Peter Hanna
Associate Editor
Loyola University Chicago School of Law, JD 2026
In April of 2024, The Federal Trade Commission (FTC) issued their final rule banning non-competes across the nation in an effort to promote competition. A non-compete contract is an agreement between an employee and an employer where the employee agrees not to work for competitors or start a competing business for a certain period after leaving the company. Non-competes are meant to protect the employer’s business secrets, customers, or sensitive information from being used by rivals. The FTC’s proposed rule aimed to eliminate nearly all non-compete clauses and declare them an “unfair method of competition” under the rule. The rule would affect existing agreements, except for certain senior executives, and require employers to notify affected workers of its enforcement. It also sought to prohibit employers from entering into nearly all new non-compete agreements after the effective date of September 4th. Since the original publishing of the rule and leadup to the effective date, there have been many new developments in reaction to the final rule. This includes some precedent-setting legal decisions as well as actions taken by various state governments. With these developments, the current status has been altered, which could lead to a number of possible short-term outcomes.
Current legal status
One of the main decisions that arose from the litigation of this issue includes Ryan LLC v. Federal Trade Commission, which included the Chamber of Commerce of the United States and the Texas Association of Business joining the suit as plaintiff intervenors. U.S. District Judge Ada Brown of the Northern District of Texas set aside the FTC’s ban on non-competes and held that it shall not be enforced or otherwise take effect nationwide. In her opinion, she wrote that “the text and the structure of the FTC Act reveal the FTC lacks substantive rule-making authority with respect to unfair methods of competition” and that “the Rule is arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation.” She emphasized that the role of an administrative agency is to do as told by Congress and not to do what the agency thinks it should do on its own. Along with this decision, Properties of the Villages, Inc. v. FTC, a suit brought by an active adult community in central Florida, also garnered a ruling in favor of the plaintiffs in the form of a preliminary injunction. However, both these decisions are considered to be injunctions preventing the FTC Rule from being enforced, but only as to the plaintiffs. Some cases remain active, including ATS Tree Services v. FTC, which will continue to affect the application of the Act. A decision in this case is expected before the end of 2024, and given these outcomes, the matter could very likely be escalated to the U.S. Supreme Court for a final ruling, since this involves questions of administrative authority and federal regulatory overreach.
Action taken by several states
Even if the national ruling made by the FTC is rejected judicially, employers may still face restrictions on their noncompete agreements included in employee contracts at a state level. For example, Minnesota, North Dakota, California, and Oklahoma do not recognize non-compete agreements at all. Many other states have placed some sort of restrictions on these contractual agreements as well, and this trend is expected to continue. This could turn problematic for larger companies with employees nationwide, and a concise form of federal regulation may be required to sustain fair competition around the United States. Employers must stay alert as they navigate these new legal environments while ensuring compliance with both federal developments and state-level regulations. It is important for employers to be prepared for potential changes depending on the ongoing legal outcomes.
What are the arguments for and against the ban?
Proponents of the ban argue that there is empirical evidence which illustrates that non-compete clauses can harm workers, consumers, employee mobility, and innovation by eliminating any new avenues for new inventions, competing companies, and multiple options for similar services. They further argue that strict laws already serve to protect trade secrets, diminishing the need to prevent an important competitive aspect of our economy. On the other hand, those against the ban argue that the FTC’s decision to ban non-compete agreements could significantly harm businesses and the economy. Without them, industries reliant on specialized knowledge may struggle to innovate. Small and mid-sized companies, in particular, depend on non-competes to protect themselves from larger competitors. The ban could also lead to a talent drain, as employees may leave for higher-paying rivals after receiving expensive training, making it harder for companies to recoup their investment and discouraging further innovation.
Near future possibilities
The future of the rule remains unclear, with inevitable, long-lasting litigation that could delay any final implementation for years. If upheld, it would be an enormous shift in how employers go about restrictive covenants, pushing companies to lean on other approaches such as confidentiality clauses or non-solicitation agreements to guard their business interests. It is important that a regulatory framework comes about in order to make compliance easier to attain by all types of businesses around the country. But as of now, employers can take precautions and prepare contingencies, review their existing contracts, and consider alternative protections for proprietary information and trade secrets.