FTC Votes Through Noncompete Rule

The Federal Trade Commission voted 3 to 2 on Tuesday to move ahead with a federal ban on noncompete clauses for workers, including senior executives.

The commission vote was made during a public hearing led by FTC Chair Lina Khan, a proponent of the rule, with time given to each member to voice their opinion. The final rule provides that non-compete contracts are an “unfair method of competition” and therefore a violation of Section 5 of the FTC Act.

The final rule will take effect 120 days after it is published in the Federal Register, and once enacted, will outlaw noncompete agreements for both rank and file employees and senior executives. Any existing contracts for general workers will also need to be tossed, but in a change from the initial proposal, current noncompete agreements with senior executives can remain.

The noncompete rulemaking has been closely watched by businesses and their advocates as the rule could impact noncompetes targeting knowledge of proprietary information or client poaching. Shortly after the vote, the U.S. Chamber of Commerce issued a statement that it would be suing the FTC to block the rule on the grounds that it has overstepped its mandate.

“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,” the Chamber wrote in a statement.

Susan Sperber, partner, Lewis Roca, specializing in employment law, says she expects an injunction of the rule is possible as litigation goes through the courts. That said, she notes that financial services firms or others should take the rule into account when making decisions going forward—perhaps shifting to nonsolicitation agreements, which can protect from employees taking clients with them or soliciting them after leaving.

“If I was advising a company about how to handle these issues on a going-forward basis I would be saying, ‘hey, let’s make sure that to the extent that we can tailor the agreements that we are entering into to remain enforceable on the chance that this rule is found to be legal or put into effect,” she says. “I wouldn’t be telling people to sit on their hands or to continue on as usual.”

Sperber noted that she was surprised the FTC went ahead with keeping the noncompete ban for senior level executives, particularly when considering when key executives at large firms may hold proprietary information crucial to business operations. Meanwhile, she noted that the rules don’t go after non-solicitation agreements so long as they don’t “effectively act as noncompetes.” In addition, there are some carve outs for the sale of businesses that can still be protected by noncompete rules, though more clarity is needed in that area, she says.

Sperber noted that while most financial advisories operate with non-solicitation agreements, those also face restriction in some states, and so rules will still differ even should the final rule pass.

“The FTC sets a floor on what is permissible, but it doesn’t set a ceiling on it,” she says. “If you are in certain states like California or Colorado, which regulates by statute non-solicitation agreements this new rule may or may not impact you; you may already have limits on what kind of noncompetes you can enter into.”

During the hearing, FTC rule makers said their research found that noncompete agreements are less harmful for senior executives as they tend to be negotiated. But they do create decreased labor mobility and earnings, and a hindrance of innovation as executives are not able to form new companies or move to new places as easily, the regulator argued.

The FTC estimates that fewer than 1% of workers to be affected by the rule are senior executives, as designated by earning more than $151,164 annually and are in a “policy-making position.”

When it comes to the general workforce, the FTC argued that the rule would increase earnings in the workforce by $400 billion to $488 billion in the next 10 years, or $524 on average per worker, citing the U.S. Bureau of Economics. The bureau also provided forecasting that the rule would create 8,500 new businesses a year and about 17,000 to 29,000 patents a year over the next decade.

Khan, Commissioners Rebecca Kelly Slaughter and Alvaro Bedoya voted yes; Commissioners Andrew N. Ferguson and Melissa Holyoak voted no.