The Biden administration faces multiple lawsuits—including from the nation’s biggest business lobby—over a new federal ban on the vast majority of worker noncompete agreements, with the groups claiming that the ban harms the economy and sets a dangerous precedent for government overreach.
The lawsuits come in response to a 3–2 vote by the Federal Trade Commission (FTC) on April 23 to impose a near-total ban on “noncompetes,” as the federal agency often refers to the worker noncompete agreements.
The FTC defines noncompete clauses as terms or conditions of employment that prohibit or penalize a worker from taking a job for a competitor or starting a competitive business.
“This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy,” Suzanne Clark, president and CEO of the U.S. Chamber of Commerce, said.
The Chamber filed its lawsuit on April 23 in a Texas court, seeking to strike down the FTC’s near-total ban on noncompetes.
The FTC’s newly announced final rule labels such agreements as an “unfair method of competition” and claims that the ban will increase worker earnings by as much as $488 billion over the next decade and will lead to the creation of more than 8,500 new businesses each year.
“Noncompete 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 Khan said in an April 23 statement announcing the new rule.
“The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”
Opponents of the ban, including some lawmakers and business groups, have argued that banning noncompetes is a heavy-handed Washington dictate that runs counter to the spirit of federalism, impedes the freedom of employers and employees to enter into potentially mutually beneficial agreements, and hampers competitiveness.
“The Federal Trade Commission’s decision to ban employer noncompete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive,” Ms. Clark said in a statement.
The Chamber argues that noncompete agreements can be beneficial for both businesses and employees by protecting investments in research and development while promoting workforce training.
The group’s lawsuit accuses the FTC of abusing its authority by relying on an obscure and rarely invoked provision of the Federal Trade Commission Act to claim that it has the power to ban noncompetes under the guise of outlawing “unfair methods of competition.”
Dallas-based tax service firm Ryan LLC filed its legal challenge to the FTC rule on April 23 in a different federal court in Texas. The company argued that the ban would “upend companies’ intellectual property protections and talent development and retention” and alleged that the FTC is overstepping its authority and unlawfully meddling in free markets.
An FTC spokesperson denied the allegation that it is exceeding its authority and said the agency welcomes the opportunity to make its case in court.
“Our legal authority is crystal clear,“ FTC spokesperson Douglas Farrar told The Epoch Times in an emailed statement, citing the FTC Act’s ”unfair methods of competition” clause to justify the ban.
“This authority has repeatedly been upheld by courts and reaffirmed by Congress,” Mr. Farrar continued. “Addressing noncompetes that curtail Americans’ economic freedom is at the very heart of our mandate, and we look forward to winning in court.”
Background
When it first proposed the ban in January 2023, the FTC argued that noncompetes were “exploitative,” suppressed wages, and hampered innovation and competition.Holding that such agreements violate the Federal Trade Commission Act, the agency estimated that banning them could increase wages by hundreds of billions of dollars over a decade and expand opportunities for more than 30 million U.S. residents.
Opponents of the ban include some lawmakers, who argued that the proposed ban was another example of federal government overreach and warned that it would amount to a radical rejiggering of free markets.
“The regulation would undermine the rule of law by invalidating tens of millions of existing contracts to which employers and employees voluntarily agreed,” Judiciary Committee Chair Jim Jordan (R-Ohio) and Reps. Darrell Issa (R-Calif.), Thomas Massie (R-Ky.), and Scott Fitzgerald (R-Wis.) wrote in a February 2023 letter to Ms. Khan and other commissioners.
The lawmakers argued that the proposed ban would not only be unlawful but also “radically restructure the American economy.”
“The rule is also inconsistent with tenets of federalism because it sets a one-size-fits-all approach that would outlaw practices that 47 states have deemed to be legal,” the lawmakers said.
Yet, according to the FTC, such opposing voices were few and far between. The agency said in its April 23 statement that a vast majority of the 26,000 comments it received during the public comment period were in favor of the ban.
The Chamber wasn’t convinced, alleging in its lawsuit that the FTC “failed to meaningfully engage with” any alternative suggestions for a less-radical ban.
Details of the Noncompetes Ban
Existing noncompetes, meaning ones that are entered into before the rule goes into effect (120 days after publication in the Federal Register), become unenforceable after the effective date if they apply to non-executive staff. For senior executives, existing noncompete agreements will stay in force beyond the effective date.For purposes of applying the final rule, senior executives are defined as workers who earn more than $151,164 per year and are in policymaking positions. The agency estimates that less than 1 percent of workers are estimated to be senior executives under the new rule, according to the FTC fact sheet.
The rule requires employers to notify workers whose noncompetes are no longer enforceable after the rule takes effect.
According to the fact sheet, roughly one in five working-age Americans, or about 30 million people, are subject to noncompetes.
The FTC estimates that banning noncompetes will spur innovation and new business formation growth, creating more than 8,500 new businesses each year and between 17,000 and 29,000 more patents each year over the next decade.
It also stated that workers will see their wages grow by $524 per year on average thanks to the ban (between $400 billion and $488 billion in total over a decade) and that health care costs will fall by between $74 billion and $194 billion over the next decade because of reduced spending on physician services.
The original proposed version of the rule was stricter than the final rule, as it sought to ban existing noncompetes with senior executives and had a narrower sale-of-business exception. The final rule features an exception that allows noncompetes between the seller and buyer of a business.
