In a landmark decision for the U.S workforce, the Federal Trade Commission (FTC) voted 3–2 to ban most non-compete agreements. These agreements prohibit employees from leaving to work for a competitor or launch a rival enterprise. The new rule automatically terminates most current contracts, forbidding businesses from using them in the future. The FTC says the ruling will encourage innovation.
“Non-compete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” FTC Chair Lina M. Khan said in a statement. “The FTC’s final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”
The FTC rejected an interview request from The Epoch Times.
Following a 90-day public comment period, the FTC released a proposed rule in January 2023. Almost 25,000 of the more than 26,000 comments the FTC received on the proposed rule supported the agency’s ban on non-compete agreements. The comments informed the FTC’s final rulemaking process.
Employee/Employer Balance Needed
Seth Price, founding partner of the Washington, D.C.-based Price Benowitz LLP and founder of BluSharkDigital.com, told The Epoch Times he understands both perspectives.
“As a former television reporter, I was subject to non-compete agreements, but now I own companies that may call for them. There should be a balance,” said Mr. Price.
He illustrates that non-compete clauses are typically outside the purview of lawful business interests and are rarely enforced for low-level positions, such as secretarial or janitorial work. However, an employee in whom a company has invested thousands, if not millions, to build a brand to promote organizational goals needs different consideration.
He says non-solicitation is equally as important. A non-solicitation agreement is a contract that prohibits an employee from contacting current or former clients or customers of the business for their own gain or the gain of a competitor after leaving the company.
“Once someone is competing against you, it’s difficult to enforce the non-solicitation policy, and you may have significant consequences,” said Mr. Price. “It’s a slippery slope when someone wants to take their business elsewhere, taking the goodwill generated with one organization but then taken elsewhere. Once someone is directly competing with you, the non-solicitation has less teeth.”
Do Government Agencies Have Too Much Power?
R.C. Williams, an economist and co-founder of Watchmen Action, has been subject to a non-compete agreement at a broadcast company. He speculates that companies use them because they can.“I understand if there is a legitimate concern that an employee might take intellectual property, but you can’t stop someone from working, especially if they aren’t taking trade secrets,” said Mr. Williams.
Mr. Williams’s more considerable concern is the growing power of government agencies.
“These three letter agencies rule by fiat, said Williams. “They throw the baby out with the bathwater. It’s the epitome of government overreach.”
The FTC reports that most workers’ non-compete agreements will be nullified upon the new rule’s effective date under the new regulations. Although the FTC’s final rule prohibits employers from entering or attempting to enforce any new noncompete agreements, even if they involve senior executives, it does not apply to existing noncompetes for executives, who make up less than 0.75 percent of workers.
Mike Daugherty, founder of LabMD, and author of “The Devil Inside the Beltway,” says he knows firsthand the wrath of government agencies. After years of litigation, Mr. Daugherty sued the FTC in 2019 for allegedly flawed data-security practices. He prevailed over the agency when the U.S. Court of Appeals for the Eleventh Circuit determined that the FTC had overreached its jurisdiction by not proving a breach or a victim yet attempting to impose vague remedial measures.
“First of all, I don’t like non-compete clauses,” said Mr. Daugherty. “But I also don’t think these government agencies should be able to incite rules and do whatever they want regardless of jurisdiction.”
Mr. Daugherty says most Americans don’t understand that the controlling government has grown underground for the past hundred years since President Woodrow Wilson.
Lawsuits Challenge Noncompete Ban
In response to the FTC’s vote, The U.S. Chamber of Commerce filed a coalition lawsuit against the FTC after the agency voted to ban employer non-compete agreements. The chamber maintains the FTC’s move will hurt workers, employers, and the economy because it creates a dangerous precedent for government micromanagement.Suzanne P. Clark, U.S. Chamber of Commerce president and CEO, said in a statement: “Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules. Non-compete agreements are either upheld or dismissed under well-established state laws governing their use. Yet, three unelected commissioners have unilaterally decided they have the authority to declare what’s a legitimate business decision and what’s not by moving to ban noncompete agreements in all sectors of the economy.”
Alternatives to Non-compete Agreements
Businesses often use non-compete agreements to safeguard trade secrets and confidential information. Some employers add non-compete clauses to employment contracts, while others prefer to create stand-alone non-compete agreements. Some economists maintain non-compete clauses discourage employees from leaving an organization. Encouraging them to stay long-term reduces employee turnover.Walter Block, an American economist and the Harold E. Wirth Eminent Scholar Chair in Economics in the College of Business at Loyola University, New Orleans, says consenting adults should be able to engage in whatever employment agreement the parties deem acceptable.
Mr. Block said, “It’s a matter of freedom. Unless you have an open marriage, couples have a non-compete clause that says you are loyal to one another. You should be allowed to have a monogamous marriage. The same is true for employee–employer relationships.”
According to the commission’s findings, employers can safeguard their investments without enforcing a non-compete by using one of several other options available to them.
The FTC says non-disclosure agreements and trade secret laws offer employers methods for protecting confidential and proprietary data. The agency’s research shows that over 95 percent of employees with a noncompete agreement already have one.
In the 3–2 vote, Commissioners Melissa Holyoak and Andrew N. Ferguson voted against approving the final rule’s issuance. The final rule will become effective 120 days after publication in the Federal Register.
