The Federal Trade Commission Bans Covenants Not to Compete

The Federal Trade Commission (FTC) has issued a final rule banning noncompete agreements nationwide. These agreements, affecting approximately 30 million workers, have been criticized for suppressing wages and innovation. By banning noncompete agreements, the FTC estimates a 2.7% annual increase in new business formation, leading to over 8,500 additional startups annually. This action is also projected by the FTC to boost workers’ earnings by an average of $524 per year and decrease healthcare costs by up to $194 billion over a decade, while driving innovation with more patent filings.

Under the new rule, existing noncompete agreements will be unenforceable for most workers. Senior executives, representing less than 0.75% of the workforce, are currently excepted. However, employers are barred from entering into new noncompetes with senior executives. All employers must also inform affected workers that existing noncompete agreements will not be enforced.

Following a public comment period, the FTC found overwhelming support for the ban, citing agreements not to compete as anticompetitive and detrimental to labor market efficiency and innovation. The FTC suggests alternatives like trade secret laws and improving wages and working conditions to retain employees.

Approved with a 3-2 vote, the final rule will take effect 120 days after publication in the Federal Register, with a reporting mechanism for violations. Overall, the FTC’s action aims to promote competition, protect workers’ rights, and foster economic growth by eliminating restrictive noncompete agreements.