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image for Breaking the Chains: FTC’s Ban on Noncompete Agreements

By Mark Carey

On April 23, 2024, the Federal Trade Commission approved a ban on noncompetition agreements nationwide that has been well anticipated and now hotly contested.  On May 7, 2024, the final rule banning noncompete agreements will be published in the Federal Register and become effective on September 4, 2024, if not enjoined by a conservative federal judge in Texas.  The ban will eliminate noncompetition agreements for nearly 30 million employees and will only be enforced for executives earning more than $151,164.00 who have a policy making position such as a CEO. Read the complete Supplementary Information (547 pages!) to the rule below in the federal register.

Federal Register

The Rule Briefly Explained

In essence, the rule provides, “[f]or workers who are not senior executives, existing noncompete agreements are no longer enforceable after the final rule’s effective date. Employers must provide such workers with existing non-competes notice that they are no longer enforceable. To facilitate compliance and minimize burden, the final rule includes model language that satisfies this notice requirement…the final rule provides that, with respect to a worker other than a senior executive, it is an unfair method of competition for a person to enter into or attempt to enter into a non-compete clause; to enforce or attempt to enforce a non-compete clause; or to represent that the worker is subject to a non-compete clause.”

Federal Register

The rule defines non-compete clauses to mean the following: “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from 1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or 2) operating a business in the United States after the conclusion of the employment that includes the term or condition. The final rule further provides that, for purposes of the final rule, ‘term or condition of employment’ includes, but is not limited to, a contractual term or workplace policy, whether written or oral.”  

Federal Register

There are two important and big exceptions to the rule. The rule does not prohibit non-competes entered into by a person “pursuant to a bona fide sale of a business entity.”  The most important exception is that the rule does not apply to currently pending and future lawsuits filed against employees and executives prior to September 4, 2024, the effective date of the rule.  Maybe there will be a rush by employers to file injunctive relief lawsuits prior to the deadline.

Federal Register

Employees Are Now Free Agents

This now means 30 million employees are “free agents” and can switch employment to work for competitors. The rule does not eliminate employee nondisclosure agreements (NDAs) and trade secret laws, the remaining tools employers can use to safeguard against disclosure of their confidential information.

Noncompete agreements have been a default management tool for nearly 200 years in this country.  The earliest case was from 1837 (Alger v. Thacher).  Employees have remained outraged and out leveraged for far too long.  It took one pandemic and a bit of election season voter influencing by the Biden administration for employees to realize coercive noncompete agreements need to be eliminated nationwide. State legislators across the country partially agreed, passing various state initiatives to weaken but not eliminate noncompete agreements. (Source). 

The FTC argued in an April 30, 2024 court pleading in the injunctive relief action filed by the US Chamber of Commerce,

Non-compete clauses by their very definition restrict competition in labor and product service markets by preventing individuals from moving freely to switch jobs or start their own businesses. As a result, noncompetes suppress wages, dampen innovation, prevent businesses from hiring the talent necessary to be successful, and inhibit new businesses from starting.  For many workers, the use of non-competes is also coercive, because contracts containing non-competes are forced upon them unilaterally under circumstances in which they have little to no bargaining power vis-a’-vis the employer…

The Commission also found that for non-senior executives, as defined in the Final Rule, the use of non-competes is “exploitative and coercive” conduct that similarly harms both labor markets and product and services markets. Id. at 105-06. For these workers, the Commission concluded that non-competes are “almost always unilaterally impose[d]” by employers, who “exploit their superior bargaining power to impose—without any meaningful negotiation or compensation—significant restrictions on a worker’s ability to leave for a better job or to engage in competitive activity.” Id. at 117. Non-competes thus “force workers to either stay in a job they want to leave or bear other significant harms and costs, such as leaving the workforce or their field for a period of time; relocating out of their area; or violating the non-compete and facing the risk of expensive and protracted litigation. (Source)

The FTC Chair Lina Khan stated,

“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more 8,500 new startups that would be created a year once the noncompetes are banned…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.”

The Business Lobby Quickly Fights Back

On April 24, 2024, the U.S. Chamber of Commerce v. FTC and other probusiness lobby groups filed a complaint for injunctive relief in the Eastern District of Texas; a bit of forum shopping indeed given the conservative leaning of the judges in that district.  The Chamber states on its website, “The Federal Trade Commission’s decision to ban employer noncompete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive…Since its inception over 100 years ago, the FTC has never been granted the constitutional authority to write its own competition rules. Noncompete agreements are either upheld or dismissed under well-established state laws governing their use…Big businesses face a regulatory onslaught as federal agencies pursue aggressive policy changes through regulation, preventing them from innovating, growing and hiring.”  The U.S. Supreme Court is currently reviewing two cases, Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Department of Commerce, challenging agency regulations and the deference courts give federal agencies.  The Chamber lawsuit follows in quick step to enjoin the FTC and the plaintiff hopes the timing of the suit coincides with the Court’s Loper and Relentless decisions scaling back federal agency power and deferential treatment by the courts.

The U.S. Chamber of Commerce Complaint

According to the complaint,

The true strength of a company lies in its people. Recognizing this, many businesses invest considerable sums in training and developing their employees to maximize their potential and to hone their skills.  And in particular for companies in highly competitive and innovative industries, those same employees serve as the guardians of businesses’ second most valuable asset, which is the highly sensitive and proprietary information that allows them to succeed.” (Complaint 1-2).

No company exists without its employees. However, when you place restrictions on an at-will employee’s ability to leave and find similar employment, there is no loyalty, only resentment among employees. A majority of at-will employees already have previous experience and training and that is why they were hired. The Chamber’s comment above presumes a focus only on entry level employees, which is misleading. I would also argue all employers benefit from the work experience of employees who shift between employers in a no noncompete zone like California because of increased competition and expertise among employees. Employers are also already protected against the potential for leakage of highly sensitive and proprietary information in the form of nondisclosure and confidentiality agreements and trade secret laws that protect their interests.  

The Chamber complaint further asserts that,

“Many businesses continue to rely on targeted noncompete agreements for these same reasons. Those agreements typically require that an employee agree, as a condition of employment or in exchange for compensation, that if he decides to leave the company, he will not work for the employer’s competitors for a limited period of time thereafter. These agreements benefit employers and employees alike- the employer protects its workforce investments and sensitive information, and the worker benefits from increased training, access to more information, and an opportunity to bargain for higher pay.” (Complaint 1-2).

The problem with the above statement is that employees cannot choose in the marketplace because most employers use noncompete agreements as a condition of employment.  Employees can never negotiate the terms of these “take it or leave it” noncompete agreements.  In my experience negotiating noncompete agreements for new hires, there is no bargaining for higher pay. The only time my clients have the opportunity to bargain for higher pay is when they are at the C-Suite level, and I insert an additional monetary compensation for sitting on the bench and not competing for a year after the employment ends.  Regular employees lack any power to bargain for higher pay and the Chamber’s assertion is false and misleading.

The Chamber complaint also states,

“By invalidating existing noncompete agreements and prohibiting businesses and their workers from entering into such agreements going forward, the rule will force businesses all over the country- including in this District- to turn to inadequate and expensive alternatives to protect their confidential information, such as nondisclosure agreements and trade-secrete lawsuits. And many workers, including highly-skilled experts and executives, will be unable to bargain for increased compensation in return for a noncompete agreement.” (Complaint 2-3).

I am sick and tired of this pro-business default management trope.  Employers know full well they are well protected by nondisclosure agreements, except for one Mr. Weinstein and company.   Trade secret laws are routinely used by companies to go after offending employees and they function well by providing immediate relief for employers.  Noncompete agreements were always an overreach and on September 4, 2024, will become illegal.

On April 30, 2024, the FTC filed a motion to transfer venue from the Eastern District of Texas and Judge J. Campbell Barker, a conservative judge.  In my opinion, the FTC wants a better venue in the Northern District of Texas and under a possibly less conservative judge.  Judge Ada Brown is the first African American appointee of former President Trump and Native American (Choctaw Nation).   

In Summary

The average American employee and executive are now “free agents” and are free to choose his or her own career trajectory.  No longer are employees unfairly coerced and encumbered by one-sided noncompetition agreements that only benefit employers.  I cringe at the billions of dollars unnecessarily spent by employees and executives over the years fighting against employer lawsuits seeking to enforce ridiculous noncompete cases.  Of course employers are pissed, they had it so good for so long.  Now the rules of the game have changed in favor of employees.  A great crack in the wall has opened in the private government castles of American employers; employees do matter.

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