The Federal Trade Commission has voted to prohibit for-profit US employers from enforcing noncompete clauses in employment agreements.
The FTC decision is expected to have significant ramifications for the IT talent market. Experts believe that removing restrictive clauses could lead to a more competitive job market, enabling tech professionals to negotiate better conditions and to access a wider pool of better jobs.
“What the FTC’s official ban means for CIOs is a greater awareness that noncompetes do not create a barrier to employment with any company, or any sense of comfort that other employees leaving the company will not work for a competitor or start up their own business using skills they have acquired during their employment,” said Linda Ashar, an employment lawyer and an associate professor at the American Public University System.
“It also improves wage prospects” for IT workers, she said.
With a 3-to-2 vote, the FTC set a timeline of 120 days for the new regulation to come into effect, abolishing noncompetes for most workers. Unlike lower-level counterparts, for whom current noncompetes will no longer be enforceable, senior executives may still be bound by existing agreements.
During its decision-making process, the FTC listened to testimonies from thousands who felt stifled by these agreements. FTC Chair Lina Khan highlighted that noncompetes have been “robbing people of their economic liberty.” As an entity, the FTC is dedicated to protecting the American public from unfair business practices.
Room for debate
The decision caused a partisan divide among FTC commissioners, with the FTC’s two Republican members opposing the rule. They argued that the FTC overstepped its bounds and that Congress should legislate such regulatory changes.
Shortly after the ruling, the US Chamber of Commerce announced its intention to challenge the ban in court, criticizing it as “unnecessary and unlawful” and warning that it might compromise the competitive edge of American businesses. The Chamber’s strong reaction underscores the contentious nature of this new rule and signals a heated legal battle ahead. The Chamber’s mission is to advocate for the interests of business and free enterprise.
Senior tech workers may be less affected by the ruling. Keith Noe, an intellectual property lawyer with Lando & Anastasi, pointed out that the ban has a carve-out for “senior executives” making over $151,164 annually in “policy-making” roles. He said, “A CIO may fall within this category, and senior developers may as well.”
Gregory S. Bombard, a trial lawyer for tech noncompetition agreements, pointed out that there are “some significant questions” about whether the FTC has the legal authority to ban the enforcement of noncompete agreements.
“The US Chamber of Commerce has already filed a lawsuit challenging the FTC’s action. We will have to see how legal challenges to the FTC’s rule play out,” he said.
According to Bombard, if the FTC’s rule is upheld and becomes effective, software industry employers will likely focus more on protecting trade secrets.
“Noncompete agreements are just one tool in an employer’s tool belt for protecting confidential information or trade secrets from being used by a competitor,” he said. “For example, California has long banned noncompete agreements but leads the country in trade secret misappropriation litigation. We can expect that if the FTC’s rule goes into effect, then we will see more litigation over whether departing employees took confidential information or trade secrets to their new employers.”
Jonathan Landesman, head of the Labor and Employment Group at Cohen Seglias law firm, predicted that banning noncompetes would allow employees at all levels to pursue job opportunities that were once off-limits.
“Whether employees actually experience a boost in pay remains to be seen; however, there is no question that the new rule will also make it more challenging for software developers to protect the investments they have made in intellectual property and trade secrets,” he said.
“Without using noncompete agreements, businesses in the software industry will need to increase their focus on alternative ways to protect themselves and their assets, including implementing policies and practices that better track the access and use of confidential and proprietary information and developing agreements that more specifically address restricting the use of trade secrets,” he added.
Although the ban could lead to more job movement, fostering innovation, it may also increase business risks, said Lauren Aydinliyim, a former in-house lawyer in the software industry and a current professor at Baruch College in New York City whose research focuses on employee noncompete agreements.
“Software companies will need to find new ways to protect their confidential information without relying on traditional noncompetes or perhaps even existing NDAs and the like,” she said. “This could require reevaluating current practices and exploring alternative strategies for maintaining business continuity.”