FTC bans noncompete clauses; objectors quickly file suit

By , Daily Memphian Updated: April 24, 2024 7:00 PM CT | Published: April 24, 2024 6:59 PM CT

The Federal Trade Commission has issued a rule that eliminates the noncompete clauses that keep thousands of workers from moving from one job to the next.

The restriction is in place in dozens of industries, but it may be most visible in broadcasting.


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The decision, announced Tuesday, April 23, in 3-2 ruling by the FTC board, is intended to create a fairer workplace, increase innovation and foster the birth of new businesses by eliminating what the FTC views as a false restriction on talent.

The change would not apply to senior executive-level positions in any industry. The rule, without courthouse delays, is to go into effect in 120 days.

“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 non-competes are banned,” said FTC Chair Lina M. Khan. “The FTC’s final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”

The rule met quick opposition.

A consortium of groups, including the U.S. Chamber of Commerce, Business Roundtable, Texas Association of Business and a local chamber filed a lawsuit in a federal court in East Texas to block the ban.


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The FTC’s action sets a dangerous precedent for government micromanagement and will harm employees, employers and the economy, according to the Chamber’s website.

According to the FTC, noncompete clauses are a widespread and often-exploitive practice, imposing contract conditions that keep workers in jobs they want to leave or forcing them relocate, take a lesser position or leave the workplace entirely.

The FTC says 30 million workers — nearly one in five — are subject to noncompete clauses.

They include a wide variety of industries and may be imposed by any employer, including nail shop salons and sandwich shops, said Lisa Krupicka, attorney at Burch Porter and Johnson.

“They are most likely to be enforced when we’re talking about employees who have developed a relationship with clients so that the clients essentially think of that employee as the company, and if they leave, they’ll follow the employee,” she said.


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They are also enforced with employees who have knowledge of trade secrets — formulas, software, she said.

The restrictions against employees in more ordinary jobs are seldom enforced by the courts, she said, but they create a chilling effect because those employees often don’t have the money to file a lawsuit and end up staying in jobs out of fear of repercussions.

A noncompete agreement is a clause or series of restrictions in a contract that keeps employees from working for a competitor, sometimes for years.

Many include a suite of other agreements, including the promise not to divulge trade secrets or solicit the former employer’s customers or employees.

Those rules would still be enforceable under the proposed ban.


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“I think what businesses would say, if you’ve got a person that has the way of making our main product in his head, you can make him promise confidentiality all you want, but how are you going to enforce it,” Krupicka said. “How are you going to police it if he doesn’t?

“The easiest way has been to prohibit moving to a competitor for a year or so,” she said.

Broadcasting personalities and producers and other lesser-known people in newsrooms have long been held to noncompete clauses because it was a burden for a station to train them while they built skills, name recognition and then took a job at a competing station for what might often be a small raise, said Rick Carr, a broadcast agent in Arizona who represents air talent across the nation.

“There are ways employers can protect themselves and I expect we’ll start to see more of that. But at least this moves us toward something that’s a lot closer to a balanced relationship where people can finish a contract, not be offered a new deal at their station and then be told, ‘Oh, but you can’t work in this market for six months or a year. You don’t have to get out of the industry or move your family.

“That’s ludicrous, and it’s always been ludicrous,” Carr said.


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The rule makes it look like there will be room for more competition, said Carolyn Kane, president of NWT Group, also a national talent agency for broadcast journalists.

She expects the change could increase news salaries.

“The challenge right now is this comes at a time when news salaries are down and companies are hard-pressed to pass out even of cost-of-living raises,” Kane said. “How much money is there really to make this a reality?

“In another time, this might be a huge boon. But right now, it’s a good boon because people are not making enough money to be able to live in their hometown, for example, and just work at a different station.

“The non-competes can be very challenging, especially at the price-point some of these folks are working at,” Kane said.


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A number of states exempt news workers under specified salary level. Those agreements have worked well, Kane said.

“The problem is, there are a lot of state laws that say if you’ve offered them a contract, then the noncompete stays,” she said.

The new rule would protect those people when their contract expires, she said.

“You could then go across the street as opposed to waiting six months or one year.

“It looks very exciting, and it certainly opens up a lot of opportunity in an ever-shrinking industry. But we don’t know if it is going to stick.”


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In its comments, the U.S. Chamber said the FTC is declaring common business practices as “unfair methods of competition” and therefore illegal.

“This is despite the fact that that noncompete agreements have been around longer than the 110-year-old FTC, and until now no one has suggested that they are illegal”.

If upheld, the rule will make the vast majority of noncompete clauses invalid, says Paul Tuberville, adjunct law professor at the University of Memphis.

“It’s a very controversial rule. Traditionally, this has been more of an area where the states have legislated on these issues,” he said.

A national, consistent ruling, he said, would make it difficult for an employer to have any kind of noncompete with its employees.

Legal challenges, he said, will come before district courts asking them to enjoin the enforcement of the action.

Topics

FTC noncompete clauses
Jane Roberts

Jane Roberts

Longtime journalist Jane Roberts is a Minnesotan by birth and a Memphian by choice. She's lived and reported in the city more than two decades. She covers business news and features for The Daily Memphian.


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