Federal Trade Commission's Proposed Noncompete Clause Rule Requires Rethinking, as a Matter of Law and Policy

Request for Comments on Noncompete Rule

Agencies: Federal Trade Commission and US Department of Justice

Comment Period Opens: January 19, 2023

Comment Period Closes: March 20, 2023

Comment Submitted: April 19, 2023

Noncompete Clause Rulemaking, Matter No. P201200

INTRODUCTION

We are pleased to respond to the request for comments to help inform the Federal Trade Commission (FTC), as it considers whether to issue a final rule (pursuant to section 6(g) of the FTC Act) aimed at prohibiting the use of noncompete clauses (NCCR).1 We trust that the views we express may prove helpful to the FTC. Founded in 1980, the Mercatus Center at George Mason University is the world’s premier university-based source for market-oriented ideas—bridging the gap between academic ideas and real-world problems. The Mercatus Center advances knowledge about how markets work to improve people’s lives by training graduate students, conducting research, and applying economics to offer solutions to society’s most pressing problems. Our mission is to generate knowledge and understanding of the institutions that affect the freedom to prosper and to find sustainable solutions that overcome the barriers preventing individuals from living free, prosperous, and peaceful lives. This comment, therefore, does not represent the views of any particular affected party or special interest group; it is intended to assist the Commission in its decision-making.

We raise four key points for the Commission’s consideration:

1. A federal noncompete rule would undermine federalism, preempting beneficial state policy experimentation regarding noncompetes.
2. Limitations of existing research preclude the FTC from adequately addressing the potential costs and benefits of noncompete agreements for high-skilled workers.
3. The FTC should consider research regarding the potential innovation benefits of certain noncompete agreements for high-skilled workers prior to promulgating a Notice of Proposed Rule Making. A ban on noncompete agreements could reduce innovation through (1) fewer investments in human capital, (2) a reduction in riskier R&D investments that are necessary for breakthrough innovations, and (3) a decrease in the quantity of new innovations.
4. The FTC’s “unfair acts or practices” rule, which requires ex ante pre-employment notification of noncompetes to workers, merits consideration as an alternative, superior policy to an NCCR. Unlike a ban on noncompete agreements, a rule requiring ex ante pre-employment notification is grounded in empirical research.

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