Within the past several days, the Federal Trade Commission (FTC) has taken two important actions concerning the enforceability of employee noncompetition agreements.
In 2024, the FTC enacted rules that would have banned essentially all employee noncompetition agreements, with very few exceptions. Litigation quickly followed, with at least two appeals awaiting decisions from federal circuit courts to determine whether those rules were appropriately enacted. The FTC has now voluntarily dropped those appeals, which means lower court decisions are back in place and prevent the FTC from enforcing these rules.
That does not appear to mean that the FTC now favors employee noncompetition agreements.
At almost the same time, the FTC’s Commissioners voted to pursue a complaint against a large U.S. employer. The FTC attacked the fact that the employer imposed noncompetition agreements against all its employees, from highly paid executives to hourly laborers. The complaint alleged that the agreements denied the workers access to job opportunities, restricted their mobility, and likely caused lower wages and reduced benefits. In addition, the FTC viewed the employer’s agreements as likely to suppress competition by discouraging employees from opening competing businesses.
Ultimately, the FTC concluded that the employer’s use of noncompetition agreements was an unfair method of competition. A proposed consent decree would prevent the employer from enforcing any employee noncompetition agreements unless they were entered into with an officer, director, or senior employee, in conjunction with the grant of equity or equity-based interests in the employer-company. The proposed consent decree is now open for public comment before it takes effect. A statement issued by the FTC Chairman states that, in the future, the Commission will be “addressing noncompete agreements through enforcement actions” with a “case-specific approach” rather than under the rules put in place in 2024.
