FTC Approves Rule Banning Non-Compete Agreements

In a groundbreaking move at its April 23^rd meeting, the Federal Trade Commission approved a sweeping ban on non-compete agreements across all U.S. employers.

Under the final rule, existing non-compete agreements are upheld for senior executives, while they’re deemed unenforceable for other workers. These groups include paid staff, corporate executives, and independent contractors. The rule does include a limited exemption for non-compete agreements related to the sale of a business or substantially all its assets.

Senior executives, identified as individuals earning more than $151,164 annually and occupying policy-making positions, constitute less than 1% of the workforce.

The FTC released the proposed rulemaking for public comment earlier this year and in response received over 26,000 comments.

The FTC estimates that banning non-compete agreements will result in:

• Reduced health care costs: $74-$194 billion saved in physician costs over a decade
• New business formation: 2.7% increase in new firm formation, resulting in over 8,500 additional businesses yearly
• Rise in innovation: Estimated 17,000-29,000 more patents per year for a decade, with a significant annual increase
• Higher worker earnings: $400-$488 billion in increased worker wages over the next decade, averaging an extra $524 per worker annually

Historically, the enforceability of non-compete agreements has been determined by state courts. The new rule would shift that authority to the FTC, preempting conflicting state laws. Presently, only California, North Dakota, and Oklahoma have regulations that outlaw non-compete agreements for nearly all employees. The rule does not provide employees with a private right of action.

Alternatives to non-compete agreements that employers should start considering include requiring non-disclosure, confidentiality, and non-solicitation agreements with employees and working with legal counsel to strengthen and enforce trade secret rights.

The newly unveiled rule will take effect 120 days after publication in the Federal Register. It’s anticipated that the rule will be met with substantial legal challenges.