Update: FTC Abandons Non-Compete Rule and Simultaneously Initiates Targeted FTC Noncompete Enforcement Action

The Federal Trade Commission has abandoned its broad non-compete rule appeal but simultaneously initiated a targeted enforcement action against Gateway Services, Inc., a pet cremation company, for imposing anticompetitive post-employment non-competes on nearly 1,800 employees, including hourly workers. This strategic pivot signals the FTC's continued focus on non-compete abuses, shifting from a universal ban to case-by-case enforcement under existing antitrust laws like the Sherman Act's "rule of reason." The action underscores increased regulatory risk for companies employing widespread, untailored non-compete clauses, particularly for non-senior staff, while clarifying that agreements for senior executives or those tied to equity grants remain permissible.

Analysis

The U.S. Federal Trade Commission (FTC) has pivoted its strategy on non-compete agreements, abandoning its appeal for a blanket ban in favor of targeted enforcement actions under existing antitrust laws. This shift is exemplified by the September 4, 2025, action against Gateway Services, Inc., the largest U.S. pet cremation company, which had imposed 12-month post-employment non-competes on nearly 1,800 employees, including hourly workers, since 2019. The FTC's move, guided by Chair Andrew Ferguson's view of enforcing the Sherman Act's "rule of reason," signals a clear focus on what it deems "pernicious and onerous" agreements, particularly those applied broadly without regard to an employee's role or access to sensitive information. The proposed consent order with Gateway is severe, requiring it to cease enforcing most non-competes and submit to ten years of compliance monitoring. Crucially, the FTC's action explicitly carves out exceptions, deeming non-competes acceptable for directors, officers, and senior employees in connection with equity grants or the sale of a business, thereby clarifying the regulatory safe harbors for corporations.

Key Decisions for Investors

• Investors should increase scrutiny on companies in labor-intensive service sectors that utilize broad, non-tailored non-compete clauses for their general workforce, as these firms now face a heightened risk of targeted FTC enforcement, potential consent decrees, and reputational damage.
• When evaluating corporate governance, differentiate between firms that strategically use non-competes for senior executives tied to equity awards—a practice the FTC deems permissible—and those with policies that may suppress wages and mobility for lower-level employees, as the latter represents a tangible legal and operational liability.
• Portfolio managers should view a company's reliance on widespread non-competes for non-executive staff as a potential drag on human capital and a leading indicator of future legal costs, factoring this into valuation models, particularly for long-term holdings.