Daniel A. Hanley is a senior legal analyst at the Open Markets Institute.
Introduction
Over the last 10 years, non-competes have increasingly drawn the attention of lawmakers and regulators—state and federal alike. Non-competes shackle workers to their employer and bar them from becoming employed at a competitor within a specified geographic area and time to obtain better wages and working conditions. Many states, like Minnesota, have recently banned or substantially restricted non-competes. The increased hostility toward non-competes has triggered strong opposition in the business and legal communities. In response, these parties have deployed other binding agreements on workers that operate as functional equivalents, with TRAPs being the leading contractual weapon.
Training Repayment Agreement Provisions, or TRAPs, operate similarly to non-competes as they effectively prohibit workers from leaving their employer because they must pay their employer for often arbitrary “training” costs. In many cases, TRAPs require a worker to pay their employer thousands or, in some cases, tens of thousands of dollars should they leave within a specified time for any reason. Whether the worker accepts a competitive position or becomes a stay-at-home parent, the mere act of leaving their employer imposes a debt, making these contracts more potent than traditional non-competes. This circumstance is particularly true given that a recent study by the Federal Reserve revealed that over 40 percent of the public cannot afford a $400 emergency expense. These coercive contracts are increasingly pervasive in the American economy, with one recent study detailing that TRAPs currently bind over eight percent of workers.
When TRAPs are involved, the “training” that employers provide to their workers is often of dubious value. In one notable lawsuit, BreAnn Scally, a former PetSmart groomer, was asked by her employer to pay $5,000 for training that merely included the employer training BreAnn to do the job she was hired to do and did not award her any accredited license or degree. It is clear that to properly effectuate bans on non-competes, TRAPs must also be banned—and the Federal Trade Commission (FTC) has made the most ardent effort to abolish these contracts.
The FTC issued a final administrative rule in April that prohibits all non-competes that restrict workers, including de facto non-competes like TRAPs nationwide. The FTC accomplishes this long-advocated policy by invoking its express rulemaking powers to prohibit “unfair methods of competition.” The rule is quite strong, but not perfect, as it concerns TRAPs. In general, the rule requires the FTC first to determine whether the contract unduly prohibits a worker “from seeking or accepting” alternative employment or starting a business. In other words, unlike traditional non-competes, the rule does not prohibit all TRAPs; a subset of ostensibly “reasonable” TRAPs would avoid condemnation. While the FTC can clarify the full force of how its rule applies to TRAPs through issuing guidance documents, it is the only entity that can enforce its rule, and the FTC faces real resource constraints.
Worse yet, the Chamber of Commerce and other parties challenging the rule’s legality strategically filed their lawsuits in Texas, where they will be appealed to the Fifth Circuit, a highly conservative court that many expect to strike down the FTC’s rule. A principal issue will be whether this rule involves a “major question,” and if so, the court is likely to declare the rule to be an unlawful use of the FTC’s administrative powers absent explicit congressional authorization.
With uncertainty surrounding whether the federal judiciary will allow the FTC’s rule and other limitations imposed by the prevailing interpretation of the antitrust laws to tackle these agreements, it is critical to ask what other legal tools exist that enforcers can use to enact a robust bright-line prohibition on TRAPs, non-competes, and other coercive contacts. Fortunately, should the agency face defeat in court, several states have an untapped legal tool that can enact the FTC’s rule.
States Authority to Act
Alaska, Connecticut, Florida, Idaho, Illinois, Maine, Massachusetts, Montana, Rhode Island, Vermont, and West Virginia—which are collectively home to over 54 million people (just more than 15 percent of the U.S. population)—have express state law provisions similar to the FTC prohibiting firms from using “unfair methods of competition.” Many of these states enacted their respective laws during the 1970s, when there was a widespread belief that states should have a much more prominent role in America’s antitrust enforcement apparatus.
Critically, these 11 states do not just leave it to their own state courts’ interpretation of what “unfair methods of competition” means. Instead, the pertinent laws in these states also have clauses that expressly incorporate the phrase’s meaning in accordance with the FTC’s and federal courts’ interpretations of it.
Despite the federal judiciary’s right-ward bent, as the FTC detailed in its landmark policy statement interpreting the boundaries of what constitutes an “unfair method of competition,” controlling Supreme Court case law favors an expansive definition of the term. One notable Supreme Court decision stated, “Congress advisedly left the concept [of unfair methods of competition] flexible . . . [and] designed it to supplement and bolster [the antitrust laws] to stop . . . acts and practices [in their incipiency].”
Most importantly, these 11 states can categorically prohibit non-competes and similar contracts instead of challenging their legality on a case-by-case basis under a reasonableness test, since these states also grant their attorneys general (or, in other cases, the agency in which they operate) profoundly powerful rulemaking authority. Like the FTC, state attorneys general can use this authority to expressly prohibit such practices that deprive their constituents of their economic liberty to use their skills, forcibly bond workers to their employer, and impose arbitrarily determined debt on them. Indeed, many of these states have already enacted rules prohibiting specific business practices in the consumer protection arena.
Conclusion
It would be difficult for an eager state law enforcer to find a more popular and timely issue than non-competes and TRAPs in order to deliver a real win for their constituents, given that the FTC has practically placed the issue on a t-ball stand. The FTC’s nearly 600-page notice summarizes and analyzes practically all the empirical literature concerning the adverse effects of such agreements, including their ability to deprive workers of their economic liberty, suppress their wages, and other adverse effects such as stifling business formation. Furthermore, the FTC’s online comment submission for its rule garnered over 26,000 comments, allowing state law enforcers to review the harmful effects of these agreements. According to one analysis, 95 percent of the comments not only support the rule but also emphasize its potential to increase workers’ economic mobility and compensation. State enforcers already have the legal tools to continue to carry forward the FTC’s sweeping policy; they just need to act.
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