As we previously discussed, the Federal Trade Commission (FTC) has proposed a rule that, if enacted, would result in a nearly complete nationwide ban on employers' use of non-compete agreements. The rule has passed through the notice and comment period, which expired on April 20, 2023. During this period, the public submitted comments on the rule, which will now be considered by the FTC prior to publishing a final rule.
If the rule is finalized consistent with the proposed rule, it will effectively ban non-compete agreements nationwide. The effects on employers will be far-reaching, but will be particularly acute in client-service industries where employees drive revenue by developing personal brands and close client relationships that are easily portable absent of a non-compete. Sports agencies are one such example, as agents are often coveted by competing agencies for their close personal relationships with clients.
Employers in industries with a client focus may need to get creative to prevent unfair competition if non-compete agreements are removed from their toolboxes. One such tool—the fee tail—has been in practice in Sports Industry agencies for years now and offers agencies the potential to maintain their market share and business growth even when key employees leave without falling under the purview of the FTC's rule. A fee tail is a contractual obligation by a former employee to pay their former employer for revenues that the former employee earns from client fees after the employment relationship ends. For example, a fee tail might require a former employee, such as an agent, to continue to pay fee revenue generated from player/client contracts back to the agent's former agency for several years after the agent leaves employment at the agency. Such clauses can be simple or exceedingly complex depending on the employer and client relationships, but the upshot is that they are designed to ensure the employer's investment in the client and employee is properly compensated through fees generated in relation to that investment.
The enforceability of fee tail clauses has not been litigated nearly as much as non-compete agreements, but there are a few cases that provide guidance as to how fee tails might fare in a country where non-competes are legislated out of existence. In the case of Hendrickson v. Octagon, Inc., 225 F. Supp. 3d 1013 (N.D. Cal. 2016), sports agents representing National Football League players signed employment agreements that granted their agency the right to the fees they earned from clients in exchange for guaranteed salaries. The employment agreements further provided that if the sports agents left the agency, the agency would retain rights to a portion of the fees after they left. When the sports agents resigned, they argued that the fee tail provision in their employment agreements was unlawful because it was designed to prevent them from leaving the agency, which amounted to an illegal restraint on trade.
The federal judge who decided the Hendrickson case ruled that the fee tail provisions were valid and enforceable, because without them, an agent could "hit the jackpot simply by quitting" right before their client's player contract was due to be renegotiated. Although it validated the clause at issue in the case, the court cautioned that fee tail provisions are only enforceable to the extent they allow the employer to recoup its investment into the agent's efforts to sign clients and generate revenue using the agency's resources. Therefore, employers who decide to incorporate fee tail provisions into their employment agreements should ensure that the fee tail is not a "penalty," or an overly restrictive restraint on an employee's mobility. There is a balance that must be struck to ensure enforceability.
More recently, in the case of Legacy Agency Inc. v. Scoffield, 559 F.Supp 3d 195 (S.D.N.Y. 2021), a judge upheld an arbitrator's award requiring a sports agent to pay a fee tail to their former employer. At issue was a fee tail in the contract between the agency and its former agent which provided that if the agent resigned and represented any agency clients within one year after his termination, the agent would be required to pay his former agency a percentage of fees earned from the agency's former clients for five years following his resignation. The agent resigned, and as is common in a client-service driven industry, several of the agency's clients followed the agent out the door. The agent then refused to pay any fees back to the agency generated from the clients who left the agency with the agent, arguing that the fee tail provision of his employment agreement should not apply because his resignation was for "good reason." The agent further argued that the fee tail provision was unreasonable and should be modified by the arbitrator to align with industry standards.
After analyzing the agreement, an arbitrator designated by the Major League Baseball Players Association found that the agent had breached the employment agreement when he resigned from the agency and solicited former agency clients. The arbitrator ruled that the agency was entitled to monetary damages pursuant to the fee tail provision in the employment agreement but reasoned that the fee tail should be reduced because it was higher than the fee tails of comparable agents at the agency, and the agency could not demonstrate why a higher level of fee sharing was necessary. The arbitrator modified the fee tail provision and reduced the percentage of fee sharing to a percentage that the arbitrator deemed reasonable and enforceable.
Hendrickson and Legacy demonstrate that courts are less likely to enforce fee tail provisions when they are overly aggressive in scope or when an agency overreaches on the economic terms within the context of the agent's client relationship. If agencies require more onerous fee tails for certain employees, these decisions caution that there must be a justification for why such fee tails are necessary. Absent sufficient justification, courts and arbitrators may modify fee tail provisions to align with comparable employees or industry standards. This is a difficult balance for an agency to strike because every agency, agent, and player relationship is unique and fee tails must be tailored to those unique circumstances.
