The Federal Trade Commission made headlines earlier this month with its proposed rule banning non-competes. Other news announced by the FTC the prior day received less attention but has the potential to cause real headaches for employers – the settlement of three enforcement actions against companies for allegedly using non-competes in an unlawful manner.
These enforcement actions by the FTC are the first of their kind at the federal level and represent a significant expansion of the agency’s involvement in policing non-compete agreements.
While the proposed rule should be concerning to employers, it may never be adopted or could be invalidated by the U.S. Supreme Court. By contrast, the FTC’s enforcement actions on non-competes represent a new and non-theoretical compliance risk that employers must take into account immediately.
FTC’s New & Aggressive Interpretation of Its Authority
Prior to the FTC’s recent announcement, employers only had to worry about state attorneys general bringing enforcement actions against abusive non-competes. The Illinois Attorney General has filed a handful of such actions, including one against Jimmy John’s for requiring sandwich makers to sign non-competes.
The FTC had previously limited its activities in the employee mobility area to challenging agreements between competitors not to hire each other’s employees. The newly announced enforcement actions on non-competes represent a significant expansion of the FTC’s view of its authority in this arena.
The FTC’s aggressive assertion of authority to police non-competes is part of the agency’s overall effort to expand its powers. In November 2022, the FTC announced a new enforcement policy that rejected prior interpretations of its authority under the FTC Act as essentially limited to enforcing antitrust law.
Under the new policy, the FTC takes a broader view of its authority to combat any “unfair method of competition” – which apparently includes non-competes.
The Three Enforcement Actions – One Deserved & Two Surprising
On January 4, 2023, the FTC announced that it settled three enforcement actions involving non-compete agreements. Per the FTC’s press release, “these actions mark the first time that the agency has sued to halt unlawful non-compete restrictions.”
One of the enforcement actions was against a Michigan security guard company that required its guards to sign non-competes. The other two enforcement actions were against glass container manufacturers that imposed non-competes on their employees.
The enforcement action against the security guard company is similar to cases brought by states against companies that required low-wage workers to sign non-competes. The FTC’s complaint alleged that the security guards “typically earned wages at or near minimum wage.”
The non-compete agreements prohibited the security guards from working for a competing business within 100 miles for 2 years after termination of employment. In a chef’s kiss of overreaching, the non-competes also imposed liquidated damages of $100,000 for violating the non-compete.
The enforcement actions against the glass container manufacturers were more a product of the lack of competition in that industry than the terms of the non-competes themselves. The FTC noted that the “glass food and beverage container industry in the U.S. is highly concentrated” and that the use of non-competes “is likely to impede the entry and expansion of rivals.”
The non-competes (which were not attached to any of the FTC’s filings) appear to have been comparatively standard issue. One of the agreements banned employees for 1 year from owning or being involved in any other way with a competitive business anywhere in the U.S. The other non-compete prohibited employees for 2 years from performing “the same or substantially similar services” for a competitor anywhere in the U.S., Canada or Mexico.
Companies Ordered to Rescind Non-Competes & Notify Current & Prospective Employees
The relief imposed in each settlement is the same. Each company was enjoined from enforcing or threatening to enforce a non-compete agreement against any employee. In addition, the settlements required each company to:
- Provide a copy of the FTC’s order to every employee or former employee who signed a non-compete within the prior two years,
- Provide new hires with a “clear and conspicuous” notice that if they leave the company they are free accept a job with a competitor or open a competing business,
- Provide a copy of the FTC’s order to any manager or other employee involved with hiring or recruiting employees and require them to acknowledge in writing that they may be subject to penalties for violating the order, and
- File compliance reports with the FTC for 10 years containing information sufficient to allow the FTC to confirm the company’s compliance with the order.
Although not expressly stated, the orders do not appear to prohibit the companies from using other types of post-employment restrictions, such as confidentiality agreements.
Can Employers Still Use Non-Compete Agreements?
The FTC’s actions leave employers in an uncertain position with respect to non-competes.
On the one hand, the security guard company made itself an easy target by requiring minimum wage workers to sign non-competes and particularly by including a provision for $100,000 liquidated damages. As Forrest Gump’s mother told him: “Stupid is as stupid does.”
The glass manufacturers are a different story. Their non-compete agreements were not facially abusive. One of the FTC commissioners dissented from the order and noted that there was no allegation in the FTC’s complaint that the non-competes were unreasonable. The glass manufacturers simply had the misfortune of being in an industry the FTC considered highly concentrated.
The takeaway for employers? It is probably an overreaction to say that employers should immediately stop using non-compete agreements, although we may get there eventually. More and more states are banning or severely restricting non-competes. And if the FTC’s proposed rule is actually issued and survives the inevitable court challenges, non-competes will be banned nationwide.
But for the time being, the lesson for employers is still the one we have always advocated: use the least restrictive agreement possible. In many instances, that means only using a confidentiality agreement or a no-solicit agreement. True non-competes should be narrowly written and used only with employees where it is truly necessary to protect the company’s legitimate business interests.
James L. Komie is an attorney with Howard & Howard in Chicago, IL. He regularly writes and speaks on new developments and trends in the law regarding non-competes and trade secrets, as well as issues relating to the financial services industry.