Will non-compete clause stand up in court? FTC rules it unlawful, Chamber of Commerce threatens suit

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By BRETT ROWLAND | THE CENTER SQUARE

The Federal Trade Commission issued a final rule Tuesday to ban noncompete contracts that prevent employees from joining rival companies in a move that immediately drew a legal challenge.

U.S. Chamber of Commerce President and CEO Suzanne Clark said the measure was illegal and would hurt businesses and workers.

“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,” she said in a statement. “This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy.”

Clark said the chamber would file suit as soon as possible.

“Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules,” Clark said. “Noncompete agreements are either upheld or dismissed under well-established state laws governing their use. Yet, today, three unelected commissioners have unilaterally decided they have the authority to declare what’s a legitimate business decision and what’s not by moving to ban noncompete agreements in all sectors of the economy.”

Federal officials said banning noncompete contracts would help employees and prevent employers from using exploitative practices. The FTC said the final rule is expected to result in higher earnings for workers and lower health care costs by up to $194 billion over the next decade. The agency also said it would lead to more patents.

“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” FTC Chair Lina Khan said in a statement. “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.”

Noncompete contracts are used widely in the U.S. An estimated 30 million workers – about 20% – are subject to a noncompete contract, according to the FTC. 

Under the FTC’s new rule, existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date.

Existing noncompetes for senior executives – who represent less than 0.75% of workers – can remain in force under the final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives.

FTC officials said employers will be required to provide notice to workers bound by an existing noncompete that they will not be enforcing any noncompetes.

10 COMMENTS

  1. Not surprising. Most people that work for the FTC have never had a real job. Have never run a business. They are clueless government employees living in their own little bubble.

  2. As a condition of employment, they should be illegal. As a voluntary contact between a departing employee/associate and an organization, they should be acceptable. Too bad the FTC doesn’t seem to make the distinction between the two.

    • Should a dress code be illegal?
      Funny how a government founded on individual liberty and freedom has a problem with individuals entering inti a voluntary contract.

  3. “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,”
    .
    If that is true, and those outcomes are deemed desirable, Congress should pass a LAW banning them. Government by executive fiat must end, regardless of the policy outcomes of individual issues.

  4. I like this decision, especially helpful for the gig-worker economy. When companies don’t want to hire someone full time, not even part-time, because you’re an older worker at the top of your pay-scale, so that the only ‘benefit’ of the job in your professional career is straight pay plus the required government input to taxation base, then these employers should not expect loyalty. Trade secrets are a different issue, but company executives aren’t usually moonlighting … I would think. If they are, then they should be taking the ‘benefits’ hit. The gold watch on retirement I’m sure in non-profit organizations has long been obsolete.

  5. The article seems to imply that employees are being forced at gunpoint to sign employment contracts containing non-compete clauses. I always thought they entered into employment contracts voluntarily.

  6. I work in the private sector and have been asked three times in two different states to sign non-compete. I have refused each time. No one is strong arming you. But I have seen new businesses hurt in that way. Might this be a moral issue?

  7. So much for creating intellectual property and innovation. As a small business you take the risks and costs to develop an innovative process. You pay people for their time to work out the concept and develop protocols. They then quit and value add to their
    resume for a position to benefit from financial reward of your now developed and functional concept to your competition. This kills small business opportunity. This decision made by unelected government employees who contribute nothing to our country.

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