U.S. Federal Trade Commission: Ban on Non-Compete Agreements

On Tuesday, 23 April 2024, the Federal Trade Commission (FTC) voted to eliminate non-compete agreements (hereinafter, the “Agreement”), which affect approximately 18% of the U.S. workforce, equal to around 30 million people, according to FTC estimates.

The FTC first proposed abolishing non-compete agreements in January 2023. Of the 26,000 comments received, as many as 25,000, or 97%, were in favour of the proposal.

FTC Chair Lina Khan maintains that the freedom to change jobs is the foundation of a free and competitive economy. In her view, non-compete agreements prevent workers from improving their working conditions and wages, while also limiting companies’ growth opportunities. The removal of these restrictions would therefore promote greater dynamism, innovation and fair competition.

According to FTC estimates, eliminating non-compete agreements will lead to a 2.7% annual increase in new business formation, corresponding to approximately 8,500 new businesses, with an average wage increase of USD 524 and a reduction in healthcare costs of USD 194 billion over the next decade. It is also expected to result in an increase of up to 29,000 patents per year over the next ten years.

CONSEQUENCES FOR EMPLOYERS

This decision will have significant consequences for employers that have so far relied on non-compete agreements to protect trade secrets and intellectual property. However, intellectual property will remain protected through other agreements, such as Non-Disclosure Agreements (NDAs), which have already been signed by 95% of workers subject to non-compete agreements.

Companies will be required to remove existing non-compete agreements for most employees and inform both current and former employees that the Agreement will no longer be enforceable before the rule enters into force.

Some employers oppose the rule, arguing that the FTC lacks the legal authority to regulate competition. The U.S. Chamber of Commerce has stated its intention to challenge the rule in court.

The rule will enter into force 120 days after its publication by the FTC in the Federal Register and will apply to all workers employed by for-profit companies, while it will have no effect on workers employed by non-profit organisations.