Earlier this year, the Federal Trade Commission (FTC) announced a Final Rule outlawing nearly all noncompete agreements between employers and employees. That Final Rule, however, was overturned at the end of August 2024. After granting a limited injunction in July 2024, a Texas court invalidated the FTC’s Final Rule days before it was set to take effect on September 4, 2024.
The court ruled that the FTC has no authority to issue broad rules like the Final Rule banning noncompete agreements or invalidating millions of contracts retroactively. Instead, the court said the FTC could only deem noncompete agreements unfair methods of competition through case-by-case adjudication. The court also concluded the Final Rule was unenforceable because the FTC lacked sufficient evidence to support a categorical ban on non-compete agreements and failed to consider less restrictive alternatives.
So, What’s Next?
The FTC said it is considering whether to appeal the court’s decision. The chances an appeal will resurrect the Final Rule are slim, and any appeal will take years to resolve. In the meantime, the FTC warns the “decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.” It is unlikely the FTC will embark on widespread enforcement actions on a case-by-case basis to achieve a ban on noncompete agreements similar to what was proposed in the Final Rule. That does not mean, however, that noncompete agreements are likely to become easier to enforce in the future.
The FTC’s Final Rule was effective in elevating opposition to noncompetes, which has been growing in recent years. For example, the bipartisan “Workforce Mobility Act” introduced in the Senate in 2019, 2021, and 2023 would largely ban the use of employer noncompete agreements nationwide as a matter of federal law. Also, the National Labor Relations Board’s General Counsel has directed the Board’s agents to find that noncompete agreements are unfair labor practices except in limited circumstances. Finally, state legislatures continue to introduce and pass laws that whittle away at the scope of permissible use of noncompete agreements. California, Minnesota, Oklahoma, and North Dakota prohibit noncompete agreements entirely. Many other states do not entirely ban noncompetes but limit them to certain professions or income levels. Laws introduced in Arizona, Connecticut, Georgia, Illinois, Kentucky, Missouri, New York, Rhode Island, and Tennessee would further limit the enforceability of noncompete agreements. Quite simply, attacks on noncompete agreements are coming from multiple places.
Best Practices
The recent failure of the FTC’s Final Rule banning noncompete agreements will not end efforts to outlaw these agreements. Until these efforts succeed in outlawing noncompete agreements, employers should follow our five general rules when considering the use of noncompete agreements:
- One-Size-Fits-All agreements are never recommended.
- Evaluate whether you really need a noncompetition agreement.
- While non-solicitation, confidentiality, or other agreements may provide alternative protection, these agreements are not beyond legal or regulatory scrutiny.
- If you have unenforceable restrictive covenants with employees, you should communicate to employees that you will not enforce them or, if possible, modify them in consultation with legal counsel.
- Focus time and effort on retaining employees and protecting trade secrets.
The landscape of restrictive covenants, including noncompetes, non-solicitation, and confidentiality agreements, is constantly evolving. Employers should routinely review and refresh these agreements to ensure they are compliant with state law.
