Battles Over Noncompete Clauses Poised to Heat Up in Statehouses

The US Federal Trade Commission’s nationwide ban on noncompete clauses is set to spur more state action to limit the restrictive covenants, adding momentum to an already expanding landscape of these laws.

The national effort to ban noncompete provisions that prohibit workers from switching jobs within an industry has already prompted some states to change their laws—and more are likely to follow suit, antitrust enforcers and employment lawyers say.

“The FTC’s proposal has changed the conversation, including in states,” said Evan Starr, an associate professor at the University of Maryland who researches noncompetes and their impact. “I would expect there to be a continued push across states to mimic the FTC’s policy.”

He said a noncompete ban enacted in Minnesota last year, as well as a bill in New York that passed the state legislature but was ultimately struck down by veto, wouldn’t have come to fruition without the FTC’s national proposal last January.

Other states including Connecticut, Massachusetts, and Michigan also have measures in the works to expand their noncompete restrictions.

The FTC’s national ban, voted on last week, is the most aggressive push yet by the Biden administration to loosen the terms of employment contracts, but is already facing lawsuits. The uncertain legal future of the FTC rule means state laws are still the only restrictions in play, and clients must comply with them, lawyers and enforcers say.

“During the pendency of that determination, you want to make sure there’s still strong enforcement of these various noncompete bans,” said Gwendolyn Cooley, Wisconsin assistant attorney general for antitrust, who also chairs the National Association of Attorneys General Multistate Antitrust Task Force. “It’s important that that continues.”

Noncompetes affect roughly one in five American workers, or around 30 million people, according to the FTC. State legislatures are continuing to take a “close look” at how to restrict employers’ use of noncompetes, Cooley said.

Last year, Minnesota joined California, Oklahoma, and North Dakota in enacting its own state law banning noncompetes. Only those four states currently ban all noncompetes, but every state limits enforcement of them to varying degrees, in specific professions. New Mexico, Iowa, and Kentucky are among a handful of states that ban noncompetes for certain healthcare workers.

‘Leverage the Momentum’

The FTC’s rule cites extensive empirical research on how noncompetes push down workers’ wages and restrict innovation in the economy more broadly, offering a baseline that could encourage more states to pass broader restrictions on these clauses and enabling greater consistency in enforcement, said Orly Lobel, a law professor at the University of San Diego who specializes in employment and labor policy.

But several business groups say the FTC lacks the constitutional and statutory authority to adopt the proposed rule. State legislatures provide the “appropriate venue” to regulate noncompetes, Neil Bradley, the US Chamber of Commerce’s chief policy officer, argued on a call with reporters last week.

With the legal turmoil, lawyers are encouraging clients to keep complying with state laws.

“We’re going to see this battle in the court—and we know that regardless of whatever the outcome, states like California are going to continue to be steadfast in not enforcing noncompetes,” said Lobel. California’s ban on noncompetes is currently the most far-reaching in the country.

The FTC’s ban will “leverage the momentum that anyway exists in different states right now to move closer to the California stance,” Lobel said. States including Connecticut have pending measures this year that could expand their restrictions on employers’ use of the practice.

The FTC has previously voiced support for state restrictions. The antitrust agency wrote to New York Governor Kathy Hochul (D) last year urging her to approve the proposed ban that she ultimately vetoed.

A group of 18 state attorneys general submitted a comment last year in support of the FTC’s proposed noncompete ban. But they urged the antitrust agency to clarify its rule doesn’t preempt state laws that provide similar or greater protections, or preclude the concurrent enforcement of state laws.

Echoing those comments, the final version of the FTC’s rule says it doesn’t limit the authority of state attorneys general, other state agencies, or individuals to bring a claim or regulatory action under state laws. This marks a shift from the FTC’s initial proposal, explicitly enshrining supplemental enforcement at the state level, except when a state law conflicts with the FTC’s final rule.

“We don’t want a federal version that weakens California’s noncompete laws and the California legislature’s priorities here,” California’s chief antitrust enforcer Paula Blizzard said at the American Bar Association’s antitrust meeting earlier this month.

Uniform Compliance

The rapidly shifting landscape of state limits on noncompetes creates compliance challenges for companies operating in multiple jurisdictions, employment and trade secret lawyers say.

California this year expanded its restrictions to declare the state’s courts won’t enforce noncompetes even if they were signed in other states. At least 11 states plus the District of Columbia ban employers from imposing noncompetes on workers whose income falls below certain pay thresholds or who qualify as hourly, non-exempt workers under federal wage law.

“The cross-reference can become unwieldy, especially for a company that operates across all 50 states,” said Robyn Marsh, a partner at Seyfarth Shaw focused on trade secrets and restrictive covenants. The FTC’s rule could “potentially help business so there’s one thing to follow.”

But Marsh said most of her clients have been more concerned about complying with existing state laws than proactively adjusting their contracts in anticipation of a nationwide ban.

See also: Employers Shouldn’t Rush to Comply With FTC’s Noncompete Ban

Erik Weibust, a trade secrets attorney at Epstein Becker Green, said he’s telling clients to continue focusing on developments in noncompete restrictions at the state level.

“Our advice to clients is comply with state law, and understand the nuances of state law,” Weibust said.