FTC Drops Sweeping Noncompete Ban

The Federal Trade Commission (FTC) recently backed away from a national ban on employer noncompete agreements that it had adopted during the Biden Administration, but at the same time said it will continue considering their appropriateness when examining their legality in individual cases under the terms of its jurisdiction.

In addition, employers should keep in mind that a number of states already have adopted laws and regulations severely restricting the use of noncompete agreements by employers, especially in regard to low-wage workers, like janitors, who in some cases have been required to sign such agreements in the past. Other states are considering adopting similar restrictions.

As of late last year, 25 states already had imposed a variety of differing kinds of legal restrictions on employers who choose to require their workers to sign non-compete agreements, with the practice being banned almost completely in California, Minnesota, North Dakota and Oklahoma.

During the last Administration, Lina Khan, the Biden-appointed FTC chair, had spearheaded a campaign to expand the commission’s overall mission to include what are traditionally considered labor laws lying outside the commission’s general legal jurisdiction and more properly under the purview of other federal agencies.

As a result, Khan did not hesitate to push the envelope when it came to the Biden Administration’s vigorous and sweeping campaign to wield as much federal power as it could possibly deploy in support of its union allies.

Khan had argued that the FTC was legally permitted to have a direct role in regulating labor practices because they have an impact on business competition and thus fall under the commission’s jurisdiction in regard to antitrust enforcement and merger approvals.

Soon after the new rule went into effect on Sept. 4, 2024, two federal district courts moved to block its enforcement, signaling that legal challenges that had been mounted by employers and business associations to the FTC ban were likely to succeed in the end. Khan remained adamant that they would not, and pursued appeals that now have been dropped by the Trump-era FTC.

This September, the commission has backed away from the regulation, with new Trump-appointed FTC Chairman Andrew N. Ferguson stating that “the rule’s illegality was patently obvious.” He also termed the Khan-led strenuous efforts in development of the rule a “wasteful exercise.”

Creating some confusion for employers is the fact that just five days after announcing withdrawal of the rule, the commission sent letters to several healthcare and staffing businesses warning them against the use of broad noncompete agreements. In fact, in Ferguson’s Sept. 5 announcement, he had explicitly warned that the FTC “will continue to enforce the antitrust laws aggressively against noncompete agreements.” 

Future Actions Anticipated

In addition, foretelling the FTC’s later warning to healthcare employers about noncompete agreements, Ferguson also noted that the commission “has already moved aggressively against unlawful noncompete agreements. And in the coming days, firms in industries plagued by thickets of noncompete agreements will receive warning letters from me, urging them to consider abandoning those agreements as the commission prepares investigations and enforcement actions.”

Attorney Mark S. Goldstein of the law firm of Reed Smith warns that Ferguson’s statement and the subsequent action taken by the agency makes it clear that the FTC very much intends to pursue further claims against employers whom the commission believes have implemented impermissible noncompete agreements.

“Any U.S. businesses—regardless of size, location, or industry—that utilize noncompete agreements to any extent would be wise to heed Chairman Ferguson’s words and promptly review their noncompete arrangements,” he advises, adding that this is especially true when it comes to the ever-changing landscape of state laws regarding this issue.

He also says any holistic review that employers undertake should include an assessment of the specific language of the organization’s noncompete agreements, including whether they include a reasonable geographic scope and temporal limit, and take into account potentially applicable state law concerns, as well as take cognizance of any industry-specific considerations that might exist.