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Federal antitrust enforcers crack down on non-compete restrictions

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Home Perspectives Federal antitrust enforcers crack down on non-compete restrictions
Less than a week into the new year, the U.S. antitrust agencies’ aggressive pursuit of antitrust violations in labor markets – about which we have previously written on a number of occasions – does not appear to be slowing down. To the contrary, on January 4, 2023, the Federal Trade Commission (FTC) announced that it had taken legal action against four companies and two individuals, forcing them to drop non-compete restrictions affecting thousands of workers. Although the FTC has frequently expressed concern about mechanisms designed to reduce worker mobility, including non-compete provisions, the use of restrictive covenants to limit employee conduct has long been primarily governed by a patchwork of varying state laws. These actions mark the first time that the FTC has sued to prevent the enforcement of non-compete agreements.

The FTC enforcement actions

In the first complaint, the FTC alleges that two affiliated Michigan-based security companies and their individual owners exploited their superior bargaining power against low-wage security guards, requiring them to agree to employment terms that would prohibit them from working for a competing business within a 100-mile radius of their job site for two years after leaving the companies. Though the security guards typically earned hourly wages at or near minimum wage, the standard non-compete clause required employees to pay $100,000 as a penalty for violations. The complaint further alleges that even after a Michigan state court deemed the non-compete restrictions unreasonable and unenforceable under state law, the companies continued to require all of their security guard employees to sign them.

In two additional complaints, the FTC alleges that the two largest manufacturers of glass food and beverage containers in the United States imposed non-compete restrictions on employees across a variety of positions, including salaried employees. The broad restrictions typically banned employees from working for competitors for a period of one or two years after leaving the companies. Notably, the complaints allege that the glass container industry in the United States is highly concentrated with substantial barriers to entry and expansion, due in part to the difficulty of finding and hiring skilled employees with experience in glass container manufacturing.

All three of the complaints allege violations of Section 5 of the FTC Act (Section 5), which prohibits “unfair methods of competition.” As we noted in a recent client alert, late last year the FTC released a new policy statement reflecting an updated, expansive interpretation of Section 5 that may leave businesses with more questions than it answers.