With the stroke of a pen, Federal Trade Commission (FTC) head Lina Khan claimed to outlaw the vast majority of non-compete agreements.  Also known as "restrictive covenants", non-competes are agreements put in place that limit or 'handcuff' an employee's (and certain independent contractors) ability to compete with a business after terminating their employment or relationship with that business.  They often have a time component (months or years) and a distance component (usually expressed as an X-mile radius). These agreements can vary significantly from one employer or employee to the next. Usually, the more unique and profitable the employee's work is for the business, the more restrictive the agreement becomes.

 For those not in the know, the FTC regulates commerce.  Part of its watchdog duties is to police big business and regulate Federal Antitrust laws, like the Sherman Antitrust Act, which was passed in 1890.  The Sherman Antirtrust Act sought to break up monopolies in Oil, Steel and Railroads, among others.  You may recognize the names John D. Rockefeller, Cornelius Vanderbilt, Andrew Carnegie , and J.P. Morgan (apparently the inspiration for the Monopoly board game).  They acquired most of their respective competitors and became monopolies, which in turn hurt the consumer.

The FTC applied this same law to issue its rule banning all non-compete agreements.  The thinking is that non-compete agreements restrain freedom of workers, which in turn stifles competition.  This is obvious -- it's in the name. By themselves, it's hard to argue that non-compete agreements create monopolies. However, the point is really that anti-competitive behavior of any kind has the potential to do so.

Less clear is whether the FTC even has the power to deem non-competes unenforceable.  Some say this is best left to the states to regulate.  While Arizona does not have such a law, states like California and Washington have laws limiting non-competes to some degree.  However, all states already have case law that tests whether a non-compete is reasonable.  This typically concerns the prohibited time period and distance in the agreement and whether it would prevent the employee from the ability to earn a living.  In Arizona, it's also focused on the nature of the employee's work and the time it would take to install and/or train a suitable replacement employee. If it's deemed unreasonable, the non-compete is unenforceable.  Unlike some states, Arizona courts do not re-write the agreement to make it suitable.  It is either enforceable or unenforceable as written.

Those challenging this ruling will argue that this 'reasonnableness' test is already guards against  non-competes being fertile ground for monopolies.  The rule is set to take effect September 4, 2024, banning all new non-competes and rendering most in effect unenforceable.  However, before it takes effect, it is certain the rule will be challenged.  During that challenge, it is highly likely that the federal court hearing that case will prevent it from taking effect until it make a final decision .  What that court decides will probably be appealed and then the case will eventually make its way to the U.S. Supreme Court to decide whether the FTC is exceeding its rulemaking power.  During all of that litigation and appeal process, it is unlikely that the rule will have an effect.

In the meantime, do not assume that a non-compete is or will become unenforceable. The legal status of the FTC rule is very much in flux.  Businesses and employees alike should understand that even if the rule does become law, there are exceptions for non-profit companies and executive employees, among others.  Beyond that, other forms of restraint, such as non-solicitation and non-disclosure agreements,  and trade secrets laws (AUTSA) remain enforceable. Our firm handles non-competes and other similar agreements.  Please call if you have questions.