On July 9, 2021, President Biden issued an Executive Order on promoting competition in the economy, which encouraged the Federal Trade Commission (“FTC”) to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” On January 5, 2023, the FTC proposed a new rule imposing an almost complete ban on the use of non-competes. Even prior to that proposal, the FTC’s recent actions signaled that increased scrutiny of non-competes and other restraints on worker mobility would be forthcoming.
As detailed below, the FTC previously issued formal guidance, both jointly with the Department of Justice (“DOJ”), and individually, to expand the scope of enforcement under federal antitrust laws. The FTC’s FY 2022-2026 Strategic Plan further underscored its upcoming focus on anti-competitive practices. In addition, the FTC has targeted non-competes in several recent enforcement actions.
Employers have a pressing need to evaluate their non-compete agreements in light of the heightened regulatory risks signaled by these recent developments.
DOJ and FTC Issue Joint Antitrust Guidance for Human Resources Professionals
The recent federal focus on non-competes was signaled as early as October 2016, when the FTC and DOJ issued joint antitrust guidance directed at human resources professionals. The guidance set forth the agencies’ position that businesses that compete to hire or retain the same group of employees are competitors, regardless of whether they make the same products or provide the same services, and it is unlawful for such businesses to agree, expressly, or implicitly, not to compete with each other.
Notably, the guidance asserts that wage-fixing agreements (in which competitors agree to set employee compensation at certain levels) and no-poach agreements (in which competitors agree not to solicit or hire each other’s employees) are “naked” restraints on trade and per se illegal under the antitrust laws. The DOJ announced its intention to prosecute such agreements in criminal actions, not just civil actions.
The DOJ’s heightened enforcement is consistent with the Executive Order’s encouragement of agencies to “coordinate their efforts,” particularly with respect to “concurrent [DOJ] or FTC oversight activities under the Sherman Act or Clayton Act.” Since 2016, the DOJ has sought to enforce the new per se rule announced in the joint guidance in several criminal indictments against both employers and individuals, and remains determined.
For example, in April 2022, a Colorado jury acquitted DaVita Inc. and its former CEO of all charges brought by the DOJ alleging that it formed a conspiracy with three other owners/operators of outpatient medical facilities to avoid soliciting each other’s senior-level employees. In January 2022, the court ruled that such non-solicitation agreements could not be treated as a new category of restraint subject to per se treatment under the Sherman Act, as the DOJ argued, but may fall under a preexisting category of per se treatment for attempts at market allocation. United States v. DaVita Inc., No. 1:21-CR-00229-RBJ, 2022 WL 266759 (D. Colo. Jan. 28, 2022). Accordingly, at trial, the DOJ was required to prove that the companies entered into the non-solicitation agreements, and that they did so knowingly with the intent of allocating the market for senior executives and employees between themselves. The jury found that the DOJ did not satisfy this high standard.
Undeterred, however, the DOJ has continued to press criminal indictments in similar cases. See, e.g., U.S. v. Patel, No. 3:21-CR-220 (VAB), 2022 WL 17404509 (D. Conn. Dec. 2, 2022).
FTC’s FY 2022-2026 Strategic Plan Includes Goals Aimed at Non-Competes
On August 26, 2022, the FTC published its 5-year strategic plan which identified several goals related to non-competes. First, under its Objective 2.1 to “identify, investigate, and take actions against anti-competitive mergers and business practices,” the FTC listed as one “strategy,” to “increase use of provisions to improve worker mobility including restricting the use of non-compete provisions.”
Second, under its Objective 2.2 to “engage in research, advocacy, and outreach to promote public awareness and understanding of fair competition and its benefits,” the FTC identified its intention to “study and investigate the impact on worker wages and benefits from merger and nonmerger conduct, as well as non-compete and other potentially unfair contractual terms resulting from power asymmetries between workers and employers.”
FTC Issues Policy Statement Expanding Its Enforcement Authority Under Section 5 of the Federal Trade Commission Act
On November 10, 2022, the FTC issued a “Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act” (the “Policy Statement”). The Policy Statement announced a significant expansion of the FTC’s enforcement authority, intended, as FTC Chair Lina Khan explained to the Wall Street Journal, to “open the door to more legal challenges against businesses engaging in alleged coercive or deceptive conduct that undermines competition.”
As one of the most substantial of the FTC’s recent actions, the Policy Statement was another step toward the FTC’s close examination of anti-competitive practices under the current administration.
Section 5 of the Federal Trade Commission Act (“Section 5”) broadly prohibits “unfair methods of competition in or affecting commerce.” Although the FTC has historically assessed violations of Section 5 on a case-by-case basis, in 2015, the FTC issued a brief Statement of Enforcement Principles Regarding "Unfair Methods of Competition" Under Section 5 of the FTC Act (the “2015 Statement”), which was intended to align the FTC’s enforcement of Section 5 with other federal antitrust laws. The FTC stated that it would be “less likely” to assert a standalone Section 5 claim “if enforcement of the Sherman or Clayton Act is sufficient to address the competitive harm.”
The Policy Statement built on the FTC’s rejection, earlier last year, of the 2015 Statement by setting forth new “general principles” under which, moving forward, the FTC would evaluate whether conduct violates Section 5. Notably, under the Policy Statement, a Section 5 violation may be found even where the conduct does not directly cause actual harm to the consumers, workers, or other market participants in the matter at issue, but reduces competition “in the aggregate” along with other employers engaging in similar conduct or as “the cumulative effect of a variety of different practices.”
Thus, employers may face potential exposure under Section 5 even for conduct that would not be actionable under the Sherman Act, where the typical “rule of reason” inquiry involves an intensely factual assessment that considers any associated efficiencies and business justifications.
FTC Targets Non-Competes in Recent Enforcement Actions
In June 2022, the FTC challenged an acquisition by Arko Corporation (“Arko”) and its subsidiaries of 60 gasoline and diesel fuel outlets from a competitor, Corrigan Oil Company (“Corrigan”), due to specific non-compete provisions included in the asset purchase agreement.
The FTC alleged that the non-compete provisions violated antitrust laws by reducing (or eliminating) Arko’s competitors in market territories throughout Michigan and Ohio, and lacked any “reasonable procompetitive justification” for their application to 190 locations unrelated to the transaction.
Arko agreed to a Consent Agreement and Decision and Order which, among other conditions, (1) excluded the 190 locations from the non-compete provisions; (2) substantially restricted the duration and geographic scope of the non-compete; and (3) limited Arko’s ability to enter into future non-competition provisions that would restrict competition in areas other than those surrounding an acquired location.
Traditionally, non-compete provisions in the context of mergers and acquisitions have been subjected to less scrutiny than similar provisions in employment contracts due to the buyer’s legitimate business interest in protecting the customer “goodwill” and relationships acquired in the transaction. See, e.g., E.T. Products, LLC v. D.E. Miller Holdings, Inc., 872 F.3d 464 (7th Cir. 2017).
However, the FTC’s action against Arko, as reflected in FTC Chair Lina Khan’s accompanying statement, indicates the FTC plans to scrutinize non-competes even in such contexts, to ensure they remain “appropriately limited in geographic scope and duration” particularly if the transaction is between parties who will “remain competitors in other markets.”
On January 4, 2023, the FTC invoked its recently expanded Section 5 authority and brought actions against three companies to halt their allegedly unlawful use of non-competes. The FTC asserted that Prudential Security, Inc., and Prudential Command, Inc. (together, “Prudential”) required the security guards whom they employed to sign non-competes prohibiting them from working for a competing business within 100 miles of their job site for two years after leaving their employment. The FTC also objected to liquidated damages provisions in Prudential’s agreements which required the employees to pay $100,000 for any conduct that violated their non-competes.
The FTC also asserted actions against the two largest manufacturers of glass food and beverage containers in the United States, O-I Glass, Inc., and Ardagh Group S.A. The actions asserted that both manufacturers imposed one-to-two year non-competes on thousands of workers who worked in a variety of roles, including glass production, engineering, and quality assurance. According to the FTC, these non-competes had the effect of locking up highly specialized workers and reducing labor mobility in a highly-concentrated sector of the economy.
In each of these actions, the FTC ordered the company to void the challenged non-competes and notify past, present, and future employees that they may freely seek other employment following separation.
These recent enforcement actions represent the FTC’s novel effort to use its Section 5 authority to go beyond the bounds of traditional antitrust laws, as foreshadowed and outlined in the Policy Statement. It is a telling sign of the FTC’s future expansive enforcement of Section 5.
FTC Proposes New Rule Banning Non-Competes
On January 5, 2023, the FTC proposed a sweeping new rule which would impose a near-complete ban on the use of non-competes. The rule will undergo a period of public comment and, as currently drafted, would require compliance 180 days after a final version is published.
The proposed rule defines a non-compete clause as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” Under this definition, the proposed rule would not include restraints during employment, nor would it include other types of common restrictions such as confidentiality agreements or non-solicitation agreements.
However, under the proposed rule’s “functional test,” these other restrictions may be prohibited if they are drafted so broadly as to have the same effect as a non-compete.
Notably, the proposed rule’s definition of the term “worker” would include interns, volunteers, independent contractors, and gig economy workers, regardless of how such individuals are classified under federal or state labor laws.
The proposed rule also requires employers to rescind existing non-compete agreements and provide current and former employees with written notices stating that their non-competes are no longer effective. Employers may satisfy this requirement by using the model notice language included in the rule.
Finally, the proposed rule establishes a narrow exception to its prohibitions for non-competes arising in the sale-of-business context. Non-competes would be permitted only when entered into by an individual who holds at least a 25% ownership interest in the business entity to be sold.
The proposed rule is expected to draw extensive comments from stakeholders, who may propose different standards for low-wage workers, as compared with senior executives or highly paid and highly skilled workers. Moreover, legal challenges to the FTC’s authority to issue the proposed rule are inevitable, and it remains to be seen whether the proposed rule will survive judicial scrutiny.
For more details on the FTC’s proposed rule, please see our blog post on Law and the Workplace, available here.
As highlighted by its recent actions, since President Biden’s Executive Order the FTC has moved aggressively to expand its authority and rein in the use of non-competes as an anti-competitive practice. Though the courts have yet to weigh in on whether the FTC has overstepped its authority, in light of the FTC’s latest actions, employers should carefully review their non-competes.