Companies in this country have been using noncompete agreements for over 200 years. Sometimes the use has been necessary. Sometimes it has not. While I am no fan of noncompetes in the abstract, they are necessary for some workers in some roles in some industries.
Recognizing that need, every state except four (California, Minnesota, North Dakota and Oklahoma) permits companies to use reasonable noncompetes to protect trade secrets. Many states also permit the use of noncompetes to protect customer relationships and other legitimate business interests.
Despite the impression that there is a groundswell of legislation outlawing noncompetes, that is simply not the case. With the exception of Minnesota, no state considering a noncompete ban has enacted one in the last 100 years. To the contrary, each of the last three governors to be presented with a bill to ban noncompetes (New York, Maine and Rhode Island, in that order) has vetoed it. Even Washington, D.C., which initially enacted a ban in 2021, vacated it before it took effect.
Yet companies now face a ban from a different authority: the Federal Trade Commission (FTC), which issued a rule banning noncompetes that will take effect on Sept. 4. This marks the first time in U.S. history that the federal government has broadly regulated noncompetes. In that regard, in a 2020 FTC “workshop” to consider whether to regulate noncompetes, panelists questioned whether the FTC had the authority to regulate noncompetes.
Nevertheless, the FTC proceeded to ban noncompetes, oblivious or indifferent to the harm that such a decision would cause, and in the face of great doubts about its authority. And now companies and employees around the country are experiencing that harm firsthand.
A federal judge in Texas recently held that the FTC’s rule is unlawful, while a federal judge in Pennsylvania disagreed, and said that the rule is lawful. Both courts’ decisions apply only to the parties in those lawsuits. So, until a court invalidates the rule nationally, companies of all sizes in almost every state are in a quandary: They will either need to comply with the rule, obtain relief from a court (preferably before the rule takes effect), or ignore the rule. None is a good option.
If companies comply with the rule, they will need to notify employees by Sept. 4 that their noncompetes are unenforceable. According to the FTC, that would mean that noncompetes will be invalidated for 30 million employees — a number which, like most of the FTC’s rule, is based on flawed research and grossly overstated. But the point remains: Millions of employees will be relieved of obligations that their employers paid for, and companies will lose an important tool for protecting their trade secrets and relationships with customers and employees.
Worse, if the rule is later vacated, companies that complied may have needlessly forfeited the ability to enforce an otherwise valid agreement. This is an outcome that the FTC has roundly ignored and presumably desires. But, in fairness, it should be avoided.
If companies sue the FTC, there is no guarantee of protection from a court, or that such protection would come before Sept. 4, the date by which companies must comply with the rule. Additionally, to the extent that companies might be concerned that suing in isolation would render them a target for future FTC scrutiny, a massive wave of individual lawsuits would minimize that concern. It could also increase the odds that a court would issue a nationwide injunction.
If companies ignore the rule in whole or in part, they do so at their own peril, potentially facing enforcement actions by the FTC or lawsuits from employees for the continued use of void noncompetes.
Of course, all this uncertainty and needless waste of resources could be avoided if the FTC were to simply acknowledge the obvious and incontrovertible harm to companies and workers from the rule’s looming effective date, and voluntarily suspend it, pending a final decision in the courts. Other than to make a political point and to unfairly force companies to comply with a likely-to-be-invalidated rule, there is no reason not to postpone the rule’s effective date while the matter is being resolved by the courts.
FTC Chair Lina Khan recently told Congress that a core pillar of her agenda is faithfulness to the text of the FTC Act. Given that a court has cast serious doubt on the lawfulness of the rule, Khan should be the first in line to push the FTC to voluntarily stay the rule’s effective date. It would be the right thing to do for the good of companies and workers alike.
Russell Beck is a lawyer in Boston and an expert on trade secrets and noncompetes. He teaches at Boston University School of Law, worked with the Obama administration on noncompete policy, and wrote most of the language in the Massachusetts noncompete statute.