The FTC’s Ban on Noncompetes Is No More. What Do Employers Do Now?

Employers across the country can continue to maintain noncompete agreements as their state laws allow after a federal court in Texas struck down the Federal Trade Commission’s (FTC’s) proposed ban on most noncompetes on Aug. 20.

The rule prohibiting most existing and new noncompete agreements was scheduled to take effect Sept. 4.

Judge Ada E. Brown of the U.S. District Court for the Northern District of Texas ruled that the FTC didn’t have the authority to issue such a broad action and that its rule was “arbitrary and capricious.”

“[Brown’s] first line of attack was ruling that the agency didn’t have the power to issue the rule because Congress only authorized it to issue procedural rules to address unfair methods of competition, not substantive rules,” said Jonathan Crook, an attorney in the Charlotte, N.C. office of Fisher Phillips.

Brown found that the rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation, aimed to impose a one-size-fits-all approach with no end date, and failed to consider the positive benefits of noncompetes, Crook said.

“She pointed out that no state in the country has enacted a noncompete ban as broad as the FTC’s rule,” he said. “She questioned why the rule didn’t target specific, harmful noncompetes instead of taking a blanket approach, and she added that the agency failed to sufficiently address potential alternatives rather than a nationwide ban on just about every noncompete.”

What’s Next for the FTC

The agency has said it is considering an appeal. However, the chances of success are not good.

“Any appeal would be heard by the notoriously business-friendly 5th Circuit Court of Appeals, where the odds of the rule being resurrected are slim,” Crook said. “And the next step after that would be a potential visit to the Supreme Court, which has taken direct aim at the regulatory state in recent years and is likely a hostile environment for any attempt by the FTC to wield such power.”

Next Steps for Employers

With the FTC rule struck down for now, the situation has returned to the status quo.

“State-specific restrictions shape the contours of covenants not to compete, and you can continue to have noncompete restrictions as a tool in your arsenal to protect key relationships and confidential information,” Crook said.

He added that this is an opportune time for employers to ensure their existing noncompete agreements are “precisely tailored to meet the state laws in which you operate and that you are limiting their use to critical employees. The FTC has already indicated it will try to flex its muscles through targeted investigations if it can’t wield the power of a national rule.”

In the wake of the district court’s decision, the FTC announced that it will continue to address noncompetes through case-by-case enforcement actions.

Crook said employers may also want to compile an inventory of all existing restrictive covenant agreements, including those that apply to former workers.

“Even if the [FTC] rule never sees the light of day, having such an inventory could be a helpful resource for compliance and tracking purposes,” he said.

Michael Arnold, an attorney in the New York City office of Mintz, said that regardless of any future appellate court activity related to the FTC rule, employers are well-advised to carefully consider their use of noncompete agreements, given the recent push in some jurisdictions to ban or limit them.

“Employers looking to consider alternatives have a multitude of options at their disposal to prevent post-employment unfair competition, including by using confidentiality, trade secret, and invention assignment agreements, implementing broad trade secret protection programs, and entering into appropriately tailored nonsolicitation agreements,” he said.