Key Highlights:
- The FTC has issued a proposed rule banning non-compete agreements in employee contracts.
- The NLRB’s General Counsel issued a memorandum declaring that non-compete agreements in employment contracts violate the NLRA.
- State non-compete regulations for employers are varied, and subject to change.
- Employers do not need to eliminate the use of the agreements immediately, but non-compete agreements need to be reviewed for consistency with state non-compete regulations, with the understanding that they could be completely prohibited as the laws continue to change.
On January 5, 2023, the US Federal Trade Commission (“FTC”) proposed a rule that would ban non-compete agreements in employment contracts and preempt all state laws providing less protection than the proposed rule. The proposed rule is not limited to sports and entertainment employers, but it does apply to common workers in the sports and entertainment industries, including externs, interns, and independent contractors.
On May 30, 2023, the General Counsel (“GC”) for the US National Labor Relations Board (“NLRB”) also issued an opinion that non-compete provisions in employment are an unfair labor practice except in limited circumstances.
The proposed FTC rule and GC’s position do not require employers to immediately stop using non-compete agreements. The proposed FTC rule and GC’s position will, however, unquestionably impact sports and entertainment businesses and employers now and in the future. Indeed, in addition to serving as the catalyst for placing more scrutiny on non-compete agreements generally, the proposed FTC rule and GC’s position will provide the basis for subsequent challenges to state non-compete regulations.
Whether those challenges will bear any fruit remains to be seen. What is clear is that the FTC’s proposed rule and GC’s position have brought non-compete agreements to the forefront of the national consciousness and with it a reminder for employers to revisit their non-compete agreements, as well as the law of the state(s) in which they operate.
The FTC’s Proposed Rule
The FTC’s proposed rule stems from an executive order by President Biden. President Biden directed the FTC chair to “consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority … to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” In his remarks and the order, President Biden did not outline exactly what direction he hoped the FTC would take, but it seemed to focus on lower-wage workers.
Despite the remarks being seemingly geared towards lower-wage workers, the FTC’s proposed rule prohibits all use of non-compete provisions with “workers,” defined as a natural person who works, whether paid or unpaid, for an employer. As written, the rule applies to independent contractors, interns, externs, volunteers, apprentices, sole proprietors, and employees.
Aside from franchisee-franchisor agreements or agreements between buyers and sellers of a business, the FTC’s proposed rule would apply to any contract clause that functions to prevent a worker from seeking or accepting employment or operating a business after leaving the employer. This could potentially include a ban on non-disclosure or customer non-solicitation agreements that are broad enough to prohibit a worker from working in the same field. Further, under the proposed FTC rule, employers would be required to rescind previously entered non-compete provisions and inform workers in writing via letter, email, or text message that the non-compete clause of the agreement is no longer in effect and will not be enforced.
The FTC’s official vote to formally ban non-compete agreements in most employment agreements is not taking place until April of 2024. As a result, it is prudent for employers to follow any developments and familiarize themselves with the current state law in jurisdictions for which they do business.
NLRB General Counsel’s Opinion on Non-Compete Agreements
On May 30, 2023, the NLRB’s GC issued a Memorandum declaring her opinion that non-compete agreements in employment contracts and severance agreements violate the National Labor Relations Act (NLRA), except in limited circumstances. While the GC’s memo noted that businesses might have legitimate interests in protecting proprietary or trade-secret information through narrowly tailored workplace agreements, it stated that “a desire to avoid competition from a former employee” is not a legitimate business interest that could support a special interest defense.
Since the NLRA applies only to employees with Section 7 rights, the GC’s opinion does not apply to non-compete agreements offered to supervisory or managerial employees within the meaning of the NLRA. The GC’s memo confirms that non-competition agreements are a priority for her office. Unfortunately, the memo leaves ambiguity for employers as it does not contain examples of problematic non-compete provisions.
No matter the outcomes of the FTC rulemaking and the GC’s position on the issue, the message to employers is consistent: employers should ensure that all restrictive covenants are narrowly tailored to serve their legitimate business interests. Employers should properly differentiate between application of non-competition, non-solicitation (customer and employee), and non-disclosure agreements.
The Current State of Non-Compete Agreements Under State Law
The myriad of laws complicate sports and entertainment employers’ efforts to develop and enforce non-compete agreements, posing particular difficulties for multistate employers. Sports and entertainment employers should be mindful that the FTC’s proposed rule may eventually prohibit non-compete agreements, but until that time, they should look to the nuances of state law to carve out the limitations, if any. The following checklist can help:
State-Level Non-Compete Restrictions
States that regulate non-compete agreements to some degree currently include: Alabama, Arizona, California, Colorado, Connecticut, Delaware, D.C., Florida, Illinois, Iowa, Kansas, Louisiana, Maine, Maryland, Missouri, Montana, New Jersey, North Dakota, Oklahoma, Oregon, Tennessee, Texas, Vermont, and Washington.
In California, Colorado, North Dakota, Oklahoma, and Oregon, non-competes are either generally not enforceable or banned.
Most other listed states, if not banning outright, limit non-competes for certain employees, most commonly broadcasters or physicians.
In New York, two bills are currently pending regarding non-compete agreements. One seeks to ban post-employment non-compete agreements between employers and workers, while the second would, among other things, prohibit employers from entering into or maintaining non-compete agreements with workers, absent a “good faith basis” to believe a non-compete agreement is enforceable. In June 2023, both bills passed in the Senate.
General/Background Considerations:
- In what state(s) do we have facilities or operations?
- Is the state one of 23 states that somewhat regulates non-compete agreements?
- Is the state one of the five states that already bans non-compete agreements or deems them unenforceable?
How Do These Changes Impact Sports and Entertainment Employers Specifically?
Employers in the sports and entertainment industry often rely on these non-compete clauses in employment agreements to reduce competition. A non-compete ban would be particularly impactful to the sports and entertainment industries, where client-service employees drive revenue with personal brands and close client relationships. While other covenants can protect against the unwanted release of confidential information, non-compete agreements uniquely allow employers to retain the networks and relationships attached to their employees.
Sports
Employers, such as sports agencies, would need to be wary of the fact that the relationships described above, without non-competes, could be easily portable to competitors if a new era of non-competes arrives. For example, sports agents could easily take new talent to other agencies using recruitment resources they had while employed with the former.
Another issue to consider is the intersection of Name, Image, Likeness (“NIL”) law and new non-compete laws. NIL law is still developing, and many are pushing to see that college athletes are given “employee” status when making NIL deals. Should NIL law become federalized, the FTC would have a large role to play in the question of whether college athletes who sign NIL contracts could include non-compete agreements to bargain for higher benefits/salaries. If student athletes were granted employee status, employers would need to evaluate whether college athletes could be restricted with non-compete or other covenants depending on their state’s non-compete laws.
The FTC’s proposed rule could also bar liquidated damages clauses, which are often used in college football agreements, as they may be considered de facto non-compete clauses. These clauses allow employees to terminate their contracts early without cause, but would render them liable to their employer for the amount specified in the contract.
Entertainment
Arguably, the industry to be hit the hardest is broadcast, media, and journalism, due to the nature of the work. Factors like visibility/popularity, relationships, and public trust and recognition are all vital to entertainment employees and employers. These characteristics, depending on the job, could only be transferable in neighboring cities. Restrictions to non-compete agreements in this field could force entertainment employers to look at new ways to either use other covenants to protect connections built with their resources, or to incentivize their employees to stay with increased benefits.
Additional Resources:
Executive Order on Promoting Competition in the American Economy
NLRB General Counsel Says Noncompete Agreements Violate Federal Labor Law
California Governor Signs Law Prohibiting Employers From Entering Noncompete Agreements
New York State Assembly Passes Non-Compete Bill
Author: Darius Walker (Ogletree Deakins)
