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.