Late last month, the Federal Trade Commission (FTC) released a new rule that would ban noncompete agreements going forward and make most agreements already on the books unenforceable. The FTC argued that such a ban would spur innovation and economic growth. Unfortunately, this rule change will do neither of these things. Instead, it will undermine private contracts and likely harm consumers.
A non-compete agreement is a legal contract in which an employee or contractor cannot work for competitors within a certain timeframe after departing from the company and cannot reveal proprietary information. The justification for non-compete agreements is that they prevent previous employees from sharing valuable information with rivals. The enforceability of noncompete agreements varies across the country, with some states like California not enforcing them at all.
The FTC’s rule change makes nearly all noncompete agreements void, except for those involving senior executives, and prohibits the creation of future agreements. The FTC argues that this change will encourage more workers to start businesses since they will no longer be subject to noncompete requirements. Moreover, the FTC argues that other agreements, such as nondisclosure agreements, are more than sufficient to adequately protect company trade secrets.
However, not everyone agrees with the FTC’s rosy analysis. When the rule change was first proposed, former Commissioner Christine Wilson issued a dissenting statement, arguing the rule change lacked justification and had the potential to produce negative effects on industries such as the financial sector. Wilson also argued that the existing body of academic literature did not support the FTC’s claims but rather suggested that there continues to be a high level of uncertainty about what such a ban would do and who it would help.
Such variance in the research makes this sweeping rulemaking, at best, foolish and, at worst, dangerous. To this end, a lawsuit has been filed in Texas challenging the non-compete rule as massive government overreach and a major disruption to American businesses.
Whether some noncompete agreements go too far and are too restrictive is an open question. However, outright abolishing them is far-reaching and will undermine businesses’ ability to protect proprietary information. Without these agreements, businesses are at risk of rivals poaching their employees and bringing their knowledge with them. This can be seen in last year’s dispute between Meta and X (formerly Twitter) when Meta released its version of X called Threads. X claimed that Meta had hired some of its former employees and used the knowledge they possessed to create a competitor platform. Assuming this claim is true, California could have avoided the dispute by enforcing noncompete agreements.
Consumers also stand to miss out on important benefits because of the FTC’s rulemaking. In her dissent, Wilson cited a study that found that when noncompete agreements are unenforceable in the financial service industry, companies tolerate more misconduct among their employees out of fear that they could leave and take their clients with them. This, in turn, leads to higher fees and an overall decline in service quality for consumers.
By eliminating nearly all noncompete agreements, the FTC could produce unintended consequences for the economy by undermining a company’s ability to protect trade secrets and potentially harming consumers.
Trey Price is a policy analyst with the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit us at www.TheAmericanConsumer.Org or follow us on X @ConsumerPal.