FTC Drops Appeals But Continues Noncompete Scrutiny

In January 2023, the Federal Trade Commission (FTC) announced notice of its intent to use its authority to ban practically all non-compete clauses in employment agreements. We previously discussed this development in our alerts on January 6, 2023, and January 9, 2023. The FTC later issued its rule on the subject in April 2024.

The FTC’s 2024 rule was met by multiple legal challenges, however, and federal District Courts in Florida and Texas issued injunctions prohibiting the agency from enforcing its rule. The FTC appealed those decisions to the respective Circuit Courts (Ryan, LLC v. FTC, No. 24-10951 (5th Cir.), and Properties of the Villages v. FTC, No. 24-13102 (11th Cir.)). On September 5, the agency announced that, by a 3-1 vote of its commissioners, it had decided to vacate and withdraw those appeals.  

The immediate result of the FTC’s decision is that the FTC’s 2024 rule is now officially over.  As discussed below, however, this does not end the agency’s scrutiny of noncompete clauses.

What Can We Expect from the FTC Moving Forward?

Despite agreeing to drop the appeals, the FTC made other moves at the same time that signal an intent to continue to scrutinize noncompete clauses on a case-by-case basis.  For example, in individual statements released with their votes on whether to continue with the appeals, each of the four FTC commissioners expressed the opinion – some more vocally than others – that noncompete clauses warranted further scrutiny by the agency. On September 4, the FTC published a consent decree that it had entered into with Gateway Services and its subsidiary Gateway US Holdings, Inc., (collectively Gateway), the largest national pet cremation business, that prohibits Gateway from enforcing the noncompete clauses that it had entered into with all 1,800 of its employees.  On the same day, the FTC issued a request for information (RFI) to the public concerning noncompete clauses.  

The RFI requests information from all members of the public, current and former employees subject to noncompete clauses, employers with information about rival noncompete agreements, and “market participants in the healthcare sector.” The RFI specifically asks that public to identify specific employers who still impose noncompete agreements. And the RFI presents specific questions for the public to share as to such agreements, such as:

• What reason, if any, has the employer given for using noncompete agreements?
• What are the terms or limitations of the noncompete agreements (such as the duration or geographic scope)?
• Do the noncompete agreements harm current or former employees who take, consider taking, or would like to take new jobs?
• Do the noncompete agreements make it more difficult for rival employers to hire employees?
• Are you aware of the employer using non-solicitation or non-recruitment agreements that limit former employees from working with the employer’s former customers or former employees?
• Have any noncompete agreements covering workers in the healthcare sector affected wages, labor mobility, or the availability, quality, or cost of healthcare services in particular?

These actions signal an intent by the agency to continue to scrutinize noncompete clauses and related restrictive covenants, with perhaps a particular focus on the healthcare sector, on a case-by-case basis rather than on the blanket basis of its 2024 rule.

What Can Employers Take Away from the FTC’s Actions?

Employers who have restrictive covenant agreements with current or former employees, or who plan to request that such agreements be signed by future employees, should remain vigilant and review these clauses for enforceability in light of what we might discern from the FTC’s recent actions.

Employers should consider taking the following steps: 

• Review employment agreements and other relevant contracts to ensure that any noncompete clauses and other restrictive covenants included are necessary and reasonably limited in duration and scope and otherwise comply with the specifics of applicable state law.
• Consider whether the noncompete clause would “unjustifiably prevent workers from moving to better jobs, impede new business formation, prevent the shift of labor from over-served to under-served markets, and harm rival employers’ ability to compete”, a question posed by the FTC in its RFI. 
• Determine and document any legitimate business needs for including noncompete clauses in employment agreements. Remember that not every employee or job may need a non-compete to protect the employer’s business interests. Blanket requirements that all employees, no matter their job duties, sign one – as Gateway required – may not be enforceable.
• Consider whether its legitimate business needs may be protected by any other alternatives to noncompete clauses, such as confidentiality and customer non-solicit clauses. Note, however, that these clauses should also be narrowly tailored, as Gateway was prohibited from enforcing its non-solicitation clause except to the extent it prohibited the employee from soliciting current or prospective customers with whom the employee had direct contact or personally provided service in the last 12 months of their employment with Gateway. 
• Prepare to enforce or defend any current noncompete clauses and face scrutiny for those noncompete clauses in light of the FTC’s RFI seeking specific “examples” of employees harmed, including where “current employees avoid seeking or turn down new job opportunities because of the noncompete agreements.” 

Conclusion

While its 2024 rule is no more, the FTC has signaled it plans to stay active in the area of noncompete clauses and other restrictive covenants.  Employers should seek to minimize the potential risks associated with this development by taking the foregoing steps. Employers in the healthcare sector and other industries that commonly use noncompete clauses should act quickly and involve legal counsel to ensure compliance and minimize risk of litigation.

Please contact Michael E. Turner, Abigail W. White or any member of the Phelps Labor and Employment team if you have questions or need advice or guidance.