29 April 2024 The FTC bans non-compete agreements

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The FTC bans non-compete agreements​

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Hi Reader 👋🏽,


The Story

Imagine you start working as a bartender for $10 an hour. On your first day, your manager gives you a bunch of paperwork to sign. ‘It’s not a big deal’, he says. ‘Everyone signs it’. Okay, let’s not kick up a fuss. You need this job. You sign.

Three months pass and you hate it. The manager is horrible. You’re paid poorly and treated worse. You decide you can’t stay any longer, so you start applying for other bartending jobs. You find one that is family-owned at $15 an hour. You write your resignation letter excited about your future.

Your former manager screams at you. You can’t leave. He promises to sue you because you signed a non-compete agreement on your first day. You don’t even remember. Is he bluffing? Maybe. You leave and hope for the best.

A month later, you are being sued for $30,000 for breaching the non-compete. You’re terrified.

About 1 in 5 US workers are subject to a non-compete, according to estimates by the FTC.

The FTC or the Federal Trade Commission is the US boss in charge of protecting the public from unfair competition.

Two days ago, the FTC banned non compete agreements in the US. But why?

First, the FTC says that Congress has given them the legal right to make the ruling. They point to section 5 (and section 6(g)) of the FTC Act, which finds that ‘unfair methods of competition’ is unlawful and the FTC has the power to ‘make rules and regulations’ to carry out the FTC Act.

Second, whether a non-compete is an unfair method of competition rests on a two-part legal test:

- Whether the conduct is a method of competition?
- Whether it is unfair?

On the question of unfairness, there are two limbs: (1) whether the conduct has an indicia of unfairness and (2) whether the conduct tends to negatively affect competitive conditions.

The FTC says yes on all counts.

On (1), they argue a non-compete is restrictive and exclusionary. It prevents an employee from seeking or accepting a competing role or starting a competing business, and it negatively impacts rival companies who try to hire that employee.

For workers that are not ‘senior executives’, the FTC says non-competes are also exploitative and coercive. Employees are trapped in jobs or have to bear significant cost to move location. There is an unequal bargaining power, where employees don't have the power to negotiate or seek legal help, and employees face the risk of costly litigation. (They did not find this point to be the case for senior executives, which is why they chose not to ban existing non-competes for this group.)

On (2), the FTC found that non-competes impact competitive conditions, both in the employment market and in products and services. They limit employee mobility, earnings, innovation and the launch of new businesses.

What does this mean for law firms?

This is the domain of employment law, and companies need legal help, fast. US companies can't wait on the legal outcome from the several organisations that have now sued the FTC.

Law firms are fast to publish guidance - see White & Case, Goodwin and Weil. Companies will need to redraft new employment agreements, check whether they can keep existing non-competes for senior execs, understand the implications of garden leave (i.e. paying an employee not to return to work), and inform employees about the invalidity of any existing non-competes.

This is a great example of the role law firms play to provide clarity when new regulations are introduced.

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Have any thoughts? I'd love to hear your perspective below!