Recent legal developments surrounding the Federal Trade Commission’s (FTC) Non-Compete Clause Rule have generated significant attention across industries including construction.
For construction companies, understanding these rulings is critical, as non-competes have long served as a tool to protect intellectual property, trade secrets, and business relationships. However, with the FTC’s ambitious new rule, and subsequent legal challenges, the future of non-compete enforcement remains uncertain.
Background on the FTC Non-Compete Clause Rule
In January 2023, the FTC proposed a sweeping rule aimed at banning almost all non-compete clauses between employers and workers, marking one of the most significant federal interventions into employment contracts in U.S. history.
The final rule, adopted in April 2024, was set to take effect on September 4, 2024, unless judicial intervention delayed or blocked its enforcement.
The FTC justified the rule as necessary to address harm caused by non-compete agreements in labor markets. Non-competes, according to the FTC, stifle competition by limiting workers’ ability to seek better job opportunities, reduce wages across industries, and hinder innovation by preventing the formation of new businesses.
The rule also cited empirical research showing that about 30 million American workers — roughly one in five — were bound by non-competes, with many agreements imposed on lower-wage workers and others in positions where non-competes served little business purpose.
Key Provisions of the Rule
Comprehensive Ban on Non-Competes
The rule categorically prohibits employers from entering into non-compete clauses with workers after the rule’s effective date. This applies to both employees and independent contractors across all industries.
Existing Non-Competes
Non-Executive Workers
Non-competes signed before the rule’s effective date become unenforceable, and employers are required to notify affected workers that their non-competes are no longer valid.
Senior Executives
Pre-existing non-competes for senior executives remain enforceable, recognizing that these higher-level agreements might not inflict the same level of harm on competition.
Sale of Business Exemption
Non-competes entered into as part of the sale of a business remain enforceable, allowing sellers to protect the goodwill of the business being sold.
State Law Preemption
The rule preempts state laws to the extent that they conflict with the FTC’s regulation, meaning states that permit broad use of non-competes would no longer be able to do so.
Severability Clause
If any part of the rule is invalidated, then the remaining provisions are intended to stay in effect.
Legal Challenges to the Rule
Despite its far-reaching intent, the rule has encountered substantial legal opposition. Several court cases have challenged the FTC’s authority to implement such a regulation, resulting in conflicting rulings from different jurisdictions.
Ryan LLC v. FTC (Northern District of Texas)
One of the most significant cases, Ryan LLC v. FTC, was decided by the U.S. District Court for the Northern District of Texas. On July 3, 2024, the court issued a preliminary injunction against the FTC’s rule, halting its enforcement for the plaintiffs involved in the case. However, the court did not extend this ruling nationwide at the preliminary stage.
On August 20, 2024, the court went further, issuing a final judgment that blocked the rule nationwide. Judge Ada Brown found that the FTC exceeded its statutory authority in adopting the rule and criticized it for being “arbitrary and capricious.”
Specifically, the court held that:
- The FTC lacked the authority under the FTC Act to issue a rule of such broad economic impact without explicit congressional authorization.
- The rule was overly broad and applied indiscriminately across industries without sufficient justification.
This decision immediately prevented the FTC from enforcing the rule, just two weeks before its scheduled effective date.
ATS Tree Services LLC v. FTC (Eastern District of Pennsylvania)
In contrast to the Texas ruling, the U.S. District Court for the Eastern District of Pennsylvania ruled in favor of the FTC. The court found that the FTC acted within its authority under the FTC Act to regulate non-competes as “unfair methods of competition.” The court denied the plaintiff’s motion for a preliminary injunction, allowing the rule to stand — at least temporarily — for those under the court’s jurisdiction.
Properties of the Villages Inc. v. FTC (Middle District of Florida)
Another significant case, Properties of the Villages Inc. v. FTC, resulted in a preliminary injunction against the rule.
While the Florida court expressed concerns about the FTC’s broad rulemaking authority, it granted the injunction on narrower grounds. The court questioned whether the rule violated the major questions doctrine, which requires agencies to have clear congressional authorization when enacting regulations with significant economic or political consequences.
The Path Forward: What Comes Next?
These conflicting rulings suggest that the non-compete rule will likely remain in legal limbo for some time.
The Ryan LLC case is expected to proceed to the U.S. Court of Appeals for the Fifth Circuit, and further appeals could bring the matter before the U.S. Supreme Court. In the meantime, other district courts will likely continue to issue decisions on related challenges, adding to the uncertainty.
For now, employers, including those in the construction industry, can continue to enforce non-competes under state law, though they should remain vigilant as the legal landscape evolves. Employers are advised to review non-compete agreements and prepare for potential changes by:
- Assessing whether existing non-compete agreements could be impacted by the rule if it is upheld in the future.
- Exploring alternative mechanisms to protect proprietary information and client relationships, such as nondisclosure agreements (NDAs) and non-solicitation agreements.
- Preparing communications for employees who may be confused about the status of their non-compete agreements amid these legal developments.
Implications for the Construction Industry
The construction industry, where non-competes are frequently used to safeguard client lists, pricing strategies, and trade secrets, must pay particular attention to these developments.
Contractors and subcontractors, in particular, often rely on non-compete agreements to protect their competitive position in local markets. However, if the FTC’s rule ultimately prevails, contractors will need to find new ways to maintain confidentiality and protect business relationships without relying on non-compete clauses.
Additionally, industry-specific concerns — such as the mobility of skilled labor and the retention of project managers or estimators — might become more challenging to address in a post-non-compete landscape. Employers may need to bolster their onboarding processes and internal policies related to data security, intellectual property protection, and client management.
Conclusion
While the FTC’s Non-Compete Clause Rule represents a bold shift in labor market regulations, its future remains uncertain due to ongoing litigation. Construction companies should monitor developments closely and prepare for various potential outcomes.
Even if the rule does not take effect immediately, the legal challenges surrounding non-competes are likely to continue reshaping employment practices across industries.
In the meantime, proactive steps to protect confidential information and client relationships will be essential as the courts continue to weigh in on the rule’s fate.