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Business group plans to sue after FTC bans noncompete contracts

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The Federal Trade Commission issued a final rule Tuesday to ban noncompete contracts that prevent employees from joining rival companies in a move that immediately drew a legal challenge.

U.S. Chamber of Commerce President and CEO Suzanne Clark said the measure was illegal and would hurt businesses and workers.

“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,” she said in a statement. “This decision sets a dangerous precedent for government micromanagement of business and can harm employers, workers, and our economy.”

Clark said the chamber would file suit as soon as possible.

“Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules,” Clark said. “Noncompete agreements are either upheld or dismissed under well-established state laws governing their use. Yet, today, three unelected commissioners have unilaterally decided they have the authority to declare what’s a legitimate business decision and what’s not by moving to ban noncompete agreements in all sectors of the economy.”

Federal officials said banning noncompete contracts would help employees and prevent employers from using exploitative practices. The FTC said the final rule is expected to result in higher earnings for workers and lower health care costs by up to $194 billion over the next decade. The agency also said it would lead to more patents.

“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,” FTC Chair Lina Khan said in a statement. “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.”

Noncompete contracts are used widely in the U.S. An estimated 30 million workers – about 20% – are subject to a noncompete contract, according to the FTC.

Under the FTC’s new rule, existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date.

Existing noncompetes for senior executives – who represent less than 0.75% of workers – can remain in force under the final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives.

FTC officials said employers will be required to provide notice to workers bound by an existing noncompete that they will not be enforcing any noncompetes.