Can Employees Still Challenge Noncompetes After the FTC Drops its Appeals?

Noncompetes are back in the news. In September, the Federal Trade Commission (FTC) dropped its appeals of two federal court decisions that had blocked enforcement of its nationwide ban on noncompete clauses. That move leaves the agency’s sweeping rule out of the picture for now and raises an important question: what private rights of action, if any, remain for workers seeking to challenge noncompetes?

The FTC first issued the ban in April 2024, defining a “noncompete clause” as any employment term that prohibits, penalizes, or functions to prevent a worker from taking another job in the U.S. or from starting their own business after leaving their current position. At the time, the FTC has estimated that more than 2.9 million firms relied on such clauses. The rule was intended to wipe out new noncompetes across all industries and all workers.

With the FTC’s appeals abandoned, the focus now shifts to whether employees themselves can bring challenges under the antitrust laws—particularly Section 1 of the Sherman Act. If successful, such claims could entitle workers to triple damages and attorney’s fees, and in some cases be pursued as nationwide class actions.

Clients and the Noncompetes

There is no question that certain noncompete clauses could be successfully challenged under Section 1. Take for example a noncompete clause that expressly prohibited an employee from providing services to a group of unidentified clients for a period of time after the employee’s employment ended. In addition, assume that there are no trade secrets involved and the employee has not solicited his or her clients.

Antitrust principles allow this restrictive covenant to be challenged under Section 1, which requires two elements: (1) an agreement and (2) an unreasonable restraint of trade. A private party can sue only through Section 4 of the Clayton Act, which requires showing injury “by reason of anything forbidden by the antitrust laws.” Courts interpret this to mean there must be an effect on competition. This analysis typically follows the Rule of Reason’s burden-shifting framework, where the plaintiff must first make a prima facie showing of anticompetitive effect.

No one disputes that an agreement exists. Some agreements between a company and its employees, however, do not involve the two independent economic actors required under Section 1. The classic example is a CEO and another employee agreeing on the price of one of the company’s products—the CEO could set the price unilaterally. By contrast, in our hypothetical noncompete clause, two independent economic actors are present when the agreement is formed. Both sides must consent for the clause to take effect, and the employee retains the option to walk away.

The issue of decision makers

The Supreme Court has suggested a straightforward test: if the challenged conduct requires agreement between the participants to be effectuated, then they are independent actors. In the CEO pricing example, an agreement is unnecessary because the CEO alone controls the outcome. In the case of a noncompete, both employer and employee must agree, confirming the presence of two independent decision-makers.

Procompetitive justifications

Turning to the second element of an antitrust violation, the Rule of Reason applies. Courts traditionally recognize plausible procompetitive justifications for noncompetes, such as protecting trade secrets. The Rule of Reason requires weighing anticompetitive harms against procompetitive benefits. But when no plausible benefits exist, the restraint qualifies as a naked restraint and falls under the per se rule. Under that rule, courts presume anticompetitive effect, and defendants cannot raise justifications.

In our hypothetical noncompete, no procompetitive justification exists. There are no trade secrets at risk and no valid reason to prevent customers from choosing to do business with the employee. The clause instead produces clear anticompetitive effects: it restricts customers who are not parties to the agreement, forcing them to either remain with a company they believe provides poor service or turn to unfamiliar third parties. With fewer choices, customers face higher prices for the company’s services.

Many noncompetes may be defensible under the Rule of Reason. But when a clause lacks plausible procompetitive justifications, companies cannot take comfort in the FTC’s abandoned ban. Such clauses remain subject to attack under Section 1 of the Sherman Act.