FTC to ban most noncompete agreements
The Federal Trade Commission (FTC) issued a final rule on April 23 banning noncompete clauses nationwide.
Generally, noncompete agreements restrict employees who leave a job from working in that field for a specific time period in a certain geographic area.
The commission voted to approve the final rule 3-2, after determining that it violates Section 5 of the FTC Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce.” The final rule is set to become effective 120 days after publication in the Federal Register.
A day after the announcement, the U.S. Chamber of Commerce and several other business groups sued the FTC in Texas federal court in an attempt to block the rule. The groups argue that the commission lacks the power to adopt such a rule and doing so would undermine American businesses’ ability to remain competitive.
Under the new rule, for-profit employers are banned from entering into or attempting to enforce any new noncompetes. Existing noncompetes for most workers will no longer be enforceable except for senior executives, who represent less than 0.75% of workers, which can remain in force after the effective date. The final rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions.
Two other exceptions were created: one for worker noncompete clauses entered into in as part of a bona fide “sale of business,” and another for existing causes of action under worker noncompetes that accrued prior to the issuance of the final rule.
Employers will have to provide notice to workers bound to an existing noncompete that the noncompete agreement will not be enforced against them in the future.
An estimated 30 million Americans—or one in five workers—are bound by these agreements, according to the FTC.
“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said FTC Chair Lina M. Khan in a press release. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”
The final rule stems from the notice of proposed rulemaking the FTC issued in January 2023, which was subject to a 90-day public comment period. During that time, the FTC received more than 26,000 comments.
Khan spoke about noncompete clauses at the beginning of the 2023 AVMA Veterinary Business and Economic Forum this October. She said at the forum, “One sector from which we heard many comments was health care workers, including veterinarians. They shared stories of how noncompete clauses have upended their lives, keeping them stuck in jobs and forcing them to forego better job opportunities or otherwise uproot their families because the noncompetes have locked them out of local jobs. Others shared the fear of being buried in litigation by an employer, even when the noncompete in place was void or not enforceable.”
Noncompete agreements for employees are currently banned in California, Minnesota, North Dakota, and Oklahoma.
“The ability of States to regulate non-competes effectively is constrained by employers’ use of choice-of-law provisions, significant variation in how courts apply choice-of-law rules in disputes over non-competes, and the increasingly interstate nature of work,” the final rule notice states. “As the public comments attest, this patchwork of laws and legal uncertainty has become extremely burdensome for both employers and workers.”
The U.S. Chamber of Commerce, the country’s largest business lobby, said in its lawsuit that the FTC is empowered by federal law to enforce existing antitrust laws passed by Congress, but not to enact rules determining what other type of conduct by businesses is anticompetitive.
“Companies will face substantial legal costs as they are forced to resort to other tools to attempt to protect their investments,” the chamber said. “And the economy as a whole will suffer as start-ups and small businesses are unable to prevent dominant firms from hiring their best employees and gaining access to their confidential information.”