Recent enforcement action shows the U.S. Federal Trade Commission (FTC) is squelching noncompete agreements that some employers require workers to sign as a condition of employment.
Noncompete agreements ban employees from working for a competing employer or starting a competing business within a certain geographic area and period of time after their employment ends.
On Feb. 21, the FTC issued an order settling charges that two glass container manufacturers, O-I Glass in Perrysburg, Ohio, and Ardagh Group in Indianapolis, illegally imposed noncompete restrictions on workers across a variety of positions. The settlement directs the companies to tell workers that their noncompete agreements are nullified.
The FTC charged the companies with violations of Section 5 of the Federal Trade Commission Act, which prohibits ”unfair or deceptive acts or practices in or affecting commerce.” The agency alleged that the companies’ noncompete agreements restricted job mobility and unlawfully harmed competition.
The two companies must submit a series of compliance reports for the next nine years so the FTC can determine whether they have complied with the settlement. O-I Glass declined to comment. Ardagh Group didn’t respond to a request for comment.
“The settlements clearly reflect the FTC’s intent to move forward with its aggressive effort to ban noncompete agreements,” said Matt Durham, an attorney with Dorsey & Whitney in Salt Lake City. “Because it is a settlement, it does not have any binding effect on employers generally, but the terms of the settlement follow closely the proposed rule issued by the agency in January.”
“These settlements are at the leading edge of the FTC’s aggressive stance toward noncompetes,” said Carsten Reichel, an attorney with Norton Rose Fulbright in Washington, D.C. “By definition, they represent stronger enforcement by the agency against noncompetes because the FTC had not previously taken this type of action.”
The FTC recently proposed a rule that would stop employers from entering into noncompete agreements with workers and require employers to rescind existing noncompete agreements and provide notice that these clauses are no longer in effect. The FTC said noncompetes constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act.
“The FTC’s proposed rule will generate lively comments for and against, but I doubt the final rule will be as sweeping as the proposal. If the FTC implements a final rule banning noncompete agreements generally, there will certainly be litigation over the rule and the FTC’s authority to issue and enforce it,” Durham said.
Right now, employers should “take stock and consider how the FTC’s proposed ban will impact your business,” Reichel said.
Emily Dickens, chief of staff and head of public affairs for the Society for Human Resource Management, said the proposed FTC rule is overly broad and could potentially harm businesses that depend on noncompetes to thrive. She cited very small, emerging industries where crucial know-how cannot be safeguarded through nondisclosure agreements alone. Although “there are jobs where it makes no sense to have noncompetes,” Dickens said, “this kind of blanket ban is going to stifle innovation.”
To determine whether a noncompete agreement is overly broad, and therefore unenforceable, courts may look at several factors:
- Whether the agreement is necessary to protect a legitimate business interest.
- Whether the time limitation is reasonable.
- Whether the geographic limitation is reasonable.
- Whether the worker receives some tangible benefit, like more pay or stock options, for signing the agreement.
If a court approves a cease-and-desist order against a company’s noncompete agreements, the FTC can seek civil penalties, restitution, damages, injunctive relief and/or revisions to contracts, according to an analysis from Fisher Phillips.
“Whether the FTC will continue pursuing such actions remains to be seen, but employers should be mindful of the potential enforcement risks and review their current noncompete practices considering these settlements,” said Andrew Turnbull, an attorney with Morrison Foerster in Washington, D.C. “Although noncompetes with low-wage or low-skilled workers are likely the most vulnerable to attack, it is important to note that the FTC’s recent enforcement actions were not limited to noncompetes with those types of workers.”
California, North Dakota, Oklahoma and Washington, D.C., ban noncompete agreements with a few narrow exceptions. Colorado, Illinois, Maine, Maryland, New Hampshire, Oregon, Rhode Island, Virginia and Washington state prohibit noncompete agreements unless the worker earns above a certain threshold.
“Employers should recognize that the trend is against broad use and enforcement of noncompete agreements. They have to be aware of the changing limitations on noncompete agreements in all states in which they operate,” Durham said. They should “consider whether other types of agreements, like confidentiality or nonsolicitation agreements, could protect their interests sufficiently.”
So far, noncompete agreements remain common across the country in a variety of industries. “We see them utilized for a variety of purposes across a range of industrial sectors,” Reichel said. “The FTC estimates that there are 30 million or more noncompete provisions in the United States’ economy, which equates to about one in five American workers.”