The Biden Administration’s antitrust enforcers have doubled down on their stated goal to protect U.S. workers by continuing to target employers who allegedly restrict workers’ mobility or otherwise suppress competition in labor markets. On the heels of two years of aggressive prosecution by the U.S. Department of Justice Antitrust Division (DOJ) against alleged no-poach and wage-fixing agreements between competing employers, the Federal Trade Commission (FTC) recently announced a proposed rule banning all non-compete agreements between employers and workers. Given these recent developments, companies may want to review their antitrust policies and procedures, along with hiring, recruitment, non-compete, and compensation policies to ensure they are consistent with current law.
What’s Old Is New Again: Labor: Labor-Related Antitrust Enforcement
In late 2016, DOJ and the FTC issued the Antitrust Guidance for Human Resource Professionals (HR Antitrust Guidance) outlining the agencies’ view that wage-fixing and no-poach agreements (i) violate U.S. antitrust law. This was not news—the HR Antitrust Guidance summarized the history of the agencies’ civil enforcement efforts against no-poach and wage-fixing agreements going back to at least the early 1990s. The headline from the HR Antitrust Guidance was DOJ putting companies on notice regarding the potential for future criminal prosecution. As outlined below, four years after issuing the HR Antitrust Guidance, DOJ made good on its promise to criminally prosecute naked no-poach and wage-fixing agreements with a string of indictments and trials. The HR Antitrust Guidance proved to be harbinger of things to come for other types of labor-related antitrust enforcement.
Fast forward to 2021, when calls for increased regulation of non-competes led Democratic and Republican senators to introduce legislation to limit or prohibit the use of non-compete agreements. In July 2021, with congressional action looking unlikely, President Biden issued Executive Order 14036 aimed at promoting competition in the economy. The Order, among other things, directed the FTC to consider promulgating a rule “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” In November 2021, the FTC released a draft strategic plan for FY 2022-2026, containing a goal to “[s]tudy and investigate…non-compete and other potentially unfair contractual terms resulting from power asymmetries between workers and employers. One month later, the FTC and DOJ hosted a joint workshop on antitrust concerns in labor markets.
Now the FTC has announced a proposed rule that, if enacted, would amount to a near-total ban on the use of non-compete agreements and leave employers with fewer legal means of protecting their confidential and proprietary information.
DOJ Ramps Up Prosecution of No-Poach and Wage-Fixing Agreements
Since the issuance of the 2016 HR Antitrust Guidance, DOJ has repeatedly stated that it views naked wage-fixing and no-poach agreements between competitors as criminal violations of the Sherman Act. At the end of 2020, DOJ’s first criminal prosecution was announced and others closely followed, including:
- S. v. Jindal – in December 2020, a criminal indictment against Neeraj Jindal was returned by a federal grand jury alleging a per se illegal conspiracy for wage-fixing involving a Texas-based physical therapist staffing company. The criminal indictment alleged that the defendant (Jindal) agreed with a competing staffing agency to reduce the rates paid by each company for physical therapists during a five-month period in 2017. Jindal was also alleged to have separately reached out to four other competing agencies about collectively decreasing rates and was accused of obstructing the FTC investigation.
- S. v. DaVita – in January 2021, DOJ brought criminal charges against Colorado-based DaVita Inc. (DaVita) and its former CEO, alleging that DaVita and its competitors entered into and engaged in a conspiracy not to poach and hire one another’s senior-level employees. The alleged agreement included phone and email conversations between HR professionals, instructions not to solicit certain senior-level employees, and monitoring employees to ensure their adherence to the agreement. The senior-level employees were also required to notify their respective employers that they were seeking new employment in order for their application to be considered by the other companies participating in the arrangement.
- S. v. VDA OC LLC – in March 2021, another grand jury returned an indictment against a Nevada-based healthcare staffing company, VDA OC LLC (VDA) and a former manager of the company, alleging they had entered into and engaged in an agreement with a competitor to allocate employee nurses and fix their wages in violation of the Sherman Act. VDA recently plead guilty and was sentenced to pay a criminal fine and restitution.
- S. v. Manahe – in January 2022, four individuals in home healthcare industry were indicted for alleged agreement to fix wages of personal support workers and not hire each other’s employees during the pandemic.
In April 2022, juries in Texas and Colorado found DaVita and Jindal not guilty of criminal antitrust charges brought by DOJ. Despite the two losses, DOJ continues to move forward with pending charges brought against other companies and more indictments are likely to follow in 2023.
DOJ has also been active in civil labor market antitrust cases, including:
- S. v. Cargill – DOJ reached an $85 million settlement in July 2022 with Cargill and other poultry processors who allegedly shared information about their plant workers’ wages and benefits over a period of years.
- Markson v. CRST Int’l – DOJ filed a statement of interest in a civil suit filed by truckers claiming that trucking companies conspired not to hire each other’s workers where it reiterated position that no-poach deals are per se illegal.
FTC Doubles Down With a Sweeping Non-Compete Ban
On January 5, 2023, the FTC announced a proposed rule that would prohibit employers nationwide from entering into new non-compete agreements and maintaining existing non-compete agreements with workers, generally defined as employees and independent contractors. The draft rule defines a “non-compete clause” as a “contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.”
The rule also covers so-called “de facto” non-competes, defined as contractual terms that don’t explicitly qualify as “non-compete clauses” but have the effect of one, such as overly broad non-disclosure agreements, customer or employee non-solicitation agreements, or agreements where an employee is required upon termination to reimburse an employer for certain costs which are not reasonably related to actual costs incurred. The proposed rule would also require employers to rescind existing non-compete clauses and actively inform workers that such clauses are no longer in effect.
While the proposed rule recognizes the traditional state law exception to non-compete agreements entered into in the sale of a business, the exception is narrow, and applies only to those who own at least 25% of a company. The proposed rule, as a matter of federal preemption, would supersede any state statute, regulation, order, or interpretation that is inconsistent with the provisions of the final rule except to the extent that they provide workers with greater protections.
The FTC’s draft rule, which deems non-competes as an “unfair method of competition” under Section 5 of the FTC Act, will likely receive a significant amount of comments that must be considered by the FTC before it issues a final rule. The final rule could also result in legal challenges that will delay its implementation.
The day before announcing the new rule, the FTC announced three enforcement actions against companies who allegedly imposed non-compete agreements on lower-wage workers. The actions were brought under Section 5 of the FTC Act with the FTC stating that “each of the companies and individuals illegally imposed noncompete restrictions on workers in positions ranging from low-wage security guards to manufacturing workers to engineers,” that prohibited them from seeking or accepting work with another employer or operating a competing business after they left the companies. In each case, the FTC ordered the company to cease enforcing, threatening to enforce, or imposing a non-compete agreement on the affected workers. The companies are also required to notify all affected employees that they are no longer bound by the non-compete agreements.
Historically, the FTC has not regulated non-compete agreements between employers and employees. However, the FTC has the authority to enforce Section 5 of the FTC Act (15 U.S.C. § 45) which broadly prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce. (ii) It is unclear whether Section 5 provides the FTC with the authority to issue and enforce a nationwide rule prohibiting non-competes. (iii)
Currently, non-competes and related provisions such as non-solicits remain subject to challenge under state law regarding restrictive covenants, as well as state and federal antitrust law. Most states limit non-compete clauses at least in some way; for example, requiring that certain specific requirements be met (e.g., minimum salary requirements) or simply that their geographic scope, duration, and purpose are reasonable under the unique circumstances of the individual and the job. This leaves non-compete agreements subject to courts’ interpretations about what constitutes a legitimate business interest. Other states—including North Dakota, Oklahoma and, notoriously, California—ban non-competes altogether, but permit their use in connection with the sale of a business. Until the FTC implements a final rule, employers who use non-compete agreements should still look to applicable state laws to determine the enforceability of non-compete agreements while keeping an eye on the FTC’s rulemaking process.
Risk Assessment in an Evolving Legal Landscape
The remainder of the new year will surely bring more enforcement actions by DOJ and the FTC for alleged antitrust violations relating to the labor market. Because this area of the law is in flux and given the recent DOJ and FTC enforcement actions, we recommend that companies review current HR practices (including participation in salary benchmarking and wage surveys), provide antitrust training for relevant management and employees, and commit to a robust compliance program that accounts for the evolving legal and regulatory landscape.
As mentioned, the FTC’s proposed non-compete rule is the first step in what will likely be a lengthy rulemaking process—thus, companies do not need to take immediate action to rescind or stop using narrowly tailored non-competes. However, employers may want to prepare for future changes in the law, including the issuance of a final rule by the FTC. Companies can start by identifying current non-competes (along with non-solicitation and confidentiality agreements) with employees and independent contractors, particularly if they involve lower-wage workers, and should consult with legal counsel as needed.
Notes
i Wage-fixing is an agreement to keep wages for similar employees at similar levels to prevent employees from leaving one employer in search of higher wages at another. No-poach agreements concern employers’ conspiring to not solicit or hire one another’s employees. A “naked” agreement is one that lacks any larger business justification or rationale. A non-solicit agreement in the context of a sale of a business is typically considered “ancillary” or reasonably necessary, and, thus, is not a naked non-solicit agreement. See HR Antitrust Guidance, at 3, available at https://www.ftc.gov/system/files/documents/public_statements/992623/ftc-doj_hr_guidance_final_10-20-16.pdf
ii The FTC recently issued a policy statement regarding the scope of unfair methods of competition under Section 5 of the FTC Act. See Fed. Trade Comm’n, Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act 15 (Nov. 10, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/P221202Section5PolicyStatement.pdf. The policy statement does not specifically mention non-compete agreements.
iii The FTC’s jurisdiction under Section 5 is not unlimited—banks, federal credit unions, air carriers, common carriers, meatpackers and poultry dealers are exempt from its coverage. Importantly, Section 5 may only be enforced by the FTC (not by private plaintiffs) against “persons, partnerships, or corporations.” The FTC Act defines the term “corporation” as an entity “organized to carry on business for its own profit or that of its members,” which renders certain conduct engaged in by non-profit entities as beyond the FTC’s reach.
About the Authors
Wendy Arends is a Partner with Husch Blackwell LLP. Her practice includes all aspects of antitrust law, including enforcement actions brought by DOJ, the FTC, and state AGs, issues arising in mergers and acquisitions, and antitrust compliance and training.
Scott LeBlanc is a Partner with Husch Blackwell LLP. His practice includes all aspects of employment law, with a special focus on employment issues arising in mergers and acquisitions and in the healthcare industry.
