The FTC Sets Its Sights On Noncompete Agreements, Launches First Major Standalone Section 5 Claims

• Published date: 11 January 2023
• Subject Matter: Antitrust/Competition Law, Employment and HR, Antitrust, EU Competition , Contract of Employment
• Law Firm: Shearman & Sterling LLP
• Author: Mr Ben Gris, David Higbee, Jessica Delbaum, Djordje Petkoski, Rachel Mossman, Ryan Shores, Todd Stenerson, John Cannon, III, Doreen Lilienfeld, Gillian Moldowan, John Cove, Jr., Jacob Coate and Amelia (Memmi) Rasmussen

Introduction

Last week, the FTC announced two significant moves. First, the FTC brought its first major standalone Section 5 actions,¹ targeting certain companies' employment noncompete agreements as unfair methods of competition. The very next day, the FTC issued a Notice of Proposed Rulemaking that would ban nearly all employment noncompete agreements in the United States (the "Proposed Rule"). The Proposed Rule is significant in and of itself, potentially invalidating millions of noncompete agreements. Moreover, the complaints and the Proposed Rule reflect a newfound willingness of the FTC to bring standalone Section 5 claims and to issue substantive rules prohibiting certain practices wholesale. We discuss each action in turn.

Section 5 Standalone Claims

On January 4, the FTC filed three complaints, alleging that two glass companies (Ardagh Group and O-I Glass Inc.) and a security company (Prudential Security) had each violated Section 5 by entering and maintaining noncompete agreements with their employees.² Broadly speaking, the FTC alleged that: Ardagh's noncompete agreements prohibited over 700 employees from competing post-employment in the United States, Canada or Mexico for two years; O-I Glass' noncompete agreements prohibited over 1,000 employees from competing post-employment for one year in the United States; and Prudential Security's noncompete agreements prohibited its security guards from competing post-employment for two years within 100 hundred miles of their primary job site and imposed a $100,000 penalty for violations.

Simultaneously, the FTC announced it had entered proposed consent orders with the companies, which would ban the companies from entering or maintaining noncompete agreements with most employees for 20 years.³ Notably, the consent orders banned noncompete agreements for a wide variety of positions (all positions at Prudential, 600 at O-I Glass, and 340 at Ardagh), including both industry-specific and non-industry specific jobs (like lawyers, accountants, etc.). Commissioner Wilson dissented, decrying the lack of evidence of anticompetitive effects, renewing her concern with the FTC's new framework for evaluating Section 5 claims, and expressing due-process concerns for prosecuting conduct predating the FTC's change in approach.⁴

These are the FTC's first standalone Section 5 claims in decades. They are also the first to use the Section 5 analytical framework set out in the November Policy Statement.⁵ For example, in finding a violation, the FTC did not define a relevant market, gave little credence to possible business justifications, relied more on the intrinsically "exploitative" nature of noncompete agreements than anticompetitive effects, and focused primarily on the harm to workers (rather than consumers).

The FTC's newfound willingness to bring standalone Section 5 claims will have an impact far beyond noncompete agreements. On its face, Section 5 is tremendously broad, prohibiting all "unfair methods of competition."⁶ And the FTC has identified numerous other categories that might violate Section 5, like facilitating tacit coordination, loyalty rebates that entrench...