A federal judge ruled against a Federal Trade Commission (FTC) ban on noncompete agreements, set to go into effect next month, saying that the rule was “unreasonably overbroad without a reasonable explanation.”
A noncompete agreement is an employment contract stating that workers must not compete with their employer after their job contracts end, such as by working for a competitor or in a specific market. The FTC estimates that roughly 20 percent of U.S. workers, or around 30 million individuals, have signed such agreements.
In April, the agency voted to adopt a near-total ban on noncompete provisions in employment contracts. It issued a final rule, calling such agreements an “unfair method of competition.”
In the same month, the U.S. Chamber of Commerce, together with other plaintiffs, challenged the rule in a lawsuit, claiming that the FTC lacks the authority to issue such a ban.
They argued that the ban would place burdens on business owners who want to protect their intellectual property.
The court rejected such arguments, noting that “the role of an administrative agency is to do as told by Congress, not to do what the agency thinks it should do.”
Noncompete Versus Competition
The U.S. Chamber of Commerce hailed the latest ruling as a significant win for American businesses against “government micromanagement,” in a press release on Tuesday.“A sweeping prohibition of noncompete agreements by the FTC was an unlawful extension of power that would have put American workers, businesses, and our economy at a competitive disadvantage,” Chamber of Commerce President Suzanne P. Clark said.
The Chamber of Commerce said noncompete agreements protect investments in research and development while reducing free-riding, which cannot be adequately secured through nondisclosure agreements or trade-secret suits. The group added that 46 states, in addition to Washington, permit noncompete clauses, noting that this has “traditionally been an issue of state law.”
“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 M. Khan said.
In the press release published earlier this year, the FTC claimed that banning noncompete agreements would lead to new business growth of 2.7 percent in the American economy. This, in turn, would “result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year, and it is expected to lower health care costs by up to $194 billion over the next decade.”
The federal agency also said there would be an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years.
Seth Price, founding partner of the Washington-based Price Benowitz LLP and founder of BluSharkDigital.com, said that he understands both perspectives.
He said that noncompete clauses are typically outside the scope 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 and promote organizational goals requires different considerations.