Although antitrust enforcers’ concern for anticompetitive effects in labor markets has been escalating for some time (read our 2022 article about labor market developments here), the focus on perceived anticompetitive effects of employer/employee non-compete provisions has recently become much more acute.
Table of Contents
- Proposed US FTC Rule Banning Non-Competes
- What are the key features of the proposed rule?
- If issued, what happens if you violate the proposed rule?
- What employers would be bound by the proposed rule?
- How would the proposed rule impact non-competes entered as part of an M&A transaction?
- How would the proposed rule impact executives and executive compensation?
- Does the proposed rule ban garden leave?
- What happens next with the proposed rule, and will could it go into effect?
- Recent Wave of US FTC Enforcement Actions Against Worker Non-Compete Agreements
- White House and US Antitrust Enforcers’ Commentary on Non-Competes
Proposed US FTC Rule Banning Non-Competes
On January 5, 2023, the U.S. Federal Trade Commission announced a Notice of Proposed Rulemaking (NOPR) that would ban non-compete clauses in employer-employee contracts. (You can read the FTC's FAQs press statement here).
While the vote to issue the rule had three votes by the Democrat-appointed commissioners, Commissioner Christine Wilson (now former Commissioner) dissented. Commissioner Wilson's dissent, (which you can read here), notes that the proposed rule would be a "radical departure from hundreds of years of legal percent." It also explains that the appropriateness of non-compete clauses deserves a "fact-specific inquiry" and that enactment of the proposed rule would have "a much larger raft of unintended consequences."
Indeed, in former-Commissioner Wilson's Wall Street Journal Op-Ed published on the day she announced her resignation, Wilson highlighted the FTC's proposed non-compete rule as an example of the FTC's policy agenda causing her to resign. She explained: "In January, 2023, the commission launched a rulemaking that would ban nearly all noncompete clauses in employee contracts, affecting roughly one-fifth of employment contracts in the U.S. This proposed rule defies the Supreme Court's decision in West Virginia v. EPA (2022), which held that an agency can't claim ‘to discover in a long-extant statute an unheralded power representing a transformative expansion in its regulatory authority." Former Commissioner Wilson's WSJ Op-Ed is here.
What you need to know:
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What are the key features of the proposed rule?
- The proposed rule is broad. It would prohibit employers from imposing non-competes on workers (including independent contracts and unpaid workers), and the ban would extend to all contract provisions that create "de facto" non-compete clauses; i.e., any other contractual clause that may have the "effect" of prohibiting workers from seeking or accepting other employment. This means that an NDA that has the "effect" of limiting a worker's mobility may also be banned. (Proposed Rule § 910.1(b)(1)-(2) is here.)
- The rule would apply retroactively. Should the rule be enacted in its current form, not only would preexisting non-compete agreements become unenforceable, but the rule would also require employers to proactively rescind the non-compete, i.e., to tell individual employees that such provisions no longer applied. **The proposed rule would not affect any other provisions negotiated for in exchange for the non-compete, like a severance package. (Proposed Rule § 910.2(b) is here.)
- There is a narrow exception to allow non-competes in "sale-of-business" agreements, but the exception only applies where the individual has at least 25% ownership in the business. (Proposed Rule § 910.3 is here.)
- It would supersede all contrary state laws.
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If issued, what happens if you violate the proposed rule?
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What employers would be bound by the proposed rule?
- Most employers will be subject to the proposed rule if issued. Certain entities, however, are exempt form the FTC's jurisdiction udner the FTC Act (pursuant to which the FTC purports to be issuing the proposed rule), so it follows that those exempt entities should also be exempt from the proposed rule. Those entities generally include certain financial institutions (banks, credit unions, savings and loans), some non profit organizations, and air carriers.
- As explained below, however, the FTC and Department of Justice Antitrust Division have separately raised concerns about non-competes as an antitrust violation under Section 1 of the Sherman Act.
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How would the proposed rule impact non-competes entered as part of an M&A transaction?
- The proposed rule would apply to, and therefore ban, employee non-competes with entered as part of a merger or acquisition. The only exception, as explained above in the "key features" question, is for non-competes entered as part of the sale of a business for a person holding 25% or more of the company.
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How would the proposed rule impact executives and executive compensation?
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Does the proposed rule ban garden leave?
- Under the proposed rule, garden leave may or may not be prohibited depending on how it is structured. The proposed rule defines a "non-compete clause" as one that prevents the worker from seeking or accepting new employment "after the conclusion" of the current employment. Therefore, a garden leave provisions whereby the employee remains employed (i.e. with full salary and benefits) but is simply not allowed to access the business during the garden leave period should be permissible, but the proposed rule is not clear.
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What happens next with the proposed rule, and when could it go into effect?
- The process to implement a rule can take quite a while. It is open to public comment until at least March 20, 2023. Public comment can be made here. Thousands of comments have already been lodged. One leading theme has been the adverse impact on the protection of intellectual property (IP) and the absence of any IP exception to the proposed non-compete ban.
- The proposed rule is an extreme departure from historic business practice and even broader than the EU principle of free movement between countries and jobs—but without the EU structure that allows non-competition clauses, limited in geography and time, for certain classes of employees (e.g., key-person and IP related) that are compensated separately (e.g., garden-leave).
- If issued, the final rule would go into effect 180 days following publication, and enforcement could be further delayed by legal challenge.
Recent Wave of US FTC Enforcement Actions Against Worker Non-Compete Agreements
The FTC's proposed new rule announcement came within 24 hours of the FTC signaling its intention to achieve its anti-non-compete clause views through enforcement.
- On January 4, 2023, the FTC announced that it had filed suits—for the first time—to stop companies from enforcing non-compete restrictions. The FTC's press release is here.
- The suits involved three companies with non-competes for a range of workers, including low-wage workers, which lasted for one to two years. As a result of the suits, the companies were ordered not to enforce the non-competes, as well as put other remedies into place, such as providing notice for the next 10 years to employees that they may freely seek any job following their employment.
- In these actions, the FTC sued under Section 5 of the FTC Act, which governs unfair methods of competition. The FTC argued that the non-competes harmed employees because they result in lower wages, lower salaries, and less favorable working conditions. The FTC also argued that the non-competes harmed new competitors in the glass food and beverage containers industry, noting that the non-competes would impede entry and expansion of new competitors in a concentrated market.
Both the rulemaking and enforcement actions are in line with the FTC's November 2022 policy statement announcing that the FTC would invoke Section 5 to challenge conduct beyond that covered by the Sherman Act.
White House and US Antitrust Enforcers' Commentary on Non-Competes
In the midst of these events, individual enforcers at both the FTC and the Antitrust Division of the Department of Justice, as well as at the White House, have been vocal about their perceptions and goals for the future of non-compete enforcement:
- A comprehensive listing of public statements by the DOJ Antitrust Division on employer-employee non-competes;
- A comprehensive listing of public statements made by FTC officials on non-competes;
- And see our article covering what the July 9, 2021 Executive Order 14036 says about non-competes.
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