FTC Bans Noncompete Clauses

The Federal Trade Commission has issues a final rule on noncompete clauses, banning the popular stable of many employment contracts....
FTC Bans Noncompete Clauses
Written by Matt Milano
  • The Federal Trade Commission has issues a final rule on noncompete clauses, banning the popular stable of many employment contracts.

    Noncompetes are almost a universal element of many contracts, especially in the tech industry. The clauses have posed major problems for companies of all sizes. Some companies, such as Amazon, have become notorious for suing former employees that join rival companies, leading to challenges for Microsoft when Charlie Bell left Amazon to join Microsoft.

    It seems the FTC has had enough of such agreements stifling industries, and has issued a ruling banning the practice nationwide.

    “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. “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 agency expects a major boost to the economy as a result of the ban.

    The FTC estimates that the final rule banning noncompetes will lead to new business formation growing by 2.7% per year, resulting in more than 8,500 additional new businesses created each year. The final rule is expected to 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. 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.

    That doesn’t mean companies need to worry about trade secrets being raided by rivals, however. The agency points out that there are alternatives in place for companies to protect their IP.

    Trade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information. Researchers estimate that over 95% of workers with a noncompete already have an NDA.

    The agency says existing noncompetes for senior executives—workers earning more than $151,164 per year—remain in effect. Companies may not enter into or enforce new noncompetes, however. The agency also eliminated a part of the rule that would have required companies to formally rescind noncompetes. Instead, employers can simply “provide notice to workers bound to an existing noncompete that the noncompete agreement will not be enforced against them in the future.”

    The ban is sure to be a boon for workers in all industries, and especially the tech industry.

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