FTC votes to ban noncompete agreements

Manufacturer associations strongly oppose new rule

In what it says is an effort to promote competition, the Federal Trade Commission issued a final rule this week that bans noncompetes nationwide.

And while ink on that final rule may still be drying, a number of groups, including the National Association of Manufacturers, the National Restaurant Association and the Restaurant Law Center have already voiced strong opposition to the rule.

Other groups opposing the final rule maintain that the FTC did not have the legal right to ban noncompete clauses adding that any regulation of these agreements should be regulated by state governments, which have historically ruled on these matters.

In a news release, the FTC said the rule was designed to protect the fundamental freedom of workers to change jobs, increasing innovation and fostering new business formation.

“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. “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.”

Source: U.S. Federal Trade Commission

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 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. 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.

Noncompetes are a widespread and often exploitative practice imposing contractual conditions that prevent workers from taking a new job or starting a new business. 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. An estimated 30 million workers — nearly one in five Americans — are subject to a noncompete.

Under the FTC’s new rule, existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date. Existing noncompetes for senior executives — who represent less than 0.75% of workers — can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. Employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any noncompetes against them.

In January 2023, the FTC issued a proposed rule that was subject to a 90-day public comment period. The FTC received more than 26,000 comments on the proposed rule, with over 25,000 comments in support of the FTC’s proposed ban on noncompetes. The comments informed the FTC’s final rule-making process, with the FTC carefully reviewing each comment and making changes to the proposed rule in response to the public’s feedback.

In the final rule, the commission has determined that it is an unfair method of competition, and therefore a violation of Section 5 of the FTC Act, for employers to enter into noncompetes with workers and to enforce certain noncompetes.

The commission found that noncompetes tend to negatively affect competitive conditions in labor markets by inhibiting efficient matching between workers and employers. The commission also found that noncompetes tend to negatively affect competitive conditions in product and service markets, inhibiting new business formation and innovation. There is also evidence that noncompetes lead to increased market concentration and higher prices for consumers, the commission maintains.

Alternatives to noncompetes

The commission found that employers have several alternatives to noncompetes. Two specific alternatives it pointed to are trade secret laws and nondisclosure agreements. 

According to the commission, both give employers what it called well-established means to protect proprietary and other sensitive information.

The commission also concluded that employers wishing to keep workers can improve wages and working conditions as other alternatives to noncompetes.

Changes from the NPRM

Under the final rule, existing noncompetes for senior executives can remain in force. Employers, however, are prohibited from entering into or enforcing new noncompetes with senior executives. The final rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions.

Additionally, the commission has eliminated a provision in the proposed rule that would have required employers to legally modify existing noncompetes by formally rescinding them. That change will help to streamline compliance.

Instead, under the final rule, employers will simply have to provide notice to workers bound to an existing noncompete that the noncompete agreement will not be enforced against them in the future. To aid employers’ compliance with this requirement, the commission has included model language in the final rule that employers can use to communicate to workers. 

The commission vote to approve the issuance of the final rule was 3-2 with commissioners Melissa Holyoak and Andrew N. Ferguson voting no. Commissioners’ written statements will follow at a later date. 

The final rule will become effective 120 days after publication in the Federal Register.

Once the rule is effective, market participants can report information about a suspected violation of the rule to the Bureau of Competition by emailing noncompete@ftc.gov.

Groups, including the National Association of Manufacturers, were quick to voice their opposition. Chris Netram, the managing vice president of policy for the association, released the following statement this week:

“The FTC’s rule banning noncompete agreements is unprecedented and threatens manufacturers’ ability to attract and retain talent. In addition, today’s action puts at risk the security of intellectual property and trade secrets — anathema to an industry that accounts for 53% of all private-sector R&D.

“An NAM survey found that 66% of respondents — manufacturers of all sizes — said the ban would interfere with their operations, and nearly half said it would impact employee training programs. The ban could force manufacturers to revamp their human capital operations completely, enact burdensome controls or silo parts of their operations from each other, which would result in less training for employees, less collaboration, less innovation and less efficiency. The NAM will weigh all options in response to the commission’s vote, so that well-paying manufacturing jobs and innovation are not compromised.”

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