Competing for Economic Liberty: Implications of the FTC’s Ban on Noncompete Clauses for Employees
by Marcus Irwin
Published onAug 21, 2024
Competing for Economic Liberty: Implications of the FTC’s Ban on Noncompete Clauses for Employees
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About 110 years ago, Congress passed the Federal Trade Commission Act, under which Section 5 bans unfair methods of competition and gives the Federal Trade Commission (FTC) the power to enforce that prohibition. On April 23, 2024, the FTC used this power to issue a new rule banning noncompete clauses nationwide. The fine rule defines a noncompete clause as “a term or condition that prohibits or penalizes workers or ‘functions to prevent a worker from’ seeking or accepting work or operating a business in the United States following employment with the contracting employer.”
The FTC estimates that about one in five Americans, or about 30 million workers, are subject to noncompete agreements. While these agreements are commonly used to protect trade secrets and other confidential information in the contracts of business executives, salespeople, and scientists, they have been increasingly used in other blue-collar areas of the workforce and with hairstylists, teachers, baristas, and other entry-level workers to ensure that a company benefits from any time and training invested in an employee.
However, after deciding that noncompete agreements hinder economic liberty, hamper competition, suppress new ideas, and keep wages low, the FTC commissioners voted 3-2 to invalidate existing noncompete contracts for most employees and ban all new noncompete agreements. The FTC concluded that employers entering into noncompete agreements with workers is a form of unfair market competition and therefore a violation of Section 5 of the Federal Trade Commission Act.
For senior executives, workers who are both in policy-making positions and have an annual compensation of at least $151,164, § 910.2(a)(2) of the new Rule asserts that it is an unfair method of competition to enter into a noncompete agreement, to enforce a noncompete agreement entered into after the effective date of the Rule, or to represent that the senior executive is subject to the agreement entered into after the effective date. As the Rule is set to become effective on September 4, 2024, any noncompete agreements for senior executives entered into after that date will be invalid, while current ones created before will still be enforceable.
Furthermore, § 910.2(a)(1) of the Rule asserts that workers other than senior executives can no longer enter into a noncompete agreement, have one enforced against them, or be told they are subject to one. Thus, all current and future noncompete agreements for those workers are no longer valid.
Additionally, under § 910.2(b)(1) of the Rule, employers must provide clear and conspicuous notice to their employee under a noncompete agreement that the agreement cannot and will not be enforced. Section 910.3 further outlines a few narrow exceptions in which a noncompete agreement will be enforceable, notably to noncompete agreements that are entered into pursuant to a bona fide sale of a business entity or where a cause of action arose prior to the September 4 effective date.
There are numerous stories of employees being forced to stay at a job with unfavorable conditions or when a better position becomes available due to noncompete clauses, but under this new Rule, they will no longer have to do so. On an individual level, employees will now have much more freedom to move between jobs and greater agency in their careers, which could lead to increased wages, with an expected increase in the average worker’s earnings of $524 per year, better benefits, and higher levels of employee satisfaction.
However, the new Rule will have to overcome a legal battle before it becomes effective, as the U.S. Chamber of Commerce, the Business Roundtable, and other business groups have challenged the regulation in federal court, citing government overreach. Thus, the September 4 effective date and any potential effects of the Rule can be expected to be pushed back. The FTC points out that there are several alternatives employers can use to protect their investments and trade secrets, such as trade secret laws, non-disclosure agreements, and improved wages and working conditions, but it will ultimately be up to the courts to decide whether the new Rule is valid.
Either way, the passage of the Rule has brought significant attention to a controversial issue, and the substantial support of workers in favor of the Rule may inspire state legislators to restrict noncompete clauses in the future even if the Rule is struck down.
Marcus Irwin is a second-year law student at Wake Forest University School of Law. He holds a B.A. in Finance with a minor in Real Estate from the University of Notre Dame.
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