What Recent Court Rulings Could Mean for Your Noncompete Agreements

July 18, 2024

The Federal Trade Commission’s (FTC) recent and well-publicized ban on noncompetition covenants (“noncompetes”) will likely impact significantly the enforceability of restrictive covenants across the country. Employers and employee benefits plan administrators should consider re-evaluating noncompetes as part of their employment and benefits strategies on a going-forward basis.

Several states have already limited or banned the use of noncompetes by statute. North Dakota, Oklahoma, Nevada, Oregon, Illinois, Massachusetts, and California have all made it difficult, if not impossible, for employers to limit post-employment employee mobility through the use of noncompetes.

Among those remaining jurisdictions where noncompetes are still commonly used, most courts analyze a noncompete’s enforceability using a “reasonableness” test. Depending on the jurisdiction, this analysis typically takes into account the following factors:

Protection for the employer: Whether the noncompete is necessary to protect the employer's legitimate interests, such as trade secrets, customer relationships, or confidential information;

Time restriction: How long the noncompete lasts;

Geographical restriction: The area covered by the non-compete;

Prohibited activity: What activities are restricted;

Impact on the employee: Whether the non-compete unduly harms the employee or prevents them from pursuing their career;

Clarity: Whether the agreement is clear and specific about what it restricts, and is not so broad that it prevents the employee from finding a new job.

This list of factors is not exhaustive. In general, however, we advise our clients that a noncompete is like a good suit: the more narrowly tailored it is, the better it looks in court.

These factors may, at some point in the near future, become largely irrelevant if a nationwide ban on noncompetes becomes final. The FTC issued a final ruling banning noncompete agreements on April 23, 2024. Subject to various litigated challenges, the ban takes effect on September 4th of this year. One such litigated challenge has already signaled that the FTC ban may not take effect that soon.

On July 3, 2024, the United States District Court for the Northern District of Texas granted a preliminary injunction staying the enforcement of the final rule as to the parties in the case. The court’s decision, pending a final ruling on the merits by August 30, 2024, has signaled that the FTC’s noncompete rule may not survive judicial scrutiny.

While the judge ruled the ban was against the public interest, the preliminary injunction currently affects only a handful of businesses involved in the case. In the matter Ryan, LLC v. FTC, the court ruled that the FTC lacked the authority to create substantive rules. The court cited other reasons to justify the preliminary injunction, including the rule being overly broad without reasonable explanation and imposing a one-size-fits all approach with no end date.

A second case, ATS Tree Services LLC v. FTC, which also sought a preliminary injunction to prevent enforcement of the rule, was filed in Pennsylvania in May. Unlike Texas, the Pennsylvania court, in a ruling issued this month, declined to issue a temporary injunction, setting the stage for the matter potentially being decided by the United States Supreme Court.

In the meantime, New York’s legislators have also questioned the impact of noncompete agreements. Last year, the House, sponsored by Latoya Joyner, and Senate, sponsored by Sean Ryan, proposed bills to eradicate noncompete agreements through Assembly Bill A1278B and Senate Bill S3100, respectively.

However, Governor Hochul vetoed both bills stating the noncompete ban was too broad and needed to be narrowed to low-wage workers. Nevertheless, the Governor has indicated that New York is likely to follow the path of Massachusetts and the other states listed above in limiting employers’ ability to use noncompetes in the workforce going forward.

Both the FTC’s rule and the pending legislation in New York indicate increasing federal and state administrative and legislative hostility to non-competes. Accordingly, employers of all sizes would do well to review their current restrictive covenants and narrow them as much as practicable to what is actually needed to protect their legitimate business interests, including with respect to confidential information, goodwill in customers and employees, and unfair competition.

Gross Shuman’s labor and employment group will continue to monitor these developments and will provide further updates and additional information when it becomes available.

B. Kevin Burke Jr. 716.854.4300 ext. 292 | [email protected]

D. Charles Roberts Jr. 716.854.4300 ext. 211 | [email protected]