Will the FTC Finalize a Complete Ban on Noncompetes?

The Federal Trade Commission’s (FTC’s) proposed ban on noncompete agreements is expected to be finalized this year, perhaps as soon as April. SHRM has opposed the proposal, calling for it to be scaled back. Will the final rule be more limited and, if so, what might it look like?

“Unless the proposed rule is scaled way back, I think there will be litigation. And I think that litigation will be successful,” said David Woolf, an attorney with Faegre Drinker in Philadelphia.

Regardless, John Siegal, an attorney with BakerHostetler in New York City, said courts in most places are taking a harder look at noncompetes.

“It used to be that we’d say if you want to enforce a noncompete, the employee better be making more than the judge,” he said. “That is especially true now when the fairness of noncompetes for employees who don’t have rich deals to carry them through a restricted period has become such a public issue.”

Any litigation challenging the FTC’s rulemaking authority will face an uphill battle because the proposed rule ties the agency’s position with Section 5 of the Federal Trade Commission Act, said Dylan Wiseman, an attorney with Buchalter in San Francisco and Sacramento, Calif. The proposal “is one of the Biden administration’s cornerstone initiatives,” he said.

Workers most likely to be exempt from a ban on noncompetes in a final rule are senior executives, said Eliot Turner, an attorney with Norton Rose Fulbright in Houston and Washington, D.C.

As it stands now, the FTC’s proposed rule adopts the standard applicable in California, Wiseman said.

In California, employees can have coffee in the morning with co-workers, quit and go to work at a direct competitor, and have happy hour drinks that same day with their new team, he said.

“The checks and balances are that an employee cannot leave and exploit trade secret information,” Wiseman said. “Accordingly, the FTC’s proposed rule will elevate the importance of protecting trade secrets within the workplace.”

Nondisclosure agreements are one way to prevent the misappropriation of trade secrets. Employers can still use them even if the FTC adopts a ban on noncompetes, but only if nondisclosure agreements aren’t worded too broadly.

Compensation Threshold Urged

SHRM has urged alternatives to a ban on noncompetes. In an April 19, 2023, letter to the FTC, Emily M. Dickens, SHRM chief of staff and head of public affairs, wrote that a minimum compensation threshold to enforce restrictive covenants, for example, was a less onerous alternative to a ban, noting that several states have adopted compensation thresholds. Blanket bans on noncompetes significantly complicate HR’s responsibility to protect employers’ intellectual property and prevent unfair competition.

Other alternatives SHRM suggested were: 1) limiting noncompetes to managerial, executive-level employees or those employees with material access to competitively sensitive information and development and 2) prohibiting or limiting noncompetes in specific industries where such agreements are against public policy.

SHRM also said the proposed rule was overbroad and that the FTC lacks legal authority to ban noncompetes.

Michael Wexler, an attorney with Seyfarth in Chicago, said many states have enacted limitations on noncompete bans, such as imposing compensation levels and specific types of covered employees. He predicted the FTC would “likely pare down restrictions to fall in line with many states that have a more centrist approach.”

In BakerHostetler’s jury research for noncompete cases and in public discussions, people say that noncompete agreements for lower-salaried employees aren’t as fair as they are for highly compensated employees who might more easily absorb a post-employment restricted period, Siegal said.

It’s hard to say what a compensation threshold for a final FTC rule would be, he added, especially for a national rule that would apply in different employment markets. “The [Fair Labor Standards Act] standard for high-salaried employees, currently $107,432, would be in line with many of the state statutes that have been passed,” Siegal said.

However, he added that these thresholds avoid the issue of how to deal with well-compensated but “not superwealthy” employees in the $100,000 to $1 million salary range, like most corporate salespeople, senior technologists, professional services and financial services workers who are the subjects of most noncompete litigation. “I see that as the next frontier in this evolving debate over noncompetes,” Siegal said.

He once represented a company that had noncompetes for everyone in the organization because the founder had done business that way for decades. “That’s not a viable or effective approach anymore,” Siegal said. “In the current environment, we counsel companies to be much more specific and sensible about where noncompetes are really needed and are reasonable to protect their business interests.”

Given the large variance in average salaries between states, any minimum compensation threshold to enforce restrictive covenants might be above $150,000, predicted Majed Dakak, an attorney with Kesselman Brantly Stockinger in Los Angeles. He called such a threshold “an income maximum on the ban—that is, where the noncompete ban applies to all workers making below a certain amount but does not apply to high wage earners.”

Wiseman, on the other hand, predicted the FTC wouldn’t scale back its rule. He noted that the proposed rule states that noncompetes are an unfair method of competition and so violate the Federal Trade Commission Act. “I don’t see the FTC narrowing that statement based on an employee’s compensation,” he said.

Much at Stake

The FTC predicted that its proposed rule would increase worker wages by at least $250 billion per year.

“How likely litigation is to succeed if there were a scaled-back rule depends on what the scaled back rule looks like,” Dakak said. “But whether scaled back or not, opponents will argue that a rule restricting noncompete agreements is outside the FTC’s authority,” he added, calling a rule banning noncompetes “uncharted territory for the FTC.”