FTC Takes Action Against Companies and Executives for Unfair Non-Competes; Proposes Ban on Non-Competes

On January 4, 2023, the Federal Trade Commission (“FTC”) announced actions against three companies and two executives for imposing non-compete restrictions on workers.[1]  On January 5, 2023, the FTC proposed a ban on non-compete clauses in employment contracts.[2]  This ban would prohibit employers from entering into or enforcing non-competes with employees or independent contractors and require employers to nullify existing restrictions within six months.  The ban would include a limited exception allowing non-compete clauses for certain persons selling their business interests.  The FTC will accept public comments on its proposal for 60 days before issuing a final version of the rule.  Challenges to the proposed rule are anticipated.

These unprecedented actions follow President Biden’s July 9, 2021, Executive Order on Promoting Competition in the American Economy, encouraging the FTC to take action to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.  Until now, the FTC’s actions regarding non-compete clauses have generally been limited to policing the anticompetitive use of such clauses in the context of merger and acquisition (“M&A”) agreements.[3]  With these recently announced actions, the FTC has expanded its policing of non-compete restrictions beyond the M&A context and directly into the context of employer-employee agreements.

The FTC’s investigations resulted in findings that three companies and two executives used non-compete clauses as an unfair method of competition and violated Section 5 of the Federal Trade Commission Act (“FTC Act”). 

• The FTC determined that one company’s (and its executives’) use of non-compete clauses that prohibited workers from working for a competitor within a 100-mile radius of their job site for two years after employment and would impose a $100,000 penalty for an employee’s breach of the restriction was a violation of the FTC Act. 
• The FTC noted that such restrictions were particularly unfair because the workers barely earned minimum wage and received minimal training from the company.
• The FTC also found that two other companies’ use of two-year post-employment non-compete clauses that extended throughout North America and applied to highly skilled workers in the highly concentrated glass manufacturing sector violated the FTC Act.
• The FTC Chair, Lina Khan, noted that the restrictions “had the potential to deprive aspiring entrants of access to a critical talent pool, thereby impeding entry into a relatively consolidated industry that has experienced tight supply and unmet customer demand.”[4]

Remarks from the FTC indicate that it intends to continue this newfound focus on challenging non-compete restrictions in employment agreements and other employer-employee agreements.  Chair Khan stated: “Today’s actions should put companies and the executives that run them on notice that using noncompetes to restrain workers and restrict competition invites legal scrutiny.”[5]  Rahul Rao, Deputy Director of the FTC’s Bureau of Competition, remarked: “The FTC will continue to investigate, and where appropriate challenge, noncompete restrictions and other restrictive contractual terms that harm workers and competition.”[6]  The FTC also encouraged any employees who are aware of an unfair non-compete restriction to report it to the FTC through preexisting anti-trust reporting mechanisms.

In light of these developments and the FTC’s proposed ban on non-competes, employers who utilize non-compete and other employee mobility restrictive covenants should audit their policies, practices, and procedures regarding the use of such covenants for compliance with FTC regulations.  If you have questions about this or any other workforce issue, please contact your relationship attorney or one of Honigman’s Labor and Employment attorneys.

[1] Press Release, FTC, FTC Cracks Down on Companies That Impose Harmful Noncompete Restrictions on Thousands of Workers (Jan. 4, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-cracks-down-companies-impose-harmful-noncompete-restrictions-thousands-workers.

[2] 16 CFR Part 910.

[3] Press Release, FTC, FTC Marks One Year Anniversary of Government-Wide Initiative to Promote Competition in the American Economy (July 11, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/07/ftc-marks-one-year-anniversary-government-wide-initiative-promote-competition-american-economy.

[4] Statement of Chair Lina M. Khan Joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro M. Bedoya, In the Matters of Prudential Security, O-I Glass Inc., and Ardagh Group S.A., Commission File No. 2210026 & 2110182 (January 4, 2023), https://www.ftc.gov/system/files/ftc_gov/pdf/21100262110182prudentialardaghkhanslaughterbedoyastatements.pdf.

[5] See fn. 3.

[6] See fn. 1.