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The FTC's Noncompete Ban: A Landmark Rule Facing Legal Challenges

On April 23, 2024, the Federal Trade Commission (FTC) issued a groundbreaking final rule banning noncompete agreements nationwide. This momentous decision aims to promote competition, protect workers' fundamental freedom to change jobs, increase innovation, and foster new business formation. The rule is expected to generate over 8,500 new businesses each year, raise worker wages, lower health care costs, and boost innovation across the United States. However, the rule has already faced legal challenges from the U.S. Chamber of Commerce and several other business groups.

Background on Noncompete Agreements

Noncompete agreements are contractual provisions that prevent workers from taking a new job or starting a new business in the same field or industry as their current employer for a specified period after leaving their current position. These agreements have become increasingly prevalent in recent years, with an estimated 30 million workers---nearly one in five Americans---subject to a noncompete.

While employers often justify noncompetes as a means to protect their investments, trade secrets, and confidential information, these agreements can have far-reaching negative consequences for workers and the economy as a whole. Noncompetes often force workers to either stay in a job they want to leave or bear significant costs, such as switching to a lower-paying field, relocating, leaving the workforce altogether, or defending against expensive litigation.

The FTC's Findings and Rationale

The FTC conducted a thorough investigation and received more than 26,000 comments during the 90-day public comment period following the issuance of the proposed rule in January 2023. Over 25,000 comments were in support of the FTC's proposed ban on noncompetes, demonstrating the widespread public concern about the negative impacts of these agreements.

Based on its findings, the Commission determined that noncompetes constitute an unfair method of competition and violate Section 5 of the FTC Act. The Commission found that noncompetes negatively affect competitive conditions in labor markets by inhibiting efficient matching between workers and employers. Additionally, noncompetes tend to negatively affect competitive conditions in product and service markets, inhibiting new business formation and innovation. Evidence also suggests that noncompetes lead to increased market concentration and higher prices for consumers.

Key Provisions of the Final Rule

Under the FTC's final rule, existing noncompetes for the vast majority of workers will no longer be enforceable after the rule's effective date. However, existing noncompetes for senior executives---defined as workers earning more than $151,164 annually and in policy-making positions---can remain in force. Employers are prohibited 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, informing them that the noncompete will not be enforced against them in the future. The Commission has included model language in the final rule to aid employers in complying with this requirement.

Alternatives to Noncompetes 

The Commission found that employers have several alternatives to noncompetes that still enable them to protect their investments without restricting worker mobility. Trade secret laws and non-disclosure agreements (NDAs) provide well-established means for employers to protect proprietary and sensitive information. Researchers estimate that over 95% of workers with a noncompete already have an NDA in place.

Moreover, the Commission suggests that employers wishing to retain employees can compete on the merits of their labor services by improving wages and working conditions, rather than relying on noncompetes to lock in workers.

Economic Impact of the Noncompete Ban

The FTC estimates that the final rule banning noncompetes will lead to significant economic benefits, including: 

1. New business formation growing by 2.7% per year, resulting in more than 8,500 additional new businesses created each year.
2. Higher earnings for workers, with an estimated average increase of \$524 per year per worker.
3. Lower health care costs, with savings of up to $194 billion over the next decade.
4. Increased innovation, with an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years.

These projections underscore the substantial positive impact the noncompete ban is expected to have on the U.S. economy, workers, and consumers. 

Legal Challenges to the FTC's Rule

On April 24, 2024, just one day after the FTC issued its final rule, the U.S. Chamber of Commerce and several other business groups sued the FTC in Texas federal court over the ban on noncompete clauses. The business groups, which include the Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce, claim that the FTC does not have the authority to implement such a wide-reaching rule and that it should be a question for Congress to decide.

The plaintiffs allege that noncompete agreements are essential to protecting internal company secrets and proprietary information. They maintain that not all noncompete clauses are created equal, and many "pose no threat to competition" in the broader market. The business groups argue that the FTC's ban "breaks with centuries of state and federal law" and that the "sheer economic and political significance of a nationwide noncompete ban demonstrates that this is a question for Congress to decide, rather than an agency."

Furthermore, the business groups contend that the FTC's requirement to scrap existing noncompetes is "impermissibly retroactive" by voiding previously agreed-upon contracts. They claim that "businesses that bargained for noncompetes will lose the protections of those agreements—even if they already held up their end of the bargain."

In response to these legal challenges, the FTC rejected the allegation that it is overstepping its legal bounds. FTC spokesperson Douglas Farrar stated, "Our legal authority is crystal clear. Addressing noncompetes that curtail Americans' economic freedom is at the very heart of our mandate, and we look forward to winning in court." 

The FTC's confidence in its authority to issue the noncompete ban stems from its thorough documentation of findings and rationale in support of the rule. The Commission's decision to allow existing noncompetes for senior executives to remain in force and to eliminate the requirement for employers to formally rescind existing noncompetes demonstrates its efforts to balance the interests of workers and employers while promoting competition and economic growth.

 Potential Legal Implications and Challenges

The legal battle between the FTC and the business groups challenging the noncompete ban is likely to be a prolonged and complex one, with significant implications for labor and competition law. The outcome of this case will have far-reaching consequences for employers, workers, and the broader economy.

One potential challenge may focus on the FTC's use of Section 5 of the FTC Act to ban noncompetes. While Section 5 grants the FTC broad authority to address unfair methods of competition, the business groups argue that the Commission's interpretation of this provision is too expansive and that Congress, not the FTC, should be responsible for enacting such a far-reaching policy change. 

Another possible challenge may relate to the rule's impact on existing contracts and the potential for retroactive application. Although the final rule allows existing noncompetes for senior executives to remain in force, employers may still argue that the rule improperly interferes with their contractual rights and expectations. 

The legal challenge brought by the U.S. Chamber of Commerce and other business groups also raises questions about the role of industry lobbying in shaping competition policy. The Chamber, which represents roughly 3 million companies, has been threatening to sue the FTC over this rule since the commission first proposed it in January 2023. The business groups claim that the FTC did not adequately address many of the criticisms fielded by businesses during the public comment period. 

Despite these potential challenges, the FTC appears confident in its authority to issue the noncompete ban and has thoroughly documented its findings and rationale in support of the rule. The Commission's decision to allow existing noncompetes for senior executives to remain in force and to eliminate the requirement for employers to formally rescind existing noncompetes demonstrates its efforts to balance the interests of workers and employers while promoting competition and economic growth. 

Conclusion 

The FTC's final rule banning noncompetes represents a landmark decision that has the potential to transform the U.S. labor market and economy. By protecting workers' freedom to change jobs, fostering innovation, and encouraging new business formation, the rule seeks to address the negative consequences of noncompetes and promote fair competition. 

However, the rule is already facing legal challenges from the U.S. Chamber of Commerce and other business groups, who argue that the FTC has overstepped its authority and that the ban is too wide-reaching. As the legal battle unfolds, it will be crucial for legal professionals to stay informed about the evolving landscape of noncompete law and to advise their clients accordingly. 

The outcome of this case will have significant implications for employers, workers, and the broader economy. Employers will need to review their existing employment agreements and practices to ensure compliance with the new rule, while workers may find themselves with greater flexibility and bargaining power in their careers. 

Ultimately, the FTC's noncompete ban reflects a growing recognition of the importance of worker mobility and fair competition in driving economic growth and innovation. As the rule is implemented and its impacts become clearer, it will serve as a significant case study in the intersection of labor law, competition policy, and economic regulation. The legal challenges brought by the business groups will test the FTC's authority and the scope of its mandate to promote competition and protect workers' rights. 

Regardless of the outcome of the legal battle, the FTC's noncompete ban has already sparked a national conversation about the role of noncompete agreements in the modern workforce and the need for a more equitable and competitive labor market. As this conversation continues, it will be important for policymakers, legal professionals, and business leaders to work together to find solutions that balance the interests of workers, employers, and the broader economy.