Non-compete agreements are contracts between an employee and an employer that prevent employees from working for or starting competing businesses. These agreements typically specify a geographical area and the time period for enforcement after employment ends. Non-compete agreements are vital to safeguarding an employer’s company by protecting trade secrets and ensuring that employees cannot unfairly use company information to benefit competitors.[i]  Additionally, these agreements are used in technology, healthcare, and engineering industries, where intellectual property and customer data play crucial roles. However, in recent years, non-competes have expanded to most areas of employment.

Many American companies have abused these agreements, drawing nationwide scrutiny. Critics argue that non-compete agreements unfairly limit employees’ mobility and career freedom. In 2023, the Federal Trade Commission (“FTC”) proposed a rule banning certain types of non-compete agreements.[ii]  In doing so, the FTC cited the impact non-competes have on employees’ rights and the entire economy. Understanding the effects of this rule is essential since it affects the balance between business interests and ensuring fair labor practices, particularly in an evolving job market where flexibility and innovation are highly valued.

The FTC argues that their sweeping rule to ban non-compete agreements will “generate over 8,500 new businesses each year, raise worker wages, lower health care costs, and boost innovation.”[iii]  The Chair of the FTC, Linda M. Khan, explained that the rationale behind the ban is

[n]oncompete 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, . . . 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.[iv]

The FTC’s proposed changes align with several states, like California and Illinois, that have already limited or banned non-competes, especially for low-wage workers.  As regulators continue to act against non-competes, employers and workers will likely watch the outcome of these changes, potentially reshaping the labor dynamic in America.

Although the FTC explains that this regulation is beneficial, it has produced significant concerns for business owners. Businesses are particularly concerned about protecting their intellectual property and trade secrets. A company can be extremely vulnerable to unfair exposure of its practices without a protective device, like a non-compete. However, there are alternatives to non-competes. Many businesses will likely turn to alternative agreements, such as a non-disclosure agreement (“NDA”). NDAs can be drafted to protect confidential information and prevent the sharing of this sensitive information. An NDA is more beneficial because it allows employees the freedom to seek new employment while protecting the interests of their current employer.

The FTC explained that “[t]rade secret laws and non-disclosure agreements both provide employers with well-established means to protect proprietary and other sensitive information.”[v]  One large law firm has recommended businesses to “[b]olster the other provisions in their restrictive covenants on non-solicitation and non-disclosure, [t]ake steps to protect trade secrets and other confidential information appropriately, and [s]olidify their practices and policies on onboarding and offboarding employees.”[vi]  Ultimately, businesses must adapt and find solutions to protect information and retain employees, absent non-compete agreements under this rule.

Although eliminating non-competes is burdensome on businesses, it can be highly beneficial to employees, particularly in terms of job mobility and bargaining power.[vii] Removing restrictions allows employees to join competitors or start their own businesses without fearing legal consequences. This mobility gives employees greater power when negotiating higher salaries and benefits, making employers compete for talent.  Moreover, the FTC explains that a ban on non-competes will result in reduced healthcare costs, a “2.7% increase in the rate of new firm formation,” a rise in innovation with “an average of 17,000–29,000 more patents each year,” and “$400–$488 billion in increased wages for workers over the next decade.”[viii]

The ban on non-competes will likely be beneficial to most employees, especially those in lower-wage positions or entry-level jobs, where non-competes have often been misused. Workers in these roles will no longer be restricted from seeking better employment and higher wages, especially in roles that should not have a non-compete. Furthermore, the ban on non-competes could spur entrepreneurial activity by enabling employees to use their industry knowledge and skills to start their own businesses. This freedom may also encourage more career transitions, with workers exploring different fields or launching innovative startups without the legal constraints that non-competes previously imposed. The ban on non-competes would create a healthier and more competitive workforce.

Since the introduction of the ban on non-competes by the FTC, it has faced various legal challenges. Most notably, immediately after the filing of the rule, Ryan LLC, later joined by the U.S. Chamber of Commerce and several employer associations, filed suit against the FTC, “moving for a preliminary injunction and seeking to vacate the [rule banning non-competes]”[ix]  As part of this suit, in August 2024, the court ruled that the FTC lacked the power to ban non-competes and granted a preliminary injunction against the rule.[x]  The FTC will likely appeal this ruling. This suit is evidence that many legal implications must be considered.

The FTC should consider how its blanket ban affects many businesses and employees alike. This rule presents significant concerns for businesses while also benefiting employees significantly. In consideration of a rule that would face less scrutiny, the FTC should pass a ruling that is more balanced between the needs of both employees and employers.

The FTC should carefully consider the broad implications of its blanket ban on non-compete agreements for businesses and employees. Although the proposed rule benefits employees, it raises significant concerns for businesses. The FTC could create a rule with a more balanced approach, such as restrictions on parties to non-competes, or the term of a non-compete agreement can be in effect. A middle-grounded solution would offer companies the protection they need while preventing the misuse of non-competes against lower-wage or entry-level employees. By creating a more focused rule, the FTC can implement its goal of protecting employees while promoting and stimulating business growth.

[i] See generally Adam Hayes, What Is a Non-Compete Agreement? Its Purpose and Requirements, Investopedia (Apr. 24, 2024), https://www.investopedia.com/terms/n/noncompete-agreement.asp (explaining what non-compete agreements are).

[ii] See FTC Announces Rule Banning Noncompetes, Fed. Trade Comm’n (Apr. 4, 2024), https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes.

[iii] Id.

[iv] Id.

[v] Id.

[vi] Jackson Lewis P.C., The Battle Over…War Isn’t Over: Employer Considerations Now that FTC Non-Compete Ban is Set Aside, Jackson Lewis (Aug. 14, 2023), https://www.jacksonlewis.com/insights/battle-overwar-isnt-employer-considerations-now-ftc-non-compete-ban-set-aside.

[vii] U.S. Gov’t Accountability Off., GAO-23-103785, Noncompete Agreements: Use is Widespread to Protect Business Interests but May Harm Workers (2023), https://www.gao.gov/products/gao-23-103785.

[viii] Noncompetes, Fed. Trade Comm’n, https://www.ftc.gov/news-events/features/noncompetes (last visited Nov. 20, 2024).

[ix] P.C., supra note vi.

[x] See id.