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FTC Bans Noncompete Agreements; Business Interests Plan to Challenge Rule in Court

Ruth Singleton
Published Date:
Apr 24, 2024

The Federal Trade Commission (FTC) voted on April 23 to ban noncompete agreements for most workers across the country, The Washington Post reported. The final noncompete rule makes it illegal for employers to include such agreements in employment contracts and requires those employers with active noncompete agreements to inform their workers that these agreements are no longer valid. The only exception is for senior executives, who the FTC says represent less than 1 percent of workers.

The vote was 3-2. The three commissioners in the majority said they found overwhelming evidence that such agreements hold back wages, impede entrepreneurship and hinder labor markets. The rule is set to take effect after 120 days. 

“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,” FTC Chair Lina M. Khan said in a statement after the vote.

The two dissenting commissioners—Melissa Holyoak and Andrew Ferguson—questioned the FTC’s authority to issue the rule. The FTC lacks “the power to nullify tens of millions of existing contracts,” Ferguson said.

Some business groups also claim that the FTC lacks the authority to issue the rule, and they believe that it will hurt companies. The U.S. Chamber of Commerce plans to challenge it in court.

In a statement, Chamber CEO Suzanne P. Clark called the new rule “a blatant power grab that will undermine American businesses’ ability to remain competitive.”

“The Chamber will sue the FTC to block this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked,” Clark said.

President Biden recommended the rule in 2021 as part of an executive order. It is the latest step in a major initiative by the FTC to expand the boundaries of antitrust enforcement, the Post reported.

The FTC first proposed the rule in January 2023. At that time, in its overview of the proposed rule, the agency estimated that the rule “would increase wages by between $250 billion and $296 billion per year." The FTC also estimated that the rule could "expand career opportunities for about 30 million Americans.”

Sandeep Vaheesan, legal director at the Open Markets Institute, told the Post, “I think the FTC has done a real public service here by compiling all this evidence, making a really strong case for a complete ban and establishing a new gold standard for policymaking in this area. No employee or professional should be made to sign one of these contracts.” Her organization proposed a noncompete ban to the FTC in 2019.

Dave Wagner, a dental equipment technician in Washington state, told the Post last year that a noncompete agreement he signed left him without a job in an industry that had employed him for decades. Remarking on the FTC’s decision, Wagner said he is happy for other workers who have been in the same situation. “It was almost like you were in prison—and they owned you,” Wagner said. “I like the fact they don’t own you anymore.”

But with legal challenges soon to come, the future efficacy of the rule is unclear.

Jenner & Block lawyer Debbie Berman, in an email to the Post, said, “The uncertainty created by these rules and the future litigation creates a risky landscape for businesses as they try to protect their most valuable trade secrets and confidential information. I think we’ll see rapid movement by businesses to implement alternatives to noncompetes—such as non-solicitations agreements and deferred compensation plans—because they won’t take a gamble on protecting their proprietary information.”

Cary Coglianese, a law professor at the University of Pennsylvania, told the Post that he would not be surprised if a lower court struck down the new FTC rule. The case could reach the U.S. Supreme Court, he said: “We have a Supreme Court that has a majority that’s looking skeptically at the exercise of governing power by administrative agencies like the Federal Trade Commission.”


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