The FTC vs. Noncompete Agreements: And The Winner Is…?? – Contract of Employment

In an expected but still potentially paradigm-shifting move for
employers, the Federal Trade Commission (FTC) has issued a
“Final Rule” banning most noncompete agreements
nationwide. The FTC justified its position by declaring
that such agreements – which generally prohibit an employee
from working for another employer in the same business for some
period – are an “unfair method of competition” in
violation of Section 5 of the FTC Act.

The Final Rule marks a definitive break with most states, which
have traditionally employed a “reasonableness” standard
to determine whether a noncompete agreement is “narrowly
tailored” to protect an employer’s “legitimate
business interests.”

While some states (like Illinois) have passed laws banning
noncompete agreements for lower-earning workers, the Final Rule
applies to all employees with only three narrow
exceptions. The first is for “senior executives” making
over $151,164 per year who have an existing noncompete and
possess “final policy-making authority over significant
aspects of a business entity” (think “C-Suite”
executives). The second is a “sale of business
exception,” where a person sells their ownership interest in a
business entity or substantially all of the business’s
operating assets. The third exception is for a person already
engaged in a lawsuit over a noncompete agreement.

For all other workers, any noncompete agreement is unenforceable
after the “effective date,” which is 120 days after
publication of the Final Rule in the Federal Register. For those
employees, employers will be required to provide written notice to
their employees that their noncompete agreements are no longer
enforceable.

But will that day come? The same day the FTC announced the Final
Rule – April 23, 2024 – several lawsuits were filed in
Texas federal courts challenging the FTC’s authority to enforce
it, and more such filings are expected.

While we have seen a recent trend of courts curtailing the
authority of federal agencies, employers should still consider
utilizing other methods of protecting their businesses. The FTC
notes that “trade secret laws and non-disclosure agreements
(NDAs) both provide employers with well-established means to
protect proprietary and other sensitive information.” In
addition, the Final Rule does not ban “non-solicitation”
agreements, whereby former employees can be prevented from
“poaching” their former employer’s customers (though
such agreements may still be subject to state law
restrictions).

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