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Heard About the FTC’s Ban on Non-Competes? The Truth Is Worse

On Tuesday, the Federal Trade Commission announced a new rule banning employee non-compete agreements, treating them as harmful and an “unfair method of competition.”  This includes non-competes in the broadcast industry, where they serve a vital purpose that was given short shrift by the FTC.  Stations spend large sums of money and airtime promoting their on-air talent, building that employee’s brand with local viewers and listeners and conferring on them by association the public goodwill the station has built up in its community over many decades.  It becomes far more challenging to make that immense investment if your anchor can move across the street to a competitor and immediately transfer all of the goodwill associated with that tremendous multi-year investment to a competing station.

In adopting the ban, the FTC effectively treated non-competes as what lawyers call a “contract of adhesion”– one which a potential employee has no choice but to sign without negotiation, regardless of how draconian the terms.  That is, of course, a poor description of contracts with on-air personalities, which are often heavily negotiated with commensurate levels of compensation.  It is also worth noting that in adopting its one-size-fits-all ban, the FTC bemoaned the fact that a non-compete forces a departing employee to leave the area if they wish to continue doing the same type of work.  Of course, moving to a different market to advance a career is the norm rather than the exception in broadcasting, regardless of any non-competes, particularly given the small number of employers hiring on-air talent in any one market.

This was not an accidental oversight by the FTC.  It specifically discussed broadcasting in its Order adopting the new rule, quoting a commenter who said:

I am a professional broadcast journalist subject to a non-compete agreement with every employment contract I have ever signed, which is the industry standard.  I understand the need for contractual agreements with on-air talent and some off-air talent, but non-compete agreements have historically offered nothing to employees besides restricting where they work, and how much money they are able to earn . . . [while] knowing that employees would have to completely relocate if they wanted to seek or accept another opportunity.

Despite the fact that the comment quoted in the Order specifically acknowledges the need for non-competes with regard to “on-air talent and some off-air talent,” the FTC declined to make an exception for such non-competes, saying:

The Commission declines to exclude on-air talent from the final rule.  The Commission finds the use of non-compete agreements is an unfair method of competition as outlined in Part IV.B, and commenters do not provide evidence that a purported reduction in investment in on-air talent would be so great as to overcome that finding.  Specifically, the success of on-air talent is a combination of the employer’s investment and the talent of the worker, both of which benefit the employer.  As noted in Part IV.D, other less restrictive alternatives, including fixed duration contracts and competing on the merits to retain the talent, allow employers to make a return on their own investments. Moreover, as stated in Part II.F, firms may not justify unfair methods of competition based on pecuniary benefit to themselves.  Employers in this context do not establish that there are societal benefits from their investment in on-air talent, but only that the firms benefited.

That whooshing sound you hear is the FTC missing the point.

But broadcasters shouldn’t feel singled out, as pretty much the only exception the FTC did permit to its blanket ban on non-competes is to allow continued enforcement of existing non-competes for “senior executives” (those earning more than $151,164 annually who are in policy-making positions).  Oddly, however, the FTC Order still prohibits entering into any new non-competes with such senior executives after the new rule goes into effect.

Barring court intervention (and some appeals have already been filed), the rule will be effective 120 days after it is published in the Federal Register.  After that, broadcasters will have to abide by the new restrictions unless a court says otherwise.

That is not, however, all of the bad news for broadcasters and other employers.  In implementing the ban, the FTC is using a particularly broad definition of who qualifies as a “worker” and therefore can’t be asked for a non-compete.  It includes not just current and former employees, but anyone that “works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’ status under any other State or Federal laws, including but not limited to, whether the worker is an employee, independent contractor, extern, intern , volunteer, apprentice, or a sole proprietor who provides a service to [the business].”  So even outside parties simply rendering a service to the broadcaster cannot be asked to sign a non-compete once the new rule goes into effect.

In addition, businesses must identify those workers with which they have entered into non-competes and provide “clear and conspicuous notice to the worker, by the effective date, that the worker’s non-compete will not be, and cannot legally be, enforced against the worker.”  This notice “must be on paper delivered by hand to the worker, or by mail at the worker’s last known personal street address, or by email at an email address belonging to the worker, including the worker’s current work email address or last known personal email address, or by text message at a mobile telephone number belonging to the worker.”

For those interested in more specific details on the ban, and complying with these sweeping new requirements, I’d encourage you to read Pillsbury’s Alert on the subject (Employers Beware: FTC Announces Final Rule Banning Worker Non-Competes).

While broadcasters and other employers should begin taking steps to prepare for the ban on the assumption it will go into effect as scheduled, there is reason for optimism that the courts will step in to block some or all of the new requirements.  The FTC’s Order is unusually broad for an agency order, with sweeping assertions that find limited support in the record.  Also notable is the fact that the FTC didn’t merely establish a presumption that non-competes are an “unfair method of competition” that might be rebutted in a particular factual situation; the new rule simply deems all non-competes to be a form of unfair competition regardless of the actual facts.

In truth, many non-compete provisions are the result of extensive negotiations, with the employee bargaining for greater compensation in return for agreeing to a non-compete clause.  The FTC’s treatment of all non-competes as simply agreements involuntarily forced on workers without any corresponding compensation or other benefit to the worker (like enjoying the unflinching promotional support and trust of the station) conflicts with reality.  Courts typically require stronger and more detailed proof than general assertions that non-competes are bad for competition in all circumstances, particularly given the extensive disruption that will be caused by suddenly making them unenforceable in a matter of months.  So as the saying goes, hope for the best, but plan for the worst.