Thursday, January 5, 2023

FTC enters the noncompete wars

Yesterday, the Federal Trade Commission (FTC) issued a news release: FTC Cracks Down on Companies That Impose Harmful Noncompete Restrictions on Thousands of Workers. This marks "the first time that the agency has sued to halt unlawful noncompete restrictions." So, why has the FTC entered into an area that is primarily governed by state contract (and public policy) law?

The news release primarily points to the standard public policy considerations that already make noncompetes "disfavored" in Pennsylvania - they harm employees by limiting their ability to seek new employment (sometimes with higher wages or better conditions) and prevent businesses from acquiring new talent to compete. That said, noncompetes are still generally enforceable so long as they are tied to a legitimate p[rotectable business interest and reasonably limited in terms of  scope, geographic area, and time. 

Not official use.
The FTC claims that the noncompetes in question "constituted an unfair method of competition under Section 5 of the FTC Act." One of the cases focused primarily on lower wage security guards. Some of the specific factors highlighted by the FTC, include:

  • Hourly wage employees earning at or near minimum wage;
  • High penalties for breach, including a $100,000 penalty in the employer's standard agreement;
  • A fairly large 100-mile radius (what constitutes a reasonable geographic limitation will vary a lot depending on the circumstances); and
  • Efforts to enforce the noncompetes through litigation to prevent employees from seeking higher wages at competitors (by suing both the employees and the competitors).
Another case dealt with glass manufacturers. The employer locked down more than 1,000 employees with noncompetes. The contracts covered the whole United States for one year, and banned workers from having any involvement with a business that sold similar products or services. 

The third case dealt with a manufacturer of glass food and beverage containers. The company had 700 employees with noncompetes, who could not provide "same or substantially similar services" anywhere in the U.S., Canada, or Mexico for a period of two years to any business "involved with or that supports the sale, design, development, manufacture, or production of glass containers."

Enforcing noncompetes was complicated enough under state law. Now, employers have to consider whether an enforcement action will draw fire from the FTC. 

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