History in the Making: Conservatives Work Quickly to Challenge FTC’s Final Rule Banning Noncompete Agreements

At a Glance

• At least two federal lawsuits are challenging the FTC’s final rule that would ban nearly all noncompete agreements, with more complaints expected.
• There is no immediate need for businesses to change course, but employers should begin planning for new methods of protecting confidential information and trade secrets if the final rule goes into effect.
• Whether it makes sense for entities to attempt enforcing a noncompete agreement at this stage will require a real-time assessment of the political environment and the ongoing lawsuits. 
  
  

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Last week, the Federal Trade Commission (FTC) voted in favor of its controversial final rule banning nationwide nearly all noncompete agreements. While the potential noncompete ban has been politically controversial since it was first proposed in January 2023, legal efforts to oppose it have ramped up over the last week, with at least two federal lawsuits challenging the FTC’s authority and more complaints anticipated. As these lawsuits proceed through the federal courts, employers must wait to see whether the final rule’s implementation will be delayed by one or more preliminary injunctions pending the outcome of the lawsuits, which themselves are likely to be appealed. In the meantime, employers can delay making significant changes to existing noncompete agreements, but also might consider alternative mechanisms for protecting their confidential and trade secret information in case the final rule is allowed to take effect. Employers also should consult with counsel before bringing new claims against departing employees who violate their noncompete agreements, as the current political and legal environments have introduced new cost and delay considerations that employers will need to weigh when deciding whether and how to enforce their rights. 

What’s in the Final Rule?

The final rule retroactively applies to all noncompetes, with exceptions applied to: the sale of a business; noncompete agreements in franchisee-franchisor relationships (though the final rule would still apply to employees working at a franchise): and nonprofit organizations not subject to the FTC’s jurisdiction. The final rule also includes a carveout for existing noncompetes with “senior executives” who are in “policy-making position[s]” and received total compensation of at least $151,164 in the preceding year. However, the final rule prohibits the use of new noncompete agreements for any “senior executive” and otherwise requires employers to provide notice under the final rule to each affected employee or former employee stating that existing, nonexempt noncompete agreements will not be enforced. 

Unless otherwise enjoined or rescinded, the final rule will become effective 120 days after it is published in the Federal Register, which we expect to occur in the coming days. 

Public Comments Hinted at Constitutional Concerns and Scope of Authority

Over the course of the extended public comment period on the proposed noncompete rule, the FTC received more than 26,000 comments, including from employers, employees, academics and members of the bar. According to the agency, over 25,000 comments supported the FTC’s proposed ban on noncompetes. While a significant number of individual comments from small business owners and professionals — like veterinarians and physicians — supported the FTC’s ban, other small business owners submitted anecdotal comments regarding the negative financial impact resulting from previously trained employees opening competing businesses nearby and taking long-time clients with them. 

Opposition letters submitted from large associations and government agencies, like the Business Roundtable and the Committee on Education and the Workforce, expressed concerns regarding the constitutionality of the proposed noncompete rule and the FTC’s lack of expertise and enforcement experience in employment matters, which traditionally have been the domains of other federal agencies and the states. The Small Business Legislative Counsel, the National Small Business Association and the Consumer Technology Association submitted similar letters, identifying the need to use noncompete agreements to protect small businesses and their confidential information, including the intellectual capital of companies, from unfair competition. 

Law professors, economists and business school professors also commented, identifying, among other concerns, “methodological deficiencies” in the underlying studies relied upon by the FTC. So too did the U.S. Chamber of Commerce, which submitted a 46-page letter detailing many concerns regarding the FTC’s proposed noncompete rule and highlighting the procompetitive benefits of noncompete agreements. 

Ryan LLC v. FTC

Despite concerns regarding the legality and practical effects of a federal noncompete ban, the FTC voted in favor of proceeding with the final rule. Just hours after that vote occurred, attorneys from the Gibson Dunn & Crutcher LLP law firm filed a lawsuit on behalf of their client Ryan LLC in the Northern District of Texas challenging the FTC’s authority under the FTC Act and under Articles I and II of the U.S. Constitution to promulgate rules prohibiting specific conduct that the current slate of FTC commissioners believes to be “unfair method[s] of competition.” Notably, Ryan’s legal team is led by Eugene Scalia, who previously served as former President Trump’s Secretary of Labor and has a reputation for pushing pro-business and anti-regulatory agendas.

The complaint highlights the procompetitive benefits of noncompetes, including: promoting and incentivizing worker training to prevent a classic free-rider problem; providing higher wages for employees who have benefited from training; incentivizing research and development by disincentivizing employee poaching; catalyzing innovative ideas through collaboration across firms; and protecting nascent firms so they “survive, grow and ultimately hire more workers and generate greater economic output.” 

The Ryan complaint seeks an order from the court vacating the FTC’s final rule on noncompetes. And it goes on to push an even more aggressive agenda by requesting a declaration that the FTC itself is unconstitutionally structured and that Section 5 of the FTC Act unconstitutionally divests legislative authority from Congress. While the latter request may appear radical, it is in keeping with other anti-regulatory efforts, including the recently proposed One Agency Act, introduced by Republican representative Ben Cline, to dissolve the FTC’s Bureau of Competition and absorb its functions and employees into the Department of Justice’s Antitrust Division. 

Chamber of Commerce v. FTC

Similarly, Chamber of Commerce v. FTC, a complaint filed against the FTC and its chairperson, Lina Khan, in the Eastern District of Texas, seeks declaratory and injunctive relief against the FTC’s final rule. In addition to the arguments raised in the Ryan complaint, the Chamber complaint alleges that the final rule is unlawful in part because the FTC historically has not relied on Section 6(g) as a basis to promulgate substantive rules, and also because Congress has failed to ever enact nationwide noncompete legislation, despite rigorous debate on the topic. Plaintiffs also argue that alternatives to noncompete agreements, such as nondisclosure agreements and trade secret lawsuits, are inadequate and costly. Plaintiffs ultimately seek a declaration that the final rule is arbitrary, capricious, or otherwise contrary to law within the meaning of the Administrative Procedure Act, an order vacating and setting aside the final rule, and a permanent injunction against enforcing the final rule.

The FTC has appeared in the Chamber lawsuit and agreed to respond to plaintiffs’ Motion to Stay and/or Enjoin the final rule by May 15. Plaintiffs will have until May 28 to file their reply brief, and the district court is likely to issue its ruling shortly thereafter. Most pundits predict that the district court judge will find that, given the high stakes involved for employers across the country and the fact that it is unlikely the dispute can be resolved within the 120-day time period before the final rule takes effect, the balance of potential harms weighs in favor of granting the preliminary injunction and pausing the implementation of the final rule while the case proceeds.

Potential Federal Ban Preceded by State Laws Restricting Noncompete Agreements

While opponents of a federal noncompete ban cite the FTC’s lack of authority to enact a rule affecting employers nationwide, employers have not been exempt from tightening restrictions on noncompete agreements at the state level. California, Minnesota, North Dakota and Oklahoma already have completely banned noncompetes without carveouts for senior or highly compensated employees, and an additional dozen states have enacted statutory income thresholds and notice requirements. Significantly, while New York Governor Kathy Hochel recently vetoed a bill that would have virtually banned all noncompete agreements in her state, she indicated she would consider signing a bill that exempts high-earning employees and executives.  

For multi-state employees, this legal landscape has resulted in a complex web of noncompete restrictions they must navigate when hiring and offboarding employees who will have or had access to their employers’ confidential or trade secret information. Employers may not be able to bind comparable employees working in different states to the same noncompete agreements (a situation that has become increasingly common in an era where a large portion of an employer’s workforce may be deployed remotely), and they may need their noncompete agreements to include direct competitors operating in other states with different noncompete restrictions (e.g., California voids noncompete agreements formed in other states). 

From the perspective of the FTC and others looking to bolster employee rights, the current patchwork of noncompete laws across the country may counsel in favor of a federal rule. For states that already have noncompete bans or restrictions in effect, the final rule would preempt state laws only in the event of a conflict. For example, the final rule still allows for non-solicitation agreements that are not de facto noncompetes, but such agreements would continue to be unlawful in California where they are already banned. However, in Virginia, where noncompetes are currently banned for employees earning less than $73,000 annually, that minimum income threshold would increase to the FTC’s $151,164 threshold for senior executive employees who previously signed noncompete agreements if the final rule goes into effect. 

Recommendations 

As noted above, it is not at all certain that the FTC’s final rule will ever go into effect. Republican officials and the conservative bar have launched efforts to challenge the final rule and even the constitutionality of the FTC itself. And the upcoming presidential election could be outcome determinative, as a second Trump administration almost certainly would reset the FTC’s agenda and rescind the final rule. 

For businesses that have noncompete agreements in place with their current employees, there is no immediate need to change course. Employees currently bound by noncompete agreements remain bound (so long as such agreements remain legal in the states where they are executed or enforced), and businesses are free to continue using the same language with new employees onboarded during the next several months. Furthermore, employers should begin planning for new methods of protecting their confidential information and trade secrets if the final rule is allowed to go into effect and their noncompete agreements are no longer enforceable.

Whether it makes sense to try to enforce a noncompete agreement at this stage will be fact dependent and require a real time assessment of the political environment and the ongoing lawsuits. There also may be new cost and delay considerations while the courts adjudicate the disputes between the FTC and plaintiff businesses. Employers should consult with counsel, including counsel with FTC experience, before initiating litigation against a former employee.