FTC Bans on Non-Competes
The Federal Trade Commission (FTC) proposed a nationwide ban on non-compete agreements, arguing that non-compete agreements suppress wages, limit job mobility, and stifle entrepreneurship. While worker advocacy groups and many states have welcomed the ban, it has triggered multiple legal challenges from businesses and industry groups concerned about the impact on trade secrets, investments, and employee retention. These lawsuits are now shaping the future of non-compete agreements in the U.S with large implications for the labor and employment market.
Overview: What Are Non-Compete Agreements?
Non-compete agreements are contracts that restrict employees from joining competitors or starting a similar business within a specific geographic area and for a set period after leaving a company. Employers often use these agreements to protect sensitive information, such as trade secrets, and to maintain a competitive advantage in the market.
Historically, states have had varying stances on non-competes. For example, California prohibits them, promoting job mobility, while states like Florida enforce them, provided they protect legitimate business interests and are reasonable in scope. The FTC’s proposed nationwide ban seeks to bring uniformity to this patchwork but has sparked intense legal resistance.
Overview of the FTC’s Non-Compete Ban
In early 2023, the FTC proposed a nationwide ban on non-compete agreements, citing concerns that these contracts limit workers’ ability to change jobs, suppress wages, and stifle innovation.
The proposed rule, which is supposed to go into effect on September 4th, 2024 would:
- Prohibit employers from entering into non-compete agreements with workers, including independent contractors and unpaid employees.
- Mandate the rescission of existing non-competes and require businesses to inform employees that these agreements are no longer in effect.
- Establish a uniform federal standard, overriding existing state laws on non-compete enforcement.
The Rationale Behind the FTC's Ban
The FTC argues that non-competes unfairly restrict worker mobility and suppress wages by preventing employees from seeking better job opportunities. According to FTC research, around 30 million workers—roughly 20% of the U.S. workforce—are currently bound by these agreements. The agency believes that banning non-competes will lead to increased competition in the labor market, driving wages up and fostering entrepreneurship by eliminating barriers to starting new businesses.
Legal Challenges to the FTC Ban
Despite the FTC’s intentions, several lawsuits have been filed to block the ban, questioning whether the agency has the authority to enact such a sweeping change without direct congressional approval.
- Ryan, LLC v. FTC (Texas Lawsuit): One of the most notable challenges to the FTC's ban comes from tax services firm Ryan, LLC, along with a coalition of business groups that includes the U.S. Chamber of Commerce. Filed in Texas, this lawsuit argues that the FTC does not have the legal authority to impose a blanket ban on non-competes. In July 2024, a federal district court issued a preliminary injunction, preventing the FTC from enforcing the rule. The court expressed concern that the agency may be overreaching its regulatory powers without proper authorization from Congress (Skadden, Arps, Slate, Meagher & Flom LLP) (Claims Journal).
- Properties of the Villages v. FTC (Florida Lawsuit): Another lawsuit filed in Florida by Properties of the Villages, a large real estate developer, also questions the FTC’s authority. A federal judge temporarily blocked the rule in this case, pending further litigation. This lawsuit similarly centers around the argument that only Congress—not the FTC—has the authority to ban non-competes. While the court's decision is limited to this particular case, it may set a precedent for other challenges across the country (Claims Journal).
- Tree-Trimming Company Lawsuit (Pennsylvania Lawsuit): In a separate case in Pennsylvania, a tree-trimming service sought to block the FTC rule. However, unlike the Texas and Florida courts, the judge ruled in favor of the FTC, stating that non-compete agreements could be reasonably viewed as "exploitative and coercive." This ruling supports the FTC’s broader argument that non-competes unfairly limit workers’ rights and harm the competitive landscape. With this conflicting ruling, the issue is likely headed for appeals and potentially the U.S. Supreme Court (Claims Journal).
Legal Attacks on the FTC's Authority
Several lawsuits have been filed, arguing that the FTC’s proposed rule exceeds the agency’s legal authority. The primary arguments in these challenges focus on two major points: the FTC’s regulatory overreach and constitutional concerns.
1. FTC’s Regulatory Authority Under Attack
Opponents of the non-compete ban argue that the FTC is overstepping its statutory authority under the Federal Trade Commission Act. The Act empowers the FTC to regulate unfair or deceptive trade practices, but critics claim that banning non-compete agreements goes beyond this mandate. Businesses contend that the use of non-competes does not constitute an inherently unfair trade practice and, as such, should not be subject to blanket regulation by the FTC.
Many lawsuits claim that the FTC’s decision to impose a broad, one-size-fits-all ban on non-competes fails to account for legitimate business needs. For example, certain industries, such as technology and life sciences, argue that non-competes are necessary to protect trade secrets and prevent employees from joining competitors with proprietary knowledge that could harm the company’s competitive position. Without non-competes, these businesses claim they would be vulnerable to misappropriation of intellectual property and client relationships.
2. Constitutional Challenges: Separation of Powers and Contractual Rights
In addition to questioning the FTC’s statutory authority, some lawsuits have raised constitutional concerns. One of the most significant arguments is that the FTC’s ban violates the separation of powers between the executive branch (of which the FTC is a part) and Congress. Legal experts argue that Congress, not an administrative agency like the FTC, should be responsible for determining labor laws and the enforceability of employment contracts.
Moreover, opponents argue that the FTC’s proposed rule infringes on contractual freedoms, which are protected by the Contract Clause of the U.S. Constitution. Many businesses rely on non-compete agreements as a fundamental part of their contracts with employees, particularly in industries where trade secrets and customer relationships are critical. They assert that banning non-competes retroactively violates their rights to enter into and enforce legal contracts, creating uncertainty in the marketplace.
Key Industry Groups Leading the Opposition
Several business and industry groups have been at the forefront of legal challenges against the FTC’s proposed ban. Organizations representing sectors such as technology, healthcare, financial services, and manufacturing are particularly vocal in their opposition, arguing that the elimination of non-competes could disrupt their operations and expose them to unfair competition.
Some of the primary groups leading the charge include:
- The U.S. Chamber of Commerce: The largest business advocacy organization in the U.S. has filed lawsuits challenging the FTC’s authority to ban non-competes. The Chamber argues that non-competes are essential for maintaining a level playing field in certain industries and that the FTC’s actions exceed its statutory powers.
- Industry-Specific Associations: Various associations representing specific industries, such as biotechnology, pharmaceuticals, and high-tech, have expressed concerns that the ban could lead to a talent drain and the loss of valuable intellectual property. These organizations emphasize that non-competes are a necessary tool for protecting sensitive information in competitive industries.
What This Means for Employers
The legal uncertainty surrounding the FTC’s non-compete ban means employers must prepare for potential changes. Even if non-competes are ultimately struck down, businesses can still protect their interests using alternative legal tools, such as:
- Non-Disclosure Agreements (NDAs): NDAs prevent employees from disclosing proprietary or confidential information after they leave a company. These agreements can serve as a crucial alternative to non-competes, protecting trade secrets without directly limiting job mobility. Strengthening NDAs can help companies guard their valuable information.
- Trade Secret Protections: Under the Uniform Trade Secrets Act (UTSA) and the federal Defend Trade Secrets Act (DTSA), businesses can take legal action against former employees who misuse confidential information. Companies should take steps to ensure that trade secrets are adequately documented, protected, and enforced through appropriate legal channels.
- Focus on Employee Retention: Reducing employee turnover through competitive compensation, a positive work environment, and professional development programs can help companies avoid dependence on restrictive non-compete agreements.
The Road Ahead: What Employees Should Know
For employees, the FTC's proposed ban on non-competes offers the potential for greater job mobility, higher wages, and more entrepreneurial freedom. However, even if non-competes are banned, employees must still comply with NDAs and trade secret laws. Violating these agreements could lead to legal action and limit the ability to fully leverage knowledge gained in previous roles.
Conclusion: A Pivotal Moment for Non-Competes
The Federal Trade Commission’s (FTC) proposed ban on non-compete agreements represents a watershed moment in U.S. labor and employment law, but it faces significant legal hurdles. This groundbreaking move has sparked a wave of lawsuits challenging the FTC’s authority and the constitutionality of its rule. These ongoing legal battles, which include major cases like Ryan, LLC v. FTC in Texas and Properties of the Villages v. FTC in Florida, are poised to reshape the future of employment contracts across the country.
As courts continue to weigh in, businesses should closely monitor these developments and be prepared to adapt to a new era of workforce management. The outcome of these lawsuits will have profound implications across industries, potentially influencing how businesses protect their intellectual property, retain talent, and manage post-employment activities.
Whether the FTC’s rule is upheld, modified, or overturned, both employers and employees must be ready to navigate a shifting legal landscape. Employers will need to explore alternative strategies—like strengthening non-disclosure agreements (NDAs) and trade secret protections—while fostering a more flexible workforce that no longer relies on the restrictive covenants of non-competes.
In this new labor environment, businesses can no longer solely depend on non-competes to protect their interests, and employees will enjoy greater mobility. The final outcome, however, remains uncertain as courts continue to deliberate on these critical issues.
Stay tuned for further updates on these lawsuits and the future of non-compete agreements in the U.S.
Della Torre Law PLLC
