Over the last few months, the Federal Trade Commission (FTC) has faced criticism from business groups including the U.S. Chamber of Commerce over its recently adopted rule, approved by a narrow 3-2 vote, banning non-compete agreements.
For its part, the Chamber appears as concerned about the process leading to the FTC’s action as the substance itself. For example, on the day the ban was announced, the Chamber said that “Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules. Noncompete agreements are either upheld or dismissed under well-established state laws governing their use. Yet, today, three unelected commissioners have unilaterally decided they have the authority to declare what’s a legitimate business decision and what’s not by moving to ban noncompete agreements in all sectors of the economy.”
This accords with the views of the two dissenting FTC commissioners: both Commissioners Holyoak and Ferguson noted in their statements of dissent that under their interpretation, Section 6(g) of the FTC Act does not give FTC the power to institute the ban; constitutionally, that authority sits with Congress.
The Chamber and other plaintiffs have filed suit challenging the FTC’s rule, and just before July 4, Judge Ada Brown of the U.S. District Court for the Northern District of Texas dealt at least a temporary blow to the FTC’s efforts (a Pennsylvania judge subsequently delivered a more favorable result for the FTC). That first Texas decision was followed up just days ago by another, which Law360 has said “permanently blocked” the FTC rule. It appears plausible if not likely that the FTC’s action will ultimately be deemed to have been arbitrary and capricious, and the FTC determined to lack the statutory authority to ban non-competes as attempted. The tenuousness of the FTC’s action is underscored by the U.S. Supreme Court’s recent Loper Bright decision overturning Chevron deference to federal agencies.
But even if the litigation ultimately succeeds, a federal ban on non-competes could be legislatively imposed on some workers or professions. Sens. Marco Rubio and Maggie Hassan have introduced the Freedom to Compete Act, which would “amend the Fair Labor Standards Act of 1938 (FLSA) to prevent employers from using non-compete agreements in employment contracts for certain non-exempt employees.” Unlike the FTC’s ban, the Rubio-Hassan legislation would likely face no challenge based on its alleged or actual unconstitutionality; it is generally accepted that while FTC’s authority to regulate in this space is dubious, Congress’ clearly exists. The Rubio-Hassan proposal also appears more limited and narrowly focused on less well-remunerated employees, instead of broad swaths of workers including some higher earners.
But is there a utility in applying non-competes to some categories of worker? A series of cases recently filed in Texas and Oklahoma by Traditions Health LLC (Traditions) indicates the answer is “Yes.” Notably, under Texas law, non-competes remain permissible in some circumstances, while in Oklahoma, they generally are not enforceable.
Traditions is currently suing one Christopher Willis, a serial entrepreneur in senior care, hospice care, and related spaces. A few years ago, Willis sold a hospice company to Traditions, and as part of that transaction, joined the company and entered a multi-year non-compete preventing him from starting a cookie-cutter company that would compete with Traditions. However, Willis allegedly launched a new hospice company (Luminos) while still subject to his non-compete with Traditions, and he and several associates have been named as defendants to federal litigation asserting a bevy of spurious behavior including unauthorized access of databases, theft, and HIPAA (federal privacy law) violations. (Willis is named as a defendant to the Texas litigation referenced above, while his company, Luminos, is named in both cases.)
Of note, the defendants have allegedly engaged in behavior that some might consider a form of terminally-ill patient and/or elder abuse. One lawsuit accuses the defendants of “seeding confusion, and causing chaos and trauma” to hospice patients, who are typically in their final six months of life, “solely out of their self-interest of padding their financial bottom line.” While the courts will ultimately make a final determination, company records do show that Willis set up Luminos before his non-compete allegedly expired. It is suspected that Willis may have intended to start the new company and ultimately sell it back to Traditions, or another company in the hospice sector. Given the behavior alleged, had this been the goal, it may now never be fulfilled — neither Traditions nor its competitors seem likely to do business with him in the future. Regardless, the litigation underlines why non-competes may not be the injustice asserted by critics, even when applied to workers not making hundreds of thousands of dollars per year.
True, the FTC’s ban on non-competes does not appear targeted to individuals in Willis’ specific situation (where he entered into a non-compete as the result of a business sale). But it would seem to cover the likes of business development/sales, administrative staff, home health aides, and others, unless they were owners in whole or in part of the company that was acquired.
So, the FTC rule could enable wealthy and sophisticated operators prepared to violate valid and enforceable non-competes – including, allegedly Willis – to launch a competitor staffed with workers poached from a business that is a party to a non-compete. This could make it easier for individuals and companies to emulate the path that Willis has allegedly pursued, and result in very adverse consequences for patients.
While some carveouts may be sensible from a public policy perspective, blanket or near blanket bans on non-competes are likely to be counterproductive (it’s also tough to see why, from a raw economics or ethics standpoint, Willis’ non-compete, if validly entered into, shouldn’t be enforced).
Furthermore, any federal action on this subject should be achieved through the legislative, not administrative process. Voters elect Members of Congress to make the laws, and the Constitution empowers the executive branch, of which FTC is a part, to enforce them. This vital separation of powers concept is worth protecting. The FTC’s action regarding non-competes opens the door as a matter of precedent to what could be a litany of greatly more problematic rulemaking on issues far more controversial than allowing an entry level worker to change jobs.
Brian McNeill is a member of the Virginia Bar, and a graduate of Boston College and the Antonin Scalia Law School at George Mason University. He specializes in investigative research, which helped clients obtain a favorable outcome in two landmark cases: the Chevron – Ecuador litigation, in which a U.S. federal judge found that a $9.5 billion judgment against Chevron in Ecuador was obtained through fraud and racketeering, and Beef Products Inc. v. ABC, one of the largest defamation settlements in U.S. history.
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