The FTC rule prohibiting non-compete agreements is dead. Long live non-competition agreements? | Spilman Thomas & Battle, PLLC

Earlier this year, the Federal Trade Commission (FTC) announced a final rule banning almost all non-compete agreements between employers and employees. This final rule, however, was rescinded in late August 2024. After granting a limited injunction in July 2024, a Texas court invalidated the FTC’s final rule days before it was set to take effect on September 4, 2024.

The court ruled that the FTC does not have the authority to issue blanket rules such as the final rule prohibiting non-competition agreements or to retroactively invalidate millions of contracts. Instead, the court said the FTC could only consider non-compete agreements to be unfair methods of competition through case-by-case arbitration. The court also concluded that the final rule was unenforceable because the FTC lacked sufficient evidence to support a categorical ban on noncompetition agreements and failed to consider less restrictive alternatives.

So what’s next?

The FTC said it plans to appeal the court’s decision. The chances of an appeal resurrecting the final rule are slim, and any appeal will take years to resolve. In the meantime, the FTC cautions that “the ruling does not preclude the FTC from remedying noncompetes through enforcement action on a case-by-case basis.” The FTC is unlikely to engage in large-scale, case-by-case enforcement action to achieve a ban on non-compete agreements similar to that proposed in the final rule. This does not mean, however, that non-compete agreements are likely to be easier to enforce in the future.

The FTC’s final rule was successful in increasing opposition to noncompetes, which has increased in recent years. For example, the bipartisan “Workforce Mobility Act” introduced in the Senate in 2019, 2021, and 2023 would largely prohibit the use of employer non-compete agreements nationwide in connection with federal law. Additionally, the General Counsel of the National Labor Relations Board directed Board officers to conclude that non-compete agreements constitute unfair labor practices except in limited circumstances. Finally, state legislatures continue to introduce and pass laws that narrow the scope of permissible use of noncompete agreements. California, Minnesota, Oklahoma, and North Dakota prohibit non-compete agreements entirely. Many other states do not prohibit non-competes entirely but limit them to certain occupations or income levels. Laws introduced in Arizona, Connecticut, Georgia, Illinois, Kentucky, Missouri, New York, Rhode Island and Tennessee would further limit the enforceability of non-compete agreements. Simply put, attacks on non-compete agreements come from several places.

Best practices

The recent failure of the FTC’s final rule banning non-compete agreements will not end efforts to ban these agreements. Until these efforts succeed in banning non-compete agreements, employers should follow our five general rules when considering the use of non-compete agreements:

1. Universal agreements are never recommended.
2. Evaluate whether you really need a non-competition agreement.
3. Although non-solicitation, confidentiality or other agreements may provide alternative protection, these agreements do not escape legal or regulatory scrutiny.
4. If you have unenforceable restrictive covenants with your employees, you should let them know that you will not enforce them or, if possible, modify them in consultation with legal counsel.
5. Spend time and effort on employee retention and protecting trade secrets.

The landscape of restrictive covenants, including non-competition, non-solicitation and confidentiality agreements, is constantly evolving. Employers should regularly review and update these agreements to ensure they comply with state law.