Non-Competes in 2024: What to Expect

PUBLISHED FEBRUARY 2024

Non-compete agreements have always been a staple in employers’ efforts to protect their competitive information and relationships, but in recent years, non-competes have come under attack from all angles at the state and federal levels. Employers should carefully monitor the developments to ensure their contracts are up to date and evaluate their strategies for protecting competitive information by focusing on other avenues available that do not rely on non-competes. 

1. The FTC’s Proposed Rule Banning Non-Competes
To kick off 2023, the Federal Trade Commission proposed a categorical ban on the use of non-compete clauses by employers. Specifically, the Proposed Rule would ban employers from entering, maintaining, or enforcing non-compete clauses with their workers. Though the Proposed Rule does not target non-solicitation or non-disclosure clauses, it proposes a functional test to determine whether a clause is covered, meaning that any clause that effectively bars an employee from seeking employment in their chosen industry could be considered a non-compete. The Proposed Rule would require employers to rescind any existing non-compete and provide notice to all current and former affected individuals.

2. Exceptions
The Proposed Rule is very broad and applies to all kinds of paid and unpaid workers, including independent contractors and volunteers. Some state laws are narrower (bans for employees only) or are less clear in whether they are intended to apply to other categories of workers. Similarly, the Proposed Rule did not contain a carve-out for highly compensated workers. Other states, like Illinois, allow for non-competes if an employee earns above a certain salary threshold (among other requirements). It is best practice to evaluate each case on its facts and review the applicable law since there is no one-size-fits-all approach to non-compete guidance.

3. The Status of the Proposed Rule 
The Proposed Rule was open for public comment until April 2023, and we are now waiting for the FTC to issue a Final Rule. There is no deadline for the FTC to issue a Final Rule, and no one knows with certainty what the Final Rule will say. Employers would be wise to prepare for a Final Rule similar or identical to the proposed one.

4. Anticipated Challenges to the Final Rule
Regardless of what the Final Rule looks like, it will be immediately challenged in court (like the vaccine mandates). There are strong arguments to attack the FTC’s authority to issue the rule, but there will be uncertainty in the interim that may make it harder to enforce non-competes. Moreover, the rule-making effort is merely another example of growing hostility towards non-competes, and we will likely see Congress and states revisit this issue.

5. FTC Lawsuits Against Employers for Imposing Non-Competes
During 2023, and even without the issuance of a Final Rule, the FTC filed three complaints against employers over their use of non-competes. The claims alleged the employers imposed non-competes on employees in an unfair manner that tended to harm competition, thus violating antitrust laws. The complaints were unrelated to any enforcement efforts by the employers at issue, but the FTC argued that the non-competes at issue had the effect of prohibiting workers from earning higher wages and were, therefore, unfair labor practices. This ties into the cooperation agreements entered between the FTC, the NLRA, and DOL in 2023, which make it more likely that employers’ non-competes may come under scrutiny as a result of an unrelated audit or investigation. 

6. Employee “Theft”
The Proposed Rule and most state laws voiding non-competes do not impact the enforceability of non-solicitation clauses, though some do (e.g., Colorado and Illinois). However, with the federal government’s recent focus on antitrust, non-solicitation clauses purporting to prohibit the hire of employees by a competitor or business partner may come under closer scrutiny. Employers should be mindful of any agreement that could be interpreted as restricting the ability to hire employees. 

7. Hiring Employees Subject to Non-Competes
Even with the changes in the law, hiri-ng employees subject to non-competes can still be risky. Generally, non-competes are not, per se, invalid, and lawsuits to enforce non-competes can be pursued even if the covenant in question is likely to ultimately be found overbroad or unenforceable. Unfortunately, the path to proving a non-compete is unenforceable in court, or arbitration is disruptive, time-consuming, and expensive. Employers should consult legal counsel to evaluate the facts of each particular situation on a case-by-case basis to develop a risk management strategy for hiring and retaining employees.