The trend in recent years has undeniably been against the broad use and enforcement of employee noncompete agreements. The number of states that have implemented or proposed legislation restricting employers’ ability to use such agreements to prevent former employees from competing with them continues to grow each year. While an employer’s ability to use such agreements is largely dictated by these state laws that vary from place to place, the federal government has recently taken action to curb the use of noncompete agreements across the nation. Most notably, the Federal Trade Commission (FTC) made news in January 2023 when it announced a proposed federal rule, which if enacted, would ban the vast majority of non-compete agreements in the United States.
In the months since, the FTC also issued complaints against three large manufacturers of glass food and beverage containers (O-I Glass, Inc., Ardagh Group S.A., and Anchor Glass Container Corp.), as well as a security guard services company (Prudential Security, Inc.), to force the companies to drop noncompete agreements that each company had utilized widely across their workforce. The companies have each resolved the complaints by entering into Consent Orders with the FTC that, among other things, prohibit the companies from enforcing noncompete agreements against most, if not all, employees (the Consent Orders specify hundreds of employee positions covered by the Order, including both rank and file and managerial positions). The Consent Orders also require the companies for the next 10 years to provide clear notices to new employees that they may freely compete with the company following their employment.
In its complaint against Prudential Security, the FTC primarily objected to the company allegedly taking advantage of its unequal bargaining power to impose onerous noncompete agreements on its workforce of largely low-wage security guards. The complaint noted that even though the employees typically earned hourly wages at or only slightly above minimum wage, the company’s non-compete agreements went as far as to require that employees pay a $100,000 penalty for any violations of the agreement.
But the three nearly identical complaints against the glass container manufacturers focused instead on the “highly concentrated” nature of the glass container industry in the United States. The complaints noted that in the glass container industry, “[t]here are substantial barriers to entry and expansion, including the ability to identify and employ personnel with skills and experience in glass container manufacturing.” The complaints alleged that the manufacturing companies’ use of non-compete agreements was both unfair and had the likely effect of harming competition, consumers, and workers by: (i) impeding the entry and expansion of rivals in the glass container industry, (ii) reducing employee mobility, and (iii) causing lower wages and salaries, reduced benefits, less favorable working conditions, and personal hardship to employees.
In public statements on these complaints, the FTC left no doubt as to its disapproving view of noncompete agreements. It stated: “Noncompete restrictions harm both workers and competing businesses.” Considering the FTC’s position, as well as the broader trends in state law, companies should be intentional in deciding when to use employee noncompete agreements. Employers should consider only using non-compete agreements with employees whose departure would pose a true risk to the business interests of the company. In Prudential Security’s case, that seemed to be the FTC’s particular concern. Other governmental bodies have also criticized the indiscriminate use of noncompete agreements, particularly with lower-wage and rank and file employees. Indeed, while the FTC’s Consent Orders included a long list of positions for which the companies could not utilize noncompete agreements, the Orders appear to leave room for the use of such agreements for some positions, including high level executive roles, which are not mentioned.
Companies should also carefully consider what specific business interests they are trying to protect, and consider whether such interests can be adequately protected through means other than noncompete agreements. Notably, the FTC referenced in its complaints against the manufacturing companies its view that there were “less restrictive means” to protect the companies’ interests than utilizing non-compete agreements. As an example, the FTC noted that the companies could protect their interests by using confidentiality agreements that prohibit employees and former employees from disclosing company trade secrets and other confidential information. Other potential options include employee inventions agreements to protect a company’s intellectual property or inventions, and non-solicitation agreements to protect a company’s employees and customer base. Such agreements are typically viewed more favorably in court, and are more likely than noncompete agreements to be deemed enforceable.
About the Author:
Gerard Clodomir is an associate with Womble Bond Dickinson in the firm’s Greensboro, NC, office. Gerard is an experienced litigator who primarily represents clients in matters concerning state and federal employment laws. Gerard also helps employers position themselves to best avoid such legal actions, through training, conducting workplace investigations, and counseling clients on employment decisions, such as hiring, disciplinary actions and terminations. He also works with companies on drafting employment policies, handbooks and employment agreements.
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