Understanding the FTC’s efforts to ban noncompete agreements 

If you work in the professional services labor market, there are two employment contract terms that you may have heard used before: noncompete and nonsolicitation.  

What is a nonsolicitation agreement? 

Nonsolicitation agreements are widely applicable across various industries, particularly in roles where maintaining strong relationships with clients or employees is critical. Employers do not want employees leaving their company and bringing customers or employees with them. The company then typically has employees sign a nonsolicitation agreement preventing employees from soliciting the company’s customers or employees for a specified period of time, typically a few years. In most regards, this would be considered a reasonable employer/employee relationship.  

What is a noncompete agreement? 

Noncompete agreements, on the other hand, are much more restrictive and often used in high-level executive roles, technology, healthcare and sales industries. If the employee leaves, they will not be able to not only nonsolicit customers or employees, but that employee is effectively banned from seeking employment in the same industry for a set duration and / or radius.  

FTC’s update 

In a bold move to address these concerns, the Federal Trade Commission (FTC) announced a final rule banning noncompete clauses nationwide in favor of nonsolicitation. The FTC's actions, the methods it is employing to implement this ban, and the legal challenges it faces, particularly the ruling issued by Justice Judge Brown in the case of Ryan LLC v. Federal Trade Commission spark an interesting debate topic.  

In Jan. 2023, the FTC released its draft version of the proposed noncompete elimination ruling for public comment. By the end of the 90-day comment period, 26,000 responses were logged with over 96% of the responses being in favor of the proposition. On April 23, 2024, the FTC issued a final rule aimed at banning noncompete agreements across the United States. The rule was designed to promote competition, protect workers' rights to change jobs, and foster innovation and new business formation.  

According to the FTC, noncompete clauses are an unfair method of competition, violating Section 5 of the FTC Act. The FTC act was the congressional approval for the formation of the FTC under 15 U.S.C.  § 45(a)(1) to have the power to prohibit “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce” with the next section (2) being the FTC is empowered to prevent corporate entities from unlawful practices. The FTC can do so under 15 U.S.C. § 46 which allows the FTC to create rules and regulations for the purpose of the above. The rule the FTC was attempting to implement stipulates that existing noncompetes for the vast majority of workers will no longer be enforceable. However, noncompetes for senior executives, defined as those earning more than $151,164 annually and in policy-making positions, can remain in force. Employers are prohibited from entering into or enforcing new noncompetes, even for senior executives. To ensure compliance, the FTC would have required employers to notify workers bound by existing noncompetes that these agreements will no longer be enforced. The FTC provided model language for employers to use in these notifications and had set up a system for reporting violations of the rule, allowing market participants to email the Bureau of Competition with information about suspected breaches. 

Challenges in the ruling 

Despite the FTC's efforts, the rule has had serious legal challenges. Many large businesses filed suit to stop this from going into effect claiming that noncompetes “protect businesses’ intellectual property and … [invest] in employee training and skill development.” [5] The argument is that with workers who are locked into the business, the business will want to spend more time and investment into them.  

The most notable case is Ryan LLC v. Federal Trade Commission. In this case, Ryan, a tax firm, in concurrence by the U.S. Chamber of Commerce, argued that the FTC's ban exceeded its authority. On July 3, 2024, U.S. District Judge Ada E. Brown issued a nationwide injunction preventing the FTC from enforcing the rule. Judge Brown's ruling was based on the conclusion that the FTC lacked the statutory authority to promulgate the rule and that the rule was arbitrary and capricious. The court's decision effectively halted the implementation of the noncompete ban, creating a significant setback for the FTC. Further, on Aug. 20, 2024, Judge Brown issued summary judgment in favor of Ryan, permanently downing the policy from going into effect. Ryan celebrated the victory in a press release stating “noncompetes serve as a cornerstone of mutual trust between employer and employee.” On Oct. 18, 2024, the FTC filed a formal appeal to the Fifth Circuit. 

As the appeal process plays out it remains an interesting debate over if noncompetes. Do noncompetes favor businesses more than workers? To the FTC, the answer is still yes. The FTC stands by its initiative to ban noncompete agreements. This marks a significant shift in the regulatory landscape, aiming to enhance worker mobility and foster a more competitive market. While the rule has garnered substantial support for its potential to empower employees and stimulate innovation, it faced formidable legal challenges, as evidenced by the ruling issued by Judge Brown. As the FTC navigates these hurdles and appeals the decision, the outcome will have profound implications for employers and employees alike. The ongoing debate underscores the need to balance protecting business interests with ensuring fair labor practices, making this a pivotal moment in the evolution of employment law in the United States. Employers and workers alike will need to stay informed about ongoing legal developments and be prepared for potential changes in the regulatory landscape.