By Brooke Rogers
Davis Graham
The current landscape of noncompete agreements has caused confusion and uncertainty for employers nationwide — or has it?
On April 23, the Federal Trade Commission finalized a rule banning noncompete agreements for most employees, effective Sept. 4. Hours after the FTC finalize the rule, a small tax firm in Texas, Ryan, LLC, filed a lawsuit in the U.S. District Court for the Northern District of Texas seeking to stop the enforcement of the rule. Other plaintiff-parties intervened as well, including, the U.S. Chamber of Commerce, Business Roundtable, Texas Association of Business and the Longview Chamber of Commerce. The crux of the plaintiffs’ argument was: (1) the FTC rule exceeded the FTC’s statutory authority to issue such a rule, (2) the rule was unconstitutional (3) and the rule was arbitrary and capricious.
In August 2024, Trump-appointed District Court Judge Ada Brown granted the plaintiffs’ preliminary injunction request, effectively halting the FTC rule from going into effect nationwide on Sept. 4. Brown found that the plaintiffs satisfied their burden warranting a preliminary injunction by meeting the 4-prong test and showing that they were: (1) likely to succeed on the merits that the FTC lacked the statutory authority to promulgate the noncompete rule; (2) had established irreparable financial harm should the rule go into effect; and for (3) and (4) had established that the injury to the public interest by upsetting the status quo outweighed the government’s interest in enacting the rule. On Oct. 18, the FTC filed a notice of appeal, setting up the dispute to reach the Fifth Circuit and potentially thereafter, the U.S. Supreme Court.
Similar lawsuits popped up in other federal courts as well, including ATS Tree Services, LLC v. Federal Trade Commission, filed in U.S. District Court for the Eastern District of Pennsylvania that likewise challenged the FTC’s noncompete ban and sought a preliminary injunction against its enforcement. However, in that case, District Court Judge Kelley Brison Hodge , a Biden appointee, took the exact opposite approach and denied a preliminary injunction. After the Ryan, LLC injunction was decided, ATS filed a motion to stay the case arguing that the Ryan, LLC decision initiated a nationwide ban effectively halting its case. Hodge disagreed and denied the motion. In response, ATS voluntarily dismissed its lawsuit.
Ultimately, there is some uncertainty over whether the FTC rule banning noncompete agreements will ever become effective. However, employers should already be aware and prepared to quickly address changes in the legal landscape related to noncompete agreements or other restrictive covenants they may want to use in employee agreements.
Four states – California, Montana, Oklahoma and Wisconsin – already essentially have complete bans on noncompete agreements. Many other states have restrictions on noncompete agreements relating to income or industry.
For example, here in Colorado in 2022, the Colorado Legislature enacted new restrictions relating to noncompete agreements, making them significantly more difficult to enforce. Colorado Revised Statute 8-2-113 states that any noncompete agreement is presumptively void, except for narrow exceptions involving highly compensated workers and the protection of trade secrets, recovery of expenses relating to education or training of a new worker, confidentiality agreements, agreements involving the purchase and sale of a business or the assets of a business and provisions relating to the repayment of a scholarship in certain circumstances.
The Colorado law also contains specific requirements an employer must comply with if the noncompete agreement falls into one of the exceptions. For example, Section 8-2-113(4) details notice requirements an employer must comply with, including providing separate notice to the prospective worker of the noncompete agreement before the worker accepts the offer of employment and requiring that the separate notice be signed by the worker. Such requirements must be strictly followed, otherwise the noncompete agreement is void.
Companies should not ignore the current FTC rule battle or write it off as a partisan dispute. The passing of the FTC rule (although currently not enforceable) signals public opinion may disfavor the use of noncompete agreements. Companies should also be aware that a majority of individual states already regulate the use of noncompete agreements, including significant restrictions here in Colorado. Companies should take this time now to closely review and stress test any noncompete or restrictive covenants within their employee agreements to ensure their legality while the FTC rule makes its way through the legal system.
– Brooke Rogers is an associate attorney at Davis Graham. She focuses her practice on commercial litigation, with an emphasis on breach of contract disputes. Contact her at [email protected].