What’s Next for the FTC’s Ban on Noncompetes?

This past April, the U.S. Federal Trade Commission (FTC) issued a rule barring most businesses from entering into and enforcing noncompete clauses against their workers, declaring such provisions to be an unfair method of competition.

If the FTC has its way and the rule takes effect — which seems unlikely, in view of a recent court decision discussed below — most employers will no longer be able to enter into noncompetes with any employee or other worker and will be barred from enforcing existing noncompetes against all employees except for some senior executives. Even if the noncompete ban does not take effect, business leaders should prepare for the possibility that the rule could have a lasting impact on how courts and state lawmakers evaluate noncompete provisions, with the possibility of more states implementing their own restrictions on noncompetes.

A noncompete clause is a short provision in an employment agreement that prohibits the employee from competing against their employer during their work tenure and for a period after their departure. Before the FTC attempted to implement a nationwide rule, the availability and enforceability of noncompetes was a matter of state law. Courts and legislatures in most states crafted rules and guardrails to prevent unreasonable or excessive restraints on employee mobility, but noncompetes were largely available to employers (except in California, Minnesota, North Dakota, and Oklahoma).

In adopting its rule, the FTC sought to mandate a single, nationwide approach to most noncompetes: declaring them unlawful. Several organizations, including the U.S. Chamber of Commerce, moved quickly to sue the FTC in federal court, alleging that the agency had overreached. Indeed, of the five FTC commissioners involved in the ruling, the two who voted against the ban issued statements arguing that the agency lacks the power to invalidate provisions in millions of agreements or to upend state laws that permit noncompetes. The challengers of the rule recently won a temporary reprieve, with a federal court issuing a preliminary injunction against the FTC that prevents it from enforcing the rule against the parties in the lawsuit.

As lawsuits over the rule play out, many business leaders are wondering what impact it will have on their company if it goes into effect, and how to plan amid the uncertainty. Below, I provide answers to commonly asked questions about the noncompete ban and its potential effect on business leaders.

What will be the immediate impact of the noncompete ban if it goes into effect?

The noncompete ban, set to take effect Sept. 4, 2024, broadly limits people from entering into or to attempting to enter into a noncompete agreement, to enforce or attempt to enforce a noncompete clause, or to represent that a worker is subject to a noncompete clause. The FTC itself has limited ability to enforce the ban; rather, the biggest impact will be what happens — or, more precisely, what stops happening — in courts around the country. Noncompetes will no longer be enforceable in any court in any state, except existing noncompetes for senior executives, defined by the FTC as workers earning more than $151,164 who are in a “policy-making position.” In short, employees previously bound by noncompetes will be free to leave and go work for a direct competitor of their employer.

If the noncompete ban does go into effect, can a business be sued for failing to comply with it?

Not right away. Remedies available to the FTC or aggrieved employees will be limited. The FTC will not have the power to issue civil penalties or sue for monetary damages, at least initially. Rather, the agency will need to obtain a cease-and-desist order first, through its own administrative process, or get an injunction from a federal court. Civil penalties and other remedies will become available to the FTC only if violations continue after a cease-and-desist order or injunction has been issued. In addition, the statute that the FTC relied on to pass the rule does not grant a private right of action. That means that workers would not be able to sue their employers to enforce the rule or recover monetary damages.

This is not to say that businesses should ignore the rule if it takes effect. As a regulation issued by a federal administrative agency, the rule has the force of law if properly enacted. The FTC has also published a dedicated email address for people to report suspected violations of the rule to its Bureau of Competition. While direct civil penalties may be largely unavailable to the FTC, businesses will incur legal fees and, potentially, reputational impacts if they find themselves in the FTC’s crosshairs.

Will the noncompete ban actually take effect?

There is reason to think the September date will be pushed back or the rule successfully challenged. Typically, lawsuits like the ones mentioned above can take years to reach a final conclusion. But the federal court in Dallas is moving fast. On July 3, the court issued a preliminary injunction preventing the FTC from enforcing the rule against the other parties in the lawsuit. Although the court expressly declined to issue a nationwide injunction — which means that the FTC is not prohibited from enforcing the rule against others — the court indicated that it intends to issue a final decision in the case before the rule is scheduled to take effect. In its preliminary decision, the court concluded that the FTC exceeded its statutory authority in issuing the ban and that the ban itself is arbitrary and unreasonably broad, indicating that the plaintiffs will likely succeed in their challenge.

What can businesses do to protect their intellectual property without noncompetes?

Businesses should assess their employment-related agreements more generally and consider using instruments such as nondisclosure agreements to prevent workers from using a company’s confidential information to help a competitor. The noncompete ban would not affect most employment-related provisions concerning intellectual property ownership or restricting the use and disclosure of company confidential information. Nonsolicitation provisions that prevent former employees from bringing customers or former coworkers to a new employer would remain viable as well. There is, however, a caveat: The FTC has indicated that some confidentiality and nonsolicitation agreements may be so broad as to be “functional” noncompete agreements; they would be evaluated on a case-by-case basis.

A ban of noncompetes also is not without precedent. Such clauses have been unenforceable in California — the fifth-largest economy in the world — for over 15 years. Other states, such as Minnesota, North Dakota, and Oklahoma, have adopted bans on noncompetes as well. And Massachusetts passed a law in 2018 that significantly restricts the use of noncompetes for Massachusetts employees, independent contractors, and residents.

Companies in these jurisdictions have turned to traditional forms of intellectual property protection, such as trade-secret protection, patents, and copyrights, to mitigate risk in a world without noncompetes. There has been a resurgence in trade-secret cases, as federal and state trade-secret laws remain powerful tools available to make sure departing employees do not take a company’s secret sauce to competitors. The diminishing enforceability of noncompetes coupled with the relatively recent widespread adoption of uniform trade-secret laws at the state and federal levels has led to an increase in trade-secret enforcement actions. It is no coincidence that California has the most active and well-developed body of trade-secret law. The majority of trade-secret cases in California involve departing employees that form or join a competing business.

Trade-secret cases are powerful tools because of the wide range of remedies available to injured former employers — ranging from injunctive relief to headline-grabbing damage awards. As questions concerning the enforceability of noncompetes continue to mount, businesses are well served in considering whether trade-secret protections (or patents or copyrights) may mitigate risks associated with unrestrained, nationwide employee mobility. To really get the full value from state and federal trade-secret law, however, companies should be proactive and ensure that appropriate measures are in place before a key employee leaves for a competitor.

Are there resources available to help businesses comply with the noncompete ban if it takes effect?

The FTC website on the noncompete ban contains useful information, including “A Compliance Guide for Businesses and Small Entities.” The guide outlines three basic steps that employers should take when the ban goes into effect. First, “do not include noncompetes in future employment contracts, paperwork, or websites.” Second, “if you have active noncompetes, give notice to those current and former workers who are not senior executives that their noncompetes [are] unenforceable.” The FTC’s website includes model language for such notices. Third, “do not enforce existing noncompetes going forward for workers other than senior executives.”

Even if the court in Texas invalidates the noncompete ban and that ruling holds up on appeal, we may still be at an inflection point when it comes to noncompete clauses in employment agreements. The FTC’s rule and its reasons for establishing it are getting plenty of attention. And while the FTC may have overstepped its authority when issuing the rule, its reasoning and supporting evidence will remain available — and potentially persuasive — to judges and state legislators confronted with broad noncompete language. At a minimum, business leaders will need to keep assessing noncompete clauses in employment agreements on a state-by-state basis and think about a future in which those provisions might no longer be available to them.

“The MIT Sloan Management Review is a research-based magazine and digital platform for business executives published at the MIT Sloan School of Management.”

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