FTC Announces Rule Banning Noncompetes

The Federal Trade Commission has enacted a final rule to enhance competition by banning noncompete agreements nationwide. This measure protects workers’ fundamental freedom to change jobs, boosts innovation, and encourages the formation of new businesses.

“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” said FTC Chair Lina M. Khan. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

Noncompetes are a widespread and often exploitative practice that imposes contractual conditions preventing workers from taking new jobs or starting new businesses. They frequently force workers to either stay in undesirable jobs or face significant harms and costs, such as switching to lower-paying fields, relocating, leaving the workforce, or defending against expensive litigation. Approximately 30 million workers, nearly one in five Americans, are subject to noncompetes.

Under the FTC’s new rule, most existing noncompetes will no longer be enforceable after the rule’s effective date. While noncompetes for senior executives (less than 0.75% of workers) can remain in force, employers are banned from entering into or enforcing new noncompetes, even for senior executives. Employers must notify workers, excluding senior executives, that their existing noncompetes will not be enforced.

In January 2023, the FTC issued a proposed rule and opened a 90-day public comment period. The FTC received over 26,000 comments, with more than 25,000 supporting the ban on noncompetes. The feedback informed the FTC’s final rulemaking, with the Commission carefully reviewing each comment and adjusting the proposed rule accordingly.

The final rule determines that it is an unfair method of competition, violating Section 5 of the FTC Act, for employers to enter into or enforce noncompetes with workers. The Commission found that noncompetes negatively affect labor market conditions by inhibiting efficient matching between workers and employers, and they also negatively impact product and service markets by stifling new business formation and innovation. Additionally, noncompetes contribute to increased market concentration and higher prices for consumers.

The Commission found that employers have several alternatives to noncompetes that allow them to protect their investments without enforcement of a noncompete. Trade secret laws and non-disclosure agreements (NDAs) offer well-established methods for safeguarding proprietary and sensitive information. Researchers estimate that over 95% of workers with a noncompete already have an NDA.