FTC Ends Defense of Its Noncompete Ban and Announces Enforcement Initiatives    

As anticipated, a recently reconstituted Federal Trade Commission (FTC or Commission) announced on Friday that it would no longer defend its previously issued rule (Rule) banning most noncompete agreements. See our prior post regarding the FTC’s Rule banning noncompetes. In so doing, the Commission effectively withdrew the Rule it had put in place in May, 2024, which had been blocked from taking effect via a nationwide injunction issued by a U.S. district court in Texas and an injunction issued by a Florida district court.^[1]

With the “withdrawal” of the Rule, the legality of noncompetes at the federal level will now be governed by application of the law as in effect prior to promulgation of the Rule and, as explained by the Commission, will be enforced on a case-by-case basis. That said, while ending the appeals, the FTC stated that it remains committed to “rooting out unfair and anticompetitive conduct in all appropriate cases where Congress has authorized [it] to act.”

As explained below, this was made clear when the Commission, in connection with the withdrawal of its appeals, announced that it had settled a case with a company accused of illegally using employee noncompete agreements, and also issued a request for information (RFI) inviting public comment to assist it in understanding the scope, prevalence and effects of employer noncompete agreements and, importantly,  in gathering information to inform possible future enforcement actions, particularly focusing on the impact of noncompete agreements in the health care sector.^[2]

Proposed Consent Order with Gateway Services

Last Thursday, the FTC announced that it had entered into a proposed consent order with Gateway Services, Inc., a pet cremation company, and its subsidiary Gateway U.S. Holdings (collectively “Gateway”) pursuant to which the companies will, among other things, cease enforcing substantially all of their noncompete agreements. In the complaint filed against the companies, the Commission alleged that their noncompete agreements with employees violated Section 5 of the Federal Trade Commission Act, which prohibits unfair methods of competition and unfair or deceptive acts or practices.

According to the complaint, Gateway has been requiring noncompete agreements for all new employees regardless of their responsibilities and those agreements are neither reasonable in scope nor justified to protect a legitimate business interest.

The noncompete agreements prohibit Gateway’s employees (with the exception of those in California, where such agreements are banned) from working in the pet cremation industry anywhere in the U.S. for one year after their separation from Gateway.

According to the complaint, although these noncompetes are limited in duration, their geographic scope is overbroad as it effectively requires workers to exit the pet cremation industry within the U.S. entirely and applies not just to highly compensated executives but also to hourly workers in relatively low-skill positions — the latter providing services that are critical to the operation of Gateway’s business while not requiring extensive training that might justify some noncompete restrictions.

Pursuant to the proposed consent order, Gateway is required to, among other things:

• Immediately cease entering into or enforcing noncompete agreements with all employees other than directors, officers or senior employees, where the agreement is entered into in conjunction with the grant of equity or equity-based interests, or where the agreement is entered into in conjunction with the sale of a business, if the individuals subject to the noncompete have a pre-existing equity interest in the business being sold
• Notify employees present and future that they may
  • Seek or accept a job with any company or person even if they compete with Gateway
  • Compete with Gateway including by running their own business
  • Solicit customers with whom they did not have direct contact or personally provide service to during their employment with Gateway

(Gateway may still enter or enforce agreements that prevent current or former employees from using or disclosing Gateway’s confidential business information and trade secrets.)

The Request for Information

The request for information, which was also announced last Thursday, invites public comment to assist the Commission in understanding the scope, prevalence and effects of employer noncompete agreements and in gathering information to inform possible future enforcement actions.

The enforcement focus is made clear when the Commission states that, given the private nature of employment contracts and employees’ reasonable confidentiality concerns, its law enforcement efforts would benefit from information as to specific employers who impose these agreements.

Accordingly, Commission staff encourages members of the public, including current and former employees restricted by noncompete agreements, employers facing hiring difficulties due to a rival’s noncompete agreements, and market participants in the health care sector in particular, to share detailed information about the use of noncompete agreements. 

In particular, the FTC staff is seeking detailed information from the public as to the following along with specific examples:

• The name of any employer currently using employee noncompete agreements
• The reason, if any, the employer has given for using them
• The roles, positions or job functions for which they are used
• The typical salary ranges of the roles or positions subject to noncompetes
• The terms or limitations of the noncompete agreements such as duration and geographic scope
• The track record of the employer in seeking to enforce the noncompete agreements
• The harm suffered by employees covered by noncompete agreements when they take, consider taking, or would like to take new jobs, including for example:
  • Employees avoiding seeking or turning down new jobs
  • Employees taking new jobs with lower pay or worse conditions
  • Employees leaving the industry or changing their job type when taking a new job, employees moving residences, commuting significant distances or incurring other costs to take a new job
  • Former employees taking a new job and then incurring legal costs to deal with the former employer’s attempts to enforce the noncompete agreements
• The difficulty faced by rival employers in attempting to hire employees, including incurring legal costs to deal with the noncompete agreements when hiring or seeking to hire workers and struggling to compete or going out of business
• Noncompete agreements contributing to a loss in innovation
• Non-solicitation or non-recruitment agreements limiting former employees from working with the employer’s former customers or former employees

There is a particular focus on the impact of employee noncompete agreements in the health care sector.

The Commission specifically requests that interested parties provide it with examples of noncompete agreements covering workers in the health care sector that have (i) affected wages, labor mobility, or the availability, quality, or cost of healthcare services, (ii) made it more difficult for providers of health care services to hire physicians, nurses or other professionals, or (iii) substantially affected competition within a specific geographic area as to a specific health care service.

The RFI requests that information be provided to the Commission no later than Nov. 3 and explains that submissions can be marked confidential and will not be disclosed by the Commission except as required or permitted by applicable law.

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^[1] The FTC under the leadership of its prior Chair Lina Khan had appealed those decisions — to the Fifth Circuit Court of Appeals in the Texas case and to the Eleventh Circuit in the Florida case. It was those appeals that the FTC dropped on Friday. See Ryan, LLC v. FTC, No. 24-10951 (5th Cir.), and Properties of the Villages v. FTC, No. 24-13102 (11th Cir.)

^[2] The vote to drop the appeals was 3-to-1 with Commissioners Andrew Ferguson, Melissa Holyoak and Mark Meador (all Republicans) voting in favor and Commissioner Rebecca Slaughter (a Democrat) opposing. The Rule had been adopted by the FTC while the agency was controlled by Democrats. At the time of its issuance, Commissioners Ferguson and Holyoak dissented arguing, among other things, that the Commission lacked statutory authority to issue a substantive rule such as the Rule.

Following President Trump’s inauguration, Ms. Khan resigned as a Commissioner and Republicans now control the agency with Commissioner Ferguson as chair joined by Commissioner Holyoak and newly appointed Commissioner Meador. The sole Democrat on the Commission is Commissioner Slaughter. The other Democratic commissioner, Alvaro Bedoya, has resigned.

Commissioner Slaughter was recently fired by President Trump but was reinstated when the Court of Appeals for the D.C. Circuit in a split decision ruled that the firing was unconstitutional, a ruling that has now been appealed to the Supreme Court.