BUSINESS       LAW

BY: AL HONGS

DATE: APRIL 8, 2025 

I. INTRODUCTION: A LEGAL ROLLERCOASTER FOR EMPLOYERS

In a dramatic reversal with far-reaching consequences, a Texas federal court has struck down the Federal Trade Commission’s (FTC) sweeping ban on non-compete agreements—preserving, for now, a critical tool for businesses to protect their competitive interests. The August 2024 ruling in Ryan LLC v. FTC not only halted the FTC’s controversial rule but also reignited a fierce debate about federal regulatory power, state autonomy, and the future of workforce mobility.

For business owners and legal professionals, this development carries both relief and uncertainty. While the decision allows companies to continue enforcing non-competes in states where they remain legal, the legal landscape remains volatile.

II. THE FTC’S NON-COMPETE RULE: WHAT WAS AT STAKE?

On April 23, 2024, the Federal Trade Commission finalized Rule 16 CFR Part 910, implementing what would have been one of the most significant labor market reforms in decades - a near-total prohibition on non-compete agreements nationwide. The agency justified this sweeping measure by arguing that non-competes fundamentally stifle competition, artificially suppress wages, and hinder innovation across industries. The rule contained several groundbreaking provisions that would have dramatically reshaped employment relationships, including retroactive invalidation of existing non-competes for rank-and-file workers, an exemption only for senior executives earning over $151,164 annually, and a mandatory requirement for employers to formally notify affected employees that their non-compete clauses were no longer enforceable.

The FTC's action immediately sparked fierce opposition from the business community. Trade groups, led by the U.S. Chamber of Commerce, filed lawsuits within hours of the rule's publication, challenging what they viewed as a gross overreach of the agency's authority. Critics raised multiple substantive objections, arguing that the blanket ban failed to account for legitimate industry-specific needs, particularly in sectors like technology (where trade secret protection is crucial) and healthcare (where patient relationships require continuity). Opponents further contended that existing state laws already provided balanced frameworks for evaluating reasonable non-compete agreements, and that the FTC's economic projections about wage growth and innovation benefits were speculative and not supported by rigorous evidence. This fundamental disagreement about both the FTC's legal authority and the policy merits of non-competes set the stage for the legal battles that would follow.

III. RYAN LLC V. FTC: WHY THE BAN WAS STRUCK DOWN

On August 20, 2024, Judge Ada Brown of the U.S. District Court for the Northern District of Texas delivered a decisive blow to the FTC by granting summary judgment in favor of Ryan LLC, a tax consulting firm. The court's ruling centered on two critical legal findings that undermined the FTC's position. First, Judge Brown determined the FTC lacked proper congressional authority for its sweeping ban. While the agency had relied on Section 6(g) of the FTC Act - which permits rulemaking to carry out its duties - the court characterized this as merely a "housekeeping" provision rather than a grant of substantive legislative power. Importantly, the judge emphasized that Congress had never explicitly authorized the FTC to prohibit entire categories of employment contracts through rulemaking.

Second, the court found the FTC's rule to be "arbitrary and capricious" under administrative law standards. The agency had failed to adequately consider less restrictive alternatives that could have addressed its concerns without a complete ban, such as limiting prohibitions to low-wage workers. Additionally, the FTC had dismissed substantial evidence showing that carefully crafted, narrowly tailored non-compete agreements can serve legitimate business interests in protecting trade secrets and proprietary information.

This landmark ruling completely vacated the FTC's rule, preventing it from taking effect on September 4, 2024, as planned. While the FTC has since appealed to the Fifth Circuit Court of Appeals, most legal analysts predict the conservative-leaning appellate court will uphold Judge Brown's decision. This expectation stems both from the strong legal reasoning in the district court's opinion and the Fifth Circuit's historical skepticism of expansive federal regulatory power.

IV. WHAT THE RULING MEANS FOR EMPLOYERS TODAY

The court's decision to overturn the FTC's non-compete ban has created a complex, state-by-state enforcement landscape. In business-friendly jurisdictions like Texas and Florida, employers can continue using non-compete agreements provided they meet traditional reasonableness standards regarding geographic scope, duration, and legitimate business interests. However, the ruling changes nothing for employers in restrictive states such as California, Oklahoma, and North Dakota, where most non-competes remain prohibited under longstanding state laws. This patchwork system creates significant compliance challenges for national employers operating across multiple states.

While the blanket federal ban has been invalidated, the FTC retains some authority to regulate non-competes through other means. The agency can still challenge individual agreements it deems "unfair" under Section 5 of the FTC Act, particularly in industries with documented abuses. Fast food chains and other low-wage employers should be especially cautious, as the FTC has signaled it will prioritize cases involving hourly workers who lack meaningful bargaining power. This targeted enforcement approach may prove more time-consuming for the agency but allows for nuanced consideration of specific circumstances.

State legislatures have been actively reshaping the non-compete landscape independent of federal action. New York's legislature recently passed a comprehensive ban that awaits the governor's signature, while Minnesota and Illinois have adopted middle-ground approaches tying enforceability to salary thresholds. Colorado has implemented unique protections requiring employers to provide both advance notice and additional compensation when using non-competes. These state-level developments suggest that despite the federal court victory, employers must remain vigilant about evolving compliance requirements across different jurisdictions. The coming legislative sessions will likely see additional states reconsidering their non-compete laws, creating an ongoing need for businesses to monitor these changes.

V. STRATEGIC STEPS FOR BUSINESSES

Considering the evolving legal landscape surrounding non-compete agreements, businesses should prioritize conducting a comprehensive compliance audit. This process should involve carefully reviewing all existing non-compete agreements to ensure they meet state-specific legal standards, as requirements continue to vary significantly across jurisdictions. Particular attention should be paid to identifying potentially problematic clauses, such as those imposing overly broad restrictions on mid-level employees who may not have access to truly sensitive business information. These "at-risk" provisions could face legal challenges even in states that generally permit non-competes.

To mitigate risks while still protecting legitimate business interests, companies would be wise to strengthen alternative forms of protection. Updating non-disclosure agreements (NDAs) to more precisely define and safeguard trade secrets and confidential client information can provide substantial protection without relying on controversial non-competes. Implementing garden leave clauses—where employees receive full pay during a notice period but are not restricted from future employment—offers a more balanced approach that courts typically view more favorably. Additionally, businesses should consider implementing incentive-based retention strategies, such as performance bonuses, equity grants, or training repayment agreement provisions (TRAPs), which can effectively deter turnover while avoiding the legal and reputational risks associated with restrictive covenants.

Looking ahead, proactive monitoring of ongoing legal developments will be crucial. The FTC's appeal of the Texas court decision and the potential for Supreme Court review could dramatically reshape the landscape yet again. Simultaneously, businesses must stay attuned to rapidly changing state legislation, as numerous jurisdictions continue to reconsider their approaches to non-compete enforcement. Establishing a system for tracking these developments will enable organizations to adapt their policies promptly as new laws and regulations emerge. By taking these steps now, businesses can position themselves to navigate whatever changes may come while maintaining appropriate protections for their valuable assets and relationships.

CONCLUSION: A TEMPORARY WIN, BUT THE BATTLE ISN’T OVER

The Ryan LLC decision provides employers with continued — though uncertain — ability to enforce non-compete agreements, at least temporarily. While this ruling prevents a nationwide ban, businesses must recognize the changing legal environment and act accordingly. Companies should implement non-competes strategically, limiting them to essential positions handling sensitive information, while simultaneously developing alternative protections like strengthened NDAs and retention incentives. With states actively revising their laws and potential federal action still possible, ongoing legal monitoring is essential. Employers are advised to conduct thorough agreement reviews with employment counsel to ensure compliance today while preparing for tomorrow's regulatory shifts. The prudent approach balances current enforcement capabilities with preparation for future restrictions.

While the immediate threat of a blanket federal ban has been averted, the regulatory environment remains highly fluid. Multiple states have already enacted restrictions or outright bans, and the FTC's recent actions may spur additional legislative activity when state assemblies reconvene. At the federal level, Congress may view this judicial decision as impetus to clarify the FTC's authority or establish national standards through new legislation. Given this uncertainty, we strongly recommend consulting with experienced employment counsel to:

• Conduct a comprehensive review of existing agreements

• Ensure compliance with current state requirements

• Develop forward-looking strategies that account for potential regulatory changes

The takeaway for businesses is clear: While non-compete agreements remain a viable option in many jurisdictions, their long-term viability demands both careful implementation today and strategic planning for tomorrow's legal landscape.

The Federal Trade Commission (FTC) has issued its final rule banning noncompete clauses in employment contracts, set to take effect on September 4, 2024. This landmark regulation marks a significant shift in employment law and aims to foster a more competitive and innovative labor market.

Comprehensive Ban on New Noncompete Agreements

Under the new rule, the FTC prohibits employers from entering into noncompete agreements with all workers, including senior executives. This regulation is rooted in the FTC’s authority under Section 5, which designates unfair methods of competition as illegal. By eliminating noncompete agreements, the FTC aims to remove barriers that hinder worker mobility and stifle competition.

Different Approach for Existing Noncompete Agreements

The rule differentiates between existing noncompete agreements for senior executives and those for other workers. For senior executives, defined as workers in policy-making positions earning more than $151,164 annually, existing noncompete agreements can remain in effect. However, for workers other than senior executives, existing noncompete agreements will become unenforceable after the rule's effective date. Employers must provide clear notice to affected workers that their noncompete agreements will no longer be legally binding.

Anticipated Economic Impact

The FTC projects significant economic benefits from banning noncompete agreements. Reduced healthcare costs are expected, with an estimated $74-194 billion reduction in spending on physician services over the next decade. The ban is anticipated to boost new business formation by 2.7%, resulting in approximately 8,500 new businesses annually. Innovation is expected to rise, with an increase of 17,000-29,000 new patents each year, and innovation growth is projected to accelerate over the next decade. Worker earnings are expected to increase by $400-$488 billion over the next ten years, with average annual earnings rising by approximately $524 per worker.

Alternatives to Noncompete Agreements: Non-Solicitation and Confidentiality Covenants

As noncompete agreements are phased out, employers could consider alternative contractual protections such as well-drafted non-solicitation and confidentiality covenants. These agreements can effectively safeguard business interests without restricting employee mobility.

Non-solicitation covenants prevent former employees from soliciting clients, customers, or other employees for a certain period after leaving the company. When carefully drafted, these covenants can protect an employer's client base and workforce from poaching while still allowing employees to work in their field.

Confidentiality agreements, also known as nondisclosure agreements (NDAs), prohibit employees from disclosing proprietary information, trade secrets, and other sensitive data. These agreements are crucial in protecting intellectual property and maintaining a competitive edge.

Invention Assignment Clauses

Employers could also consider implementing invention assignment clauses, often referred to as "shop-right" clauses. These provisions require employees to assign any inventions or intellectual property developed during their employment to the employer. Such clauses ensure that the company retains ownership of innovations created by its workforce, safeguarding its intellectual property rights.

Enforcement and Compliance

Upon the rule’s effective date, market participants can report suspected violations to the FTC’s Bureau of Competition. Employers must notify workers with existing noncompete agreements that these agreements are no longer enforceable. This notice must be clear, conspicuous, and provided in a manner accessible to the worker, such as hand delivery, mail, email, or text message.

Exceptions and State Laws

The rule allows certain exceptions, such as noncompete agreements tied to the bona fide sale of a business and pre-existing causes of action. It also preserves state authority and private rights of action, ensuring that state laws providing greater protection to workers remain intact.

Conclusion

The FTC’s final rule on noncompete agreements is poised to reshape the employment landscape by enhancing worker mobility, fostering competition, and driving economic growth. As businesses and workers prepare for the September 4, 2024, implementation date, the rule promises to unlock new opportunities and efficiencies across the labor market.

Employers could proactively adjust their employment agreements, focusing on non-solicitation and confidentiality covenants, along with invention assignment clauses, to protect their interests in the absence of noncompete agreements. These alternatives provide robust protection for businesses while supporting a dynamic and open labor market.

For more information please contact John Mark Hongs, Esq., Westminster Legal Group LLC

The U.S. Department of Labor made a significant announcement today regarding a final rule for independent contractors aimed at enhancing clarity for both employers and workers in determining worker classification under the Fair Labor Standards Act. This rule is designed to address the ongoing issue of employee misclassification, a problem that adversely affects workers' entitlements to minimum wage and overtime pay, fosters wage theft, gives certain employers an unfair advantage over compliant competitors, and has broader negative implications for the economy.

The final rule's guidance aligns with established judicial precedent, offering consistency for entities covered by the Fair Labor Standards Act. The "independent contractor" rule reintroduces the multifactor analysis employed by courts for decades. This analysis considers six key factors in determining a worker's status, including the opportunity for profit or loss, the financial investment in the work, the permanence of the work relationship, the level of control exerted by the employer, the essential nature of the work to the employer's business, and the worker's skill and initiative. This comprehensive approach aims to rectify misclassification issues, uphold worker rights, and establish a fair and consistent framework for classification under the Fair Labor Standards Act.

Additionally, the rule revokes the 2021 Independent Contractor Rule, which the department believes deviates from both the law and longstanding judicial precedent. The new rule, crafted after considering feedback from stakeholders gathered in forums during the summer of 2022 and the subsequent comment period in October 2022, is set to take effect on March 11, 2024.

You can read the Final Rule, 2021 IC Rule, here:

Federal Register :: Independent Contractor Status Under the Fair Labor Standards Act