Sound & Fury, Signifying Something Really Big: FTC Quadruples Down on Non-Competes
On Wednesday, the Federal Trade Commission (FTC) announced it had entered into consent decrees with three companies, requiring them to completely scrap their long-standing non-compete agreements with their employees. The FTC maintained that these non-competes unlawfully restrained competition, thus violating federal antitrust law. In the Matter of O-I Glass O-I Glass: Proposed Decision and Order (ftc.gov); In the Matter of Ardagh Group S.A. Ardagh: Agreement Containing Consent Order (ftc.gov); In the Matter of Prudential Security Prudential Security: Decision and Order (ftc.gov). At first glance, this seems unremarkable. Both the Obama and Biden administrations previously encouraged the FTC to rein in abusive non-competes, but the FTC’s decision to challenge these particular non-competes goes light years beyond the mere regulation of abusive non-competes.
The FTC challenged these non-competes despite that in at least two of the three cases: (1) there was no evidence of any anticompetitive effects that would justify the FTC’s intervention; (2) the FTC complaints did not allege the non-competes were unreasonable in subject matter, duration, or geographic scope, which are the traditional tests for non-compete validity; (3) the FTC did not allege that these companies actually enforced their non-competes; (4) the FTC did not cite any facts supporting its assertion that the non-competes made it harder for industry competitors to identify and hire workers; (5) while the FTC alleged that the non-competes negatively impacted wages, salaries, and working conditions by reducing worker mobility, it presented no actual facts in support of the naked assertion; (6) the FTC’s across-the-board challenge ignores the fact that many employees governed by the agreements, such as accountants and human resources professionals, still had broad freedom of career movement because their skillsets were not unique to a specific industry or market; and (7) the employers in these cases had valid, and in fact procompetitive reasons for the non-competes, such as their substantial investments in expensive industry-specific employee training. This all adds up to a fairly clear picture of the FTC’s new approach to non-competes — it wants to outlaw them completely.
But you say, “John, you only discussed three cases here, while the title of your post says the FTC ‘quadrupled’ down on non-competes. What gives?” Yesterday, the FTC piggybacked off of these three cases and announced a new proposed rule that would all but eviscerate non-competes (and much more) throughout the country. Non-Compete Clause Rulemaking | Federal Trade Commission (ftc.gov) . The proposed rule applies to all employers and governs both paid and unpaid employees, independent contractors, volunteers, sole proprietors, and more. And, the proposed rule has several disturbing aspects to it. For example, the proposed rule would ban not only non-competes but many non-disclosure agreements, non-solicit agreements, training reimbursement agreements, and even many trade secrets/intellectual property agreements. Also, while the rule carves out some non-competes when the sale of a company is involved, it otherwise permits any senior executive to quit and immediately begin working for a direct competitor. Imagine Apple’s CEO quitting today and moving to Samsung tomorrow. The proposed rule would require employers to rescind all existing non-competes (and other agreements that fit within the overly broad definition of non-competes under the rule) and notify employees of the rescission. And, in a powerful diss to the 10th Amendment, the rule purports to pre-empt any state laws that contradict the rule.
Following the announcement of this ill-conceived (and likely unconstitutional) rule, the FTC will publish a formal notice of the proposed rule, which entitles the public to submit comments on the rule for the next 60 days. We very strongly encourage all employers to consider submitting comments. Even employers who do not have non-competes could be adversely affected by this rule given its overbroad implications for non-disclosure, non-solicit, trade secret, and intellectual property agreements. Of course, Sherman & Howard’s labor and employment lawyers will continue to monitor this development and keep you apprised as events unfold.
The lone FTC dissenter in the three cases issued on Wednesday loosely invoked Shakespeare, noting that these cases are anything but “sound and fury, signifying nothing.” As FTC Member Wilson lamented, “Practices that three unelected bureaucrats find distasteful will be labeled with nefarious adjectives and summarily condemned, with little to no evidence of harm to competition. I fear the consequences for our economy, and for the FTC as an institution.” Mic drop.