A federal court has struck down a proposed rule that would have banned noncompete agreements that bar employees from taking jobs with competitors.

In Ryan LLC v. Federal Trade Commission, the federal court for the Northern District of Texas struck down the Federal Trade Commission’s proposed rule that would have banned noncompete agreements.

Published April 23, the final rule would have banned the use of noncompete clauses nationwide, classifying such clauses as an unfair method of competition under Section 5 of the FTC Act. But the court held the noncompete rule exceeded the FTC’s statutory authority under the FTC Act and was arbitrary and capricious.

First, the court relied in part on the recent U.S. Supreme Court ruling in Loper Bright Enters. v. Raimondo that held that where statutes are ambiguous, courts owe no deference to federal agencies’ interpretations of laws. In Ryan LLC, the federal court went one step farther. It pointed out the scope of agency action is governed the Administrative Procedure Act, and the “APA thus codifies for agency cases the unremarkable, yet elemental proposition … that courts decide legal questions by applying their own judgment. It specifies that courts, not agencies, will decide ‘all relevant questions of law’ arising on review of agency action.”

Thus, the law reigns in government agencies that attempt to fill in the gaps left by Congress in drafting laws or adopting rules that exceed the scope Congress intended. Of course, this limits federal agencies’ ability to adopt substantives rules in areas in which Congress hasn’t spoken. Federal agencies likely will exercise caution in enacting rules in areas that affect employers, including employment and tax laws.

Second, the ruling in Ryan LLC returns the regulation of noncompete agreements to states. Only a few states ban noncompete agreements entirely, but most put some restrictions on the use of noncompete agreements.

Colorado applies stringent restrictions to the use of noncompete agreements. In Colorado, only two types of noncompete agreements are legal.

Noncompete agreements with “highly compensated employees” are allowed if the purpose of the agreement is to protect trade secrets — so long as the agreement is no broader than necessary to protect an employer’s legitimate interest in protecting its trade secrets. The salary threshold for 2024 is $123,750 annually, so noncompete agreements are prohibited for all but a small percentage of Colorado employees.

The Colorado Division of Labor Standards and Statistics determines the threshold amount each year. And agreements not to solicit an employer’s customers are legal if the employee restrained makes at least 60 percent of the salary threshold listed above. In 2024, that amount is $74,250 annually.

Employers should note that several types of agreements that were lumped into noncompete agreements are excluded from the definition of noncompete agreements by recent state legislation. Employers may recoup educational and training costs from employees who leave employment within two years of receiving such training. This recovery is limited to the prorated amount of training costs remaining, and recoupment cannot violate the Fair Labor Standards Act or Colorado Wage Act.

An employer could only deduct the remaining prorated amount of training costs if the employer entered into a written agreement with the employee to deduct those costs, and the deduction could not result in the employee making less than minimum wage on his or her final paycheck.

Also, Colorado expressly permits employers to make and enforce reasonable confidentiality provisions relevant to the employer’s business that doesn’t prohibit disclosure of information arising from the worker’s general training, knowledge, skill or experience — whether that information was gained on the job or elsewhere. But an employer may not protect information that’s readily ascertainable to the public or a worker otherwise has a right to disclose as legally protected conduct. For example, an employer could not prohibit an employee from disclosing his or her final salary or the fact they brought a complaint of sexual harassment to the employer. This exception is broad, much broader than the definition of “trade secrets.” While an employer can rarely enter into an agreement that prevents an employee from seeking other employment, the employer still can protect proprietary information.

Employers drafting noncompete agreements should consult legal counsel to make sure the agreements comply with recent changes to Colorado law. The Employers Council makes available to members on its website white papers on restrictive covenants for all of the core states it serves. Consulting and enterprise members may discuss the use of noncompete agreements with legal services attorneys.