FTC Prosecutes Three Companies Over Noncompete Contracts
January 12, 2023
As part of a new and aggressive agenda, the Federal Trade Commission (FTC) has recently taken unprecedented steps to prosecute three companies and two individuals over noncompete restrictions. The current leadership of the FTC seeks to ban noncompete restrictions via enforcement and regulatory efforts. As such, any employer using noncompete contracts or clauses needs to pay attention to this federal agency’s activities.
The FTC filed complaints against a Michigan-based security company and its owners, alleging that they unlawfully forced low-wage security guards to sign noncompete contracts. The FTC also took legal action against two manufacturers of glass food and beverage containers that used noncompete contracts with salaried employees who work with the glass plants’ furnaces and forming equipment and in other glass production, engineering, and quality assurance roles.
In both actions, the FTC contended that the employers violated Section 5 of the Federal Trade Commission Act. Section 5 declares unlawful “[u]nfair methods of competition” and “unfair or deceptive acts or practices” in or affecting commerce. Section 5 authorizes the FTC to issue a complaint and notice of hearing against an individual or company engaged in such acts. If the hearing results in a finding of unlawful conduct, the FTC can issue an order requiring the individual or company to cease and desist from the unlawful conduct. For example, in the recent cases involving the security company and glass manufacturers, the FTC issued a broad order banning the companies from using or enforcing noncompetes now and in the future and requiring them to provide notices to their employees for the next 10 years 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.
The FTC is run by five Commissioners, each serving a seven-year term. One Commissioner, objecting to the recent enforcement actions described above, expressed concern about the FTC’s current enforcement policy, whereby “[p]ractices that three unelected bureaucrats find distasteful will be labeled with nefarious adjectives and summarily condemned, with little to no evidence of harm to competition.”
Employers need to pay attention to the FTC’s enforcement efforts and its recent proposed rule to completely ban noncompete restrictions. We expect the FTC to encounter significant push-back on its proposed rule to ban noncompetes, but the agency can still target employers for enforcement actions like those described above. As such, this is a good time to proactively review your use of noncompete restrictions to ensure the interests you are seeking to protect are defensible and that the restrictions are narrowly tailored. KZA attorneys can help you prepare to defend your legitimate business interests against this assault.
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