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BFV Perspectives, Noncompete & Trade Secrets, | Jan 05, 2023

Huge News In the Noncompete World

This blog has previously covered various activity at the federal, state, and regulatory levels regarding noncompete reform. Well, in the last twenty-four hours, there have been some bombshells in the noncompete world, namely, activity at the Federal Trade Commission.

Big news: FTC Takes Action Against Companies Alleged to be Misusing Noncompetes
First, yesterday the FTC announced legal action against three companies and two individuals for what the FTC contended was misuse of noncompetes. The FTC’s complaints allege the companies and individuals illegally imposed noncompetes on workers in positions ranging from low-wage security guards to manufacturing workers to engineers, and that these restrictions constituted an unfair method of competition under Section 5 of the FTC Act. These complaints appear targeted at what the FTC perceives as abuse and overuse of noncompetes.

One complaint is against Prudential Security, Inc. and Prudential Command Inc. and their owners. The companies required low-wage security guards who earned hourly wages at or near minimum wage to sign noncompetes prohibiting them from working for a competing business within a 100-mile radius of their job site, for two years after leaving Prudential. The contracts included a $100,000 penalty for a violation.

The companies had sued former employees and competitors to block workers from accepting jobs with higher wages, and the companies continued to use the noncompetes after a court declared them unenforceable. The FTC’s order bans enforcement or threatened enforcement against past or present workers and prohibits the use of noncompetes in the owners’ other business ventures.

Complaints were also filed against the two largest manufacturers of glass food and beverage containers in the United States, O-I Glass, Inc. and Ardagh Group S.A.

O-I Glass used one-year noncompetes which bar employees from working for, owning, or being involved in any other way with any business in the United States which sells similar products or services to O-I Glass. More than 1,000 employees of O-I Glass were subject to the noncompetes, including salaried employees who work with the glass plants’ furnaces and forming equipment and in other glass production, engineering, and quality assurance roles.

Ardagh Group also imposed noncompetes prohibiting competitive employment in North America on employees in a variety of positions. The FTC found that the glass food and beverage container industry is highly concentrated, that it is difficult for new competitors to enter the market in part because of the need to find and hire skilled labor, and that the two companies’ use of noncompetes is likely impeding the entry and expansion of rival competitors.

The relief ordered by the FTC in these matters is extensive. The FTC ordered the companies to cease enforcing, threatening to enforce, or imposing noncompetes on relevant workers. The companies must notify all affected employees that they are no longer bound by the noncompetes restrictions. They are banned from communicating to any relevant employee or other employer that the employee is subject to a noncompete. They are required to nullify the noncompetes without penalizing the affected employees. They are required to provide a copy of the FTC’s complaint and order to current and future directors, officers, and employees of the companies who are responsible for hiring and recruiting. They are required for 10 years, to provide a clear and conspicuous notice to any new relevant employees that they may freely seek or accept a job with any company or person, run their own business, or compete with them at any time following their employment.

One commissioner dissented in these matters. Commissioner Wilson noted that the complaint against the glass manufacturers did not even allege that the noncompetes at issue are unreasonable and instead improperly treated them as per se unlawful under Section 5 of the FTC Act.  In the security guard matter, Commissioner Wilson noted her disagreement with the FTC’s new Section 5 Policy Statement and what she viewed as its overbroad application.  She also observed that the FTC’s Complaint offers no evidence of any anticompetitive effect in any relevant market.

The consent agreements in these matters will be subject to public comments.

Bigger news: FTC Proposes Rule Action Against Companies Misusing Noncompetes
Yesterday’s news seemed very significant, as it was the most aggressive action taken by the FTC with respect to noncompetes to date.  But today’s development is even more seismic. Today, the FTC proposed a ban on noncompetes in the employment context with very limited exceptions.

The specific proposed rule provides that it is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; to maintain a non-compete clause with a worker; or to represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe that the worker is subject to an enforceable non-compete clause.

A “non-compete clause” is defined as a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer. “Non-compete clauses” encompass “de facto non-compete clauses”, which have the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer, such as nondisclosure agreements and training repayment clauses.

Under the rule, existing noncompetes must be rescinded, and the rule provides model language for notifying a worker that his or her noncompete is no longer in effect.

The proposed rule contains exceptions but they are limited: it does not apply to noncompetes entered into by a person who is selling a business or all or substantially all of a business’ assets, when the person restricted by the noncompete is a substantial owner of the business.

Next Steps on Proposed Rule
The proposed rule will go through the public notice-and-comment process.  The FTC’s press release announcing the rule solicits “the public’s opinion on its proposal to declare that non-compete clauses are an unfair method of competition.”  It also curiously asks for “possible alternatives to this rule that the Commission has proposed.”

Given its breadth, the proposed rule will undoubtedly attract significant attention and opposition. Some have questioned whether the FTC can, and should, regulate in this area.

While much has been made in recent years of the overuse and abuses of noncompetes throughout the workplace, but especially with lower wage workers, and many states have taken steps to curb those abuses, the FTC’s proposed rule goes extraordinarily far by proposing a broad-based ban on noncompetes.

Under the FTC’s rule, the most senior executive of a Fortune 50 company who knows his employer’s innermost trade secrets and business strategies could not be restricted from working for a direct competitor in an identical competitive role. While there is certainly room to address and curtail the overuse of noncompetes, most would agree that there are many circumstances where noncompetes are appropriate and reasonable to protect trade secrets and customer goodwill, and the FTC’s proposed rule thus, at first blush, sweeps too far.

What Should Employers Do?
It remains to be seen whether the proposed rule will go into effect and if it does, if the final version will look similar to its current form.  However, if the FTC enacts a full or partial ban on noncompetes, employers will likely need to resort to other laws to protect their workplace from unfair competition by departing employees, such as federal and state trade secret laws.  Employers should thus review their trade secret protection plans and policies with counsel to ensure they are up-to-date and sufficient to protect the organization in the event noncompetes are outright banned.

If you have questions about the FTC’s recent actions or wish to discuss how they impact your organization, please feel free to contact me.

BFV Perspectives, Noncompete & Trade Secrets, | Jan 05, 2023
Benjamin I. Fink
Benjamin I. Fink

Benjamin Fink is known for his work in noncompete, trade secret and competition-related disputes. A shareholder at Berman Fink Van Horn, Ben concentrates his practice in business and employment litigation.

Neal F. Weinrich
Neal F. Weinrich

Neal Weinrich knows noncompetes and trade secrets inside and out. A shareholder at Berman Fink Van Horn, Neal counsels clients in all industries on matters involving restrictive covenants, trade secrets and other competition-related issues.