Businesses Should Watch State Moves as Noncompete Bans Change (1)

Businesses need to monitor how noncompete bans are playing out at the state and national level as they consider how else they can help protect their legitimate business interests.

The Federal Trade Commission’s adoption of its unprecedented noncompete ban, which sought to ban most new and existing noncompetes, set off a train of chaos and legal challenges. Noncompetes have historically been a state law issue, and the FTC’s noncompete ban was poised to uproot decades of state law jurisprudence governing the enforceability of the agreements.

With the FTC’s noncompete ban currently pending on appeal, state law developments have moved back to center stage. But even on the state level, hostility toward noncompetes has also increased, forcing businesses to watch these issues on multiple levels going forward.

Ban Status Update

Two federal courts—one in Texas and the other in Florida—issued injunctions blocking the FTC’s noncompete ban in the run-up to the ban’s effective date last September. The FTC, then under the leadership of Lina Khan, appealed the Texas decision to the US Court of Appeals for the Fifth Circuit and the Florida decision to the Eleventh Circuit.

Though those appeals remain pending, with a new FTC leader, some speculate the agency may direct its attorneys to withdraw the appeals. Chairman Andrew Ferguson, who voted against the ban and later issued a dissenting statement, called it “the most extraordinary assertion of authority in the Commission’s history.”

The FTC’s recent filing of its unopposed Motion to Hold Appeal in Abeyance for 120 Days in both appeals suggests a withdrawal may be forthcoming. According to the FTC, this proposed pause will conserve party and judicial resources as the FTC evaluates whether it is in the public interest to continue to defend its noncompete ban.

Regardless of what happens with the FTC’s appeals, a February memo from Ferguson’s office signals the FTC won’t abandon enforcement actions that target unfair methods of competition. According to Ferguson, potentially problematic practices include no-poach, non-solicitation, or no-hire agreements, wage-fixing agreements, and noncompete agreements. This recent directive makes clear that businesses shouldn’t expect carte blanche from the FTC in this space.

State Law Developments

As the fate of FTC’s ban plays out on appeal, states are regulating noncompete agreements themselves.

Some are picking up where the FTC left off, using legislation that generally bans the use of noncompetes. For instance, earlier this month Wyoming enacted legislation that renders noncompetes void beginning July 1, with limited exceptions.

New York legislators have taken a similar approach, introducing a bill that would ban most noncompetes on a prospective basis and with some exceptions for highly compensated individuals and noncompetes related to a sale of a business.

This comes on the heels of efforts by the New York City Council to curtail noncompetes through a series of bills—one that mirrors the FTC’s ban, another that would forbid noncompetes for “low-wage workers,” such as clerical and certain other workers defined under New York City’s labor law, and a third that would ban the use of noncompetes for freelance workers unless the employer compensates the freelance workers during the restricted period. These efforts match those that have already taken place in states such as California, where noncompetes are prohibited, and those that are taking place in Washington state, where a noncompete ban is pending.

Another trend that has emerged is restricting or eliminating the use of noncompetes for certain health-care practitioners. States such as New Jersey and Missouri have proposed to do just that. And similar prohibitions are already in place in states such as Pennsylvania, Rhode Island, and Maryland.

Alternative Protections

As navigating the noncompete landscape has become increasingly difficult, businesses should assess their existing noncompetes to ensure compliance with new and existing legislation.

With noncompetes under attack, alternative protections may offer businesses some additional peace of mind. A business may be able to protect its interests through narrowly tailored nondisclosure agreements or non-solicitation agreements, provided those agreements are otherwise lawful in its state.

Beyond contractual protections, trade secret protection exists, too. Every state except New York has adopted a version of the Uniform Trade Secrets Act, which governs civil actions involving the misappropriation of trade secrets. And since 2016, a federal cause of action under the Defend Trade Secrets Act for the misappropriation of trade secrets is available as well.

What constitutes a trade secret under each is largely similar. A trade secret is information that derives independent economic value from not being generally known to, and not being readily ascertainable by proper means by, others who are able to get economic value by using or disclosing it.

Common-law duties might also provide the protection a business needs. Even without a contract, employees typically owe their employer certain fiduciary duties such as the duty of loyalty during their employment. Broadly, this prevents employees from acting contrary to their employers’ interests—such as diverting business opportunities and poaching customers. With narrow exceptions, this duty usually ends with the employment relationship.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Amy Pearl is a business litigation associate at Archer & Greiner.

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