidence on how much it
costs firms to revise their contractual practices when they can no
longer use non-competes, and commenters did not provide evidence on
costs. However, there is evidence indicating that firms that use non-
competes are already using other types of restrictive employment
provisions. Balasubramanian et al. find that 95.6% of workers with non-
competes are also subject to an NDA, 97.5% of workers with non-competes
are also subject to a non-solicitation agreement, NDA, or a non-
recruitment agreement, and that 74.7% of workers with non-competes are
also subject to all three other types of provisions.\1258\ Firms that
are already using multiple restrictive covenants may not need to expand
the scope of existing restrictive employment provisions or enter into
new ones.
---------------------------------------------------------------------------

\1258\ Balasubramanian, Starr, & Yamaguchi, supra note 74. The
value 97.5% is calculated as (1-0.6%/24.2%), where 0.6% represents
the proportion of workers with only a non-compete, and no other
post-employment restriction, and 24.2% represents the proportion of
workers with a non-compete, regardless of what other post-employment
restrictions they have.
---------------------------------------------------------------------------

Among the approximately one half of firms that use non-
competes,\1259\ the Commission assumes that the average firm employs
the equivalent of four to eight hours of a lawyer's time to revise its
contractual practices.\1260\ The Commission emphasizes that 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 that use non-competes only with
workers who do not have access to sensitive information, or those that
are already using other types of restrictive employment provisions to
protect sensitive information, may opt to make no changes. Other firms
may employ several hours or multiple days of lawyers' time to arrive at
a new contract.\1261\ The 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-competes opt to
make no changes to their contractual practices (for example, because
their workers are among the 97.5% of workers that already have other
post-employment restrictions, or because they will rely on trade secret
law in the future, or because they are using non-competes 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 working days of an
attorney's time, this would result in the estimate of 4-8 hours on
average.
---------------------------------------------------------------------------

\1259\ Colvin & Shierholz, supra note 65 at 1.
\1260\ Part X.F.7.b.i.
\1261\ These estimates are derived from outreach to employment
attorneys active in assisting firms in writing their non-competes.
Commenters did not provide additional information or data that could
be used to update these estimates.
---------------------------------------------------------------------------

The Commission further emphasizes this estimate is an average
across all employers that would be covered by the final rule. There is
likely substantial heterogeneity in the amount of time firms would use
to revise contractual practices; very large firms that use non-competes
extensively would likely incur greater costs.
Under the assumption that the average firm that uses a non-compete
employs the equivalent of four to eight hours of a lawyer's time, this
analysis calculates the total expenditure on updating contractual
practices to range from $134.62*4*2.59 million = $1.4 billion to
$134.62*8*2.59 million = $2.8 billion. Note that this assumes decisions
regarding protection of sensitive information and contract updating are

[[Page 38498]]

made at the firm, rather than establishment, level, since sensitive
information is likely shared across business establishments of a firm.
For each affected small business, the estimated cost of updating
contractual practices is $134.62*4 = $538.48 to $134.62*8 = $1,076.96.
2. Administrative Costs for Notification Requirements
To reduce compliance costs and increase compliance certainty, Sec.
910.2(b)(5) provides that an employer complies with the notice
requirement in Sec. 910.2(b)(1) where it provides notice to a worker
pursuant to Sec. 910.2(b)(4). Furthermore, Sec. 910.2(b)(4) includes
model language that constitutes notice to the worker that the worker's
non-compete is no longer in effect. The Commission estimates that
composing and sending this message in a digital format to all of a
firm's workers and applicable former workers for whom digital contact
information is available would take 20 minutes of a human resources
specialist's time.\1262\ According to BLS, the median wage for a human
resources specialist was $31.85 per hour in 2023.\1263\ The cost of
compliance for currently employed workers with digital contact
information available is therefore ($31.85*2)/3 = $21.23 per
establishment. As estimated in Part XI.E, there are 2.59 million small
firms, comprising 2.71 million small establishments, in the U.S. that
use non-competes.\1264\ Conservatively assuming that 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 that the total direct compliance cost for workers who are
already employed and for whom digital contact information is available
is $21.23*2.71 million = $57.5 million.
---------------------------------------------------------------------------

\1262\ See Part X.F.7.
\1263\ See BLS, Occupational Outlook Handbook, Human Resources
Specialists, https://www.bls.gov/ooh/business-and-financial/human-resources-specialists.htm (last modified Sept. 6, 2023) (updated for
inflation to 2023 dollars).
\1264\ The dataset is available at Census Bureau, 2021 SUSB
Annual Data Tables by Establishment Industry, Industry (Feb. 2022)
(last revised Sept. 15, 2023), https://www.census.gov/data/tables/2021/econ/susb/2021-susb-annual.html.
---------------------------------------------------------------------------

Each small firm must additionally mail notice to workers with non-
competes for whom a physical address is available, but digital contact
information is not. The cost per notice is estimated as 5 cents for one
printed page plus mailing cost of 70 cents plus one minute of an HR
professional's time, at $63.70 per hour, for a total of $1.81 per
notice. Given an estimated count of affected workers with non-competes
at small businesses of 584,843,\1265\ the overall cost of mailed notice
provision is therefore estimated to be $1.1 million.
---------------------------------------------------------------------------

\1265\ Estimated as 80% * 18.1% * 66% * (33,271,644-27,151,987),
where 80% is the percentage of covered workers (see Part X.F.4.a),
18.1% is the estimated percentage of workers with non-competes (see
Starr, Prescott, & Bishara, supra note 68), 67% is the assumed
percent of workers without digital contact information, and
6,119,657 = 33,271,644-27,151,987 is the count of workers at small
businesses (see https://advocacy.sba.gov/wp-content/uploads/2023/11/2023-Small-Business-Economic-Profile-US.pdf).
---------------------------------------------------------------------------

G. Comments and Responses to Comments on the IRFA

The IRFA explained the Commission's preliminary assessment of the
direct compliance costs for employers, both for rescinding non-competes
for workers who are already employed as well as the costs of an
attorney to ensure contracts for incoming workers do not have non-
competes.\1266\ The IRFA also explained the Commission's assessment of
the costs of updating contractual practices, if the employer seeks to
do so, by expanding the scope of other contractual provisions to
protect trade secrets and other valuable investments.\1267\ The
Commission sought comment on all aspects of the IRFA.\1268\
---------------------------------------------------------------------------

\1266\ See NPRM at 3532.
\1267\ See id. at 3532-33.
\1268\ See id. at 3531.
---------------------------------------------------------------------------

In support of the proposed rule, one employment law firm said there
are no significant recurring compliance costs to the final rule that
would create an undue burden for small employers compared to larger
employers. The Commission agrees. The final rule is designed to require
only a one-time action and no recurring compliance requirements in
order to minimize compliance costs for employers. A technology startup
organization said the rule would save small businesses significant
legal costs from the complex legal analysis currently necessary when
trying to hire a worker subject to a non-compete, particularly when
trying to assess the patchwork of State laws, ``reasonableness'' tests,
and choice-of-law issues, which startups have few resources to pay.
Some commenters raised concerns about the preliminary assessment of
direct compliance costs, primarily concerning unsubstantiated costs of
consulting with counsel. Some commenters said small businesses would
need to consult with outside counsel to ensure they properly comply
with the final rule, though they did not explain why. Another business
association said most small businesses do not have the organizational
development required to issue the notice and would need to hire outside
counsel. A group of industry associations said the estimated costs of
$317.68 to $563.84 were not realistic and did not reflect the cost of
discussions with outside counsel on its existing agreements and
contracts and its contract negotiation practices, but the comment did
not provide information to support a different estimate. Some
commenters argued that small businesses lacking internal counsel or
employment lawyers on retainer would face substantial unplanned
expenses when seeking outside counsel on whether other restrictive
covenants violated the proposed de facto non-compete provision. These
commenters did not provide cost estimates.
First, in response to the proposed rule's Preliminary Regulatory
Impact Analysis, commenters discussed that the estimated compliance
costs and costs of contractual updating may underestimate true costs
for the broader business community and provided alternative estimates
of the time employers might spend complying with the rule and updating
contractual practices, as well as the charged rates of outside counsel.
These comments are addressed in the sensitivity analyses presented in
Part X.F.7. The Commission has also updated the estimated legal costs
in this Part. Commenters also argued that small businesses would face
greater costs associated with the use of outside counsel but did not
quantify those costs for small businesses. Again, the Commission
provides a sensitivity analysis reflecting the cost of experienced
outside counsel for all firms in Part X.F.7.b.i. Moreover, as the
Commission notes, the estimate reflects significant heterogeneity, so
that it is likely that some firms will simply be able to remove the
paper or electronic copy of the non-compete from their website or
workplace manual--requiring no attorney time--while others, like the
commenter, may spend more time consulting with counsel.
Second, in response to these and other comments and as explained in
Part III.D, the definition of non-compete clause has been revised to
reduce confusion and give employers and workers a clearer understanding
of what is prohibited, which will in turn reduce compliance costs.
Third, the FRFA includes updated compliance costs to reflect any
remaining need to assess contracts under Sec. 910.2(a). Fourth, the
Commission has made the notice

[[Page 38499]]

requirement as simple as possible by providing model language for the
notice in Sec. 910.2(b)(4) and a safe harbor allowing employers to use
a last known address and an exception for employers who do not have a
workers' contact information. Employers can provide the notice by hand
or through the mail, email, or a text message,\1269\ and employers are
not required to provide notice if they have no method of contacting a
worker by paper or digital format.\1270\ An employer is required only
to notify workers that existing non-competes are no longer in effect
and refrain from including non-competes in future contracts. This
process is designed to be as easy as possible for employers. Employers
should rarely need to seek outside legal assistance for complying with
the notice requirement, and commenters do not provide an explanation of
why legal assistance would be a necessary part of this process, though
the cost of any such legal assistance (to identify senior executives
for whom notice is not required) is accounted for in Part XI.F.1.
Finally, the Commission will provide guidance materials for small
entities to explain how to comply with the final rule.
---------------------------------------------------------------------------

\1269\ Sec. 910.2(b)(2).
\1270\ Sec. 910.2(b)(3).
---------------------------------------------------------------------------

The estimated compliance costs do not directly include any costs or
savings from the senior executive exception, because the number of
workers the exception might apply to is such a small portion of workers
overall that any effect is de minimis. At an individual firm level,
small businesses might not be impacted by the exception (if no workers
earn above the total compensation threshold). Others might face
increased compliance costs if they choose to use the exception and need
to evaluate whether a worker meets the definition of senior executive
(as accounted for in Part XI.F.1). However, the total compensation
threshold included in the final rule's definition of ``senior
executive'' is designed to ensure that employers and workers do not
need to conduct a job duties assessment for every worker, only workers
making above the threshold. In addition, in many cases it may be clear
that a worker does or does not meet the test for whether a worker is a
``senior executive'' without a detailed assessment. For example, CEOs
and Presidents are presumed to be in a policy-making position under
Sec. 910.1 and will not be otherwise subject to a job duties test,
while highly paid workers in a non-executive role such as many
physicians will not. Other small businesses might see decreased or
eliminated direct and indirect compliance costs if they can maintain
existing senior executive non-competes.
Many commenters also stated there are other indirect costs. SBA
Advocacy suggested that the IRFA did not account for additional
potential costs, including the costs of services, including higher
legal fees to protect information, potential increased training, hiring
and retention costs, and process changes.\1271\ Similarly, a business
association argued small businesses could face additional costs for
finding alternatives to protect assets and to alter hiring, training,
and retention processes. Some business associations argued that the
cost of updating contractual practices would be higher because
businesses would need to consult counsel, and many small businesses may
be unable to afford to do so. A business organization stated that the
Commission should consider the costs from a small business diminishing
in value to potential buyers because it cannot record the value of its
non-competes.
---------------------------------------------------------------------------

\1271\ SBA Off. of Advocacy, FTC-2023-0007-21110 at 3.
---------------------------------------------------------------------------

Another business organization said costs to small businesses are
not limited to updating contractual agreements, mentioning the use of
non-competes to protect assets and investments. A law firm suggested
that trade secrets litigation often costs unspecified millions in
attorney and expert fees and investigations costs. A business
association commented that the rule would likely trigger additional
litigation costs for trade secret protection and satisfying standards
for injunctive relief, as well as unspecified additional costs related
to lost business relationships and ideas. The business association
cited an article from the biotech industry as saying a ban will force
biotech companies to find other ways to protect themselves, likely
through increased trade secret litigation, and recognizing that non-
competes are critical to startups in the industry.
Two comments requested that the Commission publish a supplemental
IRFA to account for the rule's potential impact.
The Commission notes that agencies are generally not required to
consider indirect costs, though it is considered a best practice.\1272\
While commenters raised categories of indirect costs that may be
implicated (and it is not clear exactly what potential costs may fit
into those categories), commenters did not provide any data or
information that could enable the Commission to estimate any indirect
costs. Some of these costs are also attenuated and speculative. Many of
these concerns are also addressed in Parts IV.D and XI.C. The
commenters also misunderstand the calculations in the IRFA and RIA; the
estimates are an average across employers using non-competes, and there
is likely to be substantial heterogeneity. The calculations account for
the assumption that some firms may spend more than this amount. In
response to comments on hiring costs, some firms may save on hiring
costs from easier hiring, while others might have increased turnover
costs.\1273\ Businesses also have other options to compete on the
merits besides raising wages, as many commenters indicated they sought
jobs with better hours, more flexible schedules, shorter commutes,
career opportunities, and other benefits.\1274\ Businesses will be
better able to hire workers experienced in their field who require less
training than workers new to an industry.\1275\
---------------------------------------------------------------------------

\1272\ Mid-Tex Elec. Co-op., Inc. v. FERC, 773 F.2d 327, 342
(D.C. Cir. 1985) (``[I]t is clear that Congress envisioned that the
relevant `economic impact' was the impact of compliance with the
proposed rule on regulated small entities[,]'' and the court
inferred that ``Congress did not intend to require that every agency
consider every indirect effect that any regulation might have on
small businesses in any stratum of the national economy.''); see
also RFA Compliance Guide, supra note 1207 at 22-23, 64-68.
\1273\ See Part X.F.9.
\1274\ See Part XI.C.2.b.
\1275\ See Part X.F.7.a.
---------------------------------------------------------------------------

Even if commenters' unsupported assertions that trade secret
litigation and NDA enforcement may be more costly for businesses,
including small businesses, are correct, such costs are justified by
the benefits of the rule and in any event pecuniary benefits to a firm
from an anticompetitive practice are not a cognizable
justification.\1276\ The Commission estimates that the final rule may
increase or decrease overall litigation costs, and there is no evidence
in the literature to allow the Commission to quantify those costs or
benefits.\1277\
---------------------------------------------------------------------------

\1276\ See Parts IV.D.3, X.F.5-6, II.F.
\1277\ See Part X.F.7.c.
---------------------------------------------------------------------------

The comment citing an article on the biotech industry overstates
the article's statements. The article said the existing increase in
trade secrets litigation was likely to continue if the rule were
adopted, did not cite any evidence for this prediction other than that
non-competes are often used to protect trade secrets, and noted that
companies may also use NDAs or restrict access to sensitive
information.\1278\ The article

[[Page 38500]]

did not say that non-competes are critical to biotech startups.\1279\
---------------------------------------------------------------------------

\1278\ Rosemary Scott, FTC's Non-Compete Law Could Propel Rise
in Trade Secrets Lawsuits, BioSpace (Feb. 8, 2023), https://www.biospace.com/article/ftc-s-non-compete-law-could-propel-rise-in-trade-secrets-lawsuits-/.
\1279\ Id.
---------------------------------------------------------------------------

The commenter asking the Commission to consider small business
valuation changes did not provide any potential estimates of such a
cost, nor did the commenter demonstrate that such costs exist. It is
unclear whether this commenter was referring to the value of non-
competes for owners or for workers, but some such non-competes may fall
within the exceptions for existing senior executive non-competes or for
owners in a sale of business.\1280\ To the extent there are any
remaining non-competes that increase the value of a business in a sale,
the Commission finds that any marginal decrease is justified by the
substantial overall benefits of the rule.
---------------------------------------------------------------------------

\1280\ See Sec. 910.3.
---------------------------------------------------------------------------

In response to the requests for a supplemental IRFA, one is not
required by law, and this FRFA responds to all comments on the IRFA. A
supplemental IRFA would not provide the public with additional relevant
information that the IRFA did not.

H. Discussion of Significant Alternatives

The RFA requires that agencies include a description of the steps
the agency has taken to minimize the significant economic impact on
small entities consistent with the stated objectives of applicable
statutes, including a statement of the factual, policy, and legal
reasons for selecting the alternative adopted in the final rule and why
each one of the other significant alternatives to the rule considered
by the agency which affect the impact on small entities was
rejected.\1281\ Statutory examples of ``significant alternatives''
include different requirements or timetables that take into account the
resources available to small entities; the clarification,
consolidation, or simplification of compliance and reporting
requirements under the rule for small entities; the use of performance
rather than design standards; and an exemption from coverage of the
rule, or any part thereof, for small entities.\1282\
---------------------------------------------------------------------------

\1281\ 5 U.S.C. 604(a)(6).
\1282\ See 5 U.S.C. 603(c)(1)-(4).
---------------------------------------------------------------------------

In Part IX, the Commission discusses significant alternatives to
the final rule. Part IX also includes an assessment determining that
each of the significant alternatives would not accomplish the
objectives of the final rule. The Commission did incorporate some of
the alternatives proposed in the NPRM and in comments into the final
rule, namely the exception for existing senior executive non-competes,
simplifying notice requirements, eliminating rescission requirements,
and eliminating the 25% threshold for the sale of business exception.
In addition, the Commission's analysis of benefits and costs in Part X
includes an assessment of the benefits and costs of excluding senior
executives. The Commission notes that it has designed the final rule to
minimize compliance costs for all businesses and that the final rule
does not include any reporting requirements. As stated in Part X.F.7.b,
the Commission estimates that direct compliance costs and the costs of
updating contractual practices would result in costs of $538.48 to
$1,076.96 for each firm. As previously noted, the Commission does not
believe the final rule imposes a significant economic impact on a
substantial number of small entities. The Commission has also described
how the final rule will benefit and increase the number of small
businesses.
After careful consideration, the Commission is not creating an
exception for small entities or different regulatory requirements for
small entities. The final rule provides that for workers other than
senior executives, it is an unfair method of competition for a person
to enter into or attempt to enter into a non-compete, enforce or
attempt to enforce a non-compete, or represent that the worker is
subject to a non-compete.\1283\ For senior executives, the final rule
provides that it is an unfair method of competition for a person to
enter into or attempt to enter into a non-compete, enforce or attempt
to enforce a non-compete entered into after the effective date, or
represent that the worker is subject to a non-compete, where the non-
compete was entered into after the effective date.\1284\ Based on the
available evidence, the Commission does not believe that the analysis
in Parts IV.B and IV.C is fundamentally different for non-competes that
are imposed by small entities. For this reason, the Commission is not
creating an exception for small entities or different regulatory
requirements for small entities.
---------------------------------------------------------------------------

\1283\ See Sec. 910.2(a)(1).
\1284\ See Sec. 910.2(a)(2).
---------------------------------------------------------------------------

The Commission is not delaying the effective date of the final for
small entities. Under Sec. 910.6, the final rule is effective 120 days
after publication in the Federal Register on September 4, 2024. One
small business asked that the final rule's effective date be delayed
for two years to give the business time to silo its intellectual
property and implement safeguards to protect its information. In the
Commission's view, the rule's effective date of September 4, 2024 will
afford small entities a sufficient period of time to comply with the
final rule, and commenters have not provided evidence that more time is
necessary.\1285\
---------------------------------------------------------------------------

\1285\ See Part VIII.
---------------------------------------------------------------------------

XII. Paperwork Reduction Act

Under the Paperwork Reduction Act of 1995 (``PRA''),\1286\ 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.\1287\ 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.\1288\
---------------------------------------------------------------------------

\1286\ 44 U.S.C. 3501 et seq.
\1287\ 44 U.S.C. 3502(3); 5 CFR 1320.3(c).
\1288\ 44 U.S.C. 3506(c)(1)(B); 5 CFR 1320.5(a)(3).
---------------------------------------------------------------------------

A. The Proposed Rule

In the NPRM, the Commission stated that it believed the proposed
rule would contain a disclosure requirement that would constitute a
collection of information requiring OMB approval under the PRA. The
Commission stated that this disclosure requirement was proposed Sec.
910.2(b)(2), which would have required employers to provide notice to a
worker with an existing non-compete--i.e., a non-compete that was
entered into prior to the effective date--that the non-compete is no
longer in effect and may not be enforced against the worker.\1289\
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--the Commission estimated that
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 estimated 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.\1290\
---------------------------------------------------------------------------

\1289\ NPRM at 3533.
\1290\ Id. at 3534.
---------------------------------------------------------------------------

The Commission stated that the proposed rule would impose only de
minimis capital and non-labor costs.

[[Page 38501]]

The Commission anticipated that covered employers would 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,
the Commission anticipated that this one-time disclosure would not
require substantial investments in new systems or other non-labor
costs. The Commission noted that, moreover, many establishments are
likely to provide the disclosure electronically, further reducing total
costs.\1291\
---------------------------------------------------------------------------

\1291\ Id.
---------------------------------------------------------------------------

The Commission sought comment on all aspects of its PRA analysis,
including (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.

B. Comments Received

No commenters specifically addressed the PRA analysis in the NPRM.
However, the Commission received extensive comments on its Preliminary
Regulatory Impact Analysis and Initial Regulatory Flexibility Act
Analysis, and many of these commenters addressed the Commission's
estimates related to the cost of compliance. These comments are
summarized in Parts X (the Commission's Final Regulatory Analysis) and
XI (the Commission's Final Regulatory Flexibility Act Analysis). The
Commission also received comments on the proposed notice requirement
itself. These comments are summarized in Part IV.E.

C. Final PRA Analysis

The Commission finalizes the proposed rule's notice requirement
largely as proposed, with some adjustments to even further ease
compliance. In the final rule, Sec. 910.2(a)(1)(ii) prohibits
employers from enforcing existing non-competes--i.e., non-competes
entered into prior to the effective date--with respect to workers other
than senior executives. Section 910.2(b)(1) as finalized states further
that for each existing non-compete that it is an unfair method of
competition to enforce or attempt to enforce under Sec.
910.2(a)(1)(ii)--i.e., non-competes entered into with workers other
than senior executives--the person who entered into the non-compete
with the worker must provide clear and conspicuous notice to the worker
by the effective date that the worker's non-compete will not be, and
cannot legally be, enforced against the worker.
Pursuant to Sec. 910.2(b)(2), the notice must (i) identify the
person who entered into the non-compete with the worker and (ii) be on
paper delivered by hand to the worker, or by mail at the worker's last
known personal street address, or by email at an email address
belonging to the worker, including the worker's current work email
address or last known personal email address, or by text message at a
mobile telephone number belonging to the worker.
Section 910.2(b)(3) provides an exception to the notice requirement
in Sec. 910.2(b)(1) where the person that would otherwise be required
to provide the notice has no record of a street address, email address,
or mobile telephone number.
Section 910.2(b)(4) provides model language that employers may use
to comply with the notice requirement. Section 910.2(b)(5) states that
an employer presumptively complies with the notice requirement in Sec.
910.2(b)(1) where the employer provides a notice to the worker pursuant
to Sec. 910.2(b)(4). And Sec. 910.2(b)(6) allows but does not require
employers, in addition to providing the required notice in English, to
provide the notice in another language (or languages). Section
910.2(b)(6) also permits employers to use any Commission-provided
translation of the model language in Sec. 910.2(b)(4).
The notice requirement has changed in two important respects from
the proposed rule. First, employers are no longer required to provide
the notice to senior executives with existing non-competes. Second, as
long as employers provide the notice in English, they are permitted to
provide the notice in a language other than English. However, neither
of these changes significantly affects the burden of complying with the
notice. Senior executives are only 0.75% of workers, so the cost
savings to employers of not needing to provide the notice to senior
executives are minimal. No employer is required to provide the notice
in a different language, so the rule does not require employers to
incur any compliance costs for doing so.
The Commission estimates that composing and sending the notice in a
digital format to workers for whom digital contact information is
available would take 20 minutes of a human resources specialist's time.
According to BLS, the median wage for a human resources specialist in
2022 was $31.85 per hour in 2023 dollars.\1292\ The cost of compliance
for currently employed workers is therefore ($31.85*2)/3=$21.23 per
establishment.\1293\ According to the Census Bureau's Statistics of
U.S. Businesses database, in 2021 (the most recent year for which data
are available), there were 5.91 million firms and 6.88 million
establishments in the U.S.\1294\ The Commission estimates the
percentage of firms using non-competes in the U.S. at 49.4%.\1295\ The
Commission conservatively assumes that 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 yields
an estimated 3,397,545 covered establishments which would incur an
estimated labor cost burden of 1,132,515 hours to comply with this
requirement (3,397,545 establishments x 20 minutes). The Commission
estimates the associated labor cost for notifying affected workers who
are already employed and for whom digital contact information is
available is $21.23 x 6.88 million x 0.494 = $72,141,201.
---------------------------------------------------------------------------

\1292\ BLS, Occupational Outlook Handbook: Human Resources
Specialists, https://www.bls.gov/ooh/business-and-financial/human-resources-specialists.htm. The value in 2022 was $30.88, which was
updated to 2023 dollars.
\1293\ The lost productivity of workers is assumed to be twice
the median wage. See Part X.F.7.b.ii.
\1294\ Census Bureau, 2021 SUSB Annual Data Tables by
Establishment Industry (December 2023), https://www.census.gov/data/tables/2021/econ/susb/2021-susb-annual.html.
\1295\ See Colvin & Shierholz, supra note 65 at 4.
---------------------------------------------------------------------------

Businesses may not have digital contact information for workers.
The number of workers with non-competes who must therefore receive
physical notice is the total number of covered workers (101.1 million;
see Part X.F.7.a.i) times the percentage of workers who have non-
competes (18.1%) times the percentage of workers who require mailed
notice (assumed to be 66% of workers \1296\), for a total of 12.1
million workers. The Commission notes that the percentage of workers
who require mailed notice is likely a substantial overestimate, since
it is estimated based on the percentage of individuals who receive
health information digitally. The Commission believes that employers
are more likely to have digital means of providing the notice to their
current workers

[[Page 38502]]

especially, but also to their former workers. The Commission
conservatively adopts this estimate as an upper bound. The cost of
mailed notice provision includes some capital costs (the cost of
postage and mailing materials) and the cost of a human resource
professional's time. The cost per worker is estimated as 5 cents for
one printed page plus mailing cost of 70 cents plus the cost of one
minute of an HR professional's time, at $63.70 per hour, for a total of
$1.81 per notice. The overall cost of mailed notice provision is
therefore estimated to be $22 million.
---------------------------------------------------------------------------

\1296\ See supra note 1165 (CMS Supporting Statement assumes 66%
of workers require mailed notice from their health insurance
companies).
---------------------------------------------------------------------------

As the Commission stated in the proposed rule, the Commission
anticipates that covered employers already have in place existing
systems to communicate with and provide employment-related disclosures
to workers. While the final rule requires a one-time disclosure to some
workers, the Commission anticipates this one-time disclosure will 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.

XIII. Other Matters

Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs designated this final
rule as a ``major rule,'' as defined by 5 U.S.C. 804(2).

List of Subjects in 16 CFR Part 910

Antitrust.

0
For the reasons set forth above, and under the authority of Sections 5
and 6(g) of the Federal Trade Commission Act, the Federal Trade
Commission adds subchapter J, consisting of parts 910 and 912, 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

PART 912--[RESERVED]

PART 910--NON-COMPETE CLAUSES

Sec.
910.1. Definitions.
910.2. Unfair methods of competition.
910.3. Exceptions.
910.4. Relation to State laws and preservation of State authority
and private rights of action.
910.5. Severability.
910.6. Effective date.

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

PART 910--NON-COMPETE CLAUSES

Sec. 910.1 Definitions.

As used in this part:
Business entity means a partnership, corporation, association,
limited liability company, or other legal entity, or a division or
subsidiary thereof.
Employment means work for a person.
Non-compete clause means:
(1) A term or condition of employment that prohibits a worker from,
penalizes a worker for, or functions to prevent a worker from:
(i) Seeking or accepting work in the United States with a different
person where such work would begin after the conclusion of the
employment that includes the term or condition; or
(ii) Operating a business in the United States after the conclusion
of the employment that includes the term or condition.
(2) For the purposes of this part, term or condition of employment
includes, but is not limited to, a contractual term or workplace
policy, whether written or oral.
Officer means a president, vice president, secretary, treasurer or
principal financial officer, comptroller or principal accounting
officer, and any natural person routinely performing corresponding
functions with respect to any business entity whether incorporated or
unincorporated.
Person means any natural person, partnership, corporation,
association, or other legal entity within the Commission's
jurisdiction, including any person acting under color or authority of
State law.
Policy-making authority means final authority to make policy
decisions that control significant aspects of a business entity or
common enterprise and does not include authority limited to advising or
exerting influence over such policy decisions or having final authority
to make policy decisions for only a subsidiary of or affiliate of a
common enterprise.
Policy-making position means a business entity's president, chief
executive officer or the equivalent, any other officer of a business
entity who has policy-making authority, or any other natural person who
has policy-making authority for the business entity similar to an
officer with policy-making authority. An officer of a subsidiary or
affiliate of a business entity that is part of a common enterprise who
has policy-making authority for the common enterprise may be deemed to
have a policy-making position for purposes of this paragraph. A natural
person who does not have policy-making authority over a common
enterprise may not be deemed to have a policy-making position even if
the person has policy-making authority over a subsidiary or affiliate
of a business entity that is part of the common enterprise.
Preceding year means a person's choice among the following time
periods: the most recent 52-week year, the most recent calendar year,
the most recent fiscal year, or the most recent anniversary of hire
year.
Senior executive means a worker who:
(1) Was in a policy-making position; and
(2) Received from a person for the employment:
(i) Total annual compensation of at least $151,164 in the preceding
year; or
(ii) Total compensation of at least $151,164 when annualized if the
worker was employed during only part of the preceding year; or
(iii) Total compensation of at least $151,164 when annualized in
the preceding year prior to the worker's departure if the worker
departed from employment prior to the preceding year and the worker is
subject to a non-compete clause.
Total annual compensation is based on the worker's earnings over
the preceding year. Total annual compensation may include salary,
commissions, nondiscretionary bonuses and other nondiscretionary
compensation earned during that 52-week period. Total annual
compensation does not include board, lodging and other facilities as
defined in 29 CFR 541.606, and does not include payments for medical
insurance, payments for life insurance, contributions to retirement
plans and the cost of other similar fringe benefits.
Worker means a natural person who works or who previously worked,
whether paid or unpaid, without regard to the worker's title or the
worker's status under any other State or Federal laws, including, but
not limited to, whether the worker is an employee, independent
contractor, extern, intern, volunteer, apprentice, or a sole proprietor
who provides a service to a person. The term worker includes a natural
person who works for a franchisee or franchisor, but does not include a
franchisee in the context of a franchisee-franchisor relationship.

Sec. 910.2 Unfair methods of competition.

(a) Unfair methods of competition--(1) Workers other than senior
executives. With respect to a worker other than a senior executive, it
is an unfair method of competition for a person:
(i) To enter into or attempt to enter into a non-compete clause;

[[Page 38503]]

(ii) To enforce or attempt to enforce a non-compete clause; or
(iii) To represent that the worker is subject to a non-compete
clause.
(2) Senior executives. With respect to a senior executive, it is an
unfair method of competition for a person:
(i) To enter into or attempt to enter into a non-compete clause;
(ii) To enforce or attempt to enforce a non-compete clause entered
into after the effective date; or
(iii) To represent that the senior executive is subject to a non-
compete clause, where the non-compete clause was entered into after the
effective date.
(b) Notice requirement for existing non-compete clauses--(1) Notice
required. For each existing non-compete clause that it is an unfair
method of competition to enforce or attempt to enforce under paragraph
(a)(1)(ii) of this section, the person who entered into the non-compete
clause with the worker must provide clear and conspicuous notice to the
worker by the effective date that the worker's non-compete clause will
not be, and cannot legally be, enforced against the worker.
(2) Form of notice. The notice to the worker required by paragraph
(b)(1) of this section must:
(i) Identify the person who entered into the non-compete clause
with the worker;
(ii) Be on paper delivered by hand to the worker, or by mail at the
worker's last known personal street address, or by email at an email
address belonging to the worker, including the worker's current work
email address or last known personal email address, or by text message
at a mobile telephone number belonging to the worker.
(3) Exception. If a person that is required to provide notice under
paragraph (b)(1) of this section has no record of a street address,
email address, or mobile telephone number, such person is exempt from
the notice requirement in paragraph (b)(1) of this section with respect
to such worker.
(4) Model language. For purposes of paragraph (b)(1) of this
section, the following model language constitutes notice to the worker
that the worker's non-compete clause cannot legally be enforced and
will not be enforced against the worker.
BILLING CODE 6750-01-P

Figure 1 to Paragraph (b)(4)--Model Language

[[Page 38504]]

[GRAPHIC] [TIFF OMITTED] TR07MY24.000

BILLING CODE 6750-01-C
(5) Safe harbor. A person complies with the requirement in
paragraph (b)(1) of this section if the person provides notice to a
worker pursuant to paragraph (b)(4) of this section.
(6) Optional notice in additional languages. In addition to
providing the notice required in paragraph (b)(1) of this section in
English, a person is permitted to provide such notice in a language (or
in languages) other than English or to include internet links to
translations in additional languages. If providing optional notice
under this paragraph (b)(6), a person may use any Commission-provided
translation of the model language in paragraph (b)(4) of this section.

Sec. 910.3 Exceptions.

(a) Bona fide sales of business. The requirements of this part
shall not apply to a non-compete clause that is entered into by a
person pursuant to a bona fide sale of a business entity, of the
person's ownership interest in a business entity, or of all or
substantially all of a business entity's operating assets.
(b) Existing causes of action. The requirements of this part do not
apply where a cause of action related to a non-compete clause accrued
prior to the effective date.
(c) Good faith. It is not an unfair method of competition to
enforce or attempt to enforce a non-compete clause or to make
representations about a non-compete clause where a person has a good-
faith basis to believe that this part is inapplicable.

Sec. 910.4 Relation to State laws and preservation of State authority
and private rights of action.

(a) This part will not be construed to annul, or exempt any person
from complying with any State statute,

[[Page 38505]]

regulation, order, or interpretation applicable to a non-compete
clause, including, but not limited to, State antitrust and consumer
protection laws and State common law, except that this part supersedes
such laws to the extent, and only to the extent, that such laws would
otherwise permit or authorize a person to engage in conduct that is an
unfair method of competition under Sec. 910.2(a) or conflict with the
notice requirement in Sec. 910.2(b).
(b) Except with respect to laws superseded under paragraph (a) of
this section, no provision of this part shall be construed as altering,
limiting, or affecting the authority of a State attorney general or any
other regulatory or enforcement agency or entity or the rights of a
person to bring a claim or regulatory action arising under any State
statute, regulation, order, or interpretation, including, but not
limited to, State antitrust and consumer protection laws and State
common law.

Sec. 910.5 Severability.

If any provision of this part is held to be invalid or
unenforceable by its terms, or as applied to any person or
circumstance, or stayed pending further agency action, the provision
shall be construed so as to continue to give the maximum effect to the
provision permitted by law and such invalidity shall not affect the
application of the provision to other persons or circumstances or the
validity or application of other provisions. If any provision or
application of this part is held to be invalid or unenforceable, the
provision or application shall be severable from this part and shall
not affect the remainder thereof.

Sec. 910.6 Effective date.

This part is effective September 4, 2024.

PART 912--[RESERVED]

By direction of the Commission, Commissioners Holyoak and
Ferguson dissenting.
April J. Tabor,
Secretary.

Note: The following appendix will not appear in the Code of Federal
Regulations.

Appendix A--Table A.1
----------------------------------------------------------------------------------------------------------------
Estimated Estimated
Estimated number increase in total increase in
State of covered annual worker average annual
workers earnings worker earnings
----------------------------------------------------------------------------------------------------------------
Alabama................................................ 1,620,882 $822,829,396 $508
Alaska................................................. 251,167 145,317,588 579
Arizona................................................ 2,460,342 1,410,771,964 573
Arkansas............................................... 999,178 478,239,544 479
California............................................. ................. ................. .................
Colorado............................................... 2,251,980 1,484,772,427 659
Connecticut............................................ 1,314,029 945,571,637 720
Delaware............................................... 367,291 220,637,013 601
District of Columbia................................... 598,990 604,415,889 1,009
Florida................................................ 7,486,582 4,229,047,004 565
Georgia................................................ 3,764,270 2,188,893,667 581
Hawaii................................................. 495,988 270,123,206 545
Idaho.................................................. 656,688 315,487,683 480
Illinois............................................... 4,735,066 3,051,620,266 644
Indiana................................................ 2,490,735 1,280,797,352 514
Iowa................................................... 1,229,598 624,937,405 508
Kansas................................................. 1,112,654 553,683,941 498
Kentucky............................................... 1,536,365 759,416,081 494
Louisiana.............................................. 1,492,474 747,953,455 501
Maine.................................................. 501,216 258,101,666 515
Maryland............................................... 2,112,817 1,378,702,305 653
Massachusetts.......................................... 2,876,506 2,288,111,777 795
Michigan............................................... 3,440,754 1,946,978,052 566
Minnesota.............................................. ................. ................. .................
Mississippi............................................ 916,362 384,971,511 420
Missouri............................................... 2,256,955 1,184,012,673 525
Montana................................................ 396,982 191,696,465 483
Nebraska............................................... 787,174 399,373,568 507
Nevada................................................. 1,177,510 646,371,090 549
New Hampshire.......................................... 536,516 343,360,391 640
New Jersey............................................. 3,307,696 2,301,979,408 696
New Mexico............................................. 666,290 326,156,344 490
New York............................................... 7,411,689 5,879,334,118 793
North Carolina......................................... 3,759,643 2,105,343,963 560
North Dakota........................................... ................. ................. .................
Ohio................................................... 4,314,090 2,330,837,261 540
Oklahoma............................................... ................. ................. .................
Oregon................................................. 1,560,619 916,694,759 587
Pennsylvania........................................... 4,690,586 2,795,472,689 596
Rhode Island........................................... 385,074 220,004,925 571
South Carolina......................................... 1,745,274 858,798,497 492
South Dakota........................................... 354,502 169,742,169 479
Tennessee.............................................. 2,526,310 1,389,744,066 550
Texas.................................................. 10,599,295 6,535,957,999 617
Utah................................................... 1,320,994 715,807,809 542
Vermont................................................ 241,017 127,248,043 528
Virginia............................................... 3,166,902 1,995,480,948 630

[[Page 38506]]

Washington............................................. 2,809,814 2,090,953,114 744
West Virginia.......................................... 539,026 253,817,680 471
Wisconsin.............................................. 2,301,874 1,207,149,373 524
Wyoming................................................ 217,787 108,650,236 499
Full US, excluding CA, ND, OK, MN...................... 101,785,552 53,291,058,349 524
----------------------------------------------------------------------------------------------------------------
Note: The estimated number of covered workers is calculated as 80% * (total employed population in the state);
the estimated increase in total earnings is calculated as 0.86% * (estimated total covered earnings), where
estimated total covered earnings is calculated as (estimated number of covered workers) * (average annual
earnings); and the estimated increase in average earnings is calculated as 0.86% * (average annual earnings).
Total employed population and average annual earnings are taken from the U.S. Census Bureau Quarterly Census
of Employment and Wages for 2022 (see https://www.bls.gov/cew/data.htm). National totals may not equal the sum
of state-specific estimates due to rounding.

[FR Doc. 2024-09171 Filed 4-30-24; 8:45 am]
BILLING CODE 6750-01-P