IP Alerts

April 24, 2024

The Federal Trade Commission (FTC) recently issued a final rule that bans noncompete clauses (“noncompetes”) nationwide. The FTC believes the new rule will protect the ability of workers to change jobs, increase innovation, and foster new business formation. The new rule will go into effect 120 days after it is published in the Federal Register.

Noncompetes are often used in employment contracts and impose conditions that prevent workers from taking a new job or starting a new business in a certain field. Noncompetes typically force workers to either stay in a job they want to leave or switch to a lower-paying field. The FTC estimates 30 million workers are subject to a noncompete clause.

In the final rule, the Commission determined that noncompetes are an unfair method of competition, and therefore a violation of Section 5 of the FTC Act (ban on unfair methods of competition). The FTC found that noncompetes tend to: negatively affect competitive conditions in labor markets by inhibiting efficient matching between workers and employers; negatively affect competitive conditions in product and service industries, inhibiting new business formation and innovation; and can lead to increased market concentration and higher prices for consumers.

Under the FTC’s new rule, existing noncompetes for the vast majority of workers will no longer be enforceable. 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. Existing noncompetes for senior executives can remain in force, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. The final rule defines senior executives as workers earning more than $151,164 annually and who are in policy-making positions.

One argument in favor of noncompetes is that they protect a company’s investment in their personnel particularly investments made concerning senior executives. Anticipating this sort of argument, the FTC found that employers have several alternatives to noncompetes that still enable firms to protect their investments without having to enforce a noncompete.

More specifically, the FTC argued that trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information. The FTC also asserted that instead of using noncompetes to lock in workers, employers that wish to retain employees can compete for the worker’s services by improving wages, benefits and/or working conditions.

As mentioned, the new rule is currently scheduled to go into effect 120 days after it is published in the Federal Register. However, several legal challenges are expected to be directed against the new rule in the near future. Given this, the ultimate fate of the new rule is uncertain.

For more information on this topic, please contact Fitch Even partner Timothy R. Baumann.

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