By Andreia M. Tamashiro, LLM 2025
The Federal Trade Commission (FTC) has proposed a NonCompete Rule designated to promote competition and employees’ rights. This rule poses a significant challenge for companies, especially startups, which may need to allocate more resources to protect their intellectual property. If the rule becomes effective, there may be a surge in trade secret litigation and patent filing and increased scrutiny when hiring to avoid litigation risks. Although the FTC has faced judgments with different outcomes, they are committed to imposing the rule – and have already filed a notice of appeal against a decision issued by the Texas court barring enforcement of the rule.
The FTC’s new rule
On April 23, 2024, the FTC issued a final rule banning noncompetes, deeming them an “unfair method of competition” and prohibiting employers from enforcing noncompete clauses with employees.
The new rule applies to all workers, whether paid, unpaid, or independent contractors, as well as senior executives. Following the rule’s effective date, existing noncompetes are no longer enforceable for workers but can remain in force for senior executives.
The FTC calculates that around 30 million Americans are under noncompete agreements, signed not only by high-level executives but also by low-wage employees such as hairstylists, bartenders, and security guards. The FTC’s main goal with its rule is to enable employee movement and higher wage earnings, ultimately increasing innovation and fostering new business formation.
The FTC estimates that banning noncompete will help boost innovation and increase the number of patents filed annually to an average of 11%- 19% over the next decade. Along with patent growth, the FTC also estimates a 2.7% increase in new startup formation, which means more than 8,500 new businesses would be created annually.
Even though the rule does not explicitly prohibit non-disclosure agreements (NDAs), training repayment agreement provisions, or non-solicitation agreements, the FTC has stated that if these agreements are “so broad or onerous” that they end up having the same practical effects as noncompete agreements, such terms will be classified as such and prohibited.
Noncompete and Intellectual Property
Lina Khan, the current chair of the FTC, has stated that employers and companies will still be able to protect themselves through trade secrets law, even without noncompete clauses.
However, Emily Glendinning, the Chief Privacy Officer at BAE System, has raised concerns about this approach. She argues that even with NDAs and trade secret litigation, if a former employee works for a competitor, there is no way to monitor what might be disclosed. Without noncompetes, the most confidential information shared with an employee could be vulnerable to exposure, endangering a company’s competitiveness.
Joseph Lanser, a patent attorney, pointed out that implementing the FTC’s new rule would increase hiring pressures and concerns for smaller businesses and tech startups. He highlighted that prospective employees would likely undergo intense vetting to avoid potential litigation targets in the future. If exposed, trade secrets can cause serious damage to a company. Lanser raised the possibility of patent filing to ensure more valuable protection. However, not all trade secrets are patentable, and information, such as sales and marketing strategies, would be vulnerable.
Robert A. Surrette, an intellectual property attorney, highlighted that some startups opt to develop products and implement trade secrets to protect them rather than filing patents. He emphasized that the noncompete rule would force smaller companies to allocate funds towards patent filing, consequently increasing costs and undermining intellectual property development.
Ongoing Judicial Disputes and the Uncertainty of the Rule’s Implementation
The final rule was set to be effective on September 4, 2024, 120 days after its publication. However, the Ryan LLC v. FTC decision (Civil Action No. 3:24-CV-00986-E), issued on August 20, barred the FTC from enforcing the rule nationally. In Ryan LLC, the Northern District of Texas held that the FTC lacks authority to make substantive rules regarding unfair methods of competition and, therefore, cannot issue a rule banning noncompete agreements. The court found the FTC’s rule to be “arbitrary and capricious” given its breadth. The court reasoned that state noncompete rules are tailored to specific factual situations, whereas the FTC’s proposed rule imposed a general ban. On October 18, the Commission filed a notice of appeal in the US Court of Appeals for the Fifth Circuit against Texas’s decision.
Two additional cases against the FTC present different outcomes. In ATS Tree Services v. FTC (Civil Action No. 24-1743), the Eastern District of Pennsylvania denied ATS Tree Services’ motion for preliminary injunction and upheld the Noncompete Rule’s effective date. The court ruled that the plaintiff failed to demonstrate a fear of workers leaving the company in the absence of a noncompete agreement and stated that an NDA could address this concern. Furthermore, the court found that the FTC has the authority to engage in substantive rulemaking, which includes banning noncompete clauses altogether.
In Properties of the Villages, Inc. v. FTC (Case No. 5:24-cv-316-TJC-PRL), the Middle District of Florida granted the plaintiff’s preliminary injunction but upheld the rule’s effective date. Based on its sister court’s reasoning in ATS, the court agreed that the FTC has substantive rulemaking authority but questioned whether the Commission can issue the rule under the major question doctrine. The court concluded that the FTC lacks clear Congressional permission to issue the final rule and prohibited enforcement of the final rules as to the plaintiff individual – but did not issue a nationwide injunction like Ryan LLC. On September 24, 2024, the FTC filed a notice of appeal in the U.S. Eleventh Circuit to challenge the preliminary injunction.
The Uncertain Future of Noncompete
The FTC’s Noncompete Rule remains enjoined. However, the future of the FTC and noncompete agreements is uncertain after the Inauguration Day. Donald Trump himself used noncompete during his first presidential campaign and, before entering politics, agreed to a “six-state noncompete” as part of a bankruptcy settlement. Will the support of J.D. Vance for Khan be sufficient to ban noncompete?
Meanwhile, companies may need to draft agreements carefully to ensure protection while avoiding overreach.