While covenants not to compete or interfere with an employer’s business in postemployment often “serve legitimate business interests such as preserving trade secrets and protecting investments in personnel” (Aydin Corp. v. Loral Corp., 718 F.2d 897, 900 (9th Cir. 1983)), the legal landscape is changing rapidly. Former employees have been successful in arguing the scope, duration, or geographic area is unreasonable and various states have enacted restrictions or even bans on such post-employment restrictions. And now the Federal Trade Commission (FTC), the National Labor Relations Board (NLRB), and the Department of Justice (DOJ) have indicated a renewed willingness to challenge such post-employment restrictions as being anticompetitive and possibly illegal.
Section 1 of the Sherman Act prohibits (1) a contract, combination, or conspiracy among two or more businesses; (2) by which the persons intended to harm trade or commerce; and (3) that actually injures competition. A plaintiff must prove both that an actual agreement exists and that it injured competition. Section 2 of the Sherman Act prohibits monopolization, or attempts to monopolize, whether carried out by an individual business or in combination or conspiracy with another.
Both sections are shockingly vague and succinct, leaving it to over a century of litigation to explain the exact parameters of a conspiracy or what constitutes a monopoly. To summarize heavily, Section 1 prohibits unreasonable restraints on trade, for otherwise it would prohibit nearly every contract. Under Section 2, monopolies are not illegal on their face. Instead, it is prohibited to acquire or maintain monopoly power through improper means, or the attempt to do so. In all cases, the Sherman Act prohibits anticompetitive conduct, not aspirations. Most states have also enacted their own state law analogues of the Sherman Act.
With this context, post-employment restrictive covenants theoretically could violate the Sherman Act if they unreasonably restrain competition, improperly create or maintain a monopoly, or otherwise misuse an advantageous market position. However, for a private plaintiff to bring an antitrust action, they must also have antitrust standing, a separate inquiry from Article III standing. This additional requirement stems from the Supreme Court’s recognition that the antitrust laws were not designed to protect every conceivable party who could be harmed by anti-competitive behavior. Antitrust standing requires a showing of antitrust injury, which is injury of the type the antitrust laws were designed to prevent and flows from that which makes defendants’ acts unlawful, and a showing that the party is the proper plaintiff in light of the “efficient enforcer” factors.
Historically, antitrust law has not been concerned with employees or terms of employment. Various courts have stated that the loss of a job is not the type of injury that antitrust law was designed to prevent, so employees have no antitrust injury as a matter of law. This is because, while employed, an employee is neither a competitor nor a consumer, which are the two categories of potentially injured parties that are ordinarily afforded antitrust standing. A typical result is explained in Vinci v. Waste Management, Inc., 80 F.3d 1372 (9th Cir. 1996). There, a former employee of a waste management company sued the company for allegedly firing him for failing to cooperate in an anticompetitive scheme. But because the terminated employee was not a “participant in the same market as the alleged malefactors,” he was neither a competitor nor a consumer, and therefore his termination did not constitute an antitrust injury. Similarly, the Seventh Circuit found a former employee lacked antitrust injury or standing to challenge her post-employment noncompete. O’Regan v. Arbitration Forums, Inc.,
121 F.3d 1060 (7th Cir. 1997).
Even if antitrust standing is established, antitrust challenges to restrictive covenants are rarely successful. The Second Circuit has found that anticompetition covenants in licensing agreements did not violate the Sherman Act because “restrictive covenants…do not rise to the status of Sherman Act violations.”Cap. Temporaries, Inc. of Hartford v. Olsten Corp., 506 F.2d 658, 666 (2d Cir. 1974). The Seventh Circuit has held that noncompete covenants did not harm competition because the main purpose of the transaction was legitimate and the covenants were reasonable in terms of time, geographic scope, and product. Lektro-Vend Corp. v. Vendo Co., 660 F.2d 255, 269 (7th Cir. 1981).
But despite historical judicial reluctance to apply antitrust law to post-employment restrictive covenants, both the FTC and the DOJ are actively involved in seeking to extend competition law to apply to such post-employment restrictions.
Section 5 of the Federal Trade Commission Act bans “unfair methods of competition” and “unfair or deceptive acts or practices.” Over a year ago, the FTC proposed a rule to ban post-employment noncompetes altogether. According the FTC’s “fact sheet” on the proposed rule, such post-employment restrictions reduce workers’ wages, stifle new businesses and innovation, and hinder economic liberty. The FTC received over 27,000 comments on its proposed rule. In April of this year, the FTC announced its new rule (Noncompete Rule | Federal Trade Commission (ftc.gov)) banning all future noncompetes, which will take effect later this year. Existing noncompetes will be rendered void if the worker makes less than $151,164 but can be enforced if the worker makes more than that and is in a “policy-making position.” Legal challenges to that rule have already been announced.
But even if the FTC’s rule cannot go into effect, other federal government agencies are pushing ahead with efforts to limit the enforceability of such post-employment restrictions. For instance, last year the National Labor Relations Board released its opinion in McLaren Macomb, 372 NLRB No. 58. There, the NLRB held that an employer violated the National Labor Relations Act by having employees sign severance agreements that contained confidentiality and non-disparagement clauses. Subsequently, the NLRB’s Office of General Counsel issued a guidance memo (GC-23-08) stating that, except in limited circumstances, the “the proffer, maintenance, and enforcement of [non-compete] agreements violate Section 8(a)(1) of the Act.” That memo went on to explain that any post-employment restrictions that “could reasonably be construed by employees to deny them the ability to quit or change jobs by cutting off their access to other employment opportunities that they are qualified for based on their experience, aptitudes, and preferences as to type and location of work” will violate the NLRA.
Separately, the DOJ has intervened in existing litigation, or prosecuted such litigation on its own, when there is a possibility of expanding antitrust law to challenge post-employment restrictions. In particular, the DOJ has taken a recent interest in cracking down on “no-poach agreements.” No-poach agreements are agreements between competitors in which they agree not to hire, recruit, or pursue each other’s employees. The FTC and the DOJ issued formal guidance in 2016 indicating that the DOJ would criminally prosecute non-poach agreements.
In 2021, the DOJ secured a grand jury indictment against Surgical Care Affiliates LLC for allegedly coming to a secret agreement with competitors not to pursue senior-level employees as the first criminal no-poach case. This case was dropped in November 2023. Another no-poach criminal indictment came in March 2021 against VDA OC LLC, a healthcare staffing company, for conspiring with a competitor to fix nurse wages and not recruit or hire each other’s nurses. This case ended in a success for the DOJ: VDA OC LLC pleaded guilty to criminal antitrust charges for the no-poach conspiracy, marking the first conviction for these types of agreements. The DOJ also secured an indictment against DaVita Inc., another healthcare company, for participating in the Surgical Care Affiliates conspiracy, but a jury found defendants not guilty in April 2022.
Whether any of these agencies’ efforts to restrict post-employment restrictions will prove successful in the long run is unclear right now. But what is clear is that employers need to consider carefully whether and how to seek enforcement of any post-employment restrictions with their former employers, as the federal government is watching.
