FTC Non-Compete Ban Sparks Legal Challenge

Happy Thursday! British politicians are on a sneaker-killing spree. First, it was Prime Minister Rishi Sunak and his Adidas Sambas. Now, Nigel Farage—the head of the Brexit Party—has apparently doomed the Adidas Gazelles. We don’t know which model is next to be condemned to perpetual uncoolness, but Liz Truss had best stay away from our Stan Smiths. 

Quick Hits: Today’s Top Stories

• Mark Meadows, former chief of staff to then-President Donald Trump, and former Trump lawyer Rudy Guiliani were among the 18 people indicted by an Arizona grand jury on Wednesday on felony charges relating to election interference. The indictment alleges that seven attorneys or aides involved with the 2020 Trump presidential campaign—including Meadows and Giuliani—attempted to award the state’s electoral votes to Trump, despite the fact that Trump lost the state by more than 10,000 votes. The 11 others indicted were Arizona GOP officials who falsely declared to Congress that Trump was the rightful winner of the state.
• Israel is planning to advance a military operation aimed at taking the southern Gaza city of Rafah, a final Hamas stronghold in the enclave, Egyptian and former Israeli officials said on Wednesday. President Joe Biden warned Israel last month that invading Rafah—where hundreds of thousands of Palestinian civilians have fled—would cross a “red line.” Israel reportedly intends for the military operation to roll out in phased, targeted attacks, rather than a full-scale offensive, after evacuating civilians from the area. Meanwhile, the Israel Defense Forces (IDF) confirmed on Wednesday that it struck various Hezbollah strongholds in southern Lebanon, targeting at least 40 sites.
• Hamas is still holding nearly 130 hostages in the Gaza Strip—several of whom are dual Israeli-American citizens—but it’s unclear how many of those hostages are still alive. Hamas released a highly edited propaganda video on Wednesday featuring 23-year-old American-Israeli hostage Hersh Goldberg-Polin reading a statement pressing Israeli Prime Minister Benjamin Netanyahu to cut a deal with the terrorist group to free the remaining hostages. Hamas brutally kidnapped Goldberg-Polin from the Nova music festival on October 7 and blew off much of his left arm in a grenade explosion. It was unclear exactly when the video was filmed, though Goldberg-Polin said he had been held for nearly 200 days. 
• Germany’s foreign ministry announced on Wednesday that the country would continue to financially support the United Nations Relief and Works Agency (UNRWA), the primary U.N. agency working in Gaza. Several countries, including the U.S. and Germany—the top two contributors—paused their funding of the agency in January following Israel’s claim that at least 12 of its workers participated in Hamas’ October 7 attacks. Germany’s government said it would reinstate the funding after a review commissioned by the U.N. released on Monday found that “Israel has yet to provide supporting evidence of this.” In a press statement, German officials emphasized what they called the “vital and currently irreplaceable role played by UNRWA in meeting the basic needs of the people in Gaza.”
• Toomaj Salehi, an Iranian rapper and vocal critic of the Iranian regime in both his music and on social media, was handed a death sentence on Wednesday on charges including “corruption on Earth.” Salehi was first arrested in October 2022 for speaking in support of anti-government protests in the country. In April 2023, a U.S. State Department spokesman said the rapper’s arrest “underscores just how much Iran’s leadership fears its own people, particularly young people like Toomaj.” Salehi has 20 days to appeal the sentence, which his lawyer said he plans to do.
• President Biden on Wednesday signed into law a $95 billion foreign aid and national security package which includes support for Ukraine, Israel, and the Indo-Pacific. The Senate on Tuesday overwhelmingly passed the legislative package—which also contains a measure that could lead to the potential ban of TikTok—that the House drew up and passed last week. “When our allies are stronger, we are stronger,” Biden said shortly after signing the bill.
• The Supreme Court heard oral arguments on Wednesday in a case examining whether an Idaho law restricting abortion access violates a federal law that requires hospitals receiving Medicare funding to provide emergency care. The Biden administration sued Idaho in 2022, arguing the federal law—known as EMTALA—protects abortions that doctors deem medically necessary. Conversely, the Idaho law only allows exceptions to save the mother’s life and in cases of rape or incest. The justices seemed divided over the issue on Wednesday, and the court’s decision could have implications beyond Idaho, including in six other states that have implemented similar abortion bans.
• After initially setting a deadline of midnight on Tuesday for protesters to dismantle their camp or face “disciplinary action” from the university or law enforcement, Columbia University administrators on Wednesday extended the deadline for the groups to do so. A Columbia spokesperson told the Columbia Spectator early Wednesday morning that university administrators were continuing negotiations with the student activists for the next 48 hours. Meanwhile, police arrested more than 50 people at a pro-Palestinian demonstration at the University of Texas at Austin (UT) on Wednesday after they proceeded with plans to occupy a part of the campus lawn without authorization from the UT administration. 
• Jim Hoft, the founder of the conspiracy theory-laden website, Gateway Pundit, announced on Wednesday that the site’s parent company had declared bankruptcy. Hoft said that the move was made to help “consolidate litigation” against the company, which was sued by two Georgia election workers in December 2021 for publishing “false and endlessly repeated accusations that [they] committed election fraud.” 

Time To Check Your Contract 

In light of the Federal Trade Commission’s (FTC) decision Tuesday to retroactively ban non-compete agreements, your Morning Dispatch editors have an announcement to make.

Just kidding. We’ve learned from painful experience not to joke about major changes to this newsletter.

The FTC passed a rule on Tuesday eliminating non-competes—contract clauses that block employees from working for a company’s competitors for a certain period of time after leaving a job—for all American workers, initiating a sweeping change affecting millions of employees. But the rule already faces a legal challenge from the business groups that favor non-competes and believe the FTC has overstepped its authority.

The commission approved the change in a 3-2 vote with two Republican commissioners voting against the ban. “The FTC’s final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market,” Lina Khan, the FTC chair, said in a statement on Tuesday. The non-compete ban—which goes into effect 120 days after the rule is published in the Federal Register—will apply retroactively to existing non-competes, with the exception of senior executives in policy-making positions at their firms who earn more than $151,164 annually. Future non-competes for executives are prohibited after current agreements expire.

The rule will affect the employment agreements of millions of Americans, from fast-food workers all the way up to CEOs. A 2022 analysis from the Bureau of Labor Statistics found that an estimated 18 percent of workers—approximately 30 million people—are subject to non-competes. As we wrote when the proposed rule was introduced in January 2023: 

Non-competes … are most common for highly paid workers, but extend well beyond the world of well-compensated executives and employees with technical expertise. An analysis from the Federal Reserve Bank of Minneapolis found about 12 percent of workers in their thirties making $20 an hour or less were bound by non-competes, compared to about 18 percent of workers making more. In practice, the agreements are often sprung on workers after they’ve accepted a job and turned down other offers—and they can be almost goofily overused. The Jimmy John’s chain, for example, required all its sandwich makers to sign such deals until 2016, when a lawsuit forced it to end the practice. A string of studies suggest enforced non-competes tend to lower wages, discouraging employees from taking higher paying or better fitting job opportunities—and in some cases driving them to accept pay cuts or leave their industry to escape a lousy workplace.

The agency laid out the case for banning non-competes in the 570-page final rule (which is a riveting read), arguing that the agreements constitute an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act, which regulates “unfair or deceptive acts or practices.” Non-competes prevent workers from effectively negotiating for greater pay, taking new jobs, and starting new businesses, the FTC argued, directly hurting competition in the labor market. “The vast majority of workers do not have a real opportunity to negotiate the agreement,” Matt Marx—a business professor at Cornell University whose research on non-competes was cited in the final rule—told TMD.

The rule received 26,000 comments during the public comment period, many of them—25,000, according to the FTC—consisting of stories about how non-competes have hurt the commenter personally. At Tuesday’s commission meeting, Khan shared stories of an employee who couldn’t leave a job following a merger with a corporation whose principles conflicted with their own religious beliefs and a worker who was laid off after an employer denied a religious exemption and had to take a job at “a fraction of his previous salary” because of his non-compete. “Robbing people of their economic liberty also robs them of all sorts of other freedoms,” Khan said.

But opponents of the rule aren’t convinced that a full ban on non-competes will be a purveyor of economic good. “Non-compete agreements can serve vital procompetitive business and individual interests—such as protecting investments in research and development, promoting workforce training, and reducing free-riding—that cannot be adequately protected through other mechanisms such as trade-secret suits or nondisclosure agreements,” the U.S. Chamber of Commerce argued in a comment on the proposed rule last April. 

Competition enforcers argue the consequences for businesses will be minimal compared to the economic benefits. The FTC’s Bureau of Economics estimates the rule will lead to a 2.7 percent increase in the rate of new business formation (8,500 new businesses annually) and a rise in innovation with an “average of 17,000-29,000 more patents each year for the next ten years.” Workers, now freer to move jobs for higher pay, are projected to see an average annual earnings increase of $524 per year.

But these are just projections, and some economists argue more research needs to be done on the economic effects of restricting the use of non-competes before a nationwide ban is instituted. “While there’s increasing evidence that banning non-competes—at least the way that it’s been done—increases wages, it’s not conclusive,” Brian Albrecht—the chief economist at the International Center on Law and Economics—told TMD. “There are not that many papers on this. We do not have that many clear examples.” He cited Oregon’s statewide ban on non-competes for hourly workers as a clear example of wages rising after a ban went into effect, but argued that there’s comparatively little research on the effects of a ban applying to every level of income.

While most of the literature on non-competes shows that they depress wages, critics of the FTC’s rule argue that a blanket ban could decrease innovation and efficiency by increasing employee turnover and reducing information sharing within a company. A firm is likely to be more protective of valuable proprietary information internally if employees can leave to immediately work for competitors.

But the FTC argued that this hasn’t been the case in states like California and Oklahoma, where laws prevent non-competes from being enforced. “Non-competes have not been available in these states, but that has not prevented industries that depend on protecting trade secrets and retaining skilled workers from thriving,” said Ben Cady, an attorney in the FTC’s Office of Policy Planning. “The technology sector, for example, is particularly dependent [on] protecting proprietary information and retaining skilled workers, and it [has] flourished in California even though employers cannot enforce non-competes.”

Marx also argued that non-competes are an overly broad solution to concerns about proprietary information and intellectual property. “A non-compete is a really blunt instrument because it creates all of these negative consequences for the sake of trying to protect something that, as the FTC said, is already protectable through other means,” he told TMD, pointing to non-disclosure agreements (NDA), non-solicitation agreements (NSA), and trade secrets protections as tools sufficient to protect companies.

Still, critics of the FTC’s decision believe non-competes are a vital tool, especially for smaller businesses, because enforcing NDAs and NSAs can require investigations and more expensive litigation.

But the biggest question mark around the final rule isn’t its effects on the economy, but whether it will pass legal muster. The U.S. Chamber of Commerce, together with the Business Roundtable, filed a lawsuit in federal court on Wednesday challenging the rule and arguing it amounts to an unprecedented and illegal power grab by the FTC. “Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules,” Chamber President Suzanne Clark said in a statement on Tuesday. “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 non-compete agreements in all sectors of the economy.” 

Both commissioners who voted against the rule said they were sympathetic to a non-compete ban on policy grounds but agreed that the commission lacked the power to institute the rule. “Even if the commission has statutory authority to issue legislative rules under Section 6(g), it lacks statutory authority to issue this rule,” Commissioner Andrew Ferguson argued. “The Supreme Court has explained that when an agency claims power to regulate in an area of tremendous ‘economic and political significance,’ the agency may not rely on ‘a merely plausible textual basis for the agency action. The agency must instead point to ‘clear congressional authorization’ for the power it claims.’”

Khan believes that “the most straightforward reading” of Section 6 empowers the agency to make rules regarding unfair competition. “Our legal authority is crystal clear,” Douglas Farrar, an FTC spokesperson, said in a statement responding to the lawsuit. “Addressing non-competes that curtail Americans’ economic freedom is at the very heart of our mandate, and we look forward to winning in court.” Section 6(g) of the FTC Act says the FTC may “from time to time … make rules and regulations for the purpose of carrying out the provisions of this subchapter,” which deals mostly with competition investigation and enforcement. 

The final rule will become yet another high-profile FTC action under Khan that has become embroiled in legal challenges. But proponents of the ban say that the conversation sparked by the final rule will be helpful even if it’s struck down by the courts. “One of the things I’m most excited about, regardless of what happens with the rule, is everybody’s talking about it,” Marx told TMD. “People are more aware. And now when they get a job offer, they might say, ‘Hey, is there going to be a non-compete on this job?’”

Worth Your Time

• Apparently, venture capitalists and book publishers have a lot in common. “[Publishers] invest small sums in lots of books in hopes that one of them breaks out and becomes a unicorn, making enough money to fund all the rest,” Elle Griffin wrote on her Substack, The Elysian, in a report on the finances of five major book publishers. “The Big Five publishing houses spend most of their money on book advances for big celebrities like Britney Spears and franchise authors like James Patterson and this is the bulk of their business. They also sell a lot of Bibles, repeat best sellers like Lord of the Rings, and children’s books like The Very Hungry Caterpillar. These two market categories (celebrity books and repeat bestsellers from the backlist) make up the entirety of the publishing industry and even fund their vanity project: publishing all the rest of the books we think about when we think about book publishing (which make no money at all and typically sell less than 1,000 copies).”
• “The skies above Athens turned orange on Tuesday as clouds of dust from the Sahara blew north, casting an eerie glow over the Greek capital’s landmarks,” Niki Kitsantonis reported in a photo essay for the New York Times. In the times of Ancient Greece, an orange atmosphere would have been a sign that the gods of Mount Olympus were displeased—but with summer on the horizon, perhaps they just wanted a spray tan. “The phenomenon isn’t new—sandstorms from North Africa have shrouded Britain, Greece and Spain in the past—but the event led to remarkable scenes around the Acropolis and in other parts of Athens.” Indeed, the pictures bear a closer resemblance to the fictional planet of Arrakis from Dune than to the bustling Greek city. 

Presented Without Comment

GOP Sen. Mitt Romney, asked to weigh in on Donald Trump’s hush money case: “I think everybody has made their own assessment of President Trump’s character. And as far as I know, you don’t pay someone $130,000 not to have sex with you.”

Also Presented Without Comment 

Former President Donald Trump, on Truth Social: “Wow! Former A.G. Bill Barr, who let a lot of great people down by not investigating Voter Fraud in our Country, has just Endorsed me for President despite the fact that I called him ‘Weak, Slow Moving, Lethargic, Gutless, and Lazy’ (New York Post!). Based on the fact that I greatly appreciate his wholehearted Endorsement, I am removing the word ‘Lethargic’ from my statement. Thank you Bill.”

In the Zeitgeist 

In his first-ever outing at Nationals Park in Washington, D.C.—and on Japanese Heritage Night with diplomats from his home country watching—Dodgers’ star Shohei Ohtani did this: 

Toeing the Company Line

• In the newsletters: Scott praised (🔒)—and explained—the resilience of global supply chains, Jonah condemned (🔒) the left-wing silence on the pro-terrorist speech on college campuses, and Nick argued (🔒) that the MAGA movement and anti-Israel protests have their capacity for both menace and cringe in common. 
• On the podcasts: Adaam interviewed Israeli-born Columbia Assistant Professor Shai Davidai about the protests at Columbia University on The Dispatch Podcast, and today’s episode of The Remnant, Jonah is joined by Chris to discuss antisemitism at elite colleges and drama in the House of Representatives. 
• On the site: Ari Blaff reports from Portland on Oregon’s swift reversal on drug legalization and David May and Antonette Bowman remind colleges that they could enforce their own rules in the face of encampments on campus.

Let Us Know

Are you in favor of the FTC’s non-compete ban?