FTC Bans Non-Competes

The Federal Trade Commission (FTC) has taken a significant step by banning noncompete clauses in the United States. These clauses have been a common feature in employment contracts, especially within the broadcast industry, particularly for talent. Let’s delve into the implications of this decision:

What Is the FTC’s Rule?

The FTC’s final rule aims to promote competition by prohibiting noncompetes nationwide. It safeguards the fundamental freedom of workers to change jobs, encourages innovation, and fosters new business formation. Noncompete clauses have long been criticized for keeping wages low, stifling new ideas, and hindering economic dynamism. The rule is expected to have a significant impact on the American economy.

• Benefits and Effects: The FTC estimates that the ban on noncompetes will lead to 2.7% annual growth in new business formation, resulting in over 8,500 additional startups each year.
• Higher Earnings: Workers are likely to see an increase in earnings, with the average worker earning an additional $524 per year.
• Health Care Costs: The rule is expected to lower health care costs by up to $194 billion over the next decade.
• Innovation Boost: The ban is projected to drive innovation, resulting in an estimated 17,000 to 29,000 more patents annually for the next 10 years.

Who Is Affected? Existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date. Senior executives (representing less than 0.75% of workers) can still be subject to existing noncompetes, but employers cannot enter into new noncompetes with them. Employers must provide notice to workers (other than senior executives) bound by existing noncompetes that these clauses will not be enforced against them.

Public Support and Process: The FTC issued a proposed rule in January 2023, which received over 26,000 comments during the 90-day public comment period. The overwhelming majority of comments supported the FTC’s proposed ban on noncompetes. In summary, the FTC’s decision to ban noncompetes is a significant move toward empowering workers, fostering innovation, and promoting a more dynamic economy. 

Alternatives to Noncompetes: The Commission found that employers have several alternatives to noncompetes that still enable firms to protect their investments without having to enforce a noncompete. Trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information. Researchers estimate that over 95% of workers with a noncompete already have an NDA. The Commission also finds that instead of using noncompetes to lock in workers, employers that wish to retain employees can compete on the merits for the worker’s labor services by improving wages and working conditions.