Trends in Non-Compete Litigation and Enforcement

Introduction

Prosecution of no-poach agreements has been a recent focus for the Department of Justice (DOJ) Antitrust Division. But in the past two years, DOJ has seen several losses, including a judgment of acquittal from the bench in United States v. Patel,^[1] a jury acquittal in United States v. DaVita,^[2] and a voluntary dismissal by the Division in November 2023.^[3] Despite DOJ’s recent string of losses in its criminal prosecution of no-poach agreements, federal and state enforcement agencies have continued to closely scrutinize employment agreements through new legislation and rulemaking intended to crack down on a wide range of “non-compete” clauses. Private plaintiffs also have been aggressively exploring novel avenues of potential liability.

California has prohibited such provisions in employment agreements for years. California recently expanded its legislation, and other states have enacted similar legislation. The California Department of Justice’s Antitrust Division has signaled a renewed interest in criminal enforcement of its antitrust statute, alongside heavy scrutiny of non-compete agreements.

The Federal Trade Commission (FTC) issued a final rule banning nearly all non-competes nationwide in April 2024. The rule was swiftly challenged in litigation by industry organizations, with different federal district courts taking different approaches to the final rule. On August 20, 2024, the Northern District of Texas issued a permanent nationwide injunction blocking the FTC rule. The FTC filed a notice of appeal on October 18, 2024. In contrast, the Eastern District of Pennsylvania denied a motion for preliminary injunction on July 23, 2024, and the plaintiff voluntarily dismissed the case.

Thus, the reach and application of the new laws, to the extent they survive legal challenge, remains an open question for the courts to answer, and counsel should stay apprised of these new developments and be prepared to adapt to the rapidly shifting regulatory environment.

California: Leading the Way

California’s Business & Professions Code Section 16600 states that all contracts that restrain employees from engaging in “a lawful profession, trade, or business of any kind” are void. For years, employees and employers have litigated the contours of this prohibition and, more recently, federal and state courts have applied Section 16600 to a wide range of contractual provisions, including restrictions on employment with a competitor, restrictions on use of information acquired during employment, non-disclosure agreements, and agreements barring solicitation of the former employer’s customers or employees.

Effective January 1, 2024, the California legislature revised the statute in several respects that serve to bolster the prohibition.^[4] First, it affirmed the reading of Section 16600 as consistent with the California Supreme Court’s ruling in Edwards v. Arthur Andersen, “void[ing] the application of any non-compete agreement in an employment context, or any noncompete clause in an employment contract, no matter how narrowly tailored….” unless it is covered by the statutory exceptions for the sale or dissolution of corporations, partnerships, or limited liability companies.^[5] Second, the statute requires employers to provide notice of non-compete provisions to current employees and certain former employees under such contracts.^[6] Third, a void non-compete clause is unenforceable regardless of where it was signed and whether the employment was “maintained outside of California.”^[7] Fourth, Section 16600.5 now permits affected employees to petition for injunctive relief or actual damages, and prevailing plaintiffs can recover attorneys’ fees.^[8] Finally, the amended statute applies retroactively to non-compete clauses signed prior to January 1, 2024.

While these amendments undoubtedly strengthen California’s already robust ban on employee non-competes, it will be up to federal and state courts across the country to decide whether and how to apply California’s statute, particularly where the employee lives and works in a state lacking such a stringent prohibition on non-compete provisions. California’s exceptions are narrow, and even “safer” restrictions, such as those narrowly tailored to protect trade secrets, could arguably be at risk given the sweeping language reflected in the legislative amendments.

In the months after these changes were signed into law, several plaintiffs’ counsel announced their intent to amend their complaints and/or file new lawsuits in California courts where there is a California nexus in the employment relationship, even where the employer or the employee reside elsewhere. For example, in CG Enterprises v. WSP, filed January 1, 2024 in California state court and later removed to federal court, an Arizona-based plaintiff sued a New York-based defendant for attempting to enforce a non-compete provision that would prevent the plaintiff from working for a California-based competitor.^[9] Several other cases filed in California state courts in recent months likewise refer to the newly enacted provisions as persuasive authority for California’s strong public policy against non-competes in employment agreements.^[10] Additional cases and challenges will undoubtedly follow, both in California and elsewhere.

FTC Rulemaking: A National Ban on Non-Competes

On January 5, 2023, the FTC published its notice of proposed rulemaking, laying out a draft rule which would prohibit “non-compete clauses” in employment agreements across the country.^[11] During the public comment period, the FTC received more than 26,000 comments, and on April 16, 2024, the FTC announced a special Open Commission Meeting to hold a vote on whether to authorize public disclosure of the text of the final rule and to subsequently present the rule.^[12]

On April 23, 2024, following a 3-2 vote in favor, the FTC issued the final rule,^[13] which prohibits any “non-compete clause” that:

[p]rohibits a worker from, or penalizes a worker for, or functions to prevent a worker from: (i) Seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (ii) Operating a business in the United States after the conclusion of the employment that includes the term or condition.^[14]

Standing alone, the definition of “non-compete” does not provide much guidance, but the rule offers a non-exhaustive list of examples of so-called “de facto non-compete clauses,” including the following:

1. A non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker's employment with the employer.
2. A contractual provision between an employer and a worker that requires the worker to pay the employer or a third-party entity for training costs if the worker's employment terminates within a specified time period, where the required payment is not reasonably related to the costs the employer incurred for training the worker.

“Worker” is defined broadly as “a natural person who works or who previously worked, whether paid or unpaid, without regard to the workers’ title or status under [the] law….”^[15] Thus, the rule as enacted would apply to employees, independent contractors, interns, volunteers, apprentices, those who work for franchisees or franchisors, any person who provides services to another person, and sole proprietors.^[16] However, franchisees in franchisee-franchisor relationships are excluded.

Although its application is expansive, the final rule does not contain a private right of action for workers subject to purportedly unlawful non-compete agreements. Instead, the final rule requires employers to provide notice to affected workers that their non-compete agreement will not and cannot be legally enforced against the workers, and includes model language for such a notice.^[17] Provision of the notice to the worker pursuant to the sample language constitutes a safe harbor for the notice provision requirement.^[18]

In the supplementary information accompanying the final rule, the FTC provides a lengthy list of recent settlements, court opinions, and press coverage to illustrate the range of practices that would be prohibited, including: a steelmaker prohibiting its executive from working for “any business engaged directly or indirectly in competition with” the company anywhere in the world for a year following the conclusion of the executive’s employment;^[19] a contract prohibiting a sales representative from “engag[ing] directly or indirectly, either personally or as an employee, associate, partner, or otherwise, or by any means of any corporation or legal entity, or otherwise, in any business in competition with Employer….” within a 100-mile radius of the employment location for two years;^[20] and a medical services firm barring an ophthalmologist from the practice of medicine for two years in two Idaho counties without payment of a “practice” fee of either $250,000 or $500,000.^[21]

The final rule includes a carve-out for existing non-compete clauses for “senior executives,” defined as workers in policy-making positions and earning more than $151,164 annually.^[22] Such compensation can include base pay and incentives, but would not include fringe benefits such as health insurance, contributions to retirement plans, or payments for life insurance.^[23] The final rule also includes exceptions for: (1) the bona fide sale of a business entity, (2) existing causes of action, and (3) enforcement or attempted enforcement of a non-compete clause where a person “has a good-faith reason to believe that [the rule] is inapplicable.”^[24]

The FTC rule has yet to take effect and is already embroiled in litigation, with the Northern District of Texas recently issuing a nationwide injunction against it. The FTC filed its notice of appeal on October 18, 2024.^[25] However, should the rule survive these legal challenges, it will have far-reaching implications. The FTC rule would apply to a wide range of employment agreement provisions and to nearly all workers in the United States, with only limited exceptions.

Challenges to the FTC’s Final Rule

Ryan, LLC, a business tax services and software firm, filed suit in the Northern District of Texas almost immediately after the FTC’s announcement of the final rule,^[26] and was quickly followed by the U.S. Chamber of Commerce (the “Chamber”) filing in the Eastern District of Texas.^[27]

In its amended complaint, Ryan, LLC argued: (1) the FTC exceeded the bounds of the statutory authority granted by Congress, and even if granted, that delegation of authority is unconstitutional; (2) non-compete agreements are beneficial to workers, employers, and the economy more broadly; (3) enforceability should be determined on a case-by-case basis; (4) there was no precedent until very recently for the FTC action against non-compete agreements; and (5) the final rule would outlaw “nearly all” non-compete agreements.^[28] Ryan, LLC also requested expedited briefing for its accompanying motion for a stay of the effective date of the FTC final rule and preliminary injunction.^[29] In its parallel complaint in the Eastern District of Texas, later stayed under the first-to-file rule, the Chamber of Commerce focused on the FTC’s lack of constitutional and statutory authority, the ability of the states to establish laws regarding non-compete agreements separately from the FTC, and the FTC’s lack of precedent in challenging non-compete agreements.^[30] The Northern District of Texas later permitted the Chamber to intervene in the Ryan, LLC litigation, alongside other interested parties: the Texas Association of Business, Business Roundtable, and Longview Chamber of Commerce.^[31]

Battle of the Amici

Numerous amici have submitted briefing in the Ryan, LLC litigation, both supporting and opposing the FTC’s final rule. The following amici submitted briefs in support of the FTC’s position: Public Citizen and the National Employment Law Project (ECF No. 90), administrative law scholars (ECF No. 106), local elected officials in Texas (ECF No. 108), the Texas AFL-CIO (ECF No. 113), Small Business Majority and Professor Evan Starr (ECF No. 138), the American Academy of Emergency Medicine (ECF No. 140), U.S. Representative Matt Gaetz (ECF No. 128), and a group of legal scholars (ECF No. 115). Plaintiffs have also received support from a variety of amici, including a combination of professional industry organizations (ECF No. 53), the National Association of Manufacturers (ECF No. 55), multiple financial services industry organizations (ECF No. 57), the Society for Human Resource Management (ECF No. 72), and the Partnership for New York City (ECF No. 73).

In support of Plaintiffs’ position, certain amici emphasized the FTC’s overreach beyond the bounds of its Congressional authority. For example, the Partnership for New York City argued that the FTC’s interpretation of the FTC Act, is “fatally flawed,” as the pertinent section of the statute granting authority for rulemaking regarding “unfair methods of competition” relates solely to the FTC’s investigative powers, not its authority to prohibit “other categories of business conduct.”^[32] Others raised concerns about the FTC’s failure to substantiate anticipated benefits and underestimation of costs to businesses, including the anticipated cost of compliance. Still others highlighted the costs stemming from decreased sharing of confidential information and loss of trade secrets because non-disclosure agreements are an inadequate substitute for non-competes.^[33] Certain amici, including industry organizations, argued that non-compete agreements are not used coercively and that the FTC’s alleged harms do not flow to consumers.^[34]

The FTC, in its rulemaking, relied on both quantitative and qualitative data, which it published as part of the proposed rule and the final rule. Plaintiffs’ amici also questioned the underlying data utilized by the FTC to articulate the purported harms of non-compete agreements to workers and the economy, arguing that the data were cherry-picked.^[35] The Society for Human Resources Management, for example, argued that the FTC arbitrarily and capriciously disregarded evidence of benefits of noncompete agreements in violation of the Administrative Procedure Act and failed to consider less restrictive alternatives to the rule.^[36]

On the other hand, the amici supporting the FTC emphasized the importance of worker protections and the effect of non-competes on lower wages, particularly the harms to low-wage workers and reduced job mobility. Others argued that non-competes restrict economic freedom for workers and the public at large, with workers bearing the burden of protecting themselves from overly restrictive agreements.^[37] Public Citizen and the National Employment Law Project challenged the use of non-compete agreements for workers who lack meaningful consent to the restrictions.^[38] The amici administrative law professors contended that the FTC is acting within its authority under the FTC Act and is doing so in a manner consistent with its prior practice regarding non-competes.^[39]

Different Approaches, Different Results

On July 3, 2024, the Northern District of Texas granted Ryan, LLC’s request for a preliminary injunction and postponed the effective date of the rule as to the plaintiffs, noting that it intends to rule on the “ultimate merits” of the action—including whether to issue a nationwide injunction—on or before August 30, 2024.^[40] The court held that the plaintiffs were likely to succeed on the merits because, by a plain reading of the FTC Act, Section 6(g) does not expressly grant the FTC authority to promulgate substantive rules regarding unfair methods of competition.^[41] The court also found that there is a substantial likelihood that the final rule is arbitrary and capricious, imposing a “one-size-fits-all” approach with no end date, and without evidence as to why such a rule is necessary.^[42] In issuing the preliminary injunction, the court followed Fifth Circuit precedent that the “nonrecoverable costs of complying with a putatively invalid regulation typically constitute irreparable harm” for the purpose of a preliminary injunction, and compliance with the final rule would result in financial injury to the plaintiffs.^[43] Both plaintiffs and defendants in Ryan, LLC filed motions for summary judgment, with various amici filing briefs in support.

On August 20, 2024, the Northern District of Texas granted plaintiffs’ motion for summary judgment and issued a permanent nationwide injunction, barring the FTC from enforcing or otherwise making effective the final rule.^[44] “Similar to the court’s reasoning in granting injunctive relief,” the court held that the FTC lacks the statutory authority to regulate competition through promulgation of substantive rules, that the history of the FTC Act and subsequent amendments support its finding, and that the rule is arbitrary and capricious.^[45]

Two other lawsuits are currently pending in the U.S. District Courts for the Eastern District of Pennsylvania^[46] and the Middle District of Florida.^[47] The Eastern District of Pennsylvania reached a different conclusion than the Ryan, LLC court, denying ATS Tree Services’ request for a preliminary injunction on July 23, 2024, even though many of the same amici filed briefs in both actions.^[48] Unlike in Ryan, LLC, the Pennsylvania federal court held that: (1) the plaintiff failed to establish more than a speculative or attenuated harm, with non-recoverable compliance costs not sufficient; (2) the FTC has authority under the FTC Act to issue the final rule and it is not limited to adjudication; and (3) the FTC did not exceed its statutory authority by banning nearly all non-compete clauses. The court also explicitly held that the major questions doctrine—which was not addressed by the Ryan, LLC court—does not apply to the final rule because it “falls squarely within [the FTC’s] core mandate, and [the FTC] has previously used its Section 6(g) rulemaking power in similar ways.”^[49] The plaintiff voluntarily dismissed the case on October 4, 2024.

In the Middle District of Florida, plaintiff Properties of the Villages sought and obtained a preliminary injunction on August 15, 2024, relying in part on established Florida law permitting non-compete agreements.^[50] However, before any further briefing on the merits, the FTC obtained a suspension of responsive pleading deadlines in light of the Ryan, LLC nationwide permanent injunction. The FTC has filed notices of appeal in both cases.^[51]

If ultimately effective, litigants agree that the FTC rule would have a significant impact on both businesses and employees, as it would apply to millions of workers in every U.S. state in nearly every profession, field, and discipline, with only narrow carve-outs.

Future Expansion?

The FTC and California reflect just two examples of the growing appetite for legislative and regulatory restrictions on employment non-competes. Indeed, the nebulous reach of Section 16600, alongside recent parallel efforts in other states, could limit or even prohibit agreements historically deemed “safe” or “reasonable,” or outside California’s regulatory domain. This evolving landscape could create confusion for employers and employees alike—all while the FTC rule remains subject to litigation, with its ultimate effect and application hanging in the balance.

In contrast to California, many large states—including New York, Texas, and Florida—broadly permit “reasonable” non-compete agreements, with limited, industry-specific restrictions. New York’s governor recently vetoed a non-compete ban passed by the legislature, but indicated that she would consider signing a narrower ban into law, citing the desire to protect “middle-class and low-wage workers,” while permitting employers to use non-competes for higher-wage workers. ^[52] Certain states have enacted focused restrictions, such as banning post-termination non-competes,^[53] voiding non-competes except for certain “highly compensated workers,”^[54] or carving out exceptions for customer non-solicitation provisions.^[55] Others, including Indiana, New Hampshire, Delaware, Massachusetts, and Rhode Island, have limited non-competes to physician non-compete agreements,^[56] and the Florida legislature and Louisiana legislature have proposed similarly limited bans, which remain pending.^[57]

Even in states that have not followed California’s approach, their focus on medical professionals may reflect the recognized impact of non-competes in certain industries, indicating that other states may be more amenable to passing industry-specific or otherwise targeted non-compete prohibitions. For example, in 2017, a Louisiana appellate court invalidated a non-compete provision that prohibited a doctor from engaging “in the practice of medicine” or rendering “any medical services” similar to those provided by the former employer.^[58] In 2022, another Louisiana court invalidated a non-compete that purported to restrict the plaintiff from employment in the marketing field.^[59]

Thus, certain states have elected to focus on protecting competition for physicians and medical professionals, while others have barred non-competes only for lower-wage workers. These prohibitions have been the subject of litigation, and in some states, the courts have pushed back on prior lenience towards non-competes and rejected them as unreasonable restraints on trade.

For example, in Wyoming, which previously permitted “reasonable” non-competes not contrary to public policy,^[60] the Supreme Court recently rejected an arbitral panel’s ruling that “Wyoming law strongly supports covenants not to compete,”^[61] and overturned a lower court’s grant of a preliminary injunction to an employer where it could not establish that a non-compete provision was consistent with public policy or a reasonable restraint on trade.^[62] The Pennsylvania Supreme Court followed similar reasoning in applying a “first impression” test to find that a no-hire provision was unenforceable, as it was broader than necessary to protect the employer’s interest and created a “probability” of harm to the public.^[63] Likewise, although Georgia does not categorically prohibit restrictive covenants, the Georgia Court of Appeals in 2023 invalidated a non-compete agreement because it failed to include a geographic limitation, and the Georgia Supreme Court granted certiorari in December 2023.^[64]

Growing Appetite for Criminal Enforcement in California?

In March 2024, the California Department of Justice’s Antitrust Chief Paula Blizzard announced at the American Bar Association’s National Institute on White Collar Crime that her division will be “reinvigorating” criminal prosecution of the Cartwright Act, California’s primary antitrust statute.^[65] This would mark a significant departure from the last two decades, where the California DOJ has focused on civil enforcement for anticompetitive conduct. To date, the Department has not announced any criminal Cartwright Act prosecutions. But given the backdrop of heightened scrutiny of non-compete agreements both in California and across the country, together with the U.S. DOJ’s recent series of no-poach prosecution losses, the California DOJ’s announcement may signal a shift towards an increasing role for states in criminal prosecution of anticompetitive conduct, including non-compete agreements.

In her remarks, Blizzard emphasized the close relationship and coordination between the California DOJ and the U.S. DOJ. She also highlighted the California legislature’s “very clear” intent that “non-competes are illegal, and no-poach agreements are illegal—flat out.”^[66] Although she did not specifically articulate any desire on the part of the state Antitrust Division to bring a non-compete case as the first Cartwright Act prosecution in decades, her comments focused heavily on employer non-competes, which should be viewed within the broader context of the recent expansion of Section 16600. As it has done with Section 16600, California—which, as Blizzard noted, is the fourth largest economy in the world—may set an important precedent for other states, or it may catalyze further interest and the ongoing coordination with the federal DOJ. Given Section 16600’s sweeping scope and California’s role as home to many of the world’s largest and most cutting-edge companies, California may position itself as a leader not only in civil and private challenges to non-compete agreements, but also in expanding criminal antitrust enforcement writ large.

However, it remains to be seen whether California’s stated focus on criminal antitrust enforcement will follow a similar path to the U.S. DOJ and FTC’s 2016 joint announcement that the U.S. DOJ would prosecute no-poach and wage-fixing agreements criminally. It took several years before the U.S. DOJ began prosecuting these cases in earnest, and it has generally been unsuccessful in its no-poach prosecutions. Only time will tell if California’s enforcement approach, and success, will carve a different path.

While the FTC lacks authority for criminal enforcement of its final rule, and while it is unclear whether and when the rule may go into effect, these recent developments should be weighed carefully and collectively when evaluating potential future risks. The FTC final rule, as drafted, specifies that no provision of the rule “shall be construed as altering, limiting, or affecting the authority of a State attorney general or any other regulatory or enforcement agency or entity or the rights of a person to bring a claim or regulatory action” arising under any state laws or regulations.^[67] That is, the FTC rule, if enacted, would work alongside Section 16600—and the many other laws regulating non-competes. Even despite the U.S. DOJ’s latest losses in its no-poach prosecutions, when considered together, Blizzard’s remarks, the FTC’s final rule, California’s newly expanded Section 16600, and the increased hostility towards non-competes in multiple other states certainly portend a more complex regulatory and compliance landscape for employers, both in California and elsewhere.

Recommendations for Navigating a New Status Quo

Despite the uncertain future of the FTC’s final rule, practitioners should take care to stay apprised of the rapidly shifting landscape for employee non-competes, both at the state and federal level. Although the court has enjoined the FTC rule from taking effect in fall 2024, the FTC has filed its notice of appeal and litigation will continue. California has taken significant measures to police non-competes and other anti-competitive conduct, with other states likely to follow. Thus, both in-house counsel and outside counsel should familiarize themselves with the FTC rule and conduct a thorough review of existing agreements that may fall within the scope of the rule, including an analysis of applicability of the senior executive exemption for any such existing employees. The potential exceptions to the rule are limited, but the FTC is prepared to enforce the rule if it goes into effect in the future, and the California DOJ has made its priorities clear.

Firms should also consider compliance training for human resources teams, managers, and recruiters, as the FTC’s final rule would apply not only to written agreements, but also to oral agreements. Equally important is consideration of protection of trade secrets and sensitive business information. This is particularly essential for tech companies, where non-competes often focus on retention of and access to trade secret and commercially sensitive information, which are vital to competition. Employers should consider whether, in the potential absence of previously permitted non-compete agreements, state and federal trade secret law offer sufficient protection for their most sensitive information—or whether internal access policies and information sharing protocols should be revised, including addition of provisions mandating the sharing of information only on a need-to-know basis. If the FTC rule goes into effect and confidentiality agreements are weakened or unenforceable, it is also possible that the courts may see a rise in trade secret litigation as firms are required to act to protect their most valuable information.

Conclusion

The FTC’s rule, if it takes effect, would enact a nationwide ban on most non-compete provisions, and the nation’s largest state has sought to expand its authority to prohibit non-competes. Although the FTC’s non-compete ban faces fierce opposition and is currently enjoined, state legislatures and federal and state courts still have a long road ahead to clarify and interpret the evolving non-compete landscape. California’s recent expansion of its law has yet to be tested more broadly, and courts will need to grapple both with its intended extraterritorial application and its conflict with other existing states’ regulations. The California Department of Justice’s recent announcement of renewed interest in criminal enforcement of the Cartwright Act represents yet another variable in the challenging landscape of competition compliance for California employers. Even in more permissive states, the trend is towards more aggressive non-compete regulations, including industry-specific restrictions and protections for lower-wage workers. Thus, a robust and comprehensive review of potentially covered agreements is recommended, in tandem with continued monitoring of the ongoing litigation challenging the FTC’s final rule and how its enforcement and applicability will shift following the courts’ ultimate determinations.