A major regulatory initiative to ban most noncompete agreements nationwide has come to a halt. The Federal Trade Commission (FTC) has withdrawn its appeal of a federal court ruling that blocked the ban. This decision has significant implications for small businesses, entrepreneurs, and employees across the country. For business owners, it means a key tool for protecting trade secrets remains available, but for workers, it signals a return to the status quo of restricted job mobility.
This reversal marks the end of a high-profile effort that promised to reshape labor dynamics in the United States. The proposed rule would have invalidated nearly all existing noncompete clauses and prohibited new ones. Now, the landscape is shifting back to a state-by-state and case-by-case approach. Understanding this change is crucial for any business owner who uses or is considering using noncompete agreements.
The Rise and Fall of the Nationwide Ban
In April 2024, the FTC, under then-Chair Lina Khan, finalized a rule that would have broadly prohibited noncompete clauses. These clauses are contractual terms that prevent an employee from working for a competitor or starting a similar business for a certain period after leaving their job. At the time, the FTC estimated that these agreements affected about one in five American workers, or roughly 30 million people.
Proponents of the ban argued it would unlock significant economic potential. They projected it could boost worker wages by as much as $300 billion annually and encourage the creation of thousands of new businesses by freeing up talent. The rule was designed to increase worker mobility, allowing employees to seek better opportunities and use their skills more freely in the marketplace.
However, the rule faced immediate and strong opposition from the business community. Groups like the U.S. Chamber of Commerce and Ryan LLC, a Dallas-based tax services firm, quickly filed a lawsuit. They argued that the FTC had overstepped its authority by attempting to implement such a sweeping, nationwide regulation that preempted state laws. A federal judge in Texas agreed, issuing a ruling that blocked the ban before it could take effect.
Why the FTC Withdrew Its Appeal
The recent decision to abandon the appeal followed a shift in leadership at the FTC. The new commission, under Chair Andrew Ferguson, expressed clear reservations about the legality and scope of the original ban. In a joint statement, Ferguson and Commissioner Melissa Holyoak called the rule a case of “extraordinary assertion of authority” that unlawfully overrode state laws governing contracts. They argued that the rule “preempted the laws of all fifty States, and actively displaced hundreds of existing laws across forty-six States.”
This perspective highlights a core legal tension: the balance between federal regulatory power and state-level governance of contracts and employment law. The new FTC leadership believes the agency exceeded its constitutional limits by attempting to impose a one-size-fits-all solution on a complex issue traditionally handled by individual states. With the withdrawal of the appeal, the Texas court’s decision to vacate the rule stands, effectively ending the push for a federal ban.
A New Direction: Case-by-Case Enforcement
While the nationwide ban is off the table, the FTC is not abandoning the issue of noncompetes entirely. The agency is pivoting to a more targeted enforcement strategy. Instead of a blanket prohibition, the commission will now focus on challenging noncompete agreements that it deems anticompetitive under existing laws, such as the Sherman Act.
FTC Chair Andrew Ferguson has acknowledged that noncompete clauses can be abused and “severely inhibit workers’ ability to make a living.” The new approach aims to address these abuses on a case-by-case basis. This strategy was recently demonstrated when the FTC ordered a large pet cremation company to stop enforcing noncompetes with nearly 1,800 of its employees.
The FTC is also gathering information from the public about how noncompetes are used. This data will likely inform future targeted enforcement actions, focusing on agreements that are overly broad, punitive, or used in industries where they serve little legitimate purpose.
Implications for Small Businesses and Entrepreneurs
This reversal has direct consequences for how small businesses operate and protect their interests.
Protecting Trade Secrets and Investments
For many small businesses, noncompete agreements are a vital tool for protecting legitimate business interests. These can include safeguarding confidential information, trade secrets, client lists, and the significant investment made in employee training. Business groups argued that the ban would have made it easy for key employees to leave for a competitor, taking valuable proprietary knowledge with them.
With the ban overturned, business owners can continue to use noncompete agreements, provided they comply with their state’s specific laws. This allows them to protect their competitive edge and ensure that sensitive information remains secure.
Navigating a Complex Legal Landscape
The withdrawal of the federal ban means that the legality of noncompete agreements continues to be governed by a patchwork of state laws. This reality creates complexity. Some states, like California, have long banned most noncompetes. Others allow them but place strict limitations on their scope, duration, and the geographic area they cover. Courts often require that a noncompete be reasonable and necessary to protect a legitimate business interest.
Small business owners must work closely with legal counsel to draft noncompete agreements that are enforceable in their specific jurisdiction. A poorly drafted or overly restrictive agreement may be struck down in court, leaving the business unprotected.
Employee Mobility and Talent Acquisition
The debate over noncompetes also involves a fundamental tension between protecting a business and fostering a dynamic labor market. Critics of the FTC’s reversal argue that a case-by-case approach is insufficient. Commissioner Rebecca Kelly Slaughter, the lone dissenter in the vote, noted that piecemeal enforcement fails to protect workers like “the person working at the hair salon in Minnesota, or the engineer in Florida.”
For businesses, this means the talent pool may remain constrained in certain regions or industries where noncompetes are common. While your own noncompetes may protect your business, the noncompetes of your competitors may make it harder to hire experienced talent.
What Steps Should Your Business Take Now?
The end of the proposed federal ban restores the previous legal framework. What was once billed as a sweeping overhaul of the employment landscape has now given way to a more incremental and targeted approach. Business owners should review their practices and prepare for this new phase of enforcement.
Here are some actionable steps:
- Review Existing Agreements: If you use noncompete agreements, review them with legal counsel to ensure they are compliant with your state’s laws and are reasonably tailored to protect specific, legitimate business interests.
- Consider Alternatives: Noncompete agreements are not the only way to protect your business. Nondisclosure agreements (NDAs) and non-solicitation agreements can also provide strong protections for your trade secrets and client relationships without restricting an employee’s ability to work in their field.
- Stay Informed: The FTC is actively seeking information and pursuing enforcement actions. Keep an eye on developments from the FTC and changes in your state’s laws regarding restrictive covenants.
The debate over noncompetes is far from over. As the FTC shifts its focus to targeted enforcement, businesses must ensure their practices are both legally sound and strategically smart.
Law 4 Small Business (L4SB). A Slingshot company. A little law now can save a lot later.
