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Proposed Consent Orders Invalidating Noncompete Agreements Reflect FTC's Broad View of FTC Act Section 5

January 6, 2023

Proposed Consent Orders Invalidating Noncompete Agreements Reflect FTC's Broad View of FTC Act Section 5

January 6, 2023

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Although not final, the complaints and proposed orders demonstrate that the FTC intends to proceed with enforcement consistent with the expansive view of Section 5 of the FTC Act published late last year.

On January 4, 2023, the U.S. Federal Trade Commission (FTC) took legal action for the first time to prohibit the use of noncompete restrictions by three companies and their executives. In doing so, the FTC flexed its newly reestablished standalone authority under Section 5 of the FTC Act. In a partisan 3-to-1 vote, the FTC commissioners voted to issue administrative complaints and accept consent agreements that prohibit the firms and their executives from imposing, attempting to impose, enforcing or threatening to enforce noncompete agreements on a broad swath of covered workers. The orders also require the firms to provide written notice to the thousands of impacted workers that the noncompete agreements are null and void.

Impacted Firms and Relief Ordered

The FTC alleged that Prudential Security, Inc. and Prudential Command Inc. (collectively, Prudential), both providers of security guard services, and their owners required their security guards—who typically earned hourly wages at or slightly above minimum wage—to sign unnegotiable contracts containing restrictive covenants preventing them from working for any competing business within a 100-mile radius of their job site for two years after leaving Prudential. The contracts also included a liquidated damages provision requiring any former employee in violation of the noncompete to pay $100,000 as a penalty. According to the FTC, Prudential enforced the noncompete against former employees and continued to do so even after a Michigan state court determined that the noncompete was unreasonable and unenforceable under state law.

In two separate matters involving businesses that each manufacture glass food and beverage containers, the FTC alleged that O-I Glass, Inc. (O-I Glass) and Ardagh Group S.A., Ardagh Glass Inc. and Ardagh Glass Packaging Inc. (collectively, Ardagh Glass) violated Section 5 of the FTC Act. According to the FTC, O-I Glass required various employees—including salaried employees who work with the plants’ furnaces and forming equipment and in other glass production, engineering and quality assurance roles—to agree to noncompete provisions that typically prohibited the workers from working for, owning or being involved in any other way with any business in the United States that competes with O-I Glass for a period of one year after leaving O-I Glass; and Ardagh Glass required different employees to consent to noncompetes that prohibited the employees from working with competing businesses in the United States, Canada or Mexico for a period of two years after leaving Ardagh Glass. The FTC also alleged these companies’ use of noncompetes likely impedes entry and expansion of rivals in a concentrated industry.

The proposed consent orders, which will be subject to public comment and finalization by the FTC, prohibit the impacted parties from enforcing, threatening to enforce or imposing noncompetes against any covered employees. The relief to be ordered also would:

  • Prohibit the parties from communicating to any covered employee or other employer that the employee is subject to a noncompete;
  • Require the parties to void and nullify the noncompetes at issue;
  • Require the parties to provide copies of the final order to current and past employees subject to the covenants;
  • Mandate that the parties provide copies of the complaint and order to current and future directors, officers and employees responsible for hiring and recruiting; and
  • Require the parties to provide, for the next 10 years, clear and conspicuous notice to any new covered employee that the employee is free to seek or accept a job with a competing company at any time following employment.

One Commissioner Dissents

Commissioner Christine S. Wilson dissented in each case. In the Prudential matter, Wilson neither condoned nor endorsed the conduct of Prudential, but disagreed with the majority using the new Section 5 policy statement to condemn conduct summarily as an unfair method of competition with no evidence of anticompetitive effects in any relevant market. She also warned that the Prudential matter has “great significance” because “it foreshadows how the Commission will apply the new Section 5 Policy Statement,” noting that “[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.”

With respect to the O-I Glass and Ardagh Glass matters, Wilson raised similar concerns. She cautioned:

Context [of the consent agreements] is important … When faced with the expense of complying with expansive demands for documents and other material, and the possibility of an enforcement action regardless of the merits, parties under investigation rationally may express a willingness to settle. Under these circumstances, staff’s investigation typically is quite limited.

According to Wilson, the complaints contained largely “boilerplate language” and were “woefully devoid of details that would support the Commission’s allegations.” She noted that she sees “no evidence of anticompetitive effects” that would tend to show that the parties “violated Section 5 of the FTC Act.” She also took issue with the FTC complaints’ lack of analysis of the reasonableness of the temporal length, subject matter and geographic scope of the noncompetes at issue―and failure to allege that the relevant provisions were ever even enforced. She also objected to the majority’s conclusion that the provisions at issue impeded the entry or expansion of rivals in the industry without providing any factual allegations regarding the inability of any rival to enter or expand. Wilson also concluded that the complaints failed to account for the business justifications of the provisions at issue and that the parties lacked sufficient notice that their conduct would be viewed as unlawful to comport with due process.

Although not final, the complaints and proposed orders demonstrate that the FTC intends to proceed with enforcement consistent with the expansive view of Section 5 of the FTC Act published late last year. Companies should consult with experienced counsel to help them navigate this rapidly changing landscape.

For More Information

If you have questions about this Alert, please contact Sean P. McConnell, Sarah O'Laughlin Kulik, any of the attorneys in our Antitrust and Competition Group, Lawrence H. Pockers, Shannon Hampton Sutherland, any of the attorneys in our Non-Compete and Trade Secrets Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.