FTC, in Intriguing Move, Launches Initiative to Scrutinize Noncompetes

Last August, a U.S. federal court issued a nationwide injunction on the April 2024 Federal Trade Commission (FTC) final rule that banned most American employers from using noncompete agreements as a condition of employment.

In January, new President Donald Trump recast the agency to be more conservative and pro-business, installing as its chair Andrew Ferguson, a man who once said, “Congress has not authorized [the FTC] to issue [rulemaking on noncompetes]. The Constitution forbids it. And, it violates the basic requirements of the Administrative Procedure Act.”

So, it may be somewhat surprising that, on Feb. 26, Ferguson stated his intent for the FTC to scrutinize the fairness and legality of noncompete agreements and similar arrangements. To accomplish that, he announced the creation of a Joint Labor Task Force that will identify and prosecute employer practices the agency deems as “deceptive, unfair and anticompetitive” and harmful to workers.

Ferguson’s Plans for the FTC

Ferguson, a Republican who joined the FTC in March 2024 after serving as chief counsel to U.S. Sen. Mitch McConnell (R-Kentucky) and a Republican counsel on the U.S. Senate Judiciary Committee, shared his views on the agency’s purpose and direction in a Feb. 26 memorandum to the heads of the U.S. Bureau of Competition, Bureau of Consumer Protection, Bureau of Economics and Office of Policy Planning.

“A healthy labor market is critical to the country’s success,” Ferguson wrote in the memo. “For most workers … the ability to command a reasonable wage on the labor market is an individual’s single-most valuable commodity. [However,] their ability to earn a living is … harmed by deceptive, unfair and anticompetitive employer labor practices that drive down what they earn for their labor. … [These practices] are as varied as they are unscrupulous. They affect workers in all types of industries. And as far as the FTC is concerned, they trigger our mandates to fight unfair or deceptive practices and unfair methods of competition.”

Ferguson listed examples of conduct he said fall under the FTC’s jurisdiction, including:

Noncompete agreements, which Ferguson said employers frequently use “to impose unnecessary, onerous and often lengthy restrictions” on workers’ abilities to take new jobs in the same industry after they leave their employment.
No-poach, nonsolicitation and/or no-hire agreements, where employers agree to refrain from hiring each other’s employees.
Wage-fixing agreements, where employers agree to fix the level of wages they offer to employees.
Labor-contract termination penalties, through which an employer can impede its workers from switching to a competing employer by imposing unjustified fees when workers want to end their contracts.
Labor market monopsonies, where a business uses anticompetitive methods to create or maintain significant buyer power in a market for labor.
Collusion or unlawful coordination on “diversity, equity and inclusion” (DEI) metrics, which Ferguson said “may have the effect of diminishing labor competition by excluding certain workers from markets … on the basis of race, sex or sexual orientation.”
Deceptive job advertising, including job postings that “lure potential employees with false promises regarding important issues like rates of pay or benefits.”
Harmful occupational licensing requirements, where employers or professional associations advance or promote “needless occupational licensing restrictions that can serve as an unwarranted barrier to entry and reduce labor mobility.”

While Ferguson stated his agency will target unreasonable noncompete agreements and other restrictive practices that violate federal laws, he underscored it will not do so through rulemaking. As such, it will not pursue an amended (or new) noncompete final rule. And, while appellate courts are examining challenges to the nationwide injunction on the April 2024 rule, those decisions are likely to be affirmed, which would allow the previous rulemaking to be put to rest.

Creation of a Body to Examine Noncompetes and More

With rulemaking not among Ferguson’s chosen options, he has decided to scrutinize the matter of noncompetes and other restrictive practices through a new Joint Labor Task Force, which will consist of at least three members from the competition, consumer protection and economic bureaus and one member from the policy planning office. Toward addressing “deceptive, unfair or anticompetitive labor market conduct,” task force responsibilities will include:

Prioritizing investigations and prosecution;
Harmonizing the bureaus’ investigation methods and procedures;
Exchanging leading practices through a cross-bureau information-sharing protocol;
Promoting related research and disseminating the findings throughout the agency and to the public;
Identifying advocacy opportunities on legislative or regulatory changes that would remove barriers to labor market participation, mobility and competition;
Engaging in public outreach informing workers of the state of the law and to encourage workers to report questionable employer conduct; and,
Coordinating all investigations and enforcement actions brought by the bureaus, so that improper conduct is prosecuted as a matter of consumer protection and competition law.

Insights for Employers and HR/TR Pros

How should employers internalize the FTC’s stated actions and priorities? Two law firms provided their take.

Fisher & Phillips LLP, in a post to its website, advised organizations and their HR and total rewards professionals to:

Prepare for scrutiny. “Employers should recognize that their use of noncompetes could be scrutinized. But this doesn’t mean employers must abandon them altogether.”
Fine-tune your practices. “The best approach is to analyze what restrictions are needed — and with which workers — and focus on noncompete agreements only with employees who pose unfairly competitive risks that would not be sufficiently prevented or mitigated through the use of less restrictive covenants, such as confidentiality clauses, nonsolicitation of customer clauses or agreements not to solicit company personnel.”
Remember the purpose. “Used judiciously, noncompetes remain an important tool that you can consider using in appropriate jurisdictions to protect your business against unfair competition.”

The Ogletree Deakins law firm shared in a blog post: “To increase chances of withstanding scrutiny under the FTC’s latest agenda and under state law, employers should continue to ensure that restrictive covenants are tailored as needed to protect their legitimate business interests, including with respect to confidential information (trade secrets), goodwill in customers and employees, and unfair competition.”

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics: