Goodbye Noncompetes: Federal Trade Commission Votes to Ban Noncompete Clauses

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MEDICAL ECONOMICS

The Federal Trade Commission (FTC) met April 23 and voted 3-2 to ban noncompete clauses between employers and workers, calling the agreements unfair restrictions on trade that hurt employees and stifle innovation. Going forward, this will negate existing noncompetes, except for those of high level executives.

In an online discussion on April 23, the commissioners cited health care specifically among their reasons for supporting the ban. However, the new national rule against noncompetes may not reach all health care workers, as one commissioner noted the FTC jurisdiction covers for-profit businesses, meaning the new rule would not apply to staff in nonprofit hospitals and health systems.

Commission Chair Lina M. Khan and Commissioners Rebecca Kelly Slaughter and Alvaro Bedoya voted for the new rule. Commissioners Melissa Holyoak and Andrew N. Ferguson voted against it, calling it an overreach of the FTC’s power on an issue that should be regulated by Congress.

"Workers … Want to Compete"

Benjamin Cady, attorney adviser in the FTC’s Office of Policy Planning, summarized the final rule:

• New noncompete agreements are banned for workers, including senior executives, as of the effective date.
• Existing noncompetes may remain in effect for senior executives who earn more than $151,164 and are in a “policy-making position.” They are much more likely to negotiate and receive compensation for noncompetes.
• Existing noncompetes are unenforceable for all other workers after the effective date. Formal rescission is not required. Employers must provide notice to employees, and the FTC has model language for that.
• The effective date will be 120 days after publication in the Federal Register.

In January 2023, the FTC proposed the comprehensive ban on noncompetes. More than 26,000 public comments rolled in, with more than 25,000 of those supporting the ban. Those painted a “compelling picture of the economic and human toil from the perspective of individuals and families,” said the online presentation by Cady.

“Workers told us that they want to compete,” Cady said. “They want to be able to take better jobs and make the most of their abilities. They want to strike out on their own and start new businesses, but noncompetes to prevent them from doing so. Workers other than senior executives also explained that they had no real choice about whether to enter into noncompetes and no practical ability to negotiate.”

His presentation included a quotation from “a physician in a rural underserved area of Appalachia” who said noncompetes are ubiquitous in health care, making providers feel trapped in current employment. That in turn leads to burnout that shortens career longevity.

Support for the ban spanned wage levels and sectors, Cady said.

As for the economy, the FTC staff estimate the ban will increase earnings by up to $488 billion over the next decade, with more than 8500 new businesses a year and up to 29,000 new patents a year over the next decade, Cady said.

There are arguments that noncompetes are needed to protect trade secrets or investments in staff training. But valid confidentiality agreements and trade law exist, and there is little to no evidence about employers being less likely to invest in staff, Cady said.

"Directly Undermining Competition"

The commissioners agreed the ban affects a huge swath of the American economy—and estimated 30 million workers work under noncompete clauses, and it is arguable their existence affects work conditions for employees who do not have them.

In her comments, Khan cited the economic and legal arguments along with the stories from American workers.

Noncompetes can infringe on workers’ core constitutional rights, for example, when they feel trapped by employers who do not respect their religious practices or who deny religious exemptions, Khan said.

“And I know these accounts … to my mind, they really point to the basic reality of how robbing people of their economic liberty also robs them of all sorts of other freedoms, chilling people’s speech, infringing on their religious practice, and impeding people's right to organize,” Khan said. “And in our American system, we have long viewed open markets and free enterprise as a key bulwark against coercion and centralized control, and it's been striking as we go through the record and all of these stories that they show in a very clear and concrete way, how noncompetes restrict this most basic freedom.”

In other comments, business founders and entrepreneurs said noncompetes impeded their abilities to bring new breakthrough ideas to market.

“I would just like to point to the fact that the record is also replete with stories of how noncompetes are directly undermining competition and product and service markets,” Khan said.

"Huge Step Forward"

Commissioners Rebecca Kelly Slaughter and Alvaro Bedoya both touched on health care in their comments.

Slaughter called the Commission’s action a “huge step forward for American workers,” because it is profoundly unfair and unfree for workers to be stuck in jobs they can’t leave because noncompete clauses stop them from working from nearby competing businesses.

She noted powerful stories from health care workers who are employed by nonprofits that use noncompete clauses. “I do not think there’s a good justification for them to be excluded from this rule,” Slaughter said, but by law Congress has limited the FTC’s jurisdiction to for-profit businesses and entities.

"Lives Upended"

At first, Bedoya said he had questions about the FTC’s ability to enact a rule instead of using individual enforcement actions. He said physician comments, combined with effects of COVID-19, were a factor in convincing him.

“I started reading the record and the comments of physicians who had their lives upended by noncompetes,” Bedoya said. “These are doctors who had to move their families, move out of the state, just so they could practice medicine. A pandemic killed a million people in this country and there are doctors who cannot work because of a noncompete.”

Slaughter and Bedoya said they have continuing interest in business relationships between franchisors and franchisees and ensuring the law is followed in those. Slaughter also voiced support for bipartisan legislation in Congress to ban noncompete agreements.

"Accountability Checkpoints"

The power to make laws is vested in Congress, and while many lament the gridlock in Congress today, divesting legislative power to the executive branch bypasses those accountability checkpoints in the lawmaking process, Holyoak said.

“The lawmaking process was designed to be difficult and to include many accountability checkpoints,” Holyoak said.

“The modern administrative state may be accustomed to the ease and breadth of legislative rulemaking,” she said. “But an agency should not lose sight of those constitutional prescriptions and should therefore approach legislative rulemaking with circumspection.”

Ferguson agreed and argued the FTC does not have authority to nullify tens of millions of contracts and preempt laws of 46 states. The FTC has power lawfully conferred by Congress, but for the Commission, “Americans can't vote us out when we get it wrong,” he said.

Holyoke and Ferguson noted they don’t necessarily support noncompetes. They have been regarded with deep suspicion for centuries, they cut against ancient common law tradition protecting every person’s right to ply a trade, “and may in some circumstances undermine competition and innovation,” Ferguson said.

Khan countered by asserting the FTC’s authority and history that for more than 60 years, the Commission has promulgated more than 25 laws covering a wide range of industries and issues.