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FTC issues final rule banning noncompete clauses; U.S. Chamber vows to sue

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The Federal Trade Commission issued a final rule Tuesday banning noncompete clauses nationwide, according to a press release

The commission claims the ruling will increase innovation and foster new business. The ruling becomes effective 120 days after publication in the Federal Register, likely in early September, an FTC guide says

“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,” said FTC Chair Lina M. Khan, in the release. “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.”

The U.S. Chamber of Commerce released a statement Tuesday saying it will sue the FTC over the ruling. 

“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,” Chamber CEO Suzanne P. Clark said in the 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. Noncompete agreements are either upheld or dismissed under well-established state laws governing their use. Yet, today, 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.” 

Clark went on to say the rule “sets a dangerous precedent” for government. 

The FTC says the rule will lead to new business formation by 2.7% per year, resulting in 8,500 additional new businesses annually. It also claims the rule will result in higher earnings for workers, with the average worker earning an additional $524 per year. 

An estimate state guide created by the FTC shows workers in the District of Columbia could see the largest wage increase at $1,009 annually. Workers in Mississippi would see the lowest increase at $420 annually. 

Healthcare costs could lower by $194 billion in a decade, the release says. It doesn’t provide details on how this would happen. 

“In addition, the final rule is expected to help drive innovation, leading to an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years under the final rule,” the release says. “Noncompetes are a widespread and often exploitative practice imposing contractual conditions that prevent workers from taking a new job or starting a new business.

“Noncompetes often force workers to either stay in a job they want to leave or bear other significant harms and costs, such as being forced to switch to a lower-paying field, being forced to relocate, being forced to leave the workforce altogether, or being forced to defend against expensive litigation. An estimated 30 million workers—nearly one in five Americans—are subject to a noncompete.” 

The final rule leaves existing noncompetes for senior executives earning more than $151,165 or more annually. Companies, however, will be prohibited from entering into or enforcing new noncompetes with senior executives, the FTC release says. 

It also does not apply to noncompete clauses involving the sale of a business entity, a person’s ownership interest in a business entity, or all or substantially all of a business entity’s operating assets, according to language in the rule. 

A seller could still agree to a noncompete clause under the rule. However, it would prohibit a noncompete clause for any workers of a business being sold. 

Mark Cunningham, Partner at Jones Walker LLP, also said Wednesday that the selling of a business exception only applies to owners with 25% or more of the ownership stake. 

If you have five owners who own it in equal divisions meaning they have 20% ownership, you could not impose a noncompete on those owners,” Cunningham said. “That’s an important exception.” 


Photo courtesy of Hailshadow/iStock 

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