One April 24, one day after the Federal Trade Commission issued a final rule banning noncompete clauses, the U.S. Chamber of Commerce and several local groups filed suit against the FTC in the Fifth District Court of Texas. On April 23, the FTC issued its ruling, stating it will “promote competition by banning noncompetes nationwide, protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.”

The commission vote to approve the rule passed 3-2. The FTC proposed the rule in January 2023 and received more than 26,000 comments. The ban will become effective in 120 days and will bar the noncompetes for future employees. Existing noncompetes for senior executives can only be enforced for employees earning more than $151,164 and in “policy-making” positions.

The U.S. Chamber of Commerce slammed the decision. “The Federal Trade Commission’s decision to ban employer noncompete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive,” said Suzanne P. Clark, Chamber president and CEO.

After the rule was first proposed, the U.S. Chamber of Commerce sent a letter to U.S. congressmen in opposition to it. NIADA signed onto the letter, joining dozens of other federal, regional and state associations, in opposition. “On behalf of the undersigned organizations and our members across the country, we write to unequivocally oppose the Federal Trade Commission’s proposed rule to impose a nationwide ban on almost all noncompete clauses. The FTC lacks the constitutional or statutory authority to issue such a rule and, in attempting to do so, the agency is improperly usurping the role of Congress,” the letter read. “Moreover, this sweeping rule would invalidate millions of contracts around the country that courts, scholars, and economists have found entirely reasonable and beneficial for both businesses and employees. Accordingly, we ask you to exercise your oversight and appropriations authority to closely examine the FTC’s proposed rulemaking.”

The NIADA criticized the FTC after it announced the final rule, reiterating its opposition. “In February 2023, NIADA, along with over 100 other trade associations and the U.S. Chamber of Commerce, sent a letter to the U.S. Congress detailing our opposition to the, at that time, proposed rule from the FTC invalidating non-competes,” said Jeremy Beck, NIADA vice president of dealer development. “As we stated in that letter, we believe the FTC lacks constitutional or statutory authority to issue such a rule. We are disappointed that the FTC has issued their final rule, the non-compete clause rule, effectively invalidating most noncompetes currently in place and prohibiting the use of them in the future. We continue to advocate for our members by opposing this rule and encourage members of the U.S. Congress to assert their constitutional authority.”

According to the NIADA, the ban does not eliminate trade secret regulations and non-disclosure agreements.

To comply, dealers must do the following:

• Come into compliance with the rule during the 120-day compliance period starting on the day after the rule is listed in the Federal Register.
• Cease issuing noncompetes as a term or condition of employment for any employees.
• Current employees whereby a noncompete is in place are immediately invalid, with one exception relating to “senior executives.” Notify, in writing, employees and former employees that are under a noncompete, excluding defined “senior executives” that their non-competes will not be enforced.

Steve Levine, chief legal and compliance officer for Ignite Consulting Partners, also criticized the new rule.“My thoughts are that while I will concede that noncompete agreements have at times been drafted broadly and relied upon excessively by some businesses,” Levine said, “I believe the FTC has exceeded its authority and overstepped its role in taking this action. It has also ignored the fact that there is judicial precedent in state courts that have addressed the issues raised by non-compete agreements. “I anticipate there will be legal challenges brought, but in the meantime, I think it is important for businesses to review their existing employment contracts to make sure that non-disclosure agreements, non-solicitation agreements, and confidentiality agreements are in place to protect the business and its proprietary information and relationships.”

Levine had a real-life example of why this is a bad proposal. A dealer-client of his had a general manager who had worked for the dealer over eight years. But the dealer never required a non-compete clause.“The GM leaves the dealer, opens up two blocks away and basically uses everything he learned and every relationship he development against the dealership he left,” Levine said.

The FTC defended its move in its announcement. “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 noncompetes are banned,” said FTC Chair Lina M. Khan. “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.”

The FTC estimates that the final rule banning noncompetes will lead to new business formation growing by 2.7% per year, resulting in more than 8,500 additional new businesses created each year. The final rule is expected to result in higher earnings for workers, with estimated earnings increasing for the average worker by an additional $524 per year, and it is expected to lower health care costs by up to $194 billion over the next decade. In addition, the final rule is expected to help drive innovation, leading to an estimated average increase of 17,000 to 29,000 more patents each year for the next 10 years under the final rule.