FTC bans noncompetes

The Federal Trade Commission on Tuesday issued a final rule banning noncompetes, an order that's expected to be quickly challenged in the court system.

Commissioners voted 3-2 on the rule, which is slated to become effective 120 days after publication in the Federal Register, according to a news release. It would ban most noncompetes, defined by Investopedia as contractual conditions that stop employees from working for a competitor or starting a competing business within a specific geographical area for a certain time after exiting an employer.

“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 M. Khan said in the release. “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 FTC estimates the rule would increase earnings for the average worker by $524 annually and that it would lower health care costs by up to $194 billion over the next decade. Additionally, up to 29,000 more patents each year are expected to be created with the rule in effect, FTC officials say.

The release indicates an estimated 30 million workers, or nearly one in five Americans, are subject to a noncompete.

Under the FTC change, existing noncompetes for senior executives – who represent less than 0.75% of workers – can remain active, officials say. Employers would be banned from entering into or attempting to enforce any new noncompetes, even those for senior executives.

U.S. Chamber of Commerce President and CEO Suzanne P. Clark said in a statement released yesterday that the business advocacy organization plans to sue the FTC in an attempt to block the new rule.

“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," Clark said in the statement. “The chamber will sue the FTC to block this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked.”