WASHINGTON, D.C.—The Federal Trade Commission (FTC), the federal agency responsible for policing and preventing unfair competitive practices in commerce, announced a new rule, on April 23, banning the use and enforcement of noncompetes nationwide.
The FTC Commissioners determined that noncompetes are an unfair method of competition, and therefore violated Section 5 of the FTC Act.
The ruling states that in relation to the Federal Trade Commission Act: “The final rule provides that it is an unfair method of competition—and therefore a violation of section 5—for persons to, among other things, enter into non-compete clauses (“non-competes”) with workers on or after the final rule’s effective date.”
However, for senior executives of companies who are in existing non-competes prior to the effective date, “existing non-competes can remain in force.” The FTC clarified that existing noncompetes for all other workers are no longer enforceable and employers are prohibited from entering into or enforcing new noncompetes with senior executives. The final rule will become effective 120 days after publication in the Federal Register.
The Commission hopes this new rule will generate over 8,500 new businesses each year, raise worker wages, lower health care 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 Khan. “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.”
Additionally, the Commission eliminated a provision in its draft that would have required employers to legally modify existing noncompetes by formally rescinding them. That change, according to the FTC, will aid in streamlining compliance. Employers are now required to provide notice to workers bound to existing noncompetes that their noncompete agreement is no longer enforceable.
The Commission vote to approve the issuance of the final rule was split, 3-2, with Commissioners Lina Khan, Rebecca Kelly Slaughter, and Alvaro Bedoya voting in the affirmative; and Melissa Holyoak and Andrew Ferguson dissenting.
“I do not believe we have the power to nullify tens of millions of existing contracts; to preempt the laws of forty-six States; to declare categorically unlawful a species of contract that was lawful when the Federal Trade Commission Act (FCT Act) was adopted in 1914; and to declare those contracts unlawful across the whole country irrespective of their terms, conditions, historical contexts, and competitive effects. Accordingly, I respectfully dissent,” wrote FTC Commissioner Andrew Ferguson in a statement on the ruling.
The U.S. Chamber of Commerce has filed a lawsuit alleging that the FTC overstepped its authority.
“Like many of the rules, the FTC’s blanket ban on noncompetes defies its agency’s constitutional and statutory authority, shifting power from Congress and into the hands of three unelected commissioners,” wrote Suzanne Clark, President and CEO of the U.S. Chamber of Commerce, in a statement. “The FTC only has the authority to identify specific, individual instances of unfair competition on a case-by-case basis, but Chairwoman Lina Khan has decried this approach as ‘whack-a-mole’ and pledged instead to lay down prescriptive, often one-size-fits-all rules, without letting the Constitution stand in her way.”
According to the FTC, nearly 30 million American workers are subject to a noncomplete clause or agreement. The FTC estimates that the final rule banning noncompetes will lead to new business formation growing by 2.7% per year, resulting in more than 8,500 additional new businesses being created each year.
“The final rule is expected to result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year, and it is expected to lower health care costs by up to $194 billion over the next decade,” the FTC released in its statement. “In addition, the final rule is expected to help drive innovation, leading to an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years under the final rule.”
The Commission shared that employers can still utilize trade secret laws and non-disclosure agreements (NDAs) in lieu of noncompetes to protect proprietary and other sensitive information.
In elaborating as to why it is suing the FTC, the U.S. Chamber of Commerce wrote, “the FTC has never been granted the constitutional and statutory authority to write its own competition rules. This decision sets a dangerous precedent for government micromanagement of business.”
“The Chamber’s lawsuit against the FTC is our latest effort to challenge the Administration’s aggressive campaign to micromanage business decisions,” wrote Clark, President and CEO of the U.S. Chamber of Commerce. “It follows our victories against the Securities and Exchange Commission over its stock buyback rule, the National Labor Relations Board over its joint-employer rule, and the Consumer Financial Protection Bureau over its rule on ‘Unfair, Deceptive, or Abusive Acts or Practices.’”
The U.S. Chamber of Commerce is the world’s largest business organization advocating for small businesses, chambers of commerce, and global corporations across the country. The chamber has criticized the Biden Administration for imposing $1.033 billion in net regulatory costs on the economy ($201 billion in 2021 + $117 billion in 2022 + $129 billion in 2023 + $616 billion in 2024).
“The business community has rightly decried overregulation for years, prompting some critics to accuse us of crying wolf,” Clark wrote. “Today, there’s no question that the wolf is here. The regulatory agencies are redefining the relationship between business and government without heed to elected representatives or the Constitution. The U.S. Chamber will see these agencies in court.”
One Response
Don’t Non-compete agreements by their very existence attempt to write their own competition rules??? . Can an employee also have restrictive governance by stating that the company cannot hire another employee “X” for specified time “Y” which would be damaging to the former employee who receives benefit from the relationships initiated and developed by the former employee? There are no guarantees in life, compete, let the best man/women win.