The Federal Trade Commission’s ban on noncompete agreements is now in question after a federal judge upheld a challenge to the rule on August 20, blocking it from taking effect in September as scheduled. Here, Stanford Law Professor Mark Lemley discusses the FTC’s ban, the impact of noncompete agreements on American workers and the economy, and the next steps for the FTC to attempt to reinstate the rule in the wake of the Supreme Court’s Loper decision that reduced the power of federal agencies.

The FTC voted in April to ban noncompete agreements. What was the rationale for the ban?

More than 20 percent of all US workers are not allowed to leave their jobs and work in the same field due to noncompete agreements.  This includes not just high-paid positions like management and engineers, but sandwich makers and other minimum-wage workers.  Preventing people from taking better jobs reduces employee mobility.  That, in turn, reduces wages.  It also reduces innovation, because people with a good idea can’t start a new company to turn it into reality.

You’ve written about these agreements and said the ban was a major step towards opening labor markets and improving the lives of tens of millions of workers. Why? Can you explain why noncompetes aren’t good for business or workers?

The economic evidence is overwhelming that noncompetes hurt workers, reducing wages and employee happiness.  Companies that know they have a captive workforce treat their workers worse.

The evidence also shows that noncompetes reduce innovation.  People with good ideas can’t leave to start companies.  Orly Lobel and I have summarized the evidence in this paper.

And noncompetes hurt growing companies, who can’t hire the best people.  The only ones who benefit are dying companies, who make it hard for their best employees to leave for a competitor.

We heard this week that the ban was overturned by Judge Ada Brown of U.S. District Court for the Northern District of Texas, who said that the FTC lacked the authority to impose the restriction on companies. What do you make of this? What was the legal reasoning?

Judge Brown held that the FTC didn’t have the power to regulate noncompetes.  The FTC’s power stems from Section 5 of the FTC Act, which gives it the power not only to enforce the antitrust laws but to prevent unfair methods of competition.  The FTC concluded that noncompetes were an unfair method of competition, but the judge held that it didn’t have the power to regulate the market in such a way.  A district court in Pennsylvania came to the opposite conclusion, upholding the FTC’s authority to regulate noncompetes.  There are reasonable arguments on both sides of the question of the FTC’s authority.

What do you expect the FTC to do? What is their legal next step?

Unfortunately, the judge issued a nationwide injunction against the whole rule, not just its application to the parties before the court. That is problematic, particularly since a court in Pennsylvania came to the opposite conclusion.  Government regulations shouldn’t be shut down altogether if plaintiffs can find even one judge who dislikes the regulations.  I am confident the FTC will appeal. But Judge Brown sits in the Fifth Circuit, which has proven notoriously hostile to anything that comes out of the Biden Administration, so the odds there aren’t great regardless of the strength of the FTC’s case.

Do you expect this to go to the Supreme Court? Will the Court’s recent overturning of the Chevron Doctrine impact how you might predict the outcome of a Court decision if the case goes there?

I think it will ultimately have to go to the Supreme Court because we are likely to have conflicting circuit opinions.  Unfortunately, the Supreme Court has been on a crusade to reduce the power of administrative agencies and has already taken away the FTC’s power to obtain disgorgement of profits from wrongdoers.  There are cases that challenge the agency’s entire right to exist.  And as I have written elsewhere (https://harvardlawreview.org/forum/vol-136/the-imperial-supreme-court/), the Court has been interested in consolidating its own power and stripping power from everyone else.  If the Court remains the same when the challenge reaches it, the FTC may have an uphill battle.

Mark Lemley is the William H. Neukom Professor of Law and director of the Program in Law, Science & Technology at Stanford. He is also a Senior Fellow at the Stanford Institute for Economic Policy Research and is affiliated faculty in the Symbolic Systems program. He teaches intellectual property, patent law, trademark law, antitrust, the law of robotics and AI, video game law, and remedies.