No More Willy-Nilly: The FTC’s New Noncompete Message

The FTC has now withdrawn its appeal of the Ryan, LLC v. FTC decision.¹ The FTC’s ill-fated attempt to completely ban noncompete agreements by administrative rule is history, but that does not mean the federal government’s attempt to regulate this normally state-law-oriented subject is over. Just ask FTC Chairman Ferguson, who warned employers this past week that “[t]he failure of the Biden Commission’s rule does not mean that employers are free to impose noncompete agreements willy-nilly.”² 

This article provides some guidance on how an employer might pass the “willy-nilly” test and avoid being characterized as an employer that abuses the use of noncompete restrictions. First, it is important to understand the FTC’s apparent shift in focus.  

Is the handling of noncompete contracts back in the hands of the states where it has been handled for the last 100+ years? Nope. It has become abundantly clear that the FTC is not done addressing what it perceives to be a problem with employers’ overuse of noncompete agreements. On September 4, the FTC announced its intent to pursue a complaint against Gateway Services, Inc. based on the company’s use of noncompete agreements.³ In connection, Commissioners Ferguson and Holyoak issued a joint statement describing the philosophy behind this shift in approach. The new approach is described as “addressing noncompete agreements through enforcement actions against companies that misuse them in violation of the law.”⁴ The statement argues that a “steady stream of enforcement actions against an unlawful practice provides the markets with transparency about what the agency believes the law requires.”⁵ This case-by-case approach by the federal government, they argue, will better shift behavior in the marketplace. 

At the same time the FTC issued its announcement and Commissioners Ferguson and Holyoak published their joint statement, the FTC issued a Request for Information (RFI) asking the public for more information about the scope and nature of noncompete agreements being used in the workplace and arguments related to their justification.⁶ In so doing, the FTC emphasized that the RFI was not a regression to a rule-making approach. Instead, the FTC insisted that it would be focused on evaluating the use of noncompete agreements by employers on a case-by-case basis. In its RFI, the FTC explicitly states that the RFI responses may be used to help guide the focus of the FTC’s enforcement initiatives on an industry basis.⁷ Note: Employers with a legitimate need for noncompete protection should make their voices heard now by responding to the RFI, because based on the prior FTC RFIs, noncompete opponents are going to be vociferous (loudness can drown out logic). 

 There are already indications of how information collected through the RFI might guide the FTC’s new approach. The RFI asks for information from those negatively impacted such as “…employers facing hiring difficulties due to a rival’s noncompete agreements, and market participants in the healthcare sector in particular …” On September 10, less than a week after the FTC issued the RFI, Chairman Ferguson “sent letters to several large healthcare employers and staffing firms urging them to conduct a comprehensive review of their employment agreements—including any noncompetes or other restrictive agreements—to ensure they are appropriately tailored and comply with the law.”⁸ 

Clearly, the FTC has already singled out healthcare as an area of concern for purposes of federal regulatory scrutiny. Why the FTC feels healthcare may be in need of heavier federal oversight is a bit mysterious given that states already regulate the use of noncompete agreements with physicians, nurses, and other healthcare workers more heavily than any other single industry sector—more than 45 new laws have been proposed and 12 have passed or have taken effect in the last eight months alone.⁹ And the argument over job and wage suppression doesn’t explain the increased scrutiny either because, to quote The Wall Street Journal: “Healthcare Jobs Are a Rare Bright Spot in the Stalling Labor Market.”¹⁰ The answer may be the disproportionally high volume of comments focused on the healthcare industry in the failed FTC rule’s 2023 notice-and-comment period, which suggests that the FTC may be more influenced by anecdotal polling responses than by actual legislative efforts in the states or by the economic data regarding how employees are faring in the healthcare sector.  

Setting aside getting a good response to the RFI on file before November 3 to avoid being the next industry target, what can employers focus on to help reduce the risk that their use of restrictive covenants is not the FTC’s next target?   

How to pass the “willy-nilly” test? The complaints in the Gateway Services case and a number of the other individual enforcement actions the FTC has pursued based on similar noncompete abuse arguments provide some general rules of thumb to guide us. Keep in mind that these considerations can vary based on circumstances (like employee level, industry, etc.) but they at least serve as a good starting point: 

1. Remember that preventing unfair competition is the legitimate purpose of a restrictive covenant, not employee retention or blocking mobility.
2. Consider using different levels of restriction for different roles instead of the same agreement for everyone from the receptionist to the VP of Sales.
3. Consider whether a lesser restriction, like a customer-focused non-solicit or customer protection clause, is all the business needs to protect its interest adequately for the particular employees at issue.
4. Be realistic about tailoring the scope of activity, geography, and timing limits so that they focus on preventing unfair competition and not every conceivable role with a competitor (even as a janitor).
5. Follow local law as much as possible. If the agreement is in violation of state law, that fact might give the FTC an immediate reason to question an employer’s level of diligence and intent.

The more an employer follows the appropriate guidelines in drafting and implementing these agreements, the harder it will be to accuse them of imposing noncompete agreements on their employees willy-nilly.¹¹ Employers should confer with their employment counsel to create a wholistic, well designed program and set of agreements, prioritizing legitimate legal requirements over ease of administration.