“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”

 – FTC Commissioner Christine S. Wilson

The Federal Trade Commission (“FTC”) started 2023 with a bang. In addition to issuing a proposed Rule that would ban post-employment noncompetes nationwide, the FTC announced that it had settled two previously undisclosed enforcement actions and entered into proposed consent orders with three employers based on a novel legal theory.  According to the Complaints filed in each action, the FTC contends that the defendant employers’ use of broad post-employment non-compete agreements constituted “unfair methods of competition” in violation of Section 5 of the FTC Act. Unfortunately, the timing of the announcement of these enforcement actions—one day before announcing the proposed rule—seems intended to discourage employers from challenging the FTC’s authority to issue rules banning, or otherwise regulating, noncompetes, and to intimidate the business community.

The FTC’s aggressive push to make new law in this area comes in the context of a broader push by Democratic commissioners to expand the definition of actionable “unfair methods of competition” beyond types of conduct challenged in previous enforcement actions.  Unlike most state-level efforts to regulate or restrict the enforcement of non-competes, which frequently target existing factors in non-compete enforcement such as the length of time or geographic scope of a restriction, or whether the restriction protects a legitimate business interest, the FTC approach seems aimed at creating completely new law rather than acting as a gloss on existing law. ^[1]

By way of context, Section 5 of the FTC Act empowers the agency to file suit to enjoin “persons partnerships, or corporations . . .  from using unfair methods of competition in or affecting commerce.”  Although the statute has been on the books since 1914, the issue of what constitutes an “unfair method of competition” remains vague and poorly defined.  There is broad agreement that activity which violates other antitrust laws such as the Sherman Antitrust Act of 1890 also violates the FTC Act.  However, for the past 40 years, the FTC’s Bureau of Competition has largely focused enforcement efforts on conduct running afoul of traditional antitrust laws rather than testing the limits of the FTC’s authority under Section 5.  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 announcing a new policy expanding the definition of “unfair methods of competition” to include conduct which: (1) goes beyond competition “on the merits” because it is “coercive, exploitative, collusive, abusive, deceptive, predatory, or involve[s] the use of economic power of a similar nature”; and (2) “tend[s] to negatively affect competitive conditions.”  Entities accused of unfair competition would then have an opportunity to present a “justification” for the allegedly unfair method of competition as an affirmative defense.  Moreover, noncompetes have been in use in the United States for well over 200 years, far longer than the FTC has even been in existence, and the FTC did not consider their use to be an unfair method of competition at the time the FTC Act was enacted in 1914, or at any time since (until now). There are compelling arguments that the FTC does not have the authority under Section 5 of the FTC Act to go after employers who utilize agreements that are permissible in 47 states.

In its enforcement actions against Prudential Security, O-I Glass, Inc., and Ardagh Group, S.A. the FTC alleges that the Defendant employers’ practice of requiring employees to execute post-employment non-competes constitutes an unfair method of competition.  All three employers agreed to enter into consent agreements rather than litigate to challenge the FTC’s legal theories.  In her Dissenting Statement explaining her vote against bringing the actions against O-I Glass and Ardagh Group, Commissioner Christine S. Wilson explained how the FTC’s theory runs roughshod over existing law in this area:

The second noteworthy aspect of these complaints is their omission of any allegations that the non-compete provisions at issue are unreasonable, a significant departure from hundreds of years of legal precedent… Courts have long analyzed the temporal length, subject matter, and geographic scope of noncompete agreements to determine whether those agreements are unreasonable; when noncompete agreements are not found to be unreasonable, courts repeatedly have held that they do not violate the antitrust laws. In the cases before us, the Commission makes no reasonableness assessment regarding the duration or scope of the non-compete clauses. Instead, it seems to treat the non-compete clauses as per se unlawful under Section 5 of the FTC Act.

And Commissioner Wilson’s warnings were even more stark in her Dissenting Statement in the Prudential Security case:

I wish it were accurate to say that this case (with apologies to Shakespeare) is a tale of sound and fury, signifying nothing. Unfortunately, it has great significance: it foreshadows how the Commission will apply the new Section 5 Policy Statement. 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.

Notably, the facts underlying these cases allowed room to argue the post-employment restrictions were unreasonable under the common law.  For example, Ardagh restricted employees from working for any competitor in all of North America for a period of two years following cessation of employment.

A challenge to the FTC’s authority to use its enforcement powers in this manner could succeed. However, many companies don’t have the financial wherewithal to fight the FTC. If you look very hard, there is a small sliver of good news for any such companies before a Court clarifies the FTC’s powers.  Specifically, the FTC Act empowers the agency to obtain equitable relief rather than money damages, and the equitable relief provided for in the various consent agreements leaves room for appropriate non-competes.  For example, the injunctions do not cover certain employees such as senior executives and R&D personnel, positions where noncompete agreements are more defensible.  That said, the FTC’s proposed rule does not provide for such an exception so this small carveout may not be generalizable to future cases.  In the short term, employers who require entry level employees or substantial portions of their workforce to enter non-compete agreements face increased regulatory risk from the FTC.  Such employers may be well served to consider shifting to narrower types of post-employment restrictions.

FOOTNOTES

^[1] A fact confirmed in the FTC’s Notice of Proposed Rulemaking on this issue.