FTC Takes Unprecedented Enforcement Actions Against Non-Compete Restrictions
FTC Takes Unprecedented Enforcement Actions Against Non-Compete Restrictions
On January 4, 2023, the Federal Trade Commission (“FTC”) announced settlements with three companies for their use of employee non-compete restrictions in alleged violation of Section 5 of the FTC Act. Specifically, the FTC claimed that the non-compete provisions in the companies’ employment contracts unlawfully restricted employees’ mobility and ability to earn higher wages, while also impeding other companies’ ability to compete for the affected employees. According to the FTC announcement, these actions are the first time the FTC has sued to stop companies from enforcing non-compete clauses in employment agreements.
The FTC followed the settlements with an announcement the next day of a proposed rule that would broadly ban employee non-compete agreements. These steps underscore the Biden Administration’s focus on applying the antitrust laws to labor issues.
Further, these actions reflect the FTC’s new, more expansive view of its enforcement authority under Section 5 of the FTC Act, consistent with its policy announcement in November 2022. At the time, the FTC stated that it would pursue more “rigorous enforcement” against unfair methods of competition across a broader range of conduct.
The three enforcement actions targeted non-compete restrictions in the security and glass manufacturing industries. In its complaints, the FTC alleged that:
As part of the settlements, the FTC has required each company to cease enforcing, threatening to enforce, or imposing non-compete provisions on relevant workers. Each company also must notify the covered employees that they are no longer covered by a non-compete provision.
In announcing the settlements, Commissioners Lina Khan, Rebecca Slaughter, and Alvaro Bedoya issued a statement highlighting the “distinct grounds” on which non-competes can violate Section 5. In Prudential, the FTC alleged that the use of non-competes was coercive and exploitative, given that the non-compete applied to over 1,000 security guards earning low wages with minimal training and contained a $100,000 “liquidated damages” clause. The FTC also focused on the fact that Prudential continued to impose the restriction even after a Michigan state court had already found the clauses unreasonable and unenforceable. In O-I Glass and Ardagh, the FTC highlighted that the glass manufacturing industry is “highly concentrated” and alleged that the use of non-competes for highly specialized workers impeded the entry and expansion of rivals.
Republican Commissioner Christine Wilson was the lone dissenter in each case. In a statement, Commissioner Wilson criticized the majority decision, calling the enforcement actions a misuse of the FTC’s authority. Commissioner Wilson characterized the majority’s actions as the enactment of the preferences of “three unelected bureaucrats,” challenging the majority’s claim that the non-compete agreements at issue in the three cases had a significant effect on competition. The statement echoes concerns Commissioner Wilson raised after the FTC announced a broad new standard for Section 5 enforcement.
Enforcement actions are just one of the ways in which the FTC is targeting non-competes. The day after announcing these settlements, the FTC issued a proposed rule that would ban non‑compete agreements between employers and employees in nearly all contexts.
The FTC’s recent moves follow the Biden Administration’s directive to target perceived anticompetitive conduct affecting American workers. When President Biden signed his July 2021 Executive Order focused on promoting competition in the American economy, he specifically singled out non-compete agreements as particularly anticompetitive, calling on the FTC to ban or limit them.
The FTC is not the only antitrust enforcer investigating labor-related conduct. The Department of Justice (“DOJ”) Antitrust Division also has been aggressive in targeting company actions that could limit employee mobility or compensation, headlined by criminal prosecutions of no-poach, non-solicitation, and wage-fixing agreements. Since its policy change in 2016 to pursue standalone no-poach agreements as criminal violations of the antitrust laws, the DOJ has indicted eight labor market cases, and although it has not succeeded at trial, it recently obtained a guilty plea for a no-poach agreement involving school nurses. Jonathan Kanter, Assistant Attorney General for the Antitrust Division, has made clear that these cases are a priority for the DOJ, and DOJ expects to have three additional cases go to trial this year.
The DOJ has also been active in developing labor-focused antitrust policy beyond criminal enforcement, filing statements of interest and amicus briefs in civil litigation, and expanding partnerships with other federal agencies. In February 2022, the DOJ filed a statement of interest in Nevada state court arguing that standalone non-compete agreements could also constitute per se violations of the Sherman Act. In November 2022, the DOJ, along with the FTC, filed an amicus brief in an appeal challenging a no-hire clause contained in franchise agreements. The DOJ and FTC argued that, when franchisees compete for workers, no-hire restrictions can be horizontal agreements that are per se illegal unless they are reasonably necessary to a procompetitive objective of the franchise agreement itself. In July 2022, the DOJ entered into a Memorandum of Understanding with the National Labor Relations Board that affirms each agency’s commitment to increased coordination and information sharing to protect American workers from anti-competitive interference.
The FTC’s increased reliance on Section 5 of the FTC Act will likely serve as a powerful complement to the DOJ’s enforcement efforts under Section 1 of the Sherman Act, as both agencies execute on the Biden Administration’s antitrust priorities. But reliance on novel and expansive interpretations of the law comes at some risk to the FTC. As Commissioner Wilson noted in her dissents, stretching Section 5 liability makes the agency vulnerable to a successful federal court challenge by an enforcement target. This risk is particularly acute where the agency’s complaints contain scant information about the relevant market, the reasonableness of the agreements, and whether they were ever enforced. Such an action would undermine the agency’s credibility and curtail its enforcement authority. In the meantime, the FTC under Chair Khan can be expected to pursue more of these types of cases.
Regardless of how its proposed rule fares, the FTC’s recent enforcement activity shows that it is serious about policing the use of non-competes in employment agreements. Companies should expect more enforcement actions across a range of industries over the coming months. The challenge for any company that may find itself in the FTC’s crosshairs would be withstanding the significant process (and reputational) costs of an FTC enforcement action before being able to avail itself to an independent federal judge.
The FTC’s actions also follow the growing trend of jurisdictions across the country, including Colorado, Illinois, the District of Columbia, and Washington, passing laws limiting the use of non-competes with employees. Although none of those recent laws come close to the FTC’s proposed broad ban on non-competes, the trend of states regulating employee non-competes is expected to continue. It remains to be seen whether the FTC’s proposed rule and enforcement actions on non-competes will embolden some state legislatures to propose and potentially pass even more significant limits on employee non-competes.
In light of the current enforcement climate, employers should assess the extent to which non-competes are necessary to protect legitimate interests and, where they are necessary, ensure that restrictions are as narrowly tailored as possible in order to limit risk.
 Statement of Interest of the United States, Beck et al. v. Pickert Medical Group, P.C., et al., Case No. CV21-02092 (2d Jud. Dist. Nev. Feb. 25, 2022).