Now that the Federal Trade Commission has abandoned efforts for a nationwide ban on noncompete clauses, the employment provisions remain subject to a constellation of changing state laws and can sometimes still violate federal law in certain situations.

The FTC made the expected decision last month to stop defending a rule that would have banned the use of noncompete clauses in most employment contracts and rendered millions of existing clauses unenforceable.

A Texas federal court set the rule aside before it took effect last year, finding that it was "arbitrary and capricious" and that the commission lacked authority to issue the rule. The move to drop the appeal was expected since the commission's current chairman, Andrew Ferguson, strongly opposed adopting the rule during the previous administration, contending it was an overreach of the agency's authority.

Ferguson said in a statement when dropping the appeal that the new administration was choosing not to continue "tilting at windmills" by defending an indefensible rule and is instead trying to protect American workers by patrolling the markets for specific anticompetitive conduct.

John H. Chun, a partner with Herrick Feinstein LLP, told Law360 the break from the previous administration's approach to noncompetes does not mean the current commission is going to ignore the issue.

"Clearly, there were differing visions between the prior and the current chair as to how to best address abuses regarding noncompetes," Chun said. "The current FTC chair, while he was not in support of a nationwide ban, he appears to be making the curtailment of noncompete abuses a priority, on a much more case by case basis."

Meredith R. Miller, a professor at Albany Law School, told Law360 the FTC's decision to drop the rule "leaves us back where we started," with a patchwork of state approaches and an increasing number of states enacting statutes to address noncompetes in some way.

"So, we're back to a lot of unpredictability, really, for many employees," Miller said.

Four states, including California, have effectively banned noncompetes, and Miller said a number of other states have enacted laws to restrict their use, largely through salary thresholds to ensure they do not apply to lower-paid, hourly workers. Many states also do not allow noncompetes to be enforced in the healthcare space, Miller said, based on concerns about patients having access to their choice of doctor.

Chun said that noncompetes have been largely governed by state law in the past and said the states have been enacting stricter laws that had practitioners concerned about overly restrictive clauses before it became a federal issue.

"Notwithstanding the FTC ban, there had been a very noticeable trend within state jurisdictions of restricting noncompetes," Chun said. "So, regardless of whether or not the FTC ban went into effect, the smart advice and the smart practice among employers was still, in most jurisdictions, to take a close look at their noncompetes and their restrictive covenants to make sure they were tailored."

John Siegal, a partner with BakerHostetler's noncompete and trade secrets team, said that attention on noncompete clauses over the past several years, from the FTC, state lawmakers and state enforcers have led many companies to stop imposing blanket noncompetes across their workforces.

"By and large, the use of broad, across-the-board noncompetes for all employees, regardless of salary level, is something that's evolving out of the economy," he said.

When courts are left to determine if a noncompete is reasonable under common law, Miller said they focus on the postemployment duration, the geographic limits and the range of jobs it covers. The narrower the provision, the more likely it is to be enforceable, she said. The courts also look at what the employer is trying to protect, such as trade secrets or an investment in training, and consider public policy concerns like those raised by healthcare workers.

These are also elements of noncompetes that the FTC has said it will be looking at when assessing the agreements.

"That's why I don't really think it moves the needle, unless they take it upon themselves to go fry some of the bigger fish that are easier to point to as being abusive," Miller said.

The commission did recently provide an example of an instance where enforcers believe a noncompete violated the FTC Act when it announced a settlement last month with pet cremation company Gateway Services Inc. The noncompete in that case would have prevented 1,800 employees from working in the pet cremation industry nationwide for a year following their employment.

Ferguson outlined a reasonableness test in his statement for the settlement similar to the common law test, focused on geography, duration and scope.

Melissa L. McDonagh, co-chair of Littler Mendelson PC's unfair competition and trade secret practice group, told Law360 the commission seemed particularly concerned with the noncompete in the pet cremation case because it applied to all employees, regardless of their access to confidential information or position within the company. She noted the settlement included a carveout allowing the use of noncompetes with certain senior management and others, highlighting that the FTC will tolerate noncompete provisions that don't hinder ranks and file employees' ability to change jobs.

This speaks to the analysis performed by courts as well, when they look to see if noncompetes are narrowly tailored for a specific purpose.

"I think we'll continue to learn more of what the FTC considers to be the reasonable use of noncompetes with each action they file," McDonagh said.

McDonagh said companies should always try to take a tailored approach to restrictive covenants because of the potential risk that they could be found to be unenforceable. This means making sure noncompetes apply only to employees when it's necessary and seeing if nonsolicitation or confidentiality agreements could be used instead.

"These are conversations that we have all the time, about what is needed and necessary for the business and what makes sense for that particular business," McDonagh said. "That's how employers have been considering them and will continue to do so."

In addition to the Gateway settlement, the FTC launched a call for public input to "better understand the scope, prevalence, and effects" of noncompetes and to help identify future enforcement targets. The FTC also sent letters last month warning healthcare employers and staffing companies not to include overly broad noncompete restrictions in their employment contracts and urged them to conduct a review to ensure they comply with the law.

Chun said the FTC's focus on the healthcare space makes sense, given the unique concerns raised by the industry.

"I think most people can appreciate that the patient-doctor relationship is a highly respected, and maybe even sacred one, and therefore overly broad geographic restrictions on doctors that prevent a patient from being able to see his or her physician of choice is a significant burden and one that deserves careful scrutiny," Chun said.

Siegal noted that the debate around noncompetes is not clearly partisan. While California has banned noncompetes since the 19th century, and fellow Democrat-led Minnesota recently enacted a ban, the other two states that ban noncompetes are North Dakota and Oklahoma, which both have Republican governors.

There is, however, a distinction among states enacting new laws, he said, with blue states tending to impose salary thresholds, while Florida recently enacted a law, the Contracts Honoring Opportunity, Investment, Confidentiality and Economic Growth Act, that permits almost all noncompetes.

"Florida is definitely the outlier," Siegal said. "It's very broad, unprecedented, but even that one exempts healthcare professionals."

The Choice Act not only permits noncompete in most industries, it allows for a four-year postemployment term, which Siegal said is far longer than most practitioners have ever seen used. It also requires courts to issue injunctions at the outset of a dispute over the provisions, something Siegal said is unlike virtually any other law.

"No court discretion, no equitable balancing. It's just a mandatory requirement," he said. "That just completely shifts the landscape between employers and employees in this area, and is just going in completely the opposite direction of basically the rest of the country."

Siegal said now that we're largely back to a federalist patchwork of state law governing noncompetes, he thinks an emerging issue will be choice of law provisions in employment contracts and the extent to which states will honor one another's noncompete policies.

Right now, he said, the case law has been evolving towards states not honoring out-of-state noncompetes. He also said some states, including Massachusetts, have enacted laws specifically preventing employers from requiring employees to agree to be bound by another state's laws.

"That's where I think a lot of the movement's going to be over the next several years," Siegal said.