Prohibition of non-competition clauses in employment relationships: new developments in the United States and possible implications for Brazil

The Federal Trade Commission (“FTC”), the US antitrust authority, published a rule this week prohibiting non-compete clauses in labor contracts in the United States. According to the president of the FTC, Lina M. Khan, the rule is designed to increase innovation and encourage the creation of new businesses, thereby making the US economy more dynamic. In addition, the rule will encourage employers to invest in better pay and benefits to retain talent.

The new rule follows the FTC’s announcement in early January 2024 that it was considering imposing restrictions on these types of clauses.

According to the FTC, non-compete clauses prevent workers from accepting new jobs or starting activities that compete with the company they are employed by, “forcing” them to stay in undesirable jobs or face significant costs, such as moving to lower-paying areas or costly litigation. In addition to impacts on the worker, the FTC says there is evidence that non-compete agreements lead to greater market concentration and higher prices for consumers.

The FTC also found that employers have alternatives to non-compete agreements that allow companies to protect their sensitive and confidential information, such as privacy standards and non-disclosure agreements (NDAs), which are also signed by about 95 per cent of employees. Similarly, the FTC’s new rule will not apply to “senior executive” employment agreements currently in effect.

The new rules will take effect in about 120 days and are likely to be reviewed by the US judiciary. There are already reports of at least two lawsuits against the FTC challenging the new rules, and more are expected.

What is the potential impact of the new rules in Brazil? In Brazil, there is no prohibition, per se, on non-competition clauses in employment contracts, either in legislation or in the case law of the Administrative Council for Economic Defense (CADE), the Brazilian antitrust authority. There are precedents for allowing non-compete clauses in certain business contexts, as evidenced by the decisions in Merger No. 08700.002346/2019-85 (Applicants: Athena Saúde Espírito Santo S.A., Casa de Saúde São Bernardo S.A. and São Bernardo Apart Hospital S.A.), 08012.004902/2010-78 (Applicants: ESHO – Empresa de Serviços Hospitalares Ltda. and Hospital Pró- Cardíaco S.A.) and 08012.013200/2010-85 (Applicants: Hospital das Clínicas de Niterói Ltda. and Clínica Médico Cirúrgica Botafogo S.A.).

We will closely monitor whether and how the new US rules will affect CADE future assessments of non-compete clauses.

This bulletin is for information purposes only and should not be relied upon to obtain legal advice on any of the topics dealt with here. For additional information, please contact the leaders of the Antitrust, Administrative, and Anti-Corruption Law team. team.

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