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This week, the Federal Trade Commission (FTC) approved, by a 3-2 vote, a final rule that would void and ban nearly all employee noncompete agreements in the United States.
The rule is set to take effect 120 days after its publication in the Federal Register.
However, it is expected to face immediate legal challenges and injunction efforts, including on the grounds that the FTC lacks the legal authority to promulgate such a rule.
In fact, the first lawsuits on this issue were filed within hours of the FTC announcing its vote.
“Non-compete 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 non-competes are banned,” said FTC Chair Lina M. Khan.
“The FTC’s final rule to ban non-competes 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 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, according to the FTC, is expected to result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year.
It is also expected to lower health care costs by up to $194billion over the next decade.
In addition, the final rule is reportedly expected to help drive innovation, leading to an estimated average increase of 17,000 to 29,000 more patents each year for the next ten years under the final rule.
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 which 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 rulemaking process, with the FTC stating that it reviewed each comment and made 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.
