ARTICLE
18 August 2025

Post-Mortem On The FTC's Blocked Non-Compete Rule

W
WilmerHale

Contributor

WilmerHale provides legal representation across a comprehensive range of practice areas critical to the success of its clients. With a staunch commitment to public service, the firm is a leader in pro bono representation. WilmerHale is 1,000 lawyers strong with 12 offices in the United States, Europe and Asia.
In August 2024, a Texas federal court struck down a broad Federal Trade Commission (FTC) rule that would have banned the vast majority of employee non-competition agreements.
United States California Employment and HR

In August 2024, a Texas federal court struck down a broad Federal Trade Commission (FTC) rule that would have banned the vast majority of employee non-competition agreements. While this means that employers do not need to contend with a ban on their ability to impose non-competes, they are back to reckoning with a legal landscape featuring a patchwork of varied and nuanced state laws.

For startup founders—particularly those with largely remote workforces—the complexity of complying with such a landscape raises a key question: is it worth it? While non-competes can be a valuable tool for protecting a growing company's confidential information and goodwill (and are often favored by prospective investors and business partners), the significant variance among state non-compete laws (some of which include penalties for issuing non-compliant non-competes) and the oft-disputed question about which state's law applies to a given employee or agreement can make the decision about whether to impose non-competes difficult for an emerging company.

Federal Efforts to Limit Non-Competes

In April 2024, the FTC attempted to implement a rigid uniformity to US non-compete law when it issued a final rule barring almost all employee non-competes. The rule had very limited exceptions, and it would have invalidated not only nearly all future non-competes but also existing non-competes. However, before the rule took effect, the federal courts blocked its enforcement. In Ryan LLC v. Federal Trade Commission, the US District Court for the Northern District of Texas struck down the rule, finding it exceeded the FTC's authority and was arbitrary and capricious. Although the FTC appealed the decision (as well as similar decisions held by other federal courts in related cases), permitting it to continue to seek enforcement of the rule through the appellate court process, current FTC leadership appointed under President Donald Trump has indicated it will drop the appeal. With the FTC rule abandoned, we are back to the status quo.1

Current Non-Compete Enforcement Regime

Where does this leave employers? In the current landscape, employee non-competes are generally governed by state law. While the specifics of these laws vary, those states that permit non-competes will only enforce them to the extent they protect a legitimate business interest and are reasonable in scope of time, geography and restricted activities (unlike most other contracts that are presumptively valid in accordance with their terms). Case law and fact-specific analysis determines what is “reasonable,” making it difficult to predict whether a given non-compete restriction will ultimately be found valid and enforceable if contested.

In addition to this general requirement of reasonableness, many states have passed statutes imposing specific requirements for non-competes to be enforceable. For example, some states require that employers provide employees with additional consideration (beyond employment or continued employment) in exchange for them entering into a non-compete, while others mandate that certain notice periods be given to employees during which they can consider the non-compete. A number of states have also recently prohibited enforcement of non-competes against employees whose salaries fall below a certain threshold.

Finally, a growing contingent of states—currently California, Oklahoma, North Dakota and Minnesota—have banned employee non-competes. Some of these states —California, in particular—have also recently imposed laws to penalize employers that attempt to implement or enforce a void non-competition agreement. Additionally, recent California court decisions have held that employee non-solicitation provisions and overbroad confidentiality provisions (i.e., those that seek to protect confidential information other than trade secrets) can run afoul of the state's ban on non-competes because they unlawfully restrain employees' ability to practice their profession.

A growing contingent of states—currently California, Oklahoma, North Dakota and Minnesota—have banned employee non-competes. Some of these states—California, in particular—have also recently imposed laws to penalize employers that attempt to implement or enforce a void non-competition agreement. Additionally, recent California court decisions have held that employee non-solicitation provisions and overbroad confidentiality provisions (i.e., those that seek to protect confidential information other than trade secrets) can run afoul of the state's ban on non-competes because they unlawfully restrain employees' ability to practice their profession.

Conflicting State Requirements

Further complications arise when disparate state laws conflict. An employee may move across state lines, triggering a disagreement about which state's law should apply to their non-compete. Sometimes, these employee moves are an intentional effort to evade a non-compete —for example, when an employee with an otherwise enforceable non-compete moves to a state that bans non-competition agreements.

This tactic was put to the test in DraftKings v. Hermalyn, where an executive subject to a Massachusetts non-compete (defendant Hermalyn) resigned from his position with his employer (plaintiff DraftKings) and moved to California to work for a direct competitor, hoping to avail himself of California's strong public policy opposing non-competition covenants. Immediately thereafter, DraftKings filed suit in Massachusetts, where the court issued an injunction—later upheld by the First Circuit—enforcing the non-compete and prohibiting the executive from performing certain competitive work for his new employer in California. In support of its decision, the First Circuit held that California's public policy interests in having California law applied were not “materially greater” than Massachusetts' similar interests.

While DraftKings was able to enforce its non-compete and stop the executive from evading his obligations, this case illustrates the complexity employers face when dealing with conflicting state laws about the enforceability of non-competes. A young startup with limited resources would have a particularly difficult time going to court to fight a non-compete through an injunction and an appeal, not to mention sustaining parallel litigation in several different jurisdictions (which DraftKings had to contend with when the executive filed his own action in California).

Contracting Around State Law

In an attempt to avoid the inherent complexities of different states' non-compete laws, employers with a multistate workforce often seek to include in all their employee non-compete agreements a choice of law (and, often, choice of forum) provision to ensure a consistent governing law. However, this practice also has its difficulties.

Recently, [the FTC] has indicated it will still scrutinize non-competes in certain instances and has announced a task force on unfair and anti-competitive labor market practices. As FTC Chairman Andrew N. Ferguson stated in a memorandum accompanying the announcement:

  • “Noncompete agreements, which employers can use to impose unnecessary, onerous, and often lengthy restrictions on former employees' ability to take new jobs in the same industry after they leave their employment” are among the “notable examples of conduct that falls under the FTC's jurisdiction.”

Many state statutes specifically prohibit choice of law provisions that deny an employee the statutory protections available in that employee's home state. Even absent such explicit prohibitions, courts may view choice of law provisions as against public policy (particularly when attempting to enforce a choice of law provision that is friendly to non-competes in a jurisdiction that disapproves of non-competes).

Even when choice of law provisions will be enforced, the most common governing law is no longer necessarily the best option. Employers incorporated in Delaware, for example, have routinely looked to Delaware as the governing law to include in all employee non-compete agreements. Recently, however, this practice has become less attractive after a string of Delaware court cases have struck down (rather than modified) non-compete provisions after finding them to be overbroad, leaving the employees free to work for direct competitors.

What's Next?

It is unlikely the Trump Administration will attempt to revive the non-compete rule. In its absence, state legislatures are expected to continue taking a leading role in regulating non-competes. The New York State Legislature attempted in 2023 to ban almost all non-competes by passing a sweeping non-compete bill. Although New York Governor Kathy Hochul ultimately vetoed this bill, similar efforts are likely in the wake of the failed FTC non-compete rule.

FTC Enforcement Still in Play

Also important to note is that, notwithstanding the failed non-compete rule, the FTC retains its authority to adjudicate unfair business practices in specific cases. Recently, it has indicated it will still scrutinize non-competes in certain instances and has announced a task force on unfair and anti-competitive labor market practices. As FTC Chairman Andrew N. Ferguson stated in a memorandum accompanying the announcement: “Noncompete agreements, which employers can use to impose unnecessary, onerous, and often lengthy restrictions on former employees' ability to take new jobs in the same industry after they leave their employment” are among the “notable examples of conduct that falls under the FTC's jurisdiction.”

Next Steps for Employers

Staying on top of non-compete requirements is both more challenging and more important after the FTC's non-compete rule failed. Mitigating risk starts with understanding and keeping abreast of the non-compete laws in those jurisdictions where a company has employees. Employers should also remain apprised of any and all developments from the federal government, such as how the FTC task force proceeds.

Footnote

1. In addition to the FTC, the General Counsel of the National Labor Relations Board (NLRB) took the position in 2024 that employee non-competition agreements interfere with employees' rights under Section 7 of the National Labor Relations Act and therefore are impermissible. However, following the transition to the Trump Administration, NLRB Acting General Counsel William Cowen announced on February 14, 2025, that the NLRB was rescinding the guidance that had articulated that position.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

See More Popular Content From

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More