FTC votes for noncompetes ban, companies preparing to fight back

In a move that could unlock new career opportunities for more than 30 million Americans, the Federal Trade Commission (FTC) has voted 3-2 to ban non-compete clauses. However, legal challenges may embroil the new rule in courts for years before it can take effect.

The FTC declared noncompetes to be an unfair method of competition, as they tend to negatively affect competitive conditions in labor markets by inhibiting efficient matching between workers and employers.

Noncompetes prevent millions of people from seeking better-paid jobs or starting their own businesses. The FTC expects its new rule to generate over 8,500 startups each year, grow new business formation by 2.7% annually, raise worker wages, lower healthcare costs, and boost innovation.

“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 FTC estimates that the average worker would benefit by an additional $524 per year in higher earnings. The total savings in healthcare could add up to $194 billion over the next decade. The rule could also add 17,000 to 29,000 more patents each year.

Most existing non-compete agreements for workers will no longer be valid or enforceable after the rule goes into effect. Employers will have to notify affected workers about this change – they will no longer be enforcing any noncompetes. To streamline compliance, employers won't need to formally rescind noncompetes.

Existing clauses for senior executives, who represent less than 0.75% of workers, can remain in force. However, employers are banned from entering into new noncompetes, even if they involve senior executives. The FTC’s final rule defines senior executives as workers in policy-making positions, earning more than $151,164 annually.

Tech pros would get more freedom

Noncompetes were supposed to keep the top executives and brains from crossing over to the other side.

In today's world, non-compete clauses often apply even to low-wage workers or individuals who do not possess transferable trade secrets, thus weakening their bargaining leverage and preventing them from freely moving across employers. Nearly one in five Americans are subject to a noncompete.

“Noncompetes are a widespread and often exploitative practice imposing contractual conditions that prevent workers from taking a new job or starting a new business,” FTC says. Noncompetes often force workers to either stay in a job they want to leave or bear other significant harms and costs, such as being forced to switch to a lower-paying field, being forced to relocate, being forced to leave the workforce altogether, or being forced to defend against expensive litigation.

Businesses prepare to fight

The final rule should become effective 120 days after publication in the Federal Register. However, it's unlikely to happen so quickly.

The Chamber of Commerce, a business association advocacy group, has already announced that it will fight the FTC and go to court if necessary.

“The US Chamber of Commerce will oppose the proposed regulation with all the tools at our disposal, including litigation. If the FTC can regulate noncompete agreements without authorization from Congress, there is no aspect of employment or commercial arrangements that it doesn’t have the authority to regulate or ban arbitrarily,” said Suzanne P. Clark, President and Chief Executive Officer of the US Chamber of Commerce.

The FTC said after the proposed rule was issued, it received more than 26,000 comments, with over 25,000 comments in support of the FTC’s proposed ban on noncompetes.

President Joe Biden also posted his support on X, saying, “Workers ought to have the right to choose who they want to work for.”

“The FTC is cracking down on “non-compete agreements,” contracts that employers use to prevent their workers from changing jobs even if that job will pay a few dollars more, or provide better working conditions,” Biden said.


Firms “have several alternatives” to protect their secrets

FTC, in its press release, also stated that trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information and investments without having to enforce a noncompete.

“Researchers estimate that over 95% of workers with a noncompete already have an NDA. The Commission also finds that instead of using noncompetes to lock in workers, employers that wish to retain employees can compete on the merits for the worker’s labor services by improving wages and working conditions,” the FTC said.

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