In 2023, the Federal Trade Commission (FTC) proposed a sweeping rule under Section 5 of the FTC Act that would have largely prohibited employer noncompete agreements nationwide. After significant legal challenges, the FTC abandoned its effort to implement a nationwide ban, leaving regulation of noncompete agreements primarily to state law.
Does that mean employers no longer need to worry about federal scrutiny? Not entirely.
How the FTC Is Targeting Noncompete Agreements Now
Although the FTC is no longer pursuing a nationwide prohibition, it has shifted its attention to targeted enforcement actions using its existing authority under Section 5 of the FTC Act. Rather than challenging all noncompete agreements, the agency is focusing on agreements it views as unfair, overly broad, or anticompetitive. Particular scrutiny has been directed toward agreements affecting low-wage and hourly workers, healthcare employees, and restrictions applied broadly across a workforce.
The FTC has pursued these cases through administrative complaints, consent orders, and warning letters. In general, the agency seeks to prevent unfair methods of competition and to protect consumers from unfair or deceptive business practices. Consent orders typically resolve a matter without an admission of wrongdoing, but once finalized they carry the force of law and govern future conduct.
In June, the FTC finalized a consent order against Rollins Inc., one of the nation’s largest pest-control companies, following allegations that the company required most new employees to sign noncompete agreements as a condition of employment. According to the FTC’s complaint, the agreements prohibited employees from working in the pest-control industry for two years within a 75-mile radius of any Rollins location. The agency alleged that employees had little opportunity to negotiate the restrictions and received no additional consideration in exchange for them.
The FTC has taken the position that broad noncompete restrictions can limit employee mobility, suppress wages, and restrict competition by preventing workers from joining competitors or starting their own businesses. Under the consent order, Rollins must stop enforcing the challenged noncompete agreements against substantially all current and former employees and must notify affected individuals that they are no longer bound by those restrictions. The FTC also sent warning letters to 13 other pest-control companies signaling that similar agreements may face enforcement scrutiny.
Likewise, the FTC finalized a consent order against Gateway Services, Inc., a pet cremation company, requiring it to cease enforcing employee noncompete agreements. The agreements prohibited employees from working in the pet cremation industry anywhere in the United States for one year. As part of the settlement, Gateway agreed to stop enforcing existing agreements and not enter into new noncompete agreements with employees.
Key Takeaways for HR Professionals and Employers
Employers should review their use of noncompete agreements and evaluate whether existing restrictions remain necessary, narrowly tailored, and enforceable under applicable state law. The FTC’s recent enforcement activity suggests that broad, workforce-wide restrictions may receive heightened scrutiny.
Consider the following practices:
- Avoid using the same restrictive covenant for all employees. Tailor restrictions to legitimate business interests, such as the protection of trade secrets, confidential information, or customer relationships.
- Consider alternative protections, including confidentiality agreements, nondisclosure agreements, non-solicitation agreements, and invention-assignment provisions.
- Provide employees with adequate time to review restrictive covenant agreements and seek advice before signing.
- Periodically review restrictive covenant programs to ensure they remain consistent with evolving state law and federal enforcement priorities.
Contact
Questions about whether your noncompete agreements could draw FTC scrutiny? Contact KJK Labor & Employment attorney Maribeth Meluch (MM@kjk.com).