The FTC Kills Noncompetes

By: George Calhoun

In a groundbreaking move that will reshape the workplace and many litigation practices nationwide, the FTC has issued a final rule that effectively bans all employee non-compete clauses.  Approximately 30 million Americans currently work under a non-compete clause.  All but a few applicable to senior executives will be void upon the effective date of the rule. After the rule is effective, no new non-compete clauses will be enforceable, even for senior executives.

Noncompetition clauses have long been a contentious issue in the labor market.  Employers claim that they protect intellectual property, trade secrets, and business interests.  Employees find that such agreements limit worker mobility and suppress wages. According to FTC chairperson Lina Khan, “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.”  The FTC received over 26,000 comments on its proposed rule, with 25,000 of those being in support of the new rule.

The New Rule

The rule is straightforward: it prohibits employers from entering into, maintaining, or attempting to enforce non-compete agreements with workers. Specifically, the FTC determined that noncompete provisions are an “unfair method of competition—and therefore a violation of section 5” of the Federal Trade Commission Act. Furthermore, it mandates that employers rescind existing non-competes, with the exception of certain senior executives who represent less than 0.75% of the workforce.[1] For senior executives, existing non-competes can remain in force.

The new rule expressly preempts conflicting state law. Previously, states had differing laws on this issue, which often led to confusion when a worker changed states.

According to the FTC, the rule is expected to have far-reaching effects:

• Boost in Worker Earnings: Workers are projected to see an increase in earnings by an average of $524 per year.
• Surge in New Businesses: An estimated 8,500 new businesses will be created annually, fostering a 2.7% growth in new business formation.
• Innovation Unleashed: The rule could lead to an average of 17,000 to 29,000 more patents filed each year over the next decade.
• Healthcare Savings: the FTC claims that the rule could reduce healthcare costs by up to $194 billion over the next decade.

Whether the effects predicted by the FTC will materialize is uncertain.  It is certain, however, that many employees will take advantage of the new rule to change jobs or to open competing companies.

For Employers

The new FTC rule is certainly good for employees. The news is not so rosy for employers. Employees will be more free to move between jobs or to start competing businesses, often with knowledge developed at a former employer’s expense. Employers will be forced to become more proactive and competitive in retaining key employees, which likely will lead to an increase in wages for some.

What Employers Might Do

Employers will also likely focus more on trade secret and IP restrictions.  The new provisions do not authorize employees to usurp a company’s trade secrets or to steal its IP.  Similarly, nondisclosure agreements remain enforceable. Those provisions can have a similar effect as a noncompete agreement. For example, when a “VIP Host” of Maryland Live left to work at what was then the new Horseshoe casino, Maryland Live sued her for taking a list of VIP gamblers. Maryland Live brought similar claims in 2016 when employees jumped ship to MGM, allegedly with VIP lists. The Maryland Appellate Court recently confirmed that a company’s customer lists and pricing information may be entitled to trade secret protection.  Ingram v. Cantwell Cleary Co., Inc., (Md. App. 2024) (enforcing trade secret claim over customer lists separately from a noncompete provision). Although these cases also involved noncompete provisions, going forward, such claims must depend exclusively on the trade secret and confidentiality provisions in an agreement or on common law. We expect to see an increase in trade secret claims over the next five years as employers look to protect themselves from employees leaving with crucial data and immediately entering their market. Every employer should review its existing (and prospective) employment agreements to ensure they contain state-of-the-art trade secret and NDA provisions where desirable.

[1] Senior executives are defined as workers that earn more than earning more than $151,164 annually and who are in policy-making positions. Notably, many highly paid professions (in medicine and finance, for example) are often subject to non-compete agreements but do not appear to fall within the “senior executive” definition because they do not fulfill the “duties” part of the new definition in that they do not have a significant role in policy-making.  In effect, the only non-compete agreements that will be enforceable will be existing agreements with CEOs and other high-level corporate officers.