ARE THE FTC’S AND NLRB’S DECISIONS SIGNS TO PRAISE, PIVOT, OR PANIC? REMOVAL OF NON-COMPETES TO LOOSEN RESTRICTION ON TRADE
Author: Alicia MacRae, Associate Editor
A non-compete agreement is, by definition, a covenant not to compete that restricts trade engagement of a former employee within a specific scope, time, and territory.[i] These agreements aim to prevent an employee from taking investments and information from one company to its competitor.[ii] While the theory is to protect intellectual property, training investments, and proprietary operations,[iii] reality finds low-wage earners such as security guards, house cleaners, and cafeteria workers having little to no access to sensitive information being bound by these clauses.[iv] This restriction is said to “suppress wages, hamper innovation, and deprive workers of economic liberties.”[v]
Matter Number P201200, dated January 5, 2023, was proposed by the Federal Trade Commission as a new rule banning the use of non-compete clauses in employment contracts and voiding those previously signed.[vi] The rule proposes that section 910, “Non-Compete Clauses,” be added to subchapter J, “Rules Concerning Unfair Methods of Competition,” requiring compliance within 180 days of publication.[vii] The rule, if implemented, would ban employers from entering into non-compete clauses with their workers, including independent contractors.[viii] Moreover, the rule would require actively informing employees with existing non-compete contracts that those contracts are no longer in effect.[ix] Ultimately, it hopes to increase workers’ earnings by nearly $300 billion per year, save $148 billion on health care costs annually, and double the number of companies founded by a former worker in the same industry.[x] This provision also aims to close racial and gender wage gaps by 3.6 to 9.1% and limit the exploitation of workers, with referenced studies providing hopeful numbers in support.[xi]
The harms caused by non-competes are exemplified by employers’ attempted enforcement of such agreements on employees making as little as $11 an hour, such as a nighttime security guard who switched companies due to childcare issues.[xii] As another example, a phlebotomist (who drew blood samples for testing) lost a higher-paying job offer when the new employer discovered she was subject to a noncompete.[xiii] The explanation in the Memorandum GC 23-05, “Guidance in Response to the McLaren Macomb Decision,” addressed questions about the Board’s actions in that case.[xiv] Existing severance agreements were thereafter rendered unlawful and yielded broad implications for employers and employees.[xv]
These examples illuminate how non-competes have had a significant effect on employees. Non-competes have also been challenged repeatedly in the mergers and acquisitions realm as having a significant effect on affected employees. The FTC has repeatedly ordered settling charges and “imposing strict limits on mergers while prohibiting companies from entering into or enforcing noncompete agreements and other employee restrictions.”[xvi] Thus, the newly proposed provision is a cumulation of the multiple regulatory actions taken against companies and their policies, including the FTC’s order requiring companies to terminate their non-competes. The FTC, after proposing the provision, later extended the comments deadline in response to interested parties’ requests.[xvii] Responses reeled along the threads of stifling investment in employees, hesitation to share information with employees, and the move being called “a little short-sighted.”[xviii] However, the majority of the comments totaling in excess of twenty-one thousand were in support of the new provision and its ability to free employees from overly restrictive or unnecessary covenants.
Shortly after the McLaren Macomb explanatory memo, on May 30, 2023, General Counsel for the National Labor Relations Board (NLRB) issued an additional memorandum contending that an overly broad non-compete clause violates the protections afforded to employees by chilling employees from engaging in workplace market.[xix] The memorandum was to further explain the decision regarding the unlawful interference with members of a bargaining unit to exercise their collective bargaining rights and prohibiting them from disclosing the terms of the agreement.[xx] The memorandum went on to outline five types of protected activities under Section 7 of the National Labor Relations Act (the Act) that could be interfered with by non-competes.[xxi] Non-competes interfere with an employee’s ability to (1) jointly threaten to resign in demand for better working conditions, (2) carry out any threats in an attempt to obtain better working conditions, (3) seek or accept employment with competitors to obtain better working conditions, (4) solicit co-workers to work for a competitor as part of a broader protected concerted activity, and (5) engage in protected activity with other workers that may involve obtaining work with employers in a trade and geographic region.[xxii]
The memorandum does cite instances where non-competes may be lawful. However, there remains an inconsistent approach to non-competes across the country, leaving certain states as enforcement states while California has made them unenforceable since 1872.[xxiii] New York, for example, is even going so far as to propose damages.[xxiv] With multiple agencies leaning on the restriction or abolishment of non-competes, we could expect an increase in creative alternative protection of client lists, confidential information, and trade secrets while also seeing a spike in litigation related to trade secret misappropriation and disclosure violations.[xxv]
Non-competes are most likely to be found in high-skill, high-paying jobs like technology, pharmaceutical, or manufacturing where breakthrough developments are crucial to the industry, particular company, and growth.[xxvi] Investors and employers in this sector are more acutely aware of the importance of non-competes, yet studies have shown firms rarely need to enforce non-competes in having other avenues at their disposal or of greater concern.[xxvii] Perhaps getting rid of all non-competes is being “a little short-sighted” as shared by Kevin Vozar, Sr. Director of Business Development and owner relations at Cabins For You.[xxviii] Yet, it would certainly offer a balance to the buyer who has taken on debt and risk to purchase an existing business to know the seller cannot open up shop next door. While the first case about non-competes was in England in 1414, the last case may be in our near future.[xxix]
[i] Covenant Not To Compete, Black’s Law Dictionary (11th ed. 2019).
[ii] Jaclyn Phillips, et al., Non-competes: If You Can’t Use Them There, Can You Use Them Anywhere? What New York’s Potential Non-Compete Ban Adds to the Labor and Antitrust Conversation, White Case, Aug. 15, 2023, https://www.whitecase.com/insight-our-thinking/non-competes-if-you-cant-use-them-there-can-you-use-them-anywhere-what-new.
[iii] Id.
[iv] Andrea Hsu, Many workers barely recall signing noncompetes, until they try to change jobs, NPR, January 13, 2023, https://www.npr.org/2023/01/13/1148446019/ftc-rule-ban-noncompetes-low-wage-workers-trade-secrets.
[vi] Non-Compete Clause Rule, 88 Fed. Reg. 3482 (proposed Jan. 5, 2023), https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking.
[vii] FTC Non-Compete Clause Proposed Rule, 88 Fed. Reg. 3482 (January 19, 2023) (to be codified at 16 C.F.R. pt. 910) (2023).
[viii] FTC. FACT SHEET: FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition (Jan. 5. 2023).
[ix] Id.
[x] Id.
[xi] FTC. FACT SHEET: FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition (Jan. 5. 2023).
[xii] FTC. FACT SHEET: FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm CompetitioN (Jan. 5. 2023).
[xiii] Id.
[xiv] NLRB, Office of the General Counsel Memorandum GC 23-05.
[xv] Id.
[xvi] FTC. FACT SHEET: FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition. (Jan. 5. 2023).
[xvii] Non-Compete Clause Rule; Extension of Comment Period, 88 Fed. Reg. 20441 (Apr. 6, 2023), https://www.federal register.gov/documents/2023/04/06/2023-07036/non-compete-clause-rule-extension-of-comment-period.
[xviii] Andrea Hsu, Many workers barely recall signing noncompetes, until they try to change jobs, NPR, January 13, 2023, https://www.npr.org/2023/01/13/1148446019/ftc-rule-ban-noncompetes-low-wage-workers-trade-secrets.
[xix] NLRB, Office of the General Counsel Memorandum GC 23-08.
[xx] McLaren Macomb * Loc. 40 Rn Staff Council, Off. & Pro. Emps., Int’l Union (Opeiu), Afl-Cio, 372 NLRB No. 58 (Feb. 21, 2023).
[xxi] Id.
[xxii] NLRB, Office of the General Counsel Memorandum GC 23-05.
[xxiii] Chris Carroll, Why Noncompetes Could Soon Be a Non-Thing: Maryland Economist’s Studies Have Fueled Federal Drive to Ban Controversial Employee Contracts, Maryland Today, Mar. 14, 2023, https://today.umd.edu/why-noncompetes-could-soon-be-a-non-thing.
[xxiv] Jaclyn Phillips, et al., Non-competes: If You Can’t Use Them There, Can You Use Them Anywhere? What New York’s Potential Non-Compete Ban Adds to the Labor and Antitrust Conversation, White Case, https://www.whitecase.com/insight-our-thinking/non-competes-if-you-cant-use-them-there-can-you-use-them-anywhere-what-new.
[xxv] Chris Carroll, Why Noncompetes Could Soon Be a Non-Thing: Maryland Economist’s Studies Have Fueled Federal Drive to Ban Controversial Employee Contracts, Maryland Today, Mar. 14, 2023, https://today.umd.edu/why-noncompetes-could-soon-be-a-non-thing.
[xxvi] Andrea Hsu, Many workers barely recall signing noncompetes, until they try to change jobs, NPR, January 13, 2023, https://www.npr.org/2023/01/13/1148446019/ftc-rule-ban-noncompetes-low-wage-workers-trade-secrets.
[xxvii] Isaac Chotiner, What a Ban on Non-compete Agreements Could Mean for American Workers. The New Yorker, The New Yorker , Jan. 10, 2023, https://newyorker.com/new/q-and-a/what-a-ban-on-non-compete-agreements-could-mean-for-american-workers.
[xxviii] Andrea Hsu, Many workers barely recall signing noncompetes, until they try to change jobs, NPR, January 13, 2023, https://www.npr.org/2023/01/13/1148446019/ftc-rule-ban-noncompetes-low-wage-workers-trade-secrets.
[xxix] Chris Carroll, Why Noncompetes Could Soon Be a Non-Thing: Maryland Economist’s Studies Have Fueled Federal Drive to Ban Controversial Employee Contracts, Maryland Today, Mar. 14, 2023, https://today.umd.edu/why-noncompetes-could-soon-be-a-non-thing.