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FTC Prohibits Implementation Of New Non-Compete Clauses And Invalidates Many Current Contracts

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The U.S. Federal Trade Commission (FTC) has issued its final regulations on non-compete agreements, effectively prohibiting any new contracts of this nature.

Non-compete clauses have historically limited employees from joining rival companies or initiating competing ventures, especially sparking debate within the tech industry.

While some argue that these clauses are essential for safeguarding intellectual property and trade secrets, critics, including the FTC, contend that they stifle innovation and unfairly restrict employees.

“Non-compete 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 Khan, in a statement.

Proposed in January 2023, the rule change garnered significant public support, with the FTC receiving approximately 26,000 comments advocating for a ban.

Despite the widespread support, the U.S. Chamber of Commerce has pledged to challenge the FTC’s decision in court.

Under the new regulations, existing non-compete agreements, excluding those for senior executives, will be invalidated. However, clauses for top-level executives will remain enforceable due to concerns about potential disruptions.

Moving forward, senior executives will also be subject to the ban on new non-compete clauses.

It’s estimated that non-compete agreements currently impact about 20% of the U.S. workforce, affecting roughly 30 million employees.

The FTC projects that, on average, workers stand to gain an additional $524 annually as a result of these rule changes.

Washington State implemented its restrictions on non-compete agreements in 2019, limiting their applicability to employees earning over $100,000 per year and independent contractors making $250,000 annually, with a maximum duration of 18 months.

The FTC’s final rule, slated to take effect 120 days after publication in the Federal Register, will supersede Washington state law.

In a notable move in June 2022, Microsoft announced the removal of non-compete clauses from its U.S. employment contracts, excluding only senior leaders.

Microsoft’s President, Brad Smith, emphasized the importance of individual career autonomy in fostering American innovation.

“Microsoft believes that American innovation thrives when people have the freedom to pursue the career path they feel best aligns with their passion and skills,” Microsoft President Brad Smith said in a statement Tuesday.

Amazon, headquartered in Seattle, has pursued legal action against former employees for alleged non-compete breaches in the past. We’ve reached out to Amazon for comment and await a response.

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