In a Special Open Commission Meeting on April 23, 2024, the U.S. Federal Trade Commission (FTC) voted to adopt a rule that essentially bans non-compete agreements that restrict workers from moving to other jobs within the same industry. This decision follows a 2021 appeal from President Biden to the FTC to limit non-competes, which affect approximately 20% of American workers. The FTC fielded more than 26,000 comments on the proposed rule during the public comment period in early 2023, demonstrating the impact this will have on workers on both sides of the issue.
Despite a divided vote of 3-2 among FTC commissioners, the rule will end most new non-compete agreements, including those for executives, and render existing non-compete agreements for lower-level workers unenforceable when the rule goes into effect—120 days after publication in the Federal Register. The final rule would also require companies to let current and past employees know they won’t enforce the non-compete agreements. The only exceptions are existing non-competes for “senior executives” making over $151,164 a year in “policy-making” roles—estimated to represent only 1% of all workers—and the rule does not cover employees of non-profits or franchises.
Proponents of the FTC’s ban, including the Biden administration, have argued non-compete agreements limit workers’ mobility, depress wages, and damage U.S. competitiveness. The FTC estimates that a ban on most of these agreements could boost U.S. workers’ earnings by at least $400 billion over ten years. However, major business groups oppose the ban arguing that it’s overly broad and limits companies’ ability to protect their confidential information. The U.S. Chamber of Commerce, the largest pro-business lobby in the U.S., sued the FTC in a Texas federal court on April 24th, the day after the FTC voted on the rule, arguing that the FTC lacks the authority to issue such rules.
Although there may be more legal challenges to the rule in the future and its ultimate status is unclear, the recent trend at both the federal and state levels has been to narrow and limit the use of non-compete agreements. Employers should take this opportunity to review their intellectual property and the procedures they have in place to protect their assets. They should evaluate the alternative tools that are available to them including, for example, non-disclosure, non-solicitation, and trade secret agreements, ensuring that systems are in place to safeguard and restrict access to trade secrets and other confidential information.
L&A practitioners will continue to watch the issue and publish more information as there are developments.
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