​For about the last four years, the Federal Trade Commission (“FTC”) has been studying, investigating, holding various public workshops and soliciting input regarding the competition-related efficacy of non-compete restrictions. ^[1] Early on in the Biden Administration, a July 2021 Executive Order announced an all-encompassing bullseye on competition issues, Executive Order on Competition, which included an express direction to the FTC to “curtail the use of non-compete clauses and other clauses that may unfairly limit worker mobility.” (emph. added)

What You Need to Know:

• On January 4 and 5, the FTC demonstrated its full-frontal attack on non-compete clauses, first in resolving lawsuits in the security and glass container industries and requiring several companies and individuals involved to eliminate all existing non-compete clauses across their work forces, and the following day announcing a proposed new federal rule which would require employers nationwide to rescind virtually all existing non-compete clauses and forbear from imposing any similar restrictions in the future.

• The proposed rulemaking now is pending a 60-day comment period, which, if it ends with acceptance of the rule, would impose the new requirement or rescission and other limitations on non-competes 180 days later.

• Given the vigorous enforcement effort, and the proposed rulemaking, employers would be wise to review the relevant contract clauses across their workforces with legal counsel’s help; whether or not the rule passes, the enforcement effort is not likely to wane.

The FTC has taken that admonition to heart, and perhaps beyond. On January 4 and 5, 2023, announcements out of the FTC made its response quite clear. The January 4 announcement, arguably among its most aggressive and far-reaching, focused on a specific target with the first set of cases attacking non-compete restrictions, and the aim, as they say, was true – FTC Orders on Non-Compete Restrictions in Two Industries.   

Then just a day later, the aim and focus were simultaneously broadened and tightened with the FTC’s suggestion of a new nationwide rule – essentially to ban all non-compete restrictions: Non-Compete Ban Fact Sheet. 

Non-compete restrictions have always had the attention of antitrust laws, as far back as at common law in England [Mitchel v. Reynolds, 1 P. Wms. 181 (1711)] and in the United States with U.S. v. Addyston Pipe & Steel Co., 85 F. 271, 281 (6th Cir. 1898)(Taft, J.), aff’d in relevant part, 175 U.S. 211 (1899). Addyston and its famous “naked vs. ancillary restraint”^[2] analysis focused on non-compete restrictions in the sale of a business, to protect the buyer from having to watch the seller use the proceeds of the sale to then compete with the buyer. Such non-competes are specifically exempted by the Proposed Rule, which clearly addresses a labor and employment matter at its core, not a business-to-business issue. The antitrust and competition related overlays lurking behind the scenes there have now exited the shadows, and non-competes are clearly under the competition-choking microscope that the Biden Administration has empowered the FTC to deploy.^[3] Clearly, it is time to pay attention.

AN OVERVIEW

The Windup – What The FTC Is Doing and Saying

Foreshadowed in the Executive Order, and a sweeping Policy Statement issued by the FTC on “Unfair Methods of Competition” on November 10, 2022^[4], and just a day before the rulemaking proposal, the January 4 crackdown announcement covered three companies and two individuals, and forced them to drop non-compete restrictions covering thousands of workers. Complaints were issued – a first in this enforcement area – against Prudential Security, Inc. and Prudential Command, Inc. and their owners, Greg Wier and Matthew Keywell, claiming that they took advantage of their low-wage security force personnel and forced them to “sign contracts containing restrictions that prohibited them from working for a competing business within a 100-mile radius of their job site for two years after leaving Prudential.” The clauses had minimum wage workers agreeing to pay $100,000 if they violated the clause. The clauses had previously and successfully been challenged after the company sued to enforce them against several workers, and, even after a Michigan court ruled the restrictions were unreasonable and unenforceable under state law, Prudential kept using them. Prudential ultimately sold its business, and many workers were no longer subject to the restrictions, but 1,500 remained, and the FTC Order now bans their enforcement.

Similarly, the FTC sued two of the largest glass food and beverage container manufacturers in the U.S. – O-I Glass, Inc. and Ardagh Group S.A. That industry is highly concentrated, and new entrants face a tough time due to existing non-compete restrictions inhibiting the ability to hire workers who have the skills needed. O-I Glass had over 1,000 workers with restrictions, and Ardagh had over 700. The FTC Order bans the companies and where applicable, their individual owners, from enforcing, threatening to enforce or imposing non-competes against any relevant employees. It further bans, essentially, communicating with anyone about anyone’s non-compete, requires the nullification of all non-competes without penalty, along with providing copies of the FTC Order to affected personnel, and copies of the FTC complaint to all current and future officers and directors of the companies, along with employees engaged in hiring and firing. Finally, for ten (10) years, there must be a clear and conspicuous notice to all new employees that they are free to seek or accept a job with any other company, run their own business, or compete with the glass companies following their termination of employment.

Next, the January 5 Notice of Proposed Rulemaking, January 5, 2023 NPRM, targets the “freedom to change jobs [as] core to the economic liberty and to a competitive, thriving economy” according to FTC Chair Lina Khan. She continued that the rule will, “by ending the practice….promote greater dynamism, innovation, and healthy competition.”

The proposed rules would make it illegal to:

• enter into or attempt to enter into a non-compete with a worker;
• maintain a non-compete with a worker; or
• represent to a worker, under certain circumstance, that the worker is subject to a non-compete.

The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or not. It requires all existing non-competes to be rescinded and that employees be so advised of the action. And, it does not apply to non-disclosures unless they are so broad as to operate as a “de facto” non-compete under the proposed Rule’s “functional test”.^[5]

The Pitch – What The Proposed Rule Means

Aside from demonstrating a serious shot across the bow of employers who believe they are entitled to  some form of competitive protection^[6] against workers in whom they invest money to train, educate, etc.,^[7] it clearly means that employers must focus attention on what they may be able to do to protect their interests. An employer would be well advised not to assume its existing non-competes are enforceable as a matter of contract law. The proposed rule would not only prohibit use of non-competes going forward but would also invalidate existing non-compete clauses and require employers to rescind such agreements starting 180 days after publication of the final rule.

Will the Rule survive comment and be implemented? Will the Rule’s imposition of the rescission requirement for all existing non-compete agreements be successfully challenged in court? Time will tell, but even if the rule fails, given the FTC’s recently demonstrated willingness to sue under its perceived Section 5 authority, the critical and rejiggered focus for employers with non-compete restrictions currently in place across their workforce is likely to be on non-disclosure and non-solicitation clauses and their artful (re)drafting to stay outside of the “de facto non-compete zone.” Employers, particularly those with large workforces, need to think these issues through now, as the investigative vigor is just starting, and it would be a wise bet to think that the FTC will continue its enforcement efforts while the Rule’s comment period progresses – to continue to build its case.^[8]

CONCLUSION

The FTC (and the U.S. DOJ) are clearly not shying away from the essential charge set out in July 9, 2021 Executive Order linked above. As its accompanying Fact Sheet Executive Order on Competition Fact Sheet stated, there were 72 separate initiatives set out for more than a dozen federal agencies “to promptly tackle some of the most pressing competition problems in our economy.” President Biden clearly stated his intent by “taking decisive action to reduce the trend of corporate consolidation, increase competition, and deliver concrete benefits to America’s consumers, workers, farmers and small businesses….a whole-of-government effort to promote competition in the American economy.”

The recent FTC actions laid out above indicate that it is undertaking a “top” (increased merger enforcement and scrutiny) to “bottom” (non-compete restrictions) approach to its “improve-competition-in-the-American-economy” charge. As for non-competes, this is occurring in the face of significant attention over the last several years at the state level, which might call into question the need for an outright federal non-compete restriction ban:

• some states require a 14-day notice period for receiving a non-compete prior to an applicant’s start date;
• at least two states (Colorado and Illinois) and the District of Columbia have salary thresholds before a non-compete can be imposed ($100,000, $75,000 and $150,000 respectively);
• some states clearly prohibit non-competes for hourly workers (Maine, Massachusetts, Maryland, Virginia and the District of Columbia);
• other states have close-to-unenforceability or outright bans (California, North Dakota, Oklahoma);
• states have developed bodies of case law stemming from litigation involving non-compete restrictions and their enforcement and challenges.

Again, clearly, it is time to pay attention to the highlighted intersection between labor and employment matters and the antitrust laws. A word to the wise is that planning ahead, by looking at existing non-compete restrictions across a workforce, and a new focus on whether and how non-disclosure and non-solicitation clauses can be drafted to protect business/employer interests without overstepping the non-compete restriction boundaries that are taking shape.

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[1] And two years before that, in October 2016, the FTC and U.S. Department of Justice (“DOJ”) issued their joint guidance concerning no-poach and wage-fixing agreements, announcing an intent to pursue criminal prosecutions. No-Poach Guidance  
[2] Does the restraint just intend nakedly to eliminate competition, or does it arise ancillary to some other legitimate business purpose?
[3] Some will say the FTC has clearly overstepped its bounds and that there will be significant legal challenges if the rule is adopted. Others will say that the FTC jumped well past the Executive Order’s statement about non- competes which “may unfairly limit worker mobility” with its clear and outright conclusion that they in fact do – which allows the FTC to pigeonhole virtually all non-competes into the agency’s right to police “unfair competition.” Still others will say that the FTC’s crackdown on the widespread use of non-competes is long overdue given several states already have passed laws limiting their use.
[4]  See FTC Section 5 Policy Statement  
[5] Comments are due within sixty days after publication in the Federal Register. When that happens, this piece will be updated. The Rule, if adopted, goes into effect 180 days later.
[6] There is a bit of a bone thrown in the direction of employers regarding nondisclosure agreements that do not tread on the non-compete line, but the devil will be in the future details of how that seeming carve-out is dealt with when and if confronted by the FTC, as the proposed rulemaking focuses on the breadth of such clauses which would have the same effect as an actual non-compete. The same is true as to whether senior executive non-competes will be afforded some escape from the proposed Rule; specific public comment is sought on that point and the need, if any, for a distinction, and on what basis, between such employees and lower-wage employees. There is also an explicit exception in proposed rule section 910.3, which states the new rules “shall not apply to a non-compete clause that is entered into by a person who is selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity’s operating assets, when the person restricted by the non-compete clause is a substantial owner of, or substantial member or substantial partner in, the business entity at the time the person enters into the non-compete clause. Non-compete clauses covered by this exception would remain subject to Federal antitrust law as well as all other applicable law.” (emph. added). The last sentence leaves the door as wide open as it has ever been, and perhaps moreso as the FTC is basing its authority to issue this antitrust rule on its Section 5 unfair methods of competition authority – a central point of academic debate, including among the Commissioners on issuance of the NPRM. Practically speaking, the FTC implicitly believes that non-competes are unfair methods of competition subject to Section 5. This commentator is of the opinion that the proposed Rule moves non-compete clauses – historically requiring a fact-intensive review of time, scope and geographic restrictions – which is an antitrust “rule of reason” type inquiry, closer to becoming a per se violation of at least Section 5 of the FTC Act (as a per se  unfair method of competition) if not also the Sherman and Clayton Acts. That debate may well find its way into a West Virginia v. EPA, 142 S.Ct. 2587 (2022) “major question doctrine” issue – implicating issues of political significance, the regulation of a significant portion of the economy, and stepping into  an historical and  particular domain of state law. In other words, areas foreclosed to FTC action via rulemaking.
[7] Recouping such costs via a contract term if employment is terminated within a certain time period is referred to in the proposed Rule as a “de facto” non-compete if the payment is not “reasonably related to the costs the employer incurred for training the worker.” Non-disclosure clauses receive the same de facto treatment if they “effectively preclude[s] the worker from working in the same field” after terminating with the employer.
[8] Which is a case that Commissioner Wilson, in her 14-page dissent from the Notice of Proposed Rulemaking,  simply does not believe the Commission has – a case which as a matter of law justifies the proposed rule. https://www.ftc.gov/system/files/ftc_gov/pdf/p201000noncompetewilsondissent.pdf