FTC Proposes Ban on Noncompetes, Which Agency Says Stifle Innovation

MANDEL NGAN/AFP via Getty Images

Opponents of noncompetes have long argued that the agreements have a harmful impact on competition, particularly on the tech sector’s ability to develop cutting-edge devices and services.

The Federal Trade Commission on Thursday proposed a rule that would ban companies from requiring their employees to sign noncompete agreements, a prominent practice in the tech industry that prevents departing workers from taking jobs with competitors or starting their own rival businesses for a period of time after they leave their former jobs. 

The FTC’s sweeping proposal would “generally” prohibit companies from enforcing noncompete clauses in employment contracts, rescind existing noncompetes and make it illegal for employers to enter into or maintain noncompete agreements with their workers. The proposed rule would also apply “to independent contractors and anyone who works for an employer, whether paid or unpaid.”

The FTC said in a press release that noncompetes violate Section 5 of the Federal Trade Commission Act, which prohibits unfair methods of competition. The agency added that the proposed rule “could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.” 

“In product and service markets, noncompete clauses prevent entrepreneurial growth, which negatively impacts consumers by reducing competition in those markets,” the FTC’s proposed rule said. “Noncompete clauses also foreclose competitors’ ability to access labor market talent, negatively affecting those competitors’ ability to effectively compete in the marketplace. Additionally, noncompete clauses impede innovation, which may negatively impact technological growth rates.”

Noncompete agreements have been a staple of the private sector for years, particularly when it comes to ensuring that company executives do not depart for a rival company with insider information about their former employer. In recent years, however, some companies have begun to extend noncompetes to lower-wage workers, including those in the retail and food service industries. A March 2022 report from the Treasury Department noted that roughly one in five U.S. workers were bound by a noncompete agreement. 

Opponents of noncompetes argue that these agreements limit competition by protecting large companies at the expense of new entrepreneurial ventures, resulting in a detrimental impact on the development of innovative, new technologies and other services. 

The FTC’s proposal, in part, cited a study which found that when Hawaii stopped enforcement of noncompetes for high-skilled tech workers, the earnings of new workforce hires rose by approximately 4%. The FTC said that “extrapolating from the estimates for Hawaii to the average impact on high-tech workers in each state, a prohibition such as the one in this proposed rule would increase earnings of high-tech workers in the average state by 4.8 percent.” 

President Joe Biden previously signed an executive order in July 2021 to promote competition across the U.S. economy that, in part, encouraged the FTC to limit or ban noncompete agreements and said that “one way companies stifle competition is with noncompete clauses.”

As tech companies seek to address manufacturing and supply chain concerns—which were underscored by passage of the Chips and Science Act last year to boost domestic production of semiconductors and other U.S.-made technologies—access to high-skilled workers becomes a necessity. Even with a recent wave of layoffs affecting both large and small tech companies, resulting in a pool of skilled workers looking for new jobs, opponents of noncompetes argue that these agreements continue to harm domestic innovation and competition. 

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” FTC Chair Lina Khan said in a statement. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation and healthy competition.”

Supporters of noncompete agreements, however, say they are a longstanding practice in employment contracts, particularly when it comes to safeguarding intellectual property and sensitive business information from competitors. 

In a dissenting statement, Republican FTC Commissioner Christine Wilson said the proposed rule “represents a radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a non-compete clause is unreasonable in duration and scope, given the business justification for the restriction.”

The FTC voted 3-1 to publish the notice of proposed rulemaking, which marks the first step of the agency’s rulemaking process. The public will have 60 days to submit comments on the proposal before the FTC votes on a final rule. 

X
This website uses cookies to enhance user experience and to analyze performance and traffic on our website. We also share information about your use of our site with our social media, advertising and analytics partners. Learn More / Do Not Sell My Personal Information
Accept Cookies
X
Cookie Preferences Cookie List

Do Not Sell My Personal Information

When you visit our website, we store cookies on your browser to collect information. The information collected might relate to you, your preferences or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. However, you can choose not to allow certain types of cookies, which may impact your experience of the site and the services we are able to offer. Click on the different category headings to find out more and change our default settings according to your preference. You cannot opt-out of our First Party Strictly Necessary Cookies as they are deployed in order to ensure the proper functioning of our website (such as prompting the cookie banner and remembering your settings, to log into your account, to redirect you when you log out, etc.). For more information about the First and Third Party Cookies used please follow this link.

Allow All Cookies

Manage Consent Preferences

Strictly Necessary Cookies - Always Active

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data, Targeting & Social Media Cookies

Under the California Consumer Privacy Act, you have the right to opt-out of the sale of your personal information to third parties. These cookies collect information for analytics and to personalize your experience with targeted ads. You may exercise your right to opt out of the sale of personal information by using this toggle switch. If you opt out we will not be able to offer you personalised ads and will not hand over your personal information to any third parties. Additionally, you may contact our legal department for further clarification about your rights as a California consumer by using this Exercise My Rights link

If you have enabled privacy controls on your browser (such as a plugin), we have to take that as a valid request to opt-out. Therefore we would not be able to track your activity through the web. This may affect our ability to personalize ads according to your preferences.

Targeting cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.

Social media cookies are set by a range of social media services that we have added to the site to enable you to share our content with your friends and networks. They are capable of tracking your browser across other sites and building up a profile of your interests. This may impact the content and messages you see on other websites you visit. If you do not allow these cookies you may not be able to use or see these sharing tools.

If you want to opt out of all of our lead reports and lists, please submit a privacy request at our Do Not Sell page.

Save Settings
Cookie Preferences Cookie List

Cookie List

A cookie is a small piece of data (text file) that a website – when visited by a user – asks your browser to store on your device in order to remember information about you, such as your language preference or login information. Those cookies are set by us and called first-party cookies. We also use third-party cookies – which are cookies from a domain different than the domain of the website you are visiting – for our advertising and marketing efforts. More specifically, we use cookies and other tracking technologies for the following purposes:

Strictly Necessary Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Functional Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Performance Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Social Media Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Targeting Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.