The Status of Noncompetes in a New U.S. Political Landscape

The installation of a new Presidential administration on Jan. 20 has shaken the U.S. political landscape and impacted the direction and output of federal government departments and agencies. The Federal Trade Commission (FTC) is a primary example of the new order at regulatory and enforcement entities.

This article details how FTC changes, and American political changes as a whole, are altering the regulation of one agency issue: noncompete agreements.

The New FTC

According to the current verbiage on the FTC website, the agency’s mission is “protecting the public from deceptive or unfair business practices and from unfair methods of competition through law enforcement, advocacy, research and education.”

Its chair, Andrew Ferguson, was installed by President Donald Trump on Jan. 20. Ferguson, a Republican, was nominated by then-President Joe Biden to the commission in July 2023 and was confirmed on March 7, 2024. Before joining the FTC, Ferguson served as solicitor general of the Commonwealth of Virginia, chief counsel to U.S. Sen. Mitch McConnell (R-Kentucky) and a Republican counsel on the U.S. Senate Judiciary Committee.

In his new role as chair, Ferguson replaced Lina Khan, who was appointed by then-President Joe Biden in June 2021 and, as the FTC’s leader, was an aggressive enforcer of antitrust law. According to a Jan. 20 Reuters report, Khan told her staff she plans to fully resign from the commission in the coming weeks (perhaps as soon as Jan. 31). Trump intends to nominate Mark Meador to fill the void and give Republicans a 3-2 majority on the five-member committee.

A New View on Noncompete Agreements?

One of the most prominent actions of the Khan-led FTC was issuing (passed by a 3-2 committee vote) a final rule on April 23, 2024, that aimed to ban most U.S. employers from using noncompete agreements as a condition of employment, finding such contracts to be unfair methods of competition. Under the rule (published May 7 in the Federal Register), covered employers had until Sept. 4 to comply by nullifying most past agreements and eliminating this employment stipulation in most future dealings.

However …

The U.S. District Court for the Middle District of Florida granted a preliminary injunction on Aug. 15 that prohibited the FTC from enforcing the noncompete ban (although limited in scope to just the plaintiff).
The U.S. District Court for the Northern District of Texas issued a nationwide order on Aug. 20 that fully stopped the FTC from enforcing the rule.
The FTC appealed the Florida court’s order on Sept. 24 and the Texas court’s order on Oct. 18.
Courts of Appeals for the Fifth Circuit and Eleventh Circuit are currently reviewing the cases.

With Ferguson chairing a soon-to-be Republican-majority committee, legal experts predict the FTC will withdraw its appeal. Such a move would not be surprising, given Ferguson voted against the final rule in April 2024 and wrote in a June 28 dissent statement, “Congress has not authorized [the FTC] to issue it. The Constitution forbids it. And, it violates the basic requirements of the Administrative Procedure Act.” That take would be nearly identical to that of Judge Ada Brown, who presided over the Texas court case.

Ferguson has strong Republican backing in the matter. In fact, led by the Florida attorney general’s office, a group of 17 Republican-led states (Arkansas, Florida, Georgia, Idaho, Indiana, Iowa, Louisiana, Mississippi, Montana, Nebraska, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia and West Virginia) on Jan. 22 filed an amicus (or “friend-of-the-court”) brief that urged the U.S. Court of Appeals for the Eleventh Circuit to affirm the Florida federal judge decision that the Kahn-led FTC lacked clear congressional authorization to implement the ban.

According to the brief, “States have regulated noncompete clauses and contract law since the founding. The federal government, in contrast, has never done so. This dramatic change from state to federal regulation requires a clear statement from Congress that does not exist.”

The filing came after a group of 17 Democratic-led states plus Washington, D.C., filed a similar brief in November in support of the noncompete ban and its economic benefits.

Given the FTC’s likelihood to withdraw, one trade association has stepped forward, eager to continue the fight. Small Business Majority, a national small business organization, on Jan. 13 asked the two appeals courts for permission to intervene in the two core lawsuits and continue the defense on the basis that “many small businesses are disadvantaged by noncompete clauses, which make it more difficult for small firms to find and hire new talent.” It also asserted “noncompete contracts hold back aspiring entrepreneurs seeking to launch new small businesses.”

“We are prepared to continue the fight in place of the FTC on behalf of entrepreneurs everywhere who simply want an opportunity to pursue their dreams of small business ownership but have been prohibited from doing so because of unfair, unenforceable and unnecessary noncompete agreements,” said Small Business Majority founder and CEO John Arensmeyer. “Small businesses overwhelmingly want a level playing field, and noncompetes are a threat to the free, fair and open competition that is essential to a thriving and equitable economy.”

Over the past week, the FTC responded to this move by formally urging the Fifth and Eleventh Circuits not to permit the business group to intervene on its behalf.

How Should You Proceed?

Given all of this, how should employers and their HR and total rewards professionals proceed?

An article in the National Law Review summed it up nicely, stating, “This change in [FTC] focus does not give employers free reign to craft and enforce noncompetition and nonsolicitation restrictions without any limitations whatsoever. Instead, the individual states hold the power to restrict the use of restrictive covenant agreements unless and until the U.S. Congress passes a law signed by President Trump or his successor restricting the use and enforcement of noncompetes. … As Ferguson noted in his dissent to the [April 2024] final rule, the ‘established system of sensible state regulations’ controls the validity of noncompete agreements.”

Indeed, there is strong momentum for banning noncompetes at the state level. The legislation landscape shows:

Seven states (Arizona, Connecticut, Georgia, Kentucky, Missouri, New York and Tennessee) have proposed bills to restrict (or further restrict) noncompete clauses.
Three states (Iowa, Louisiana and Pennsylvania) have noncompete laws that will take effect in the near future.
Twenty-five states (plus the District of Columbia) have laws in effect that limit noncompete clauses in some form: California, Colorado, Connecticut, Delaware, Florida, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New Mexico, North Dakota, Oklahoma, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Virginia, Washington and West Virginia.

“States across the country continue to pass new legislation further restricting — and, in some cases, banning — the use of noncompete clauses,” said James Barrett, a lawyer at Ogletree Deakins. “In particular, companies using multi-state agreements should have those agreements reviewed annually, at a minimum, to ensure compliance with applicable state law.”

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