State Action Remains Viable Despite FTC's Noncompete Rule Ban

This article was originally published on September 18, 2024 on Bloomberg Law and is republished here with permission.

The Northern District of Texas’ nationwide ban on the Federal Trade Commission’s (FTC) non-compete rule does not entirely prevent the government from enforcing it. The rule was intended to limit unfair methods of competition and would have voided employees’ non-compete clauses. It required employers to send a notice stating that non-compete agreements are no longer enforceable.

At the same time, state attorneys general have stepped up their own enforcement efforts against non-compete clauses under their respective unfair and deceptive practices laws. All 50 states have unfair, deceptive and abusive practices, or UDAP, laws, which allow their attorneys general “to investigate any unfair or deceptive act or practice affecting consumers in their states.”

More and more states are passing laws that ban non-compete agreements altogether. While the Texas federal court has (at least in the absence of appeal) blocked federal action against employers, it does nothing to prevent state review and enforcement of the law.

California, Minnesota, North Dakota, and Oklahoma have banned all non-compete clauses altogether. California and Minnesota proactively prohibit non-compete clauses, whether they are signed inside or outside the state and regardless of choice of law provisions that attempt to circumvent their state borders.

Many other states have banned non-compete clauses altogether for certain categories of workers, such as in the health care sector, but with exceptions for high-wage or key employees.

Only 11 states have not enacted legislation limiting non-compete clauses. These states (Alaska, Kansas, Michigan, Mississippi, Nebraska, Ohio, North Carolina, South Carolina, West Virginia, Wisconsin, and Wyoming) still have common law protections and UDAP statutes that allow state courts and regulators to strike down non-compete clauses.

In July, Valvoline reached an agreement with attorneys general in seven states to resolve allegations of unfair labor practices related to its non-compete agreements.

Valvoline required its hourly employees to sign non-compete agreements that prohibited them from working in the oil change business at any store within 100 miles of a Valvoline facility for one year after leaving the company.

The settlement agreement explained that the attorneys general of the seven states alleged that the agreements “constituted unfair methods of competition and/or unfair or deceptive acts or practices in the conduct of commerce” in violation of those states’ UDAP laws. The agreement also required Valvoline to pay $500,000 to each state that entered into the settlement.

On August 26, California Attorney General Rob Bonta announced the filing of a stipulated judgment against CK Franchising and SDX Home Care Operations, resolving allegations that the companies violated California’s unfair competition law by using illegal “no hiring” and non-solicitation provisions.

The contracts were entered into with customers and were intended to prevent them from hiring employees of the companies. The stipulated judgment requires the companies to pay $500,000, remove the offending clauses, notify their customers and employees, and update their franchisee audit process to review their agreements.

It is noteworthy that even states that do not legally prohibit non-compete clauses have joined multi-state coalitions to investigate employers under their state’s UDAP laws.

In 2020, North Carolina Attorney General Josh Stein announced a settlement with several fast food companies over their unfair use of no-poaching agreements. North Carolina was part of a coalition of 15 states investigating eight major fast food chains, even though North Carolina does not have a non-compete ban in place.

However, as in the Valvoline settlement agreement, the States asserted that the agreements could constitute, among other things, unfair or deceptive acts and practices.

These agreements show that non-compete agreements remain a focus of state attorneys general. Despite state laws prohibiting non-compete agreements, state consumer protection laws generally authorize state attorneys general to investigate “unfair” or “deceptive” acts or practices that impact consumers in their state.

This is important because, under these laws, state attorneys general can (in most states) issue civil investigative demands or subpoenas if they have reasonable grounds to believe that a violation has occurred, is occurring, or is likely to occur.

State attorneys general are held to relatively low standards for investigating conduct they suspect is unfair or deceptive. Moreover, their past investigations, enforcement actions, and settlements show that they consider restrictions on worker mobility and freedom to contract, such as non-compete and no-poaching agreements, to fall into these categories.

State UDAP laws generally allow for the recovery of civil penalties and attorneys’ fees. In several states, penalties can be as high as $25,000 per violation, or even triple the damages for “willful” violations. For businesses that operate in multiple states or have a large number of employees, these penalties can add up quickly.

Companies operating in multiple states are also likely to be the subject of a multistate investigation if employee restrictions attract the attorney general’s interest. This is because of the growing trend of state attorneys general working together to investigate companies they suspect of engaging in unfair or deceptive acts or practices.

These investigations can result in consumer litigation in each affected state. Large companies can quickly find themselves having to answer to attorneys general in multiple states and defend themselves against multiple lawsuits.

Despite the national impact of the Texas court’s decision against the FTC’s non-compete rule, all companies should remain very modest in their approach to non-compete agreements.

Employers should consider implementing processes to ensure that restrictions imposed on their employees are, at a minimum, consistent with each state’s non-compete restrictions and, even for states without a statutory prohibition, are closely tailored on conditions such as duration and location.