FTC’s near-total ban on noncompete agreements challenged

Tuesday afternoon, the FTC voted 3 – 2 in favor of adopting a rule banning nearly all noncompete provisions that block workers from switching jobs within an industry, a decision potentially impacting tens of millions of US workers and the companies that employ them. The vote occurred three years after President Biden issued a sweeping executive order encouraging the FTC to scrutinize and limit noncompete agreements. 

The proposed rule, which attracted thousands of comments from the public and skepticism from critics about the FTC’s authority to pass competition-related rules, passed in substantially similar form as proposed. It bans nearly all new noncompete agreements going forward. The rule also prevents enforcement of existing non-competes except for those with senior executives—workers making more than US$151,164 annually in “policy” making roles. However, the rule bans new noncompetes for executives in the future.

Although the final rule does not define “de facto” noncompetes like the proposed rule did, it still reaches terms and conditions of employment that “function[] to prevent a worker” from seeking or accepting new employment or operating a business after the worker’s term of employment ends. Existing noncompetes with lower-level workers become unenforceable 120 days after the rule goes into effect. The rule excludes noncompetes between franchisors and franchisees as well as noncompetes related to the sale of a business. Similarly, workers in nonprofits, which generally fall outside the FTC’s jurisdiction, including many workers in the healthcare industry, will not be covered by the rule. 

The Commission projects that its decision would increase US earnings by at least US$400 billion over the next ten years. The rule underwent an extensive comment period, obtaining support of labor and union organizations, Democratic senators and attorneys general from many states and generating over 26,000 public comments with 96 percent of the comments reportedly registered in support of the rule.

Legal challenges were expected following the rule. The same day the rule passed, a private employer sued the FTC in Dallas, arguing that the FTC lacked the authority to promulgate the rule. This morning, the US Chamber of Commerce, which openly criticized the rule when first proposed, filed a lawsuit, along with the Business Roundtable, and other trade groups, challenging the rule in Tyler, Texas. The FTC, expecting the challenge, however, assembled a lengthy record, as well as legal authority it contends bolsters its rulemaking power. In a preview of the forthcoming litigation, FTC Chair Khan and fellow Democratic Commissioners Slaughter and Bedoya used part of their remarks during yesterday’s meeting to highlight legal support for the rule, while newly appointed Republican Commissioners Holyoak and Ferguson outlined arguments questioning the FTC’s authority to implement the rule.

Setting aside the party-line vote and the outcome of the legal challenges to the rule, it is clear that competition enforcement issues impacting labor markets remain a priority of the Commission. Both Commissioners Slaughter and Bedoya highlighted their interest in investigating competition issues in the franchise industry and not-for-profit healthcare sector, as well as challenging no-poach agreements among employers under the antitrust laws.