The Federal Trade Commission (FTC) published a new rule set to take effect in September 2024 that would ban noncompete clauses for most workers arguing such clauses negatively affect competitive conditions. The rule was immediately met with legal challenges upon publication by Ryan LLC, a Texas-based tax service firm, and the U.S. Chamber of Commerce.
Understanding Noncompete Contracts: Noncompete agreements are contractual clauses included in some employment contracts which restrict employees from working for or starting a competing business within a certain geographic area for a specified period after leaving their current employer. Originally intended to protect a company's intellectual property and trade secrets, these agreements are increasingly common across multiple industries.
Understanding Nondisclosure Agreements: A nondisclosure agreement (NDA) is a legally binding contract between two or more parties that outlines confidential information they wish to share with each other for certain purposes, while also restricting its disclosure to third parties. Such agreements establish confidential relationships between the parties involved, safeguarding sensitive information such as trade secrets, proprietary business information or intellectual property. NDAs are commonly used in business negotiations, partnerships, employment relationships and during the exchange of proprietary information to protect the interests and competitive advantage of the parties involved.
Arguments: Critics of noncompete agreements argue that they can hinder workers' ability to seek better employment opportunities, suppress wages and deter entrepreneurship. Proponents of noncompete agreements argue that businesses need these protections and that they are entered into voluntarily by both parties for at-will employment.
FTC's Rationale and Business Community Response: The FTC cites that there are currently 30 million workers that are impacted by noncompete agreements nationally. The FTC argues that the ban will encourage entrepreneurship and innovation by removing barriers that may dissuade individuals from starting their own ventures. The FTC's ban still allows for the protection of legitimate trade secrets through other means, such as confidentiality agreements known as nondisclosure agreements and intellectual property laws. Shortly after implementation of the new rule, The U.S. Chamber of Commerce and several other business organizations sued the FTC. They argue that the universal ban is too wide reaching and that the FTC overstepped its statutory mandate. They argue that the U.S. Congress, not a federal agency, should be making these types of rules.
Looking Ahead: Lawsuits filed challenging the rule seek to stop the FTC’s noncompete ban from going into effect. The legal challenges will likely delay implementation of this rule.
While awaiting a decision on the new rule from the courts, employers can assess their business by making note of which employees currently have noncompete agreements and which employees qualify as senior executives according to the new rule. Additionally, businesses may want to evaluate current NDAs ensuring those contracts are up to date. Such actions will ensure businesses are prepared if the rule takes effect.
For More Information:
Read the FTC’s announcement from April 2024 (LINK to: https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes)
Read the U.S. Chamber of Commerce’s Statement on the rule: Link to https://www.uschamber.com/finance/antitrust/u-s-chamber-to-sue-ftc-over-unlawful-power-grab-on-noncompete-agreements-ban
