Judge Axes FTC Noncompete Ban: Employers’ Next Moves Explained

Businesses now have a green light to continue enforcing noncompetes on their employees after a Texas federal judge blocked an FTC rule seeking to ban them nationwide, with the caveat that they must navigate state and other federal enforcement to limit the contracts’ use.

The Federal Trade Commission rule barring and voiding nearly all employee noncompetes won’t take effect Sept. 4 as scheduled, after Judge Ada E. Brown ruled the FTC lacked the legal authority to issue it in a Tuesday decision from the US District Court for the Northern District of Texas.

That decision spares employers from the regulation’s most immediate requirement: sending notices voiding the noncompetes that current and former employees already signed. The FTC has estimated noncompetes cover about 30 million people, or one in five US workers.

Business groups including the US Chamber of Commerce cheered the court decision as a win for employers’ ability to protect their competitive advantages, including trade secrets. The FTC said the ruling is a loss for workers’ career mobility and that the commission is seriously considering an appeal. It would land at the US Court of Appeals for the Fifth Circuit, which has earned a reputation for overturning Biden administration rules.

Brown’s ruling in one of at least three federal court challenges to the FTC rule eases much of the uncertainty for employers trying to figure out how to manage their use of noncompetes. But it doesn’t erase the threat of state and federal legal scrutiny, nor public pressure to scale back use of the restrictive employment contracts.

1. What must employers do now?

For the moment, businesses can keep using noncompetes in the same ways they did before the FTC issued its final rule in April. The judge’s decision invalidates the rule, and there’s no other federal statute or regulation that explicitly limits employers’ use of noncompetes—an area of law that traditionally has been governed by states.

That goes for other kinds of contracts that the FTC might have deemed anti-competitive under the regulation as well, such as nondisclosure agreements aimed at shielding trade secrets, nonsolicitation agreements that bar employees from calling on the company’s customer list after they leave, and training repayment agreements requiring employees to reimburse companies if they leave within a certain time period.

The FTC rule wouldn’t have banned those other kinds of restrictive clauses outright, but the commission said they sometimes function as noncompetes if they’re written so broadly that they prevent workers from taking other jobs or starting their own businesses.

Although there’s no longer an immediate compliance mandate, many attorneys have been warning businesses to think more strategically about which employees they ask to sign noncompetes and how broadly the contracts are drafted, rather than asking all employees to sign them as a perfunctory part of new-hire paperwork.

The estimates vary on how widely employers use noncompete contracts with their workers. A Federal Reserve survey published in 2023 found about one in nine US workers are covered by the restrictions, but with wide variation by geography and worker age.

2. How serious is the federal enforcement risk?

Federal agencies have a limited track record of trying to penalize or block companies’ use of noncompetes. But it isn’t unheard of, and they’ve become increasingly vocal about that possibility under the Biden administration.

For one, the National Labor Relations Board’s top lawyer is moving ahead with an enforcement strategy to effectively make restrictive covenants illegal under federal labor law.

General Counsel Jennifer Abruzzo unveiled this push more than a year ago, when she announced her view that noncompete agreements in employment contracts generally run afoul of the National Labor Relations Act. Such pacts deny workers the ability to quit or change jobs, which in turn interferes with exercising their organizing rights in their current positions for fear of being fired and not being able to obtain new employment, she said.

An NLRB administrative law judge in June ruled that an Indiana HVAC company’s noncompete and nonsolicitation policies violated federal labor law. That case is pending before the NLRB, giving the board an opportunity to create precedent on whether employers’ use of restrictive covenants is an unfair labor practice.

The FTC says it also has power to pursue enforcement actions on a case-by-case basis when it sees companies using noncompetes in ways that it deems illegal. A commission spokeswoman reiterated that position in response to Tuesday’s court decision, saying the judge’s ruling didn’t preclude that kind of enforcement under existing federal competition law.

The FTC has previously pursued this kind of enforcement, but not frequently.

The commission announced actions against a security-guard company and glass container manufacturers in January 2023, ordering them to void noncompetes covering more than 3,000 workers in total and stop using them going forward.

The commission also has pushed for limits on the use of noncompetes in newly merged companies, as part of its antitrust merger review process.

3. What do state laws allow?

The most clear-cut restrictions on employee noncompetes remain at the state level, through a combination of statutes and case law.

Courts have long exercised discretion in resolving disputes over noncompetes in the states and deciding whether and how they can be enforced. They weigh the legitimate business interests that a company is trying to protect against factors such as the geographic scope, duration, and hardship on the worker. Some states allow courts to revise existing agreements to make them enforceable, rather than void them entirely.

Some states have taken matters into their own hands through the legislative process.

California, Minnesota, North Dakota, and Oklahoma ban nearly all noncompetes, with exceptions for business sale agreements that limit shareholders in the business from immediately competing against the venture they sold. Lawmakers elsewhere have shown some reluctance to ban the contracts entirely though, as Democratic governors in three states vetoed proposed bans within the past year.

At least 11 more states plus Washington, D.C., have bright-line thresholds protecting lower-income, middle-income, or hourly workers from being restricted by noncompetes. Those thresholds range widely from earnings of twice the federal minimum wage in New Hampshire to six-figure annual salaries in Colorado, D.C., Oregon, and Washington state.

State lawmakers also have increasingly targeted noncompetes specific to doctors and other health-care professionals, banning or restricting those contracts partly with an eye toward boosting shortages of medical workers in rural areas.

Proposals to ban noncompetes remain pending in Michigan and New York City, as well as multiple bills in Congress that would restrict their use nationally.

Read More

• FTC Ban on Worker Noncompete Deals Blocked by Federal Judge
• Judge Grants Temporary Pause in Florida Noncompete Challenge
• Companies Delay Voiding Noncompetes With Fate of Ban Uncertain
• FTC Gets Win on Noncompete Ban After Loss in Another Court
• Early Court Loss for FTC Noncompete Ban Signals States in Charge
• FTC’s Noncompete Ban Mirrors State Proposals Before Scaling Back