The FTC Rule Banning Noncompetes is (Probably) Dead: 7 Questions Employers are Asking

Many employers breathed a sigh of relief last week after a federal judge in Texas struck down the Federal Trade Commission’s ban on noncompete agreements.

Employers that rely on these agreements have been in a state of limbo while the case was pending, and now that the rule has been enjoined, it has raised a lot of questions for employers. Here are seven of the most common questions:

1. Why did the court strike down the rule?

The court struck down the rule on two bases: (1) the FTC exceeded its statutory authority when it issued the ban on noncompetes; and (2) the rule was “arbitrary and capricious,” meaning that it was “unreasonably overbroad without a reasonable explanation” for the rule, and the FTC did not adequately explore less-disruptive alternatives to a near-total ban.

2. How does a Texas court have the power to issue a nationwide ban on the FTC rule?

The court struck down the rule using the Administrative Procedure Act, and the Fifth Circuit has held that remedies under that statute are nationwide in effect.

3. Is this the end of the litigation over the rule?

The FTC will likely appeal to the Fifth Circuit, but that court is probably going to be a hostile audience. Based on recent decisions out of the U.S. Supreme Court, the FTC probably won’t find a warm reception there either. The appeals process can take years, and a future, more conservative FTC might pull the plug on the efforts to save the noncompete rule. Basically, the chances of survival for this rule aren’t looking good.

4. Does this mean that my company’s noncompete is legal?

No. There are poorly drafted noncompetes that employers have been using for years, and they just haven’t discovered yet that the contract probably won’t hold up in court.

5. How do I know if my company is using an illegal noncompete?

This depends on the law of the state where you’re trying to enforce a noncompete, and it is usually a fact-specific inquiry. For example, in North Carolina, there are certain phrases that make it more likely that a noncompete is illegal. A good business law attorney will know what to look for in determining whether your noncompetes are legal.

6. Are there other ways to get the results of a noncompete agreement without using a noncompete?

Yes. For example, an employer can use confidentiality agreements, training repayment agreements, or nonsolicitation agreements. Keep in mind that your state law will probably have certain guidelines for those kinds of agreements too. As you consider whether to use these agreements, keep in mind that the point of using them isn’t to cripple an employee’s ability to work after leaving—it’s to allow your business to use necessary measures to protect its interests once an employee is gone.

7. Is it a bad idea to cut and paste the text of a noncompete agreement I found through a Google search?

That is a very, very bad idea. These types of agreements should be narrowly tailored to fit the actual needs of your specific business, and they should only be drafted by an attorney who knows this area of the law and is staying up to speed on changes in your specific jurisdiction.

With all that in mind, it looks like noncompetes are here to stay—at least for now. So, if you’re going to use them, you may proceed, but do so with caution.