In a decision that could have huge implications for the business community, the Federal Trade Commission voted 3-2 last week to ban most forms of noncompete agreements from employment contracts nationwide. Noncompete agreements may be negotiated by employers and job applicants who agree to refrain from working for competitors for a limited period of time in the event they separate from the employer. Employers may propose a noncompete agreement after significant investments to recruit and hire new employees.
The newly adopted rule, passed along party lines, would outlaw the use of noncompete agreements by employers with retroactive effect. The rule, which is scheduled to take effect 120 days after its publication in the Federal Register, could impact up to one-fifth of American workers, according to the FTC’s estimates.
However, the decision has already sparked legal challenges. The U.S. Chamber of Commerce filed a federal lawsuit in Texas seeking to block the enforcement of the noncompete ban, arguing that the FTC lacks the authority under the Federal Trade Commission Act to regulate what it deems “unfair methods of competition” through agency rulemaking.
On Wednesday, PA Chamber President and CEO Luke Bernstein released this statement:
“The FTC has neither the statutory authority nor a sensible reason to attempt to ban noncompete agreements. Employers will often seek to include these agreements in employment contracts to protect their proprietary information or justify significant investments they make in recruitment.”
“Noncompete agreements already have limits and may be deemed unenforceable if found to be unduly restrictive,” Bernstein continued. “This kind of administrative micromanagement, however, sets an alarming precedent for America’s job creators, and the PA Chamber fully supports the U.S. Chamber’s efforts to block the FTC’s extreme overreach and prevent this unnecessary and unlawful rule from taking effect.”
Republican FTC commissioners Melissa Holyoak and Andrew N. Ferguson, who voted against the rule, echoed these sentiments in their dissent, citing constitutional and legal concerns. They say the rule undermines the separation of powers and clearly exceeds the FTC’s legislative authority.
Notably, the rule does include minor exceptions, grandfathering existing agreements for senior executives earning more than $151,164 annually, and for noncompete agreements entered into under the context of the sale of a business.
While we await the outcome of the legal challenge, employers should consider their current policies related to noncompete agreements and review their existing agreements that would be deemed unenforceable under the new rule. Additionally, employers should create or review plans to protect their trade secrets and other sensitive business information in light of the rule’s passage.