With FTC Ban on Noncompetes Blocked, What Are Best Options for Employers?

By Elias Kahn | LexisNexis Practical Guidance

Just as in-house counsel thought they were receiving some clarity around a vexing employment law topic, they were ushered right back into a murky legal landscape.

On August 20, 2024, U.S. District Judge Ada Brown of the Northern District of Texas issued a nationwide injunction blocking the Federal Trade Commission (FTC)’s order that banned most noncompete agreements between employers and employees.

Judge Brown found that the FTC improperly exceeded its statutory authority by creating the rule, finding that the sweeping measure is an arbitrary and capricious “categorical ban” that violates the Administrative Procedure Act due to its “one-size-fits-all approach with no end date.” For more information on this ruling, see U.S. District Court Issues Order Blocking the FTC's Non-Compete Ban Nationwide: Client Alert Digest.

The decision, which had been foreshadowed by previous comments the judge made, set aside a long-awaited FTC rule that was scheduled to go into effect on September 4, 2024. The FTC has vowed to appeal the decision, but for the foreseeable future, noncompete agreements will continue to be part of the status quo in employment law. Non-compete agreements apply to an estimated 18% of U.S. workers, a total of approximately 30 million Americans.

Practical Guidance for Navigating Noncompete Strategies After FTC Ban Blocked

Amanda Cohen, Kimberly Franko, and Joseph Deng — partners at Baker McKenzie — contributed an insightful Law360 Expert Analysis column, “Considering Noncompete Strategies After Blocked FTC Ban,” that Law360® published soon after Judge Brown’s decision. The article contains practice insights for in-house counsel on actions they should consider taking now that Judge Brown has set aside the noncompete ban, such as the following:

1. Know where your noncompetes are

Take inventory of your restrictive covenants now. Employers are often subject to multiple and conflicting noncompetes and other restrictive covenants. Noncompetes are often in employment policies or handbooks, offer letters, employment agreements, proprietary information and invention assignments, stock option and other equity award agreements, severance agreements, and other compensation-related agreements. Overlapping and conflicting restrictive covenants are ripe for challenge on a variety of grounds.

2. Review your noncompetes for consistency and integration

If it is not administratively feasible to limit the use of multiple restrictive covenants, then employers should review the clauses for consistency and integration. For instance, if you have a noncompete in a global equity award, you don’t want an ex-employee to claim that an invalid global noncompete supersedes an otherwise enforceable local noncompete because the global noncompete was signed last and is not valid under local law.

3. Less is more

Given the growing opposition to noncompetes, companies should consider limiting such restrictive covenants to key workers who require highly specialized training or have access to sensitive company information. Narrowing the scope and duration of any noncompetes will generally enhance the enforceability of noncompetes.

4. Know where your employees are

Employers need to know where their employees are located if they are seeking to bind them with an enforceable noncompete. Often times noncompetes are misaligned with the state law where the employee is actually working. And in some instances employers may not even know or track the actual location where their employees work, particularly if employers operate with remote workforces. Multistate restrictive covenants are another option for employers with largely remote workforces.

5. Consider other strategies to protect the company

In states where covenants not to compete between employers and employees are not allowed (e.g., California, Minnesota, North Dakota and Oklahoma), employers should consider other strategies to protect confidential and trade secret information, as well as other business interests. These include customer and employee non-solicitation agreements, where permitted (e.g., it is unclear whether employee and customer non-solicitation agreements are permissible—see Restrictive Covenants (CA)); appropriately tailored confidentiality restrictions; and procedures for protecting and maintaining trade secrets and other intellectual property. Employers should also tailor their employment terms and compensation strategies to protect their business interests, such as longer notice periods, paid garden leave, staggered severance payments that terminate when the employee takes another job, and equity forfeiture or clawback provisions.

“The FTC’s rule banning noncompetes has been set aside for now, but the general trend is to limit their use,” the authors wrote in Law360. “Companies should take inventory now and continue to plan for the likely changes in the future.”

Resources for In-House Counsel

In-house counsel need access to timely legal news and insights to help them track developments surrounding noncompete agreements and be prepared to revisit any restrictive covenant clauses contained in employment agreements. Practical Guidance from LexisNexis® offers a number of resources to assist with this review, including the Restrictive Covenants Resource Kit and Non-compete Agreements: Key Negotiation, Drafting, and Legal Issues, a practice note.

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