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FTC bans noncompete agreements in split vote

Now that the FTC has issued its final rule banning noncompete clauses, it's likely to face a bevy of legal challenges.

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In a 3-2 vote, the Federal Trade Commission finalized its rule Tuesday to ban employers from entering into noncompete agreements with employees, a move the FTC argued will increase wages and expand career opportunities.

The FTC's final rule generally prevents most employers from using noncompete clauses, which the FTC described as an exploitative practice that hurts competition and innovation during a webcast of its vote. The final noncompete rule will require employers to end enforcement of existing noncompete agreements with all employees except senior executives. The final rule will take effect 120 days after it's published in the Federal Register.

Although the FTC's rule could face a legal injunction delaying its implementation, multiple U.S. states already ban or are considering banning noncompete agreements. That means businesses need to assess their use of such employee agreements as momentum behind banning noncompetes grows, said Robert Milligan, a business attorney at Seyfarth Shaw.

If the FTC's rule does go into effect, businesses will face significant legwork auditing employment and compensation agreements to determine how many noncompete agreements they might have.

"Businesses and companies need to follow this issue," Milligan said. "Until there's an injunction, you need to at least prepare that this is a rule that could go in place and what that would mean. Practically speaking, I would expect that the rule would be enjoined, but that doesn't mean this isn't a wake-up call for companies that are not real thoughtful on their use of restrictive covenants."

The FTC first proposed its rule banning noncompete clauses in January 2023, which garnered more than 26,000 public comments. Of those comments, more than 25,000 supported ending the practice, said Ben Cady, an attorney in the FTC's Office of Policy Planning, during the webcast.

"Our team has spent the last year carefully reviewing the public input and feedback," FTC Chair Lina Khan said. She added that the comments illustrated "the many dimensions in which noncompetes can constitute unfair methods of competition."

What's next for businesses

Cady said the FTC finds that noncompete agreements create unfair methods of competition, violating Section 5 of the FTC Act that prohibits "unfair or deceptive acts or practices in or affecting commerce."

After the rule enters into effect, businesses will not have to rescind individual noncompete agreements, but they will have to broadly inform employees outside of senior executives that existing agreements are no longer enforceable. Existing noncompete agreements with senior executives will be allowed to continue, but employers will not be able to enter into new agreements even with those in senior positions.

The key question we examined is, 'Are noncompetes necessary for protecting a firm's investments?' We find that the answer is no.
Ben CadyAttorney, FTC Office of Policy Planning

Cady cited examples of how businesses can use other methods to protect trade secrets beyond noncompete agreements, pointing to California, Oklahoma and North Dakota, where noncompete agreements are banned. Cady said businesses within these states rely on nondisclosure agreements, confidentiality agreements and other legal measures to protect trade secrets.

"The key question we examined is, 'Are noncompetes necessary for protecting a firm's investments?' We find that the answer is no," Cady said.

The FTC estimated that the final rule will increase employee earnings by between $400 billion to $488 billion over the next 10 years, an average of $524 per worker annually. The FTC also stated that the rule will lead to the creation of more than 8,500 new businesses over the next decade.

While there should be enforceable rules on proprietary product or customer data, noncompete agreements themselves are detrimental to employees, said Alan Pelz-Sharpe, founder of market research firm Deep Analysis.

"Noncompetes are pretty much standard across the tech sector, and anyone who has been around for a while has a horror story to tell," he said. "In addition, they are typically tough to enforce, and I am sure many -- if not most -- will be happy to see this announcement."

FTC divided on noncompete rule

Khan, along with FTC Commissioners Alvaro Bedoya and Rebecca Slaughter, voted in favor of the rule.

"I am so pleased and proud to support the final rule against noncompete agreements in employment contracts," Slaughter said.

However, FTC Commissioners Andrew Ferguson and Melissa Holyoak spoke against the rule, as well as the FTC's authority to create such rules.

While he's sympathetic to the policy embodied in the final rule regarding noncompete agreements, Ferguson said, he doesn't believe the FTC is the right agency to regulate the use of such agreements. FTC commissioners aren't elected, but appointed by the U.S. president. Ferguson suggested Congress would be better equipped to tackle such an issue.

"Our Constitution assigns Congress the legislative power because Congress answers to the people for its choices," he said. "Whenever we undertake to make rules governing the private conduct of hundreds of millions of people who do not vote for us, we should not begin with determining what the right answer to the policy question is."

The final rule is expected to face legal action including from the U.S. Chamber of Commerce. Holyoak, for one, said she doesn't believe the final noncompete rule will survive such challenges.

Milligan said if the FTC's rule is struck down, it could result in a federal push for legislation on noncompete agreements.

"A lot of people don't like noncompetes no matter what part of the aisle you're on," he said. "If it becomes a populace hot-button issue, then I wouldn't be surprised if there was momentum on some federal legislation and increasing state legislation limiting or banning noncompetes."

Makenzie Holland is a senior news writer covering big tech and federal regulation. Prior to joining TechTarget Editorial, she was a general assignment reporter for the Wilmington StarNews and a crime and education reporter at the Wabash Plain Dealer.

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