The Federal Trade Commission has voted to approve a final rule banning most new noncompete agreements, setting the stage for legal battles between business groups opposing the ruling and its supporters, including the Biden administration. The rule, which would become the first federal restriction on noncompetes for most workers nationwide, would allow existing noncompete agreements for senior executives to remain in effect but would be unenforceable for other employees.
The Chamber of Commerce has expressed its intention to challenge the ruling in court, arguing that it is unnecessary and unlawful. While the Republican commissioners believe that the FTC does not have the authority to pass the rule, the Democratic chair, Lina Khan, argues that the FTC Act provides the agency with the authority to address unfair methods of competition, dismissing claims that the agency lacks the necessary authority.
The new rule will apply to employees, independent contractors, interns, volunteers, and others working for companies under the FTC’s regulatory authority. Existing noncompete agreements for workers not defined as senior executives will not have to be rescinded but will also not be enforceable. Despite some ambiguity in defining “senior executives,” the FTC aims to limit the rule’s impact to a small percentage of workers.
The proposed rule, introduced in January 2023 following a 2021 executive order from President Biden, aims to free 30 million people from current noncompetes and increase earnings in the United States. However, the proposal has faced heavy criticism from industry associations, intellectual property groups, and small business associations, with many arguing that a noncompete ban would stifle innovation.
Legal challenges are expected, with some states already banning or restricting noncompete agreements. The FTC’s rule will supersede state regulations, prompting mixed responses from state attorney generals. Certain groups, such as franchise owners, owners of sold companies, and employees of banks and nonprofit organizations, will be exempt from the new rule. Nondisclosure and nonsolicitation agreements will not be impacted, allowing companies to pursue prosecution for specific allegations.
Overall, the new FTC rule on noncompete agreements represents a significant shift in policy that will impact millions of workers across the United States. While supporters argue that the rule will benefit workers by increasing wages and promoting innovation, opponents view it as an overreach that could harm American businesses’ competitiveness. Legal challenges and debates over state vs. federal authority are likely to continue as the rule moves towards implementation.
