FTC Takes Legal Action Against Employee Noncompete Agreements; Issues Three Complaints And Proposed Ban

• Jurisdiction: United States,Federal
• Law Firm: Buchanan Ingersoll & Rooney PC
• Subject Matter: orporate/Commercial Law, Antitrust/Competition Law, Corporate and Company Law, Antitrust, EU Competition
• Author: Ms Carrie G. Amezcua, Mark A. Kasten, Erin J. McLaughlin and Scott C. Oberlander
• Published date: 09 January 2023

The Federal Trade Commission announced on January 4, 2023, that it has issued complaints against three separate companies for violations of Section 5 of the Federal Trade Commission Act because of noncompete provisions in contracts with their respective employees. These are the first actions since the FTC issued their new Section 5 Policy Statement, which promised more enforcement against "unfair methods of competition." These are also the first complaints by the FTC challenging employer-employee noncompete agreements outside of the merger context since President Biden issued his July 2021 Executive Order urging the FTC to curtail the use of such agreements. The decision to issue the complaints, and subsequent consent orders, was not unanimous. The three Democratic Commissioners voted in favor; Republican Commissioner Christine Wilson opposed the complaints and issued dissenting statements.

On the heels of that announcement, the FTC proposed a new rule on January 5th that would prohibit employers from imposing noncompete agreements on employees. The basis for the proposed rule, according to the FTC, is that noncompete agreements are an unfair method of competition and therefore violate Section 5 of the FTC Act. As with the complaints the previous day, the vote to publish the proposed new rule broke on party lines, with the three Democratic Commissioners in favor and Commissioner Wilson opposing.

Noncompete Challenges

The complaints focused on noncompete agreements that employees at a variety of levels in the three companies were "forced" to sign, and that prohibited the employees from working for competing companies or performing similar services for two years after employment. In one instance, there was a liquidated damages clause of $100,000 for a breach of the noncompete.

The FTC alleges these post-employment restrictions violated Section 5 as an unfair method of competition. While the complaints certainly send a message to employers, and back up the FTC's statement that it will more vigorously enforce Section 5, the complaints are thin on alleging actual anticompetitive conduct and the effects from that conduct.

Across all the complaints, only one, against Prudential, alleges more than bare-bones facts. That complaint points to two examples of efforts to enforce the noncompete provisions against employees.¹ The other two complaints, on the other hand, allege no specific facts other than the existence of the noncompete agreements.²

Remarkably, the complaints focus on the harm to the employees, and all but...