The Biden administration's ban on noncompete agreements has sparked lawsuits from business groups alleging government overreach.
The Federal Trade Commission (FTC) has released a final rule that prohibits the use of noncompete agreements for the vast majority of workers nationwide. The decision, announced on April 23, aims to promote competition, support workers' freedom to change jobs, and stimulate innovation and new business formation.
FTC Chair Lina M. Khan asserts that noncompete clauses have detrimental effects on the economy by keeping wages low and suppressing new businesses and ideas. The FTC claims that the ban will lead to a 2.7% annual increase in new business formation, resulting in over 8,500 additional new businesses each year. They also claim the rule will raise workers' average earnings by $524 annually and could lower health care costs by up to $194 billion over the next decade. The final rule is expected to foster an average increase of 17,000 to 29,000 more patents filed annually for the next ten years.
The rule specifies that while existing noncompetes for a small fraction of senior executives can remain in force, employers are prohibited from entering into or enforcing new noncompetes, even with senior executives. Employers are required to inform workers, other than senior executives, that their noncompetes will not be enforced.
The FTC received over 26,000 comments during the 90-day public comment period, the majority of which supported the proposed ban. The final rule considers noncompetes an "unfair method of competition" and a violation of Section 5 of the FTC Act.
Alternatives to noncompetes, such as trade secret laws and non-disclosure agreements (NDAs), provide employers with other means to protect sensitive information. Over 95% of workers with a noncompete also have an NDA.
The final rule will become effective 120 days after publication in the Federal Register. Violations can be reported to the FTC's Bureau of Competition.
Following the announcement, the Biden administration faced lawsuits from groups such as the U.S. Chamber of Commerce, which called the ban "unlawful" and a "blatant power grab." These groups argue that the decision harms the economy and represents government overreach. The FTC, however, maintains that its legal authority is "crystal clear" and looks forward to defending the rule in court.
The FTC's ban on noncompetes has sparked a contentious debate about the balance between protecting workers' rights and maintaining competitive business practices. With lawsuits already filed, the future of the ban may hinge on upcoming legal battles that could shape the landscape of labor and competitive practices in the United States. The FTC stands by its decision, citing the expected positive impact on innovation and the economy, while opponents warn of potential negative consequences for businesses. The final rule is set to become operative in a few months, with the FTC prepared to address any reported violations.
