What’s Next for the FTC’s Ban on Noncompetes?

This past April, the U.S. Federal Trade Commission (FTC) issued a rule barring most businesses from entering into and enforcing noncompete clauses against their workers, declaring such provisions to be an unfair method of competition.

If the FTC has its way and the rule takes effect — which seems unlikely, in view of a recent court decision discussed below — most employers will no longer be able to enter into noncompetes with any employee or other worker and will be barred from enforcing existing noncompetes against all employees except for some senior executives. Even if the noncompete ban does not take effect, business leaders should prepare for the possibility that the rule could have a lasting impact on how courts and state lawmakers evaluate noncompete provisions, with the possibility of more states implementing their own restrictions on noncompetes.

A noncompete clause is a short provision in an employment agreement that prohibits the employee from competing against their employer during their work tenure and for a period after their departure. Before the FTC attempted to implement a nationwide rule, the availability and enforceability of noncompetes was a matter of state law. Courts and legislatures in most states crafted rules and guardrails to prevent unreasonable or excessive restraints on employee mobility, but noncompetes were largely available to employers (except in California, Minnesota, North Dakota, and Oklahoma).

In adopting its rule, the FTC sought to mandate a single, nationwide approach to most noncompetes: declaring them unlawful. Several organizations, including the U.S. Chamber of Commerce, moved quickly to sue the FTC in federal court, alleging that the agency had overreached. Indeed, of the five FTC commissioners involved in the ruling, the two who voted against the ban issued statements arguing that the agency lacks the power to invalidate provisions in millions of agreements or to upend state laws that permit noncompetes. The challengers of the rule recently won a temporary reprieve, with a federal court issuing a preliminary injunction against the FTC that prevents it from enforcing the rule against the parties in the lawsuit.

As lawsuits over the rule play out, many business leaders are wondering what impact it will have on their company if it goes into effect, and how to plan amid the uncertainty.