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The Federal Trade Commission on Tuesday released a final rule banning non-competitive employment agreements in the U.S. economy. If potential legal issues can be overcome, the ban would impact multiple areas of the sports industry, including professional sports leagues, endorsement and NIL contracts, and contracts with coaches, scouts and team executives.
The ban, which is scheduled to go into effect 120 days after the rule is published in the Federal Register, prevents employers from entering into or enforcing non-competes, which typically prevent employees from working for a competitor. , and are prohibited from starting a business that competes with their former employer. Existing non-compete agreements will also become unenforceable, with the exception of non-compete agreements already in place for senior executives. The rule uses his two-part test, which weighs compensation level and job description, to determine whether an employee counts as a senior manager.
According to the FTC, approximately 30 million U.S. workers (approximately 1 in 5 workers) are subject to non-competes. Generally, the shorter the period of the post-employment ban and the narrower the scope of business that is considered off-limits, the more likely a court will find the non-compete to be legal and enforceable.
For employers, non-competes can help prevent skilled workers from staying with the business and quickly joining a competitor. Non-Competitors are subject to a series of restrictive covenants intended to limit the loss of personnel and information, including for purposes of analysis and related data. Many companies also use non-solicitation and non-solicitation clauses and rely on trade secret and fiduciary duty laws to protect their interests.
Non-competes are relatively common for high-ranking employees in certain industries, particularly the technology and financial services industries. They are in the sports betting division. DraftKings and Fanatics were recently embroiled in a battle over an executive who left the gambling company for a job at a sportswear company. Non-competitions are also found in endorsement agreements that limit the contracts athletes may enter into with other brands. Coaches' contracts sometimes include non-compete clauses that limit their ability to join rival teams, as was the case when Bobby Petrino was prevented from moving from one SEC school to another.
Non-competitor players are also central to the operation of professional sports leagues. The PGA Tour's ability to suspend a golfer's participation in his LIV was based on the golfer's contractual agreement that the PGA Tour could block him. The same goes for professional tennis leagues and pro rodeo leagues that prohibit athletes from participating in competing leagues. The NFL's ability to restrict coaches from meeting with other teams during the postseason could also come under scrutiny if coaches challenge the restrictions.
The FTC argues that non-competes unduly impede workers' ability to change jobs, thereby tending to suppress wages and inhibit free markets. The underlying logic is that if a worker cannot take advantage of a job offer from a rival to negotiate a higher salary, that worker's employer may be less inclined to offer a higher salary. The agency argues that the non-compete is an unfair method of competition and violates the FTC Act.
Many states already restrict and, in some cases, prohibit non-competes. In addition to banning non-competes, California's new law also extends the ban to remote workers who live, reside, and perform all of their work in another state, but whose employer is based in California. Other measures states have adopted include bans if the employee makes less than $100,000 a year, if the employee is a medical professional, or if the non-compete lasts for more than one year. .
The FTC proposed the ban last year, led by Commission Chair Lina Khan. But the ban has its opponents, especially as evidenced by the five-member board's 3-2 vote on the final rule. The ban prevents employers and employees from negotiating contract terms in exchange for higher wages or better compensation for that employee, while restricting the employee's freedom to make changes.
The agency's two Republican commissioners, Melissa Holyoke and Andrew Ferguson, said the federal structure prohibits the agency from enforcing restrictions they say are anticompetitive. “We are not the legislature,” Ferguson reportedly said at the meeting. Reuters. “We do not believe we have the authority to void tens of millions of existing contracts.”
Last year, then-FTC Commissioner Christine Wilson argued against the proposed ban, arguing that it was based on “hundreds of years of case law that employs a fact-specific inquiry into whether non-compete clauses are unreasonable in duration and scope. It represents a fundamental departure from the Wilson warned of unintended consequences and suggested the agency lacked authority under the FTC Act. She resigned from the committee at the end of March 2023.
Any attempt by companies or other parties to challenge this rule is expected to be deemed unauthorized under the text of the FTC Act and beyond Congress's intent. One possible argument is that this ban violates Article I, Section 8 of the U.S. Constitution. Although this part of the Constitution contains the Commerce Clause, which delegates to Congress the power to regulate interstate commerce, this prohibition could be seen as an attempt to unreasonably regulate local or intrastate commerce. There is. Legal challenges could also argue that the ban raises due process issues because it alters existing arrangements without the consent of the parties. Litigants may seek restraining orders or injunctions that would delay the ban from taking effect.
