FTC sets new course for enforcement of noncompete agreements

The complaint and RFI come nearly six months after the FTC announced the formation of a Joint Labor Task Force to “prioritize rooting out and prosecuting deceptive, unfair, and anticompetitive labor-market practices that harm American workers.” The agency said that “[u]nreasonable noncompete agreements have proliferated for too long in the dark,” and the “Trump-Vance FTC intends to uproot the worst offenders and restore fairness to the American labor market” with the assistance of information gathered from the RFI.

Republican FTC puts final nail in the coffin of Biden-era Noncompete Rule

Announcing the decision to withdraw the FTC’s appeal in Ryan, LLC v. FTC,¹ FTC Chair Andrew Ferguson and Republican Commissioner Melissa Holyoak reiterated their joint dissent to the rule: that it would actively displace hundreds of existing state laws; redistribute a half trillion dollars of wealth within the general economy; and “render categorically unlawful a species of contract that has been lawful since the eighteenth century.” At the same time, however, Chair Ferguson and Commissioner Holyoak pledged that the FTC intends to continue enforcement of illegal noncompete agreements on a case-by-case basis to “protect[] American workers from the effects of their unlawful noncompete agreements.”

In a separate statement, Commissioner Mark Meador echoed his Republican colleagues’ view that the Noncompete Rule was overbroad and “an ill-advised use of Commission resources.” He went further, outlining what he considers to be the “appropriate framework” for evaluating whether a noncompete agreement violates either Sections 1 or 2 of the Sherman Act or Section 5 of the FTC Act. In particular, he said the FTC should consider the “competitive character” of a noncompete agreement by looking at: the wage and skill level of the employee bound by the noncompete agreement (noting that noncompetes “tend to be less justified when applied to low-wage workers”); whether the agreement is deployed across a distribution network involving horizontal elements (such as in the franchise context); and whether the agreement involves independent contractors whose employment agreement operates more like an independent supply arrangement (which Meador says may more closely resemble exclusive dealing).²

Commissioner Meador offered a “non-exhaustive” list of factors for the FTC to consider when evaluating the legality of a noncompete agreement. These include evaluating whether the agreement:

• Raises free-riding concerns, such as those presented by employer-specific investments in training, access to confidential know-how, and sharing of proprietary information;
• Could be replaced with a less restrictive alternative;
• Is broader in geographic scope, duration, and field of employment than necessary to protect legitimate interests;³ and
• Is imposed by a firm with market power.⁴

In addition, Commissioner Meador recommended that the FTC consider contextual economic evidence including whether there is widespread use of noncompete agreements across the industry and whether the noncompete implicates a horizontal agreement among competitors.  He also proposed that the legal inquiry regarding noncompete agreements should focus on “context, necessity, and proportionality, and employers should bear the burden of demonstrating that the agreement is reasonably necessary and narrowly tailored to achieve legitimate business interests.

In a dissent, Democratic Commissioner Slaughter characterized the FTC’s decision to abandon its appeal in Ryan as “throw[ing] in the towel on years of work by the agency to protect workers from draconian noncompete agreements that lower wages, trap workers in abusive jobs, and even inhibit new businesses formation.” Commissioner Slaughter also criticized the FTC’s decision to “void this popular rule under cover of darkness by simply withdrawing from litigations”, rather than “follow the legal process of notice and comment set forth by the Administrative Procedures Act.”⁵

Republican FTC issues RFI about the use of noncompete agreements, sends warning letters to health care employers and staffing companies

In an effort to “inform the FTC’s enforcement priorities and future actions”, the FTC’s RFI on Employee Noncompete Agreements encourages current and former employees restricted by noncompete agreements and employers facing hiring difficulties due to a rival’s noncompete agreements to share information about the use of these agreements. The RFI requests information from market participations “in the healthcare sector in particular.”

The RFI states that “while [n]oncompetes can be valid in certain circumstances, available evidence indicates that they are often subject to abuse.” Reiterating the FTC’s pledge to pursue unfair noncompete agreements on a case-by-case basis, the RFI states that the FTC is “committed to rooting out unfair and anticompetitive conduct in all appropriate cases where Congress has authorized the agency to act.”

The RFI requests information including, but not limited to:

• Reasons employers have given for using noncompete agreements;
• Typical salary ranges of the roles and positions subject to noncompete agreements;
• Duration or geographic scope of noncompete agreements;
• Extent that noncompete agreements harm current or former employees considering new job opportunities or make it more difficult for rival employers to hire employees;
• Effect of noncompete agreements on innovation;
• Whether/how noncompete agreements covering health care workers affected wages, labor mobility, or the availability, quality or cost of health care services.

On September 10 the FTC announced that it issued several “noncompete warning letters” to health care staffing companies and employers “urging them to conduct a comprehensive review of their employment agreements—including any noncompetes or other restrictive agreements—to ensure they are appropriately tailored and comply with the law.”  The letters – signed by Chair Ferguson—explain that the FTC is focusing its noncompete enforcement efforts on the health care sector due to the “particularly harmful effects” that noncompete agreements may have in health care markets (such as limiting patient choice of medical providers in rural areas where medical services “are already stretched thin.”).[1]  The warning letters “strongly encourage” recipient companies to immediately discontinue use of noncompete agreements “that are unfair or anticompetitive under the FTC Act.”

Consistent with its case-by-case approach to noncompetes, the agency announced on September 4 that it filed a complaint against a pet cremation service, alleging that the company’s noncompete agreements with its employees unlawfully prohibited them from working in the pet cremation service industry anywhere in the U.S. for one year. The complaint alleges that the agreements are unfair methods of competition because they “alter the bargaining positions” between the company and its employees and “they have the likely purpose and effect of suppressing competition by impeding the entry or expansion of [the company’s] competitors in the pet cremation services industry . . . [and] preventing or discouraging [company] employees from opening competing pet cremation businesses.” In addition, the FTC alleges that the company applied the noncompete agreements “without any individualized consideration of an employee’s role”, and used noncompete agreements as a direct response to competitive threats.

Pursuant to a proposed consent order filed with the complaint, the company is barred from, among other things, entering into any new noncompete agreements or enforcing existing noncompete agreements.

Looking ahead

Whether or not Chair Ferguson agrees with Commissioner Meador’s roadmap for FTC enforcement of noncompete agreements is an open question. What is clear, however, is that, despite the official demise of the Noncompete Rule, the “Trump-Vance FTC” has pledged to continue to “patrol[] our markets for specific anticompetitive conduct that hurts American consumers and workers, and taking bad actors to court.”⁶ Employers should take note and consult experienced counsel when drafting and/or enforcing noncompete agreements that may be subject to FTC scrutiny.

Authored by Chuck Loughlin and Jill Ottenberg.