The month before it was scheduled to take effect in 2024, a federal district court in Texas enjoined the Federal Trade Commission (FTC) non-compete rule that effectively banned employers' use of non-compete agreements. Another court issued a preliminary injunction against the rule. The FTC under the Biden administration appealed the court decisions, but earlier this month, the agency withdrew those appeals.
This does not mean that employers have nothing to fear from the FTC on the non-compete front. On the same day it withdrew its appeals, the FTC issued a joint statement from Chairman Andrew Ferguson and Commissioner Melissa Holyoak saying the FTC under President Trump would still "move[] aggressively against unlawful non-compete agreements." Those moves include targeted litigation, public requests for information, and the issuance of "warning letters…urging [potentially offending businesses] to consider abandoning [their] agreements as the Commission prepares investigations and enforcement actions." Indeed, in early September the FTC filed an action against a company that was requiring non-competes of virtually all its employees, including hourly employees who did not have customer contact or access to trade secrets. In that action, the FTC alleged that the non-compete practices of the company depressed wages and limited competition.
State Non-Compete Laws
While federal action on non-competes will likely be limited to specific, particularly anti-competitive, circumstances involving individual employers, state legislatures have been moving in recent years to impose significant restrictions on the use of non-competes by employers. For example, many states, including Colorado, Illinois, and Maryland, now require that employees meet specific compensation thresholds to be subject to valid non-competes or non-solicits. A few states, such as North Dakota, Minnesota, Oklahoma, and California, effectively ban non-competes for employees. One notable exception to the general trend of limiting enforceability of non-competes has been Florida, which earlier this year made it easier for employers to enforce non-competes.
The requirements for a valid non-compete can vary widely from state to state. Some states require employers to provide specific notices to employees (or potential employees), others require agreements that contain specific statutory language, and some may require the agreements to be distributed at certain intervals. In addition to the current limitations, many state legislatures continue to consider further significant restrictions on non-competes. For example, New York is actively considering non-compete bans for those making less than $500,000 annually.
Evolving Restrictions and Employer Compliance
On a more fundamental level, what is considered a "non-compete" may differ from state to state, and the legislation is not limited to circumstances where an employee is contractually bound to not work in X industry for Y years. The constantly changing legal landscape means employers should continually evaluate whether their existing restrictive covenants are compliant with evolving state law.
Employers with questions regarding the FTC's new stance on non-competes, or who would like assistance reviewing their employment policies and practices, are invited to contact the authors or any other attorney in Venable's Labor and Employment Group.