The FTC Bans Noncompetes? Not So Fast…

By Melissa Muro LaMere, Benjamin Naylor, Jeremy Stewart, and Devon Allgood

On April 23, 2024, the Federal Trade Commission voted to issue a final rule that bans nearly all noncompete agreements in the employment context. Although the rule is scheduled to go into effect 120 days after it is published in the Federal Register, it already faces legal challenges in the courts, which may delay its effective date, or invalidate the rule altogether. 
 
Key Takeaways From the FTC’s Final Rule

What the Rule Does:

• Virtually all existing and future noncompete agreements in the employment context will be invalidated.
• Noncompete agreements with “senior executives” that were signed before the rule takes effect will be spared through a grandfather clause, provided the person works in a “policy-making position” and earns at least $151,164 per year through salary and benefits. 
• The final rule applies to non-compete agreements with employees and independent contractors.
• Once the final rule goes into effect, employers must provide notice to all workers with noncompete agreements (other than qualifying “senior executives”) confirming that their existing noncompete agreements are unenforceable.

What the Rule Does Not Do:

• The final rule does not apply to noncompete agreements that are entered into in connection with the sale of a business.
• The final rule does not apply to noncompete agreements between franchisors and franchisees.
• The final rule does not apply to non-solicitation agreements or non-disclosure agreements (protecting confidential or trade secret information), provided that they are not so broad as to function like a noncompete agreement.

What Happens Next?

Nothing has changed, yet. The final rule will not go into effect until 120 days after it is published in the Federal Register. However, there is considerable doubt about whether the Final Rule will go into effect at all. 

Legal Challenges Have Begun

Business and trade groups immediately denounced the FTC’s rule as an unlawful attempt to curtail businesses’ right to protect trade secrets and remain competitive. In a statement, the Chamber of Commerce of the United States warned that, “[t]he 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. Since its inception over 100 years ago, the FTC has never been granted the constitutional and statutory authority to write its own competition rules.”  

On April 24, 2024, the Chamber of Commerce, along with other business groups, filed a lawsuit in the U.S. District Court for the Eastern District of Texas arguing that the FTC does not have legal authority to issue binding regulations that prohibit “unfair methods of competition.” According to the lawsuit, it is up to each individual state to regulate noncompete agreements, not the FTC. The Chamber of Commerce strategically filed its lawsuit in a conservative, business-friendly district where any appeal will be heard by the U.S. Court of Appeals for the Fifth Circuit, in which 12 of 17 judges were nominated by Republican presidents. It is unclear at this time whether the Chamber of Commerce will seek an injunction to temporarily block the FTC’s non-compete rule from taking effect.

State Legislation May Accelerate

The legal challenges that are expected to delay (or possibly invalidate) the FTC’s final rule banning noncompete agreements may cause more state legislatures to pass laws that limit the enforceability of noncompete and other restrictive covenants. Currently, California, Minnesota, North Dakota, and Oklahoma have laws banning noncompete agreements entirely. Other states prohibit noncompete agreements for workers whose salaries do not meet a certain threshold. Those states include Colorado, Illinois, Maine, Maryland, Massachusetts, Nevada, New Hampshire, Oregon, Rhode Island, Virginia, Washington, and Washington, D.C. Other states, like Massachusetts and Colorado, have imposed significant administrative and notice requirements on employers who want to use noncompete agreements. This inconsistent patchwork of state legislation is expected to continue (and even accelerate) while the FTC’s final rule makes its way through the court system, making it even more challenging for employers to protect their customer relationships and other valuable assets through the use of noncompete agreements.

While the fate of the FTC’s final rule remains uncertain, and as the proliferation of inconsistent state laws creates a challenging environment for businesses that use noncompete agreements, employers would be well-advised to closely examine their existing restrictive covenants to assess their enforceability. Employers may also wish to explore the use of new or expanded non-solicitation and confidentiality agreements as alternative mechanisms for protecting their customer and employment relationships, and confidential information.

Snell & Wilmer will continue to monitor these matters and provide regular updates as new developments occur.