FTC Bans Most Employees’ Noncompete Contracts

FTC Bans Noncompete Agreements

Business Groups Will Work to Overturn Commissioners’ New Rule

Business organizations will challenge the Federal Trade Commission’s new regulation that prohibits noncompete contracts for nearly all employees nationwide. The measure passed Tuesday, with three Democrat-appointed commissioners voting in favor and the FTC’s two Republican members voting against. The dissenting commissioners said they do not support blanket use of noncompete agreements, The Hill reported, but felt the agency did not have the authority to issue the rule without congressional approval. 

Companies use noncompete contracts to safeguard proprietary processes and products by keeping employees covered by those contracts from taking jobs with rival businesses. Noncompete clauses also prevent a former employee from starting a competing business, The Hill stated. Instead of using noncompete clauses to protect trade secrets, intellectual property and the like, the FTC wants employers to use confidentiality clauses, which do not restricting workers from being hired by a competitor.

Noncompetes Are Widespread

FTC Bans Non-Competes

Noncompete agreements have become quite common. The federal Treasury Department reports that about 18% of U.S. workers say they have noncompete agreements and roughly 37% say they have worked under such agreements during their careers. Engineers, physicians, salespeople and salon workers are the most likely employment categories with noncompete clauses, according to 2022 research from Cornell University that was cited by The Wall Street Journal.

The FTC ban may affect approximately 30 million total American workers, CNN reported, quoting statistics supplied by the FTC.  The FTC estimates that its ban would increase workers’ pay and benefits by up to $488 billion over a decade because they would have the ability to seek better jobs with competitor companies. The new regulation will require companies to notify past and present employees that their noncompete agreements will not be enforced, The Hill article said. 

Scheduled to take effect in about four months – but likely to be slowed by court challenges – the rule bars businesses from enforcing current noncompete agreements on anyone except senior executives. Senior executives are defined as company policymakers whose salaries exceed $151,164 per year, CNN said. The new rule also prohibits companies from enacting future noncompete employment contracts on senior executives. 

Effects on Franchising

Within franchising, noncompete contracts have prevented former employees from, for example, sharing food recipes and confidential preparation techniques as well as product formulas such as those used in the beauty and home services industries. Franchisors, in particular, benefit by using noncompete clauses to keep franchisees from purchasing a competing brand, which therefore limits them to buying more units of that franchisor’s brand, according to Lagarias, Napell & Dillon LLP, a franchise advocate law firm in California. 

Those restrictions are widespread in franchising, and the International Franchise Association has pushed to keep them. The IFA joined more than 280 organizations in submitting a nine-page letter in response to the FTC’s proposed regulation that, among other things, contended that the FTC lacked the legal authority to enact such a rule.

A reliable source said the new FTC rule preserves noncompetes in franchise agreements as the International Franchise Association had requested when the proposed rule was published; noncompete clauses in labor contracts remain a concern to the IFA. The IFA was one of more than 280 organizations submitting a nine-page letter in response to the FTC’s proposed noncompete regulation that, among other things, contended that the FTC lacked the legal authority to enact such a rule. Now that it has passed, the IFA is expected to join and/or mount court challenges to it.

About a year ago, Sarah Bush, general counsel for the International Franchise Association, said the IFA was sending its public comment on the proposed new rule to the FTC. Parts of the IFA comment stated that “Noncompete clauses protect the integrity of franchising and individual franchisees from unfair competition from existing and former franchisees. Such a ban would be extremely damaging to the franchise business model, encourage breaches of contract, and hurt small business owners that depend on the viability of the franchise system to protect their equity in their franchised businesses.” 

What Lawyers Say

An article on the Lagarias, Napell & Dillon website says “the standard justification [for noncompete clauses] is that the franchisor provides the franchisee with valuable specialized ‘secret’ or ‘proprietary’ information and know-how, and that it would be unfair to allow the franchisee to use the franchisor’s proprietary information to compete with the franchisor or the franchise system.” But the article tempers that statement by adding that “in many franchise systems, there is little or no secret or proprietary information (with the exception of recipes in some restaurant franchises), and the value of the franchise is mainly due to the trademarks and the public [brand] recognition which comes with them.” So once a franchisee leaves a brand, the latter advantages no longer apply anyway, according to Lararias, Napell & Dillon. 

The California law firm’s article further points out that “the intended (and actual) effect of noncompete provisions is to limit the franchisee’s options. During the term of the agreement they limit the other businesses a franchisee can own or invest in. This can keep a successful franchisee from expanding in its area of competence except by purchasing additional franchises” of the same brand.

Proponents’ Viewpoints

An FTC staff member presenting the final rule to the commissioners during Tuesday’s meeting characterized noncompete agreements as “exploitative and coercive” for almost everyone except senior executives, who are more likely than rank-and-file employees to have a lawyer assist them with contract negotiations, CNN reported. Also on Tuesday, FTC Chairwoman Lina Khan told reporters that approximately 25,000 of the 26,000 public comments received by her agency were in favor of the proposal. She said health care workers comprise “a pretty significant chunk” of those supporters. Khan had earlier gone on record as saying the rule will restore rights to American workers by allowing them to seek wider employment opportunities and higher wages. 

Soon after the FTC approved the measure, President Joe Biden said, “The FTC is cracking down on noncompete agreements that employers use to prevent their workers from changing jobs even if that job will pay a few dollars more, or provide better working conditions. Workers ought to have the right to choose who they want to work for.”

Jennifer Tosti-Kharas, a professor of organizational behavior at Babson College in Massachusetts, echoed Biden’s assessment in a comment to the Associated Press: “A noncompete would unilaterally ban someone from getting exactly the kind of job that it’s reasonable to want. … It’s using a really blunt instrument to limit people’s mobility, when in reality there are other legal mechanisms to prevent trade secrets being disclosed.” The AP article also noted that hiring managers are likely to most desire job seekers who have experience within the same industry. 

FTC History and Business Reaction 

The FTC’s new regulation is the first time in 50-plus years that FTC officials have taken such a sweeping action that affects how businesses compete, The Journal reported. In the past, the agency has operated more as a watchdog, scrutinizing companies and business practices and filing lawsuits against those it determined to be illegal, the article stated. 

Daryl Joseffer, chief counsel of the U.S. Chamber of Commerce’s Litigation Center, told CNN that the new FTC regulation is an “administrative power grab.” Chamber President and CEO Suzanne Clark called the FTC ban “a blatant power grab that will undermine American businesses’ ability to remain competitive,” The Hill reported.

In adopting the new regulation, the FTC stated that noncompete contracts and clauses violate a 1914 law that bans unfair competitive practices. Neil Bradley, in charge of strategic advocacy for the U.S. Chamber of Commerce, told The Journal that if the FTC “can issue regulations with respect to unfair methods of competition, then there’s really no aspect of the U.S. economy they couldn’t regulate. … [It opens] a pandora’s box, where they can micromanage any aspect of the economy.”

The chamber said it would immediately sue over the new regulation on grounds the FTC lacks legal
authority for issuing it. States have typically regulated noncompete agreements, not the federal
government.

Previous ArticleNext Article
Mary Vinnedge is an award-winning journalist who has served as editor in chief, managing editor and senior editor at national and regional publications, including SUCCESS and Design NJ magazines. She also held reporting and editing roles at The Dallas Morning News and Charlotte Observer newspapers.

Before Mary began covering franchise news and trends as a staff writer for FranchiseWire and Franchise Consultant Magazine, she developed articles on topics ranging from lifestyle, education, health and science to home projects, horticulture, gardening, interior design and architecture. These articles included her reporting on academic news at her alma mater, Texas A&M University, when Mary worked in the marketing department of the Texas A&M Foundation. She continues to be a news junkie and subscribes to several publications.

Today Mary and her husband are empty nesters living on Galveston Island near Houston. The couple’s blended family – scattered around the United States – includes five children, four grandchildren and two very spoiled, very barky miniature schnauzer rescues.
Send this to a friend