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The Federal Trade Commission recently announced that it is no longer seeking to enforce its April 2024 final rule, which banned noncompete agreements nationwide. According to the FTC at the time, the rule was designed to prevent "unfair methods" of competition. Two federal courts, however, struck it down, and the FTC appealed. By withdrawing the appeal, the April 2024 rule is fully obsolete. Even so, it would be a mistake for businesses to conclude that the agency is now giving free rein to use noncompete agreements in all circumstances.
A Shift to Targeted Enforcement
The FTC is shifting its strategy to selective investigations. In a statement issued alongside the dismissals, the FTC emphasized that it remains concerned with the anticompetitive effects of non-compete agreements. One of the commissioners noted that in industries "plagued by thickets" of noncompete agreements, many businesses would likely receive warning letters. The FTC, in other words, appears committed to "rigorous" enforcement against misuse of noncompetes.
What This Change Means for Businesses
For businesses, this shift means continued scrutiny of noncompete practices. The original nationwide ban would have eliminated these agreements across all industries, allowing employees to move freely between competitors. During the rulemaking process, many industries raised legitimate concerns about eliminating noncompetes entirely. Notably, in certain states, including California and Colorado, noncompetes are already largely prohibited—or strictly limited.
There is a legitimate argument that noncompetes are overused, especially for lower-level positions where employees don't have access to proprietary information, and where noncompetes represent a significant hardship to the employee. For example, a noncompete to prevent a restaurant worker or hair stylist from finding better work in their field (or starting their own business) would often seem excessive.
Colorado's Strict Requirements
In Colorado, employers who want to impose a noncompete (or customer non-solicit, which Colorado views as the same thing) must strictly comply with the statute—and it contains a lot of specific hoops to jump through. The consequences of failure to comply are significant and subject employers to automatic penalties, actual damages, costs, and attorney fees, even for merely presenting a worker with a void noncompete.
Key Takeaway: Proceed with Caution
The criticism and limitations on noncompetition agreements are a trend that is likely to continue. If your company is using outdated templates, especially if you have employees all over the country, proceed with caution.
Consider whether these agreements are truly necessary for each position and whether they're proportionate to the actual competitive harm that could result from an employee's departure.
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.
