On November 10, 2022, the FTC issued a new Policy Statement greatly expanding its scope of antitrust enforcement powers under Section 5 of the FTC Act.[1] The new Policy Statement makes it clear that the FTC will no longer limit its Section 5 enforcement powers to violations of the Sherman and Clayton Acts, and restrictive covenants like non-competition and non-hiring provisions could now be in the FTC’s sights. While the new Policy Statement does not expressly list non-competition clauses and similar restrictive covenants as targets of this expanded enforcement, the FTC certainly indicates that it is willing to consider these types of contractual clauses as areas for potential enforcement.
Section 5 of the FTC Act empowers the FTC to “prevent” and protect against businesses and individuals from engaging in “unfair methods of competition” and “unfair or deceptive acts or practices” which affect interstate commerce.[2] The FTC’s new Policy Statement clarifies and broadens what kinds of activities may be considered “unfair methods” of competition under Section 5. Unlike earlier Policy Statements, the FTC is no longer willing to only target conduct that also violates a separate antitrust statute. Instead, the FTC asserts that its Section 5 powers allow it to identify and combat unfair methods of competition that violate the “spirit” of Section 5 or otherwise run afoul of current public policy.
The FTC takes great pains to provide a litany of examples of conduct that are likely to constitute “unfair methods of competition,” and the process that it will use for determining whether a business or person has engaged in such unfair methods. However, these examples are not exhaustive, and the FTC is careful not to box itself in on what may or may not be considered “unfair methods”.
This is most evident when it comes to the matter of non-competition, non-servicing of clients, non-solicitations of clients or employees, and/or non-hiring of employee clauses (also known as “restrictive employment covenants”). These kinds of restrictive employment covenants have become commonplace in both company-to-company agreements, as well as employer-employee agreements. Many states have already enacted laws narrowing – or all but outlawing – these kinds of provisions in employment agreements. President Biden issued an Executive Order[3] last year which strongly encouraged the FTC to create stricter limitations on these kinds of provisions or even outright prohibit certain restrictive employment covenants. This included the President’s recommendation that the FTC use its antitrust enforcement powers under Section 5 of the FTC Act to limit these kinds of agreements between companies.[4]
The FTC’s new Policy Statement does not explicitly say whether restrictive employment covenants will (or may) constitute unfair methods of competition. However, the FTC strongly implies that these kinds of covenants are not excluded from its expanded Section 5 enforcement powers. The FTC, in the Policy Statement, makes it abundantly clear that it intends to focus on “incipient threats” of unfair competition, which it describes as including “conduct that tends to foreclose or impair the opportunities of market participants”[5] – a category that includes employees and job applicants. The Policy Statement also infers that the FTC may use Section 5 to target conduct that tends to limit other businesses’ ability to compete for employees, which is a frequent criticism of restrictive employment covenants. Further, the FTC expressed that it is not going to limit enforcement to those situations where a company has already acquired control of most (or all) of a market as it has in the past.
So, what does this mean for businesses? While only time will tell whether the FTC actually expands its Section 5 enforcement to include non-competes and other restrictive covenants, this is just the latest example of the growing legal and political scrutiny over non-competes and other restrictive employment covenants. Given this trend, employers should re-examine their current restrictive covenant clauses and how they are used to better ensure they comply with current Federal and state laws and public policy. Stay tuned for a follow-up article outlining those considerations, as well as what kinds of restrictive covenants we think courts will be more likely to strike down.
Elizabeth Payne-Maddalena is a Senior Associate at Berenzweig Leonard. She can be reached at epayne@berenzweiglaw.com.
[1] Nov. 10, 2022 FTC Policy Statement, Commission File No. P221202, https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyStatement.pdf
[2] 15 U.S.C. § 45.
[3] July 9, 2021 Executive Order on Promoting Competition in the American Economy, https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/
[4] White House Fact Sheet re: Executive Order on Promoting Competition in the American Economy. https://www.whitehouse.gov/briefing-room/statements-releases/2021/07/09/fact-sheet-executive-order-on-promoting-competition-in-the-american-economy/
[5] Nov. 10, 2022 FTC Policy Statement, Commission File No. P221202, https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyStatement.pdf