With the Federal Trade Commission’s ban on noncompete clauses which was set to come into effect on September 4 blocked by a federal judge in Texas and the FTC considering an appeal, Tim Walz’s selection as Democratic vice-presidential nominee is further sharpening the spotlight on the subject.

Because it’s just over a year since the state of Minnesota, where Walz was governor, introduced what was labelled one of the strictest state noncompete bans.

That move was part of a package of pro-employee measures including bolstering paid leave and worker protection as well as introducing generous child tax credits.

Minnesota’s law, which took effect on July 1, 2023, banned almost all post-termination noncompetes between employers and employees and defined the term ‘employee’ broadly to include contractors. And, unlike other state laws, it did not exclude anyone based on income. States including Colorado and Washington, for example, excluded highly-paid employees from bans on noncompetes.

The FTC’s proposed ban echoed the tougher stance adopted by Walz’s administration in Minnesota. But it went further still as it would have applied retroactively to most agreements.

But Judge Ada Brown who had previously granted a limited preliminary injunction suggesting that the FTC had overstepped its rulemaking authority, has confirmed this view in her judgement calling the rule “arbitrary and capricious.”

Jobs and competition

In the FTC’s view, banning noncompetes boosts competition and gives workers greater freedom. “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 when the move was announced. “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.”

According to the FTC’s own calculations, banning noncompetes would help create 8,500 new businesses a year, lead to between 17,000 and 29,000 more patents a year and increase average earnings by $524 each year. It estimated nearly one in five US workers – 30 million people – was subjected to a noncompete agreement.

Despite initial resistance from some business lobbies, there was some suggestion that views are changing as noncompetes such as the one in Minnesota take effect. Attorney Amy Conway of Stinson LLP told Legal Dive that “They’re starting to see positives in that they can hire new talent that they didn’t have access to before.”

This may have been an optimistic take on things given the federal decision as well as the continuing criticism of regulatory overreach by the FTC from industry representatives.