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FTC Votes to Ban Noncompete Agreements | May 2024

The Federal Trade Commission (FTC) issued a rule to ban noncompete agreements. The agency, which believes noncompetes suppress new ideas and prevent new businesses from being formed, estimates the ban will create more than 8,500 new businesses each year, increase wages, decrease healthcare costs, and increase innovation.

The Federal Trade Commission

In the United States, the Federal Trade Commission (FTC) was established in 1914 to prevent unfair competition and protect consumers from deceptive advertising. It is an independent agency of the U.S. government. Today, the FTC has many divisions and regulates a wide variety of business practices.

Inside Noncompete Agreements

A noncompete agreement is a contract between an employer and an employee in which the employee agrees not to enter into or start a similar profession or trade in competition against the employer after leaving their position. Noncompetes can also be between two companies.

These agreements typically specify a time period and geographic area in which the employee is prohibited from engaging in competitive activities. They are commonly used to protect a company's trade secrets, client relationships, and proprietary information.

Noncompetes can affect employees by restricting their ability to pursue similar employment opportunities after leaving their current job. This can put an employee in a position in which they stay at a job they would rather leave. These agreements may limit their career mobility, potentially leading to constraints on job options, geographical location, and industry choices. It is estimated that 18 percent of U.S. workers (about 30 million people) are covered by a noncompete agreement, even those who do not have access to trade secrets or proprietary information.

How the Ban Will Affect the Economy

The FTC, which decided noncompete agreements are an unfair method of competition, says the ban is good for workers, businesses, and the economy. It is intended to promote competition, support innovation (with anywhere from 17,000 to 29,000 new patents filed each year for the next decade), fuel new business formation (with 8,5000 new businesses created each year), and protect the right of workers to change jobs. It’s estimated workers will see higher earnings and lower healthcare costs.

Existing noncompete agreements that involve senior executives are not affected by the FTC’s ban, but employers cannot enter into any new noncompetes, even for senior executive roles. The rule also does not apply to banks, credit unions, or nonprofit healthcare employers.

Some argue the noncompete ban will decrease a company’s ability to protect trade secrets, client relationships, and proprietary information and harm talent retention. Others argue that even with the ban in place, companies can protect trade secrets and proprietary information through trade secret law and non-disclosure agreements. Regardless, the U.S. Chamber of Commerce says it will sue the FTC to block the ban.

In the Classroom

This article can be used to discuss trends in the management of the workforce (Chapter 10: Managing Human Resources).

Discussion Questions

  1. What is a noncompete agreement, and what role does it play in protecting a company?
  2. Why did the FTC vote to ban noncompete agreements?
  3. How might workers, businesses, and the economy benefit from the ban?

This article was developed with the support of Kelsey Reddick for and under the direction of O.C. Ferrell, Linda Ferrell, and Geoff Hirt.


Sources

Andrea Hsu, "U.S. Bans Noncompete Agreements for Nearly All Jobs," NPR, April 23, 2024, https://www.npr.org/2024/04/23/1246655366/ftc-bans-noncompete-agreements-lina-khan

Dave Michaels and Lindsay Ellis, "FTC Bans Noncompete Agreements That Restrict Job Switching," The Wall Street Journal, April 23, 2024, https://www.wsj.com/politics/policy/ftc-bans-noncompete-clauses-that-restrict-job-switching-984d2187

Federal Trade Commission, "FTC Announces Rule Banning Noncompetes," April 23, 2024, https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes

About the Author

O.C. Ferrell is the James T. Pursell Sr. Eminent Scholar in Ethics and Director of the Center for Ethical Organizational Cultures in the Raymond J. Harbert College of Business, Auburn University. He was formerly Distinguished Professor of Leadership and Business Ethics at Belmont University and University Distinguished Professor at the University of New Mexico. He has also been on the faculties of the University of Wyoming, Colorado State University, University of Memphis, Texas A&M University, Illinois State University, and Southern Illinois University. He received his Ph.D. in marketing from Louisiana State University.

Profile Photo of OC Ferrell