While most commentary and handwringing has focused on the Federal Trade Commission’s (“FTC”) Notice of Proposed Rulemaking released on January 5, 2023, many are unaware of the FTC actions taken the day before. On January 4, 2023, the FTC announced the successful launch of what it calls an enforcement “crackdown” against noncompete agreements by heralding forced settlements with three (3) different companies that made regular use of noncompete agreements with a broad range of employees, and not just with low-wage or low-skilled workers.[1] Each of the FTC Complaints alleged the “unfair use of noncompetes in violation of Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45,” and the Press Release indicated that each of the three (3) companies had agreed to the entry of a consent order that will be entered after the thirty (30) day public comment period.
As part of the Consent Orders, once finalized, each of the companies and their individual owners will be prohibited from enforcing, threatening to enforce or imposing noncompete agreements against the employees identified in the rulings. Moreover, each of the companies will be also required to nullify the challenged noncompetes without imposing any penalty on the employees and each post a notice in a conspicuous place in their workplaces for the next ten (10) years to let their workforce know that employees are free to seek or accept a job with any company, run their own business or to compete with them at any time. Ominously, the FTC’s Press Release included the following statement “The agency continues to investigate noncompete restrictions and other restrictive terms in employment contracts that may violate the law. If you are aware of an unfair noncompete you can report it to the FTC staff.”
So, let’s look at what is known about the three (3) companies targeted by the FTC based on the allegations in the Complaints:
- A Michigan-based security services company required more than 1,500 low-wage security guards to enter into noncompete agreements that prohibited them from working for any business within a 100-mile radius of their last job site for two (2) years, and also imposed a $10,000 penalty for violations. The company had been aggressive in enforcing the agreement and the FTC alleged that it continued to require employees to sign-off on the agreement even after a state court had found the restrictions were unreasonable and unenforceable.
- The other two (2) companies were identified as being the two (2) largest glass container manufacturers in the United States. The FTC noted that it pursued these matters because the glass container industry in the United States is highly concentrated, and it is very difficult for a new competitor to enter into this market without having access to highly skilled and trained workforce in this niche market.
- One of the glass container manufacturers required a contract with more than 1,000 employees that imposed a one (1) year ban “from going to work for, owning or being otherwise involved in a business in the United States that sold similar products or services without prior written consent.” The other manufacturer had a contract with approximately 700 employees that imposed a two (2) year ban from “performing the same or substantially similar services for a business in the United States, Canada or Mexico that is involved with or supports the sale, design, manufacture or production of glass containers in competition with the employer.” In both cases, the agreements were not just with hourly employees, but the challenged agreements were required of many salaried employees who were involved in various aspects of the glass production process or who worked as engineers or in a role involving quality assurance.
Keep in mind what lead to these Consent Orders was a complaint filed by the FTC’s staff against a business, not in a lawsuit filed in federal or state court, but as an administrative complaint filed internally with the agency itself[2] and a majority of Commissioners make the decision.[3] In her published statement in first of the three cases, Christine Wilson, the dissenting Commissioner, expressed concern that these cases foreshadows how the Commission intends to apply the new Section 5 Policy Statement released on November 10, 2022.[4] She criticized her fellow commissioners by saying, “Unfortunately…[these actions] foreshadow how the Commission will apply the new Section 5 Policy Statement. Practices that three (3) unelected bureaucrats find distasteful will be labeled with nefarious adjectives and summarily condemned with little to no evidence of harm to competition.” [5]
Commissioner Wilson also noted that the complaints against the two (2) glass manufacturers were very brief and “woefully devoid of details that would support the Commission’s allegations.” Moreover, she noted that the allegations failed to allege that the noncompete provisions at issue were unreasonable, which was a significant departure from legal precedent and noted that the Commission makes no reasonableness assessment regarding the duration or scope of the noncompete clauses involved, “Instead [the Commission], seems to treat the noncompete clauses as per se unlawful under § 5 of the FTC Act.” She pointed out that the complaints asserted that the noncompete clauses impeded entry or expansion of rivals into the industry but made no factual allegations regarding the inability of any rival to enter or expand its operations. The complaints further further alleged without evidence that the noncompete provisions reduced employability and caused lower wages and salaries, reduced benefits, less favorable working condition and personal hardships on employees. In concluding, she expressed concerns for due process because, “The allegations here depart from a century-long line of precedent regarding the appropriate analysis of the legality of noncompete provisions and conflict with the 7th Circuit holdings specific to § 5 of the FTC Act… the complaints in these matters challenge conduct [by the manufacturers] that predate the FTC’s November 2022 Section 5 Policy Statement… Given the state of the law for hundreds of years prior to this enforcement challenge I believe notice was lacking.”[6]
In response to Commissioner Wilson’s statement, the FTC Chair Lina M. Kahn and the other two (2) commissioners released a statement taking issue with the claim that the FTC’s actions were a “radical departure” from precedent. She pointed out in a footnote that “there is long-standing legal precedent which firmly affirms that Section 5 reaches beyond the [anti-trust provisions] of the Sherman and Clayton Acts. Reactivating Section 5 [referring to the July, 2021 rescission of investigative limits, see ftn.3], and ensuring that our approach is fully faithful to the legal authorities that Congress gave us is critical to promoting the rule of law and ensuring the democratic legitimacy of our work.”[7] The FTC indicated that it will publish the final Consent Decree in the Federal Register for each of the three cases soon after the 30 day period closes for receiving public comment.
It should be no real surprise that the current appointees to the FTC have aggressively pursued an effort to reduce or eliminate the ability of employers to require or enforce a noncompete provision with workers. One need only recall that on May 5, 2016, during the Obama administration, the White House released a report on the overuse and misuse of noncompete agreement that attracted significant attention at the time, and later on October 26, 2016, released a Call to Action based on a report from a working group[8] that led to several Democratic Senators to introduce the Workforce Mobility Act of 2018, which would have banned the use of noncompete agreements with employees. Notably, it was not only the Democrats who expressed concern about the impact of noncompete agreements. Senator Rubio introduced the Freedom to Compete Act in January 2019 that would have banned the use of noncompete agreements for most nonexempt workers. None of these legislative efforts have been successful at the federal level as Congress is in stalemate. In contrast many state legislatures have been active in this area, including Virginia which passed a new law that prohibits employers from enforcing or requiring “low-wage” employees to enter into a noncompete agreement, which is defined to include a restriction that would prohibit an employee from providing services or products to a customer during a post-employment, unless the employee initiates contact with or solicited the customer.[9] So, the desire to ban the use of post-employment noncompete agreements has not disappeared.
Despite the gridlock in Congress, President-elect Biden in December, 2020 identified noncompete reform as part of his platform where he said he would work with Congress to “eliminate all noncompete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets.”[10] In February, 2021, shortly after Biden’s inauguration, four Democratic Senators, including Virginia’s Tim Kaine, reintroduced a version of the Workforce Mobility Act to ban employee noncompete agreements. Then on July 9, 2021, two things happened. First, President Biden issued an Executive Order[11] promoting competition in the American economy where he encouraged the FTC to consider the exercise of the FTC’s rule-making authority to “curtail the unfair use of non-compete clauses and other clauses that may unfairly limit a worker’s mobility.”[12] Next, Senator Rubio reintroduced the Freedom to Compete Act. None of this proposed federal legislation has been acted upon since that time. But earlier this month, the FTC stepped into this 18-month void and publicly announced the “crackdown” discussed above. The next day it released its Notice of Proposed Rulemaking to Ban Noncompete Agreements with Employees.
At this point, the business community is on notice that the current FTC takes a very dim view of employers who make broad use of noncompete provisions or other agreements they believe effectively keep employees from having the mobility to work where they want. Serious questions have already been raised about the FTC’s power to enact a nationwide ban on employment noncompete, as well as the terms of the proposed regulations. We have separately addressed the FTC’s Notice of Proposed Rulemaking in a separate article, here, and will be hosting a webinar in February to discuss pro-active steps businesses can take to manage the risk that either the federal government or state law may impose new limits or bans on traditional noncompete agreement and how to make sure you are protecting your confidential information and trade secrets.
For more information, click here.