FTC Tackles Non-Compete Restrictions

Practical Law Legal Update w-038-1377 (Approx. 8 pages)

FTC Tackles Non-Compete Restrictions

by Practical Law Antitrust

Consent Decrees

The FTC entered consent agreements with:

Prudential Security, Inc., Prudential Command Inc., and two executives, Greg Wier and Matthew Keywell (see Prudential Security, Prudential Comment, and Top Executives).
O-I Glass Inc (see Glass Food and Beverage Container Companies).
Ardagh Group S.A (see Glass Food and Beverage Container Companies).

In each case, the consent agreements require the firms and individuals to refrain from enforcing, threatening to enforce, or imposing non-compete restrictions on relevant employees. In addition, the consent agreements require that the firm notify all affected employees that they are no longer bound by any non-compete restrictions.

Prudential Security, Prudential Comment, and Top Executives

The FTC alleged that employees of the defendants were subject to non-compete restrictions that:

Prohibited employees, for two years following separation from Prudential from:
- working for any competing business within 100 miles of the employees' primary jobsite; or
- joining, forming, or in any manner whatsoever, helping any competing business within a 100-mile radius of the employees primary jobsite.
Imposed a $100,000 penalty if the employee violated the non-compete restrictions.

According to the FTC, these restrictions limited the employees' ability to accept jobs at significantly higher wages. The FTC alleged that the firms:

Threatened employees with enforcement of the restrictions, including the penalty provision.
Reached out to competing security guard companies to notify them of the non-compete restrictions and threaten them with lawsuits for hiring any former Prudential employees.
Filed multiple lawsuits seeking to enforce the non-compete clauses.

The FTC alleged that the defendants' non-compete restrictions:

Constitute a method of competition.
Are restrictive, exploitative, and coercive.
Negatively affect competitive conditions.

In addition, according to the FTC, any legitimate objectives could be achieved through less restrictive means, for example, the use of confidentiality or non-disclosure agreements.

A Michigan state court had previously ruled that the non-compete provisions were unreasonable and unenforceable under state law, but the companies continued to require employees to sign agreements containing them. In August 2022, Prudential sold much of its business to another company, and those employees are not subject to non-compete restrictions. However, according to the FTC's complaint, lifting these restrictions impacts approximately 1,500 former employees.

Glass Food and Beverage Container Companies

According to the FTC, the glass food and beverage container industry is highly concentrated and entry is made more challenging by the lack of available skilled and experienced workers.

The FTC alleged that these O-I Glass's and Ardagh's non-compete clauses harm competition, consumers, and workers by:

Impeding entry and expansion in the market.
Reducing employee mobility.
Causing lower wages and salaries, reduced benefits, less favorable working conditions, and personal hardship to employees.

According to the FTC, the non-compete restrictions violate Section 5's prohibition on unfair methods of competition, arguing that they:

Represent a method of competition because they restrict competition for labor.
Go beyond competition on the merits because they are coercive, exploitative, exclusionary, and restrictive, representing the superior bargaining power of the employer versus the employee.
Have a likely effect of negatively affecting competition in the relevant market.
Have a likely effect of negatively affecting competitive conditions affecting workers in the relevant market.

The FTC further alleged that any legitimate objectives of the non-compete restrictions could be achieved through less restrictive means, for example by requiring confidentiality agreements.

O-I Glass, Inc.

According to the FTC, O-I Glass had imposed restrictions, generally for one year, against employees working for, owning, or being involved in any way with any business in the US that sells glass food and beverage containers after the employee left O-I Glass. At the beginning of the FTC's investigation, the FTC claimed that the restrictions impacted more than 1,000 employees.

Ardagh Group S.A.

According to the complaint, Ardagh imposed restrictions on employees that restricted them for two years after leaving Ardagh from directly or indirectly performing the same or similar services to those they performed for Ardagh in any competing business in the US, Canada, or Mexico. These restrictions, according to the FTC, at the beginning of the investigation, impacted about 700 employees.

Remedies

In each case, the proposed consent agreements include the same set of remedies. In addition to requiring that the firms and individuals within them (including with respect to the individuals named in the Prudential complaint, in their dealings with additional companies they control or may control in the future) refrain from enforcing, threatening to enforce, or imposing non-competes, the consent agreements require that the companies:

Not communicate to any relevant employee or other employer that the employee is subject to a non-compete.
Nullify the challenged non-compete restriction without any penalty to the employee.
Provide copies of the order to all relevant current and previous employees who were subject to the non-compete restrictions.
Provide copies of the order to all directors, officers, and employees who are responsible for hiring and recruiting.

Commissioner Statements Regarding Consents

Statement by Chair Lina M. Khan, Commissioners Rebecca Kelly Slaughter and Alvaro M. Bedoya

FTC Chair Khan and Commissioners Slaughter and Bedoya wrote in support of the FTC's decisions finding that the defendants used non-compete clauses in a way that constitutes an unfair method of competition in violation of Section 5. The statement highlights a few pieces of the FTC's investigation, for example:

Many of the affected security guards made barely above minimum wage, making the threat of a $100,000 penalty likely to be a significant deterrent.
The impact of the non-compete restrictions in the glass container industry is significant because the industry is highly concentrated, so by limiting the available pool of skilled workers, dominant industry participants are able to negatively affect competitive conditions.

The statement takes issue with Commissioner Christine Wilson's dissent, arguing that the Supreme Court has upheld the FTC's authority to challenge:

Inherently coercive practices like those alleged against Prudential.
Actions that impact competitive conditions, particularly where in a highly concentrated industry labor mobility is so reduced to significantly impact entry.

Dissenting Statement of Commissioner Christine S. Wilson

Commissioner Wilson wrote to raise concerns with these FTC enforcement actions, as well as to offer some broader criticisms of the FTC's recent approach to enforcement. According to Commissioner Wilson, the current FTC:

Demands information that is beyond the scope of traditional competition analysis.
Is willing to take losing cases to court.

As a result, according to Commissioner Wilson, parties express a willingness to settle to avoid the expense of complying with document demands and to avoid facing an enforcement action, regardless of the merits.

With respect to these complaints, Commissioner Wilson identified a few aspects of the complaints she finds noteworthy, including that they:

Are short, rely heavily on boilerplate language, and lack of specific details.
Lack allegations that the non-compete provisions are unreasonable.
Do not identify situations in which the non-compete clauses in Ardagh and O-I Glass were enforced.
Fail to include factual allegations regarding:
- the inability of any rival to enter or expand in the glass container industry;
- a relevant market for skilled labor as an input to glass container manufacturing; or
- a market effect on wages or other terms of employment.
Do not distinguish sufficiently between employees subject to the non-compete restrictions who have industry-specific skills and those with readily transferrable skills, such as human resources or accounting.
Inappropriately discount business justifications for non-compete provisions, by:
- stating, without substantiation, that less restrictive means are effective and available; and
- failing to address the business justification and procompetitive benefits of employer-provided training.

Commissioner Wilson also raises questions regarding due process, specifically with respect to whether the parties had notice that their conduct would be considered illegal. She notes that the current actions:

Diverge from precedent regarding the appropriate analysis of non-compete provisions.
Stand in conflict with a Seventh Circuit holding specific to Section 5.
Are premised on the Section 5 Policy Statement, which was issued in November 2022, but challenge conduct that predates that statement.

FTC's Proposed Rule Banning Non-Competes

Under the FTC's proposed rule, employers would be banned from:

Entering into, or attempting to enter into a non-compete restriction with a worker.
Maintaining a non-compete restriction with a worker.
Representing to a worker that the worker is subject to a non-compete restriction.

The proposed rule:

Applies to all workers, including independent contractors and unpaid individuals, for example, interns.
Would not generally apply to other employment restrictions, like non-disclosure agreements, but could if those restrictions are written so broadly as to function as a non-compete restriction.
Does not apply to non-competes relating to the sale of a business or all or substantially all of the assets of a business.

The FTC is seeking public comment on the proposed rule.

FTC Commissioner Statements Regarding Proposed Rule

Statement of Chair Khan, Commissioners Slaughter and Bedoya

Chair Khan, joined by Commissioners Slaughter and Bedoya issued a statement in support of the proposed rule. In it, they highlighted empirical evidence they argue supports the need to limit the use of non-compete clauses, including that they:

Reduce competition in labor markets.
Reduce innovation and competition in product and service markets.

Their statement also suggests that the proposed rule would:

Eliminate confusion regarding employment agreements that include non-competes even where they have been deemed unenforceable.
Assist in even application of non-compete rules at the federal level, noting that labor markets frequently cross state lines.

In addition, according to the statement, the FTC is well suited for enforcement in this area. The statement asserts that enforcement through rulemaking is particularly appropriate where, as here:

There are risks of significant harm.
Private litigation is likely to be limited where there is no private right of action under Section 5, and because arbitration clauses and class action waivers in employment contracts may functionally preclude employee lawsuits.

Furthermore, the statement suggests that the FTC has expertise in this area, having hosted a number of workshops and requested and reviewed public comments on the topic over the past few years. In addition, the statement argues that the FTC has appropriate rulemaking authority, suggested by precedent and statutory language.

The statement then identifies a number of topics on which they are particularly seeking comments from the public:

Should the rule apply different standards to noncompetes that cover senior executives or other highly paid workers?
Should the rule cover noncompetes between franchisors and franchisees?
What other tools might employers use to protect valuable investments, and how sufficient are those alternatives?

Statement of Commissioners Slaughter and Bedoya

Commissioners Slaughter and Bedoya wrote separately primarily to highlight two points:

The impact of non-competes is significant. The statement highlights research showing that there are significant ramifications for individual workers and labor competition more broadly, as well as for consumers. In addition, even when courts have rules them unenforceable, employers continue to use them.
The FTC would like to hear lived experiences and perspectives from the public during the comment period.

Dissenting Statement of Commissioner Wilson

Commissioner Wilson wrote a dissenting statement, challenging the substance of the rule, but also whether the FTC has the authority to engage in this type of rulemaking in the first place. According to her statement, the proposed rule is vulnerable to various challenges, including:

That the FTC lacks authority to engage in unfair methods of competition rulemaking.
The major questions doctrine address in West Virginia v. EPA applies, and the FTC lacks the necessary clear Congressional authorization.
If the FTC does have the authority to engage in this rulemaking, it is an impermissible delegation of legislative authority under the non-delegation doctrine.

In addition, Commissioner Wilson argues that the substance of the rule itself is problematic, arguing that:

Non-compete clauses merit fact-specific inquiry.
This application of the Section 5 Policy Statement demonstrates an opportunity for the FTC to condemn conduct that it disfavors, even when the conduct has been repeatedly found lawful.
The proposed rule will trigger numerous, and likely successful legal challenges regarding the FTC's authority to issue the rule.

Specifically, Commissioner Wilson takes issue with the proposed rule's:

Determination that non-compete clauses are unfair.
Treatment of business justifications.

Commissioner Wilson invites the public to comment and raise any concerns related to issues addressed in other Commissioners' statements, as well as:

What academic support is there for procompetitive justifications for non-compete provisions?
How can the FTC evaluate how experiments in the literature and resulting estimates are externally valid?
Which conclusions in the proposed rule are supported by the weight of the literature, which contradict the weight of the literature, and which are unsubstantiated?
Where the proposed rule offers limited evidence, is that evidence sufficient to support the total ban suggested by the rule or any alternative approaches?
What are the benefits and drawbacks of the currently proposed ban compared to the proposed alternative rule that would find a presumption of unlawfulness, including the role of procompetitive justifications in rebutting a presumption?

For more on non-compete agreements, see Practice Notes, Antitrust Considerations in Employment Agreement Non-Compete Clauses and Antitrust Considerations in Merger Agreement Non-Compete Clauses. For more on Section 5 generally, see Practice Note, FTC Act Section 5: Overview.

FTC Tackles Non-Compete Restrictions | Practical Law