FMI: FTC proposal to ban non-competes threatens innovation, supply chain resiliency

If it doesn’t, and the ban FTC proposed in January goes into effect as is, it could inadvertently stunt innovation in food and beverage industry, undermine the resiliency of an already fragile supply chain and call into question whether Congress “made an unconstitutional delegation of authority to the agency,” FMI argues in comments submitted this week to FTC. “Many of FMI’s members use non-compete clauses,” which “provide vital protection for companies’ sensitive information and trade secrets,” including “the cutting edge of developing technology and business strategies that help sustain an efficient food supply chain in the United States,” it explains. It also argues that contrary to FTC’s argument that non-competes are exploitative and supress wages and innovation, non-competes “promote mutually beneficial employment arrangements” that allow for the creation of new jobs for executive-level and highly-skilled workers, facilitate innovation and help businesses grow. FTC’s proposed ban of noncompetes could impact 30m workers FMI’s arguments, some of which likely are controversial, come days before the April 19 deadline for public comments on an equally contentious proposed new rule by FTC that seeks to ban companies from blocking workers from seeking or accepting jobs with competitors within a pre-established time range of their employment. The proposed rule is based on preliminary research that suggests noncompetes violate Section 5 of the Federal Trade Commission Act by discouraging the estimated 30 million workers covered by non-competes from freely switching jobs, “depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand,” argues the commission, which was split three to one in favor of the proposed rule. Those in favor argued “by ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation and healthy competition.” FMI: Banning non-competes would hinder innovation, limit jobs FMI “respectfully” disagrees with FTC in its comments, arguing that the proposed rule would have the opposite effect on the US food industry and, therefore, should be withdrawn or severely restricted “to accommodate employers’ reasonable interests in using non-compete agreements to protect sensitive business information and trade secrets and to promote beneficial employment and corporate transactions.” It argues that executive-level employees and other highly skilled workers, such as those involved in research and development, should be excluded from the proposed ban because they often have access to sensitive business information and trade secrets that “help facilitate productive and collaborative work.” FMI argues that without non-competes, companies would not feel comfortable imparting this sensitive information, severely curtailing employees’ ability to collaborate causing “innovation and entrepreneurship [to] suffer dramatically.” The trade group adds that companies’ other tools to protect trade secrets, including non-disclosure agreements and litigation, are not as effective and can be expensive. Pointing to recent survey data, FMI said the typical cost of litigation to protect trade secrets can run upwards of “$550,000 when less than $1m is at issue, and $7.4m if more than $25m is a stake.” Likewise, NDAs may stop employees from sharing detailed information, but that information “will inevitably inform [their] decision-making on matters related to [their] past employment, which could be highly damaging to [their] prior employer if the executive is working for a competitor. “Non-compete agreements thus provide a safeguard against the improper use of an employer’s sensitive information that NDAs cannot offer,” FMI adds. FMI: Executive level, highly-skilled employees are not at risk of exploitation FMI also argues that non-compete, when restricted to executive level and highly-skilled employees are not coercive or exploitative as FTC claims because these employees “generally are more sophisticated negotiators and posses greater bargaining power, which allows them to meet a prospective employer on equal footing and engage in a mutually beneficial, arm’s length negotiation.” Further, FMI argues, non-competes do not restrict jobs, but rather facilitate their creation. “Without the reassurance provided by a non-compete agreement that its sensitive business information will be protected, an employer will often be reluctant to expand its executive-level team beyond a few trusted individuals or may restrict employees’ access to information,” which limits opportunities, FMI claims. This could have a trickle-down effect to consumers resulting in higher prices, reduced innovation and make it harder for small businesses to break through, FMI argues. ‘FTC lacks statutory authority to issue [the ban]’ Beyond the potential damage FMI says banning noncompetes could inflict on the food industry, it says the proposed rule exceeds FTC’s authority, and worries if the commission moves forward it could undermine other efforts by the regulator. “FTC lacks statutory authority to issue [the ban] and, if the FTC Act could be read to authorize the rule, it would raise serious constitutional concerns that would weigh in favor of invalidating the rule,” FMI says. It adds, “if the open-ended terms of the FTC Act’s competition provisions could be construed to authorize the proposed rule, it would raise significant concerns that Congress had made an unconstitutional delegation of authority to the agency. Such a construction of the statute must therefore be avoided, if possible.”