In late-breaking news, the Federal Trade Commission (“FTC”) has adopted a final rule banning new noncompete agreements for all workers and effectively nullifying existing agreements and requiring companies to notify most current and past employees that the company will no longer enforce such agreements. In a change from the prior FTC proposal, however, the agreements may remain in effect for senior executives.
This rule is scheduled to go into effect 120 days after publication in the Federal Register, though its future is a bit uncertain. Various business groups, including the U.S. Chamber of Commerce, have indicated that they will sue to stop the rule from becoming effective. After receiving over 26,000 comments, the FTC adopted the rule on a 3-2 vote. Proponents argue that noncompete agreements are unfair and suppress worker pay and entrepreneurship, while also imposing costs and unfair terms of competition on firms wanting to hire workers bound by the agreements. Business groups, on the other hand, say noncompete agreements are critical for protecting proprietary information and intellectual property and for justifying investments in workers and their training. Without noncompetes, employers would need to worry that after sinking much time and money into training, employees might immediately jump to a better-paying competitor that did not have those costs. Nondisclosure agreements might protect some secrets but would not fully solve the problem.
Leaving aside policy questions, the dissenting Commissioners strongly questioned whether the FTC had the authority to issue such a blanket ban on noncompetes without an express directive from Congress. While various members of Congress on both sides of the aisle have introduced bills to reform noncompete agreements, none of them has been enacted. The dissenters argued that without a valid grant of authority from Congress, the final rule is unlawful. The retroactive nature of the ban adds further legal issues.
While there does seem to be a general move toward requiring certain reforms in noncompete agreements, it remains to be seen how the new FTC rule will fare in court. It is sure to face strong opposition both on policy grounds and due to claims of regulatory overreach.