After a landmark vote, the Federal Trade Commission (FTC) issued a final rule this week banning most noncompete agreements nationwide. This new rule marks a significant departure from the traditional practices of many industries and signals a pivotal moment in ongoing conversations surrounding employment rights and economic mobility.

Noncompete agreements have long been a staple of employment contracts, serving employers as a bulwark against talent poaching and the unauthorized dissemination of proprietary information. Last year, researchers estimated that more than one in five workers in the United States, or 30 million people, have signed noncompete agreements. Yet, the ubiquity of these agreements has come under mounting scrutiny. Critics decry noncompetes as stifling innovation and entrepreneurship, having a disproportionate impact on low-wage workers, and causing a chilling effect on worker collective action.

Louisiana law has already limited the enforcement of noncompete agreements in this state for decades. La. R.S. § 23:921 provides for the enforcement of employment contracts that prohibit employees “from carrying on or engaging in a business similar to that of the employer and/or from soliciting customers of the employer” but only if the restriction is limited to specifically defined geographic area which lists the parishes the employee cannot compete in, specifically define what a similar business is, and does not exceed a term of two years. Some states, like Virginia and Illinois, have gone further and banned noncompetes entirely for workers who make under a certain salary threshold. Other states, such as California and North Dakota, have banned noncompetes in all employment contracts.

The FTC’s new rule goes beyond Louisiana’s existing restrictions on noncompetes by banning almost all of these agreements nationwide. Under the final rule, any noncompete agreement entered into on or after the rule’s effective date—120 days from the publication of the final rule in the Federal Register—will be considered a violation of the Federal Trade Commission Act. For noncompetes signed before the effective date, the rule is more nuanced. Existing noncompete agreements with “senior executives” will remain enforceable, while noncompetes with other workers will be unenforceable after the rule’s effective date. The rule defines “senior executives” as workers earning more than $151,164 who are in a “policy-making position.”

In its press release announcing the final rule, the FTC claimed noncompetes are “unfair method[s] of competition” in labor markets and may even contribute to higher prices for consumers. The FTC suggested other safeguards, such as nondisclosure agreements (NDAs) and trade secret laws, would continue to provide employers with options to protect their proprietary information, even with the new rule’s prohibition on noncompetes. Yet, some companies are not satisfied with the remaining options and strongly oppose the FTC’s new rule. The U.S. Chamber of Commerce and several other business groups filed suit against the FTC in the Eastern District of Texas to enjoin enforcement of the new rule almost immediately after its announcement. The complaint alleged the FTC overstepped its executive authority in promulgating the new rule and that the rule itself is overbroad and unlawfully retroactive.

While the FTC’s new rule promises to shift the employment landscape, the pending Texas suit has rendered the rule’s full impact uncertain. In any case, the rule has already sparked a national conversation on an important issue, as advocates on both sides debate the burden and benefits of these agreements.

About the author...

Rachel Hudson
Casey Denson Law, LLC

Written on behalf of the Labor & Employment Law Committee