Early Court Loss for FTC Noncompete Ban Signals States in Charge

A federal court decision partially blocking the Federal Trade Commission’s worker noncompete ban indicates regulation will remain with the states, which have met recent resistance to barring the contracts, even from Democratic governors.

The FTC’s April rule to ban nearly all these contracts, framing them as harmful to labor competition, is a notable foray by the federal government into regulating noncompetes.

But in a July 3 decision, Judge Ada Brown in the US District Court for the Northern District of Texas put the FTC ban on hold until she makes a final ruling on whether the agency overstepped its authority in issuing it.

The FTC regulation has inspired an increase in legislation in states to ban noncompetes, which block workers from joining a competitor or starting one in a given period. But the recent struggles to enact state bans, combined with Brown’s ruling, may dim the outlook efforts to widely bar these contracts.

“This has historically been a matter of state law for years and years,” said James Komie, a partner at Howard & Howard in Chicago.

Noncompete contracts cover roughly one in five US workers, or about 30 million people, according to the FTC.

Businesses contend they protect their trade secrets and investment in employee training, but worker advocates say they’re misused on low-wage workers and constrain their earnings potential.

At least 11 states plus Washington, D.C., have passed laws banning the use of noncompetes for low-wage, middle-income, or hourly workers. But proposals to ban virtually all noncompetes regardless of income level have been a harder sell for policymakers.

Democratic governors from New York, Maine, and Rhode Island have vetoed legislation within the last 12 months to ban most or all employee noncompetes.

Ban Difficulties

New York Gov. Kathy Hochul (D) vetoed a noncompete ban in December amid vocal opposition from Wall Street and other business interests, who argued they should be allowed to use the contracts with senior executives and other high-earners.

More recently, Rhode Island Gov. Dan McKee (D) raised concerns in a June 26 veto statement that an outright noncompete ban would isolate the state, “putting Rhode Island businesses at a national disadvantage” if the federal ban doesn’t take effect or is later repealed or amended.

“I don’t think they’re outliers,” Russell Beck, an attorney focused on noncompetes with Beck Reed Riden LLP in Boston, said of the governors’ vetoes. “They’re actually thinking through the issue and not having a kind of knee-jerk reaction.”

California, North Dakota, Oklahoma, and most recently, Minnesota, are the only states to ban noncompetes in most instances, with narrow exceptions for contracts tied to the sale of a business.

California lawmakers last year doubled down by passing a pair of bills declaring the state’s courts won’t enforce noncompetes even if they were signed in other states, and imposing civil penalties on employers that require employees to sign the contracts, even if they don’t try to enforce them.

Proposals to ban noncompetes also remain pending in Michigan and New York City.

But even before recent vetoes, policymakers often have backed away from noncompete bans to settle on a less-restrictive policy, such as barring the contracts for workers below a certain salary threshold.

Councilmembers in Washington, D.C., passed a ban on noncompetes for workers making less than $150,000 per year in 2022, walking back an outright ban they adopted a year earlier but then delayed from taking effect amid outcry from businesses.

For those restricting noncompetes based on salary, the thresholds range widely from about $30,000 annually in New Hampshire to more than $100,000 in Colorado, Oregon, and Washington.

States also have advanced industry-specific noncompete restrictions, particularly in medicine.

Brown’s preliminary finding in favor of the US Chamber of Commerce and a Texas tax firm that challenged the FTC rule portends a tough legal road ahead, particularly after a recent ruling by the US Supreme Court in Loper Bright Enterprises v. Raimondo.

The court’s decision to overturn the decades-old Chevron doctrine that directed judges to defer to federal agencies’ interpretations of unclear statutes is widely expected to result in more litigation challenging agency rules.

Brown said she plans to issue her full ruling by Aug. 30, days before the FTC’s regulation would take effect.

Raising Awareness

Invalidation of the FTC’s rule could spur Congress to get more serious about passing federal noncompete legislation, according to Beck.

Bipartisan House and Senate lawmakers reintroduced the Workforce Mobility Act in 2023, which contains a ban with exceptions for the sale of a business.

The injunction of the FTC rule also could “push to the forefront whether or not noncompetes are an issue voters care about,” said Kayla Dreyer, an employment attorney at Brownstein Hyatt Farber Schreck LLP.

Where state lawmakers haven’t enacted specific limits, case law tends to dictate which noncompetes a court will consider valid and enforceable, generally depending on whether they serve a legitimate business interest and set reasonable limits such as the geographic area and time period covered.

“I always counsel clients to use the least restrictive agreement that they can, so if a nonsolicit is enough to give you the protection you need, use the nonsolicit and draft it as narrowly as you can,” Komie said.

Judges seem to be exercising greater scrutiny of noncompetes alongside the growth in public skepticism of the contracts’ merit, litigation attorney Nicholas Ruble of Baker Sterchi Cowden & Rice said of the courts in Kansas and Missouri where he practices and lawmakers haven’t enacted strict bans or wage-based noncompete limits.

The steady push for tighter restrictions on noncompetes has motivated many employers to closely review their use of the contracts and make sure they’re complying with the varying laws of the states where they operate, according to Beck.

Even if its regulation is never implemented, “the FTC has accomplished one of its goals, which is making people aware of the issue,” he said.

The case is Ryan LLC v. FTC, N.D. Tex., No. 24-cv-00986, opinion 7/3/24.