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.
The companies and, where applicable, their individual owners all agreed to consent orders to settle the claims against them, under which they are prohibited from enforcing the non-compete provisions. Among other terms, the consent orders also require the respondents, for the next 10 years, to provide clear notice to any new employees that they may freely seek or accept a job with a competitor, run their own competing business, or otherwise compete with them at any time following their employment. After a public comment period, the FTC will decide whether to make the proposed consent orders final.
Key takeaways and what’s next
As reported by our colleagues, only one day after the FTC announced the Section 5 actions cracking down on non-compete restrictions, the FTC proposed a new rule that would effectively invalidate both existing and future workplace non-compete clauses under almost all circumstances, with a sole exception for non-compete clauses that are entered into by a person selling a business entity, provided the restricted individual is a substantial owner of the business entity at the time that the person enters into the non-compete clause. The rule proposal is the first step in the regulatory process and the proposed rule is not yet final, but in conjunction with the deluge of antitrust enforcement activity in labor markets – which we expect will continue throughout 2023 and beyond – employers would be wise to monitor developments and take steps to mitigate risk in this space. It is critical that businesses work with experienced antitrust and labor and employment counsel to navigate these evolving issues. Please do not hesitate to contact Reed Smith’s antitrust and competition and labor and employment teams for further guidance, or the Reed Smith lawyer with whom you regularly work.
Client Alert 2023-006