FTC’s Proposed Noncompete Ban Would Dramatically Alter Employment

On Jan. 5, the Federal Trade Commission responded to the Biden administration’s argument that noncompete clauses hurt employees and the economy, and proposed a sweeping federal ban.

After a 60-day public comment period, the proposed rule can be published, and if no changes are made, it will go into effect as a final rule. This will represent a tremendous shift for employers and employees nationwide.

Noncompete clauses generally restrict former employees from seeking or accepting employment, for a certain time period, with a competitor of the former employer.

Noncompetes are distinct from nonsolicits, which prohibit soliciting customers and/or prospective customers; nonpoach clauses, which prohibit soliciting employers’ employees for hire; and confidentiality agreements, which protect employers’ confidential information and trade secrets.

The proposed rule addresses only noncompetes, which state law currently governs.

The FTC’s rule would make most noncompete provisions unenforceable, which is a serious change. Employers and employees need to be aware of several issues before entering into new employment agreements.

Implications for Employers

The proposed ban has a significant downside for employers.

The central role of noncompete clauses in employment contracts is to protect an employers’ confidential information, trade secrets, and customer goodwill. Without noncompetes, an employee can jump ship to a direct competitor, taking valuable assets with them.

Without noncompetes, employers will have to rely on other restrictive covenants, such as confidentiality, nonpoaching of employees, and nonsolicitation agreements to protect their valuable business interests. These agreements, however, do not restrict employees from taking a job with a competitor.

In addition, confidentiality and nonsolicitation agreements may face stricter scrutiny in the wake of the proposed noncompete ban.

The noncompete ban will impact employers’ ability to retain talent because it will likely increase job mobility for top-echelon employees looking to take their talents elsewhere. This new landscape may also cause some employers to hesitate before investing in highly skilled employees, knowing that there are fewer contractual means to ensure that an employee does not quickly depart to a competitor.

There is, however, also one significant upside for employers. Although employers may have more trouble retaining talent, hiring will be easier as potential employees will no longer be saddled with competitors’ noncompetes.

There also may be several smaller benefits to employers.

A more mobile labor pool could slightly drive wages down. Also, employers no longer negotiating noncompetes as a term of employment agreements may be able to negotiate more favorable terms elsewhere in the agreements. This means employers may not have to pay employees consideration, or something of value, in return for the noncompete that may slightly bring down compensation plans.

Finally, the ban may help employers avoid legal disputes in state courts over the enforceability of noncompetes or third-party interference with a noncompete.

However, it seems likely that these upsides will be outweighed by the newfound difficulty policing employees who are using an employer’s confidential information, targeting customers, or poaching former workers once they are already working for a competitor.

Implications for Employees

If the proposed ban is a loss for employers, it is a win for employees.

The proposed ban rewards employees with unprecedented job mobility. Employees will be able to—with less fear of legal threats—pursue job opportunities that provide better pay, benefits, culture, and balance.

At the same time, the proposed ban may cause employees to level up in place, as their current employers may need to up their game to retain existing talent, leading to better job security—a win-win for employees.

Of course, there are also downsides.

The elimination of noncompetes could cause employers to invest less in professional development opportunities, as employers may hesitate to put money into specialized skills training for employees who could ultimately benefit competitors upon an employee’s departure.

Increased job opportunities also means increased competition, particularly among top-tier employees. This could force employees to take employment on less favorable terms, including decreased compensation, or employees could have a harder time finding their desired employment.

Finally, because employers will no longer be able to rely on noncompetes to protect their confidential information, trade secrets, and customer goodwill, they likely will seek to negotiate and enforce stricter confidentiality and nonsolicitation agreements.

Legality and What’s Next

If the final rule goes into effect, it will undoubtedly face numerous legal challenges, including arguments that the rule exceeds the FTC’s administrative rulemaking authority. The rule could also be challenged as unconstitutional as interfering with the freedom to contract under the Due Process Clause; as disproportionately affects a certain category of workers, implicating the Equal Protection Clause; or as constituting an overreach of federal power in an area state law governs.

The proposed ban may also run afoul of federal antitrust laws, as opponents will argue that the FTC is improperly regulating the competitive landscape between companies. Without a doubt, businesses, trade associations, and even states will find numerous creative ways to challenge the rule in court.

The FTC’s proposed rule is a thumb on the scales in favor of employees. A federal ban will drastically alter the noncompete landscape. But the proposed ban is not consequence-free for either employees or employers, and its ultimate effect on the national job market is unclear (and unpredictable).

The proposed ban also poses complex and interesting legal questions, and the rule will face many challenges in the coming months and years. For now, employers and employees both must take this proposed rule into account before entering into any employment agreements.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Nicholas Schneider is an associate with Eckert Seamans Cherin & Mellott, focusing on complex commercial disputes, including business torts, employment disputes, misappropriation of trade secrets, copyright infringements, unfair competition, real estate disputes, and class actions.