The FTC now seems poised to join the governmental activism into non-competes that has been trending over the past few years, as we have analyzed in prior alerts. Commissioner Rebecca Slaughter recently spoke at the FTC’s headquarters about how the commission could use the rulemaking process to address competition issues arising from the use and enforcement of non-compete agreements. In her speech, Commissioner Slaughter said that she would like the FTC to consider limiting employers’ use and enforcement of non-compete clauses in employment agreements that limit employees’ abilities to change jobs within the same industry. Such growing skepticism of non-compete agreements may translate into more widespread legislative and enforcement activity, impacting employers’ ability to enforce existing employment agreements.
Commissioner Slaughter’s comments follow a July 2019 comment letter from the attorneys general of 18 states to the FTC requesting that the FTC increase antitrust scrutiny of non-compete agreements. Commissioner Slaughter expressed her support for FTC rule-making as to non-compete agreements, explaining that the use of non-compete agreements not only affects worker mobility, but also impacts wages and prevents some employers from competing for qualified employees. Commissioner Slaughter indicated that the FTC should, in the context of reviewing mergers, review the use of noncompete agreements
While Commissioner Slaughter’s comments do not represent a formal change in FTC policy, they may signal future potential activity by the FTC. Any FTC rule limiting the use of non-compete agreements could impact their use beyond current limitations based in state law.
Her comments also coincide with efforts by a bipartisan group of nine senators, led by Christopher Murphy (D-Conn.) and Todd Young (R-Ind.) to have the FTC prohibit employers’ use or enforcement of non-compete clauses in employment agreements.
Senators Murphy and Young also filed the “Workforce Mobility Act of 2019” in October that is similar to a bill they proposed earlier that ultimately failed. If enacted this time, the law would, at the federal level, prohibit employers from enforcing or threatening to enforce a non-compete agreement, except in limited circumstances. The Workforce Mobility Act would have a similar effect to California law’s general prohibition on non-compete agreements. The bill states that “[t]he proliferation of noncompete agreements…is contrary to Congress’s commitment to fostering stronger wage growth for workers,” and notes that economists estimate that nearly 20% of the workforce is subject to a noncompete agreement. While the bill generally prohibits the use of non-compete agreements (as its predecessor bill did) and provides that their use constitutes unfair or deceptive trade practices under the Federal Trade Commission Act, this latest iteration also includes exceptions for business sales and partnership dissolutions. Notably, the bill would not prohibit the use of non-disclosure or confidentiality agreements meant to protect trade secrets. While it is not clear whether the bill ultimately will become law, the reintroduction of a proposed federal ban on non-compete agreements shows that lawmakers from both sides of the aisle will continue to pay close attention to the use of non-compete agreements into the foreseeable future.
Commissioner Slaughter’s comments are largely consistent with the ways in which the legal landscape and thinking surrounding non-compete agreements are changing. In light of the increased attention state attorneys general are paying to the use of non-compete agreements, and the possibility of increased FTC scrutiny, as well as the possible passage of the Workforce Mobility Act, employers should consider the ways in which they use such agreements. While some states, such as California, prohibit their use almost entirely, other states permit their use in a variety of circumstances, typically only in order to protect clearly defined interests.
Employers should be sure to insist on non-compete agreements only where they can define an interest that the agreement is reasonably designed to protect and carefully should consider whether the enforcement of such agreements against departing employees is necessary to protect that interest. Employers also should work with counsel to ensure that their agreements adhere to the restrictions imposed by the relevant state to try to increase the likelihood of their enforceability and to explore protections that other areas of law might offer, such as intellectual property law. Further, employers should continue to monitor FTC rulemaking, along with legislative and enforcement activity, which could further limit the viability of existing non-compete agreements in the future. We will continue to monitor the FTC’s rule-making process and issue further client alerts when, and if, the FTC adopts rule changes or issues new policies on non-compete agreements.