Opinion: The evolving law of noncompete agreements

Stephen F. Aton

The Federal Trade Commission is an independent agency charged with enforcing civil antitrust laws and protecting the public from unfair and deceptive business practices. In April, it approved a rule prohibiting noncompetition agreements on a national scale. The stated aim of the agency was to promote competition, protect the right of workers to change jobs and to increase business activity. The rule was set to become effective Sept. 4. A federal District Court in Texas, however, in the case of Ryan vs. FTC, held that the agency exceeded its authority and that the rule was arbitrary and capricious. As a result of the decision – while the case is on appeal – the new rule cannot be enforced.

The FTC stated that noncompete clauses keep wages low, suppress new ideas and inhibit business growth by preventing or discouraging workers from taking alternative employment or starting a new business. During the 90-day public comment period, more than 26,000 comments were received, the overwhelming majority of which were in support of the proposed rule. After the comment period, the commissioners of the FTC voted 3-2 in favor of adopting the rule.

The terms of the proposed rule were broad-reaching and sweeping in scope. The rule would have invalidated even existing, privately negotiated, noncompetition agreements for most workers. Employees with existing agreements would have been notified by their employer that their noncompetes would not be enforced against them in the future.  However, noncompetes of senior executives, defined as those earning more than $151,164 annually, and who are in policymaking positions, were undisturbed by the rule, although employers were to be prevented from entering into new noncompetition agreements with such employees.      

Noncompetition agreements have always had to be limited both temporally and geographically to be enforceable. Prohibiting someone from practicing their trade or business in the whole world forever is the extreme case of an unenforceable noncompete. But if an employee is prohibited from competing with their former employer in a reasonable geographic area for a reasonable period of time, courts have historically been willing to uphold such agreements. For example, restricting a construction supervisor from working for a competitor of his former company for two years within a 30-mile radius may well be enforceable.   

Regardless of the merits of noncompetition agreements, the fact that three unelected commissioners of a single federal agency could invalidate privately negotiated contracts, thereby overturning legal rules and practices existing in this country for over 100 years, and in Western culture since the Middle Ages, is unprecedented. This type of agency overreaching is now proscribed by the United States Supreme Court’s overruling of the Chevron case. 

In Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., decided by the U.S. Supreme Court in 1984, the court held that federal courts were required to defer to the reasonable interpretations of ambiguous laws made by administrative agencies. As a result, federal agencies often used the so-called “Chevron deference” to justify their interpretation of the law and to make new rules and regulations that had very far-reaching impact, as if they were a legislative body.

On June 28, the U.S. Supreme Court in Loper Bright Enterprises v. Raimondo, overturned the Chevron case, holding that courts are no longer required to give deference to an agency’s interpretation of the law, which is of course the function of the courts. As a result of the overruling of Chevron, the almost unbridled power of agencies to essentially make law is now greatly constrained. If Congress or the individual states want to enact restrictions on the ability of employers to enter into certain noncompetition agreements, it may do so. 

In fact, Missouri, in section 431.204, changed the law with respect to noncompetition agreements in the state. Now, a written nonsolicitation agreement that prohibits soliciting, hiring or otherwise interfering with the employees of a business is presumed valid if it does not exceed two years. In addition, an agreement not to solicit customers with whom the former owner dealt for a period of not more than five years is similarly enforceable.

Noncompetition agreements are an evolving area of the law, and employers should carefully monitor the appeal of the FTC, although the noncompetition rule as written by the FTC board is unlikely to be reinstated.  

Stephen F. Aton is a Springfield attorney and owner of Aton Law Firm LLC, practicing estate planning, corporate and real estate law. He can be reached at steve@atonlaw.com.