FTC Noncompete Ban Looms Over Sports Execs, Coaches, NIL
The Federal Trade Commission Tuesday announced a final rule that will ban noncompete employment agreements in the American economy. Provided it survives potential legal challenges, the ban will impact multiple sectors of the sports industry—including professional sports leagues, endorsement and NIL deals, and contracts for coaches, scouts and team executives.
The ban, set to go into effect 120 days after the rule is published in the Federal Register, will block employers from entering into or enforcing noncompetes, which generally ban employees from working for a competitor or starting a business that rivals their former employer. It will also render existing noncompetes unenforceable, with the exception of noncompetes already in place for senior executives. The rule uses a two-part test, weighing compensation level and job duties, to determine if an employee counts as a senior executive.
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According to the FTC, about 30 million American workers—roughly one out of every five—are subject to noncompetes. Generally, the shorter the period of a post-employment ban and the narrower the scope of businesses deemed off-limits, the more likely a court will find a noncompete lawful and enforceable.
For employers, noncompetes help to ensure a skilled worker remains at the business and is barred from quickly joining a rival. Noncompetes are within a family of restrictive covenants designed to limit the loss of talent and intel, including for analytics and related data purposes. Many businesses also use non-solicitation and non-recruitment clauses and turn to trade secrets and duty of loyalty laws to protect their interests.
Noncompetes are relatively common for higher-ranking employees in certain industries, especially the tech and financial services industries. They’re in the sports betting sector: DraftKings and Fanatics have recently been embroiled in a battle over an executive who left the betting company for the sportswear manufacturer. Noncompetes are also seen in endorsement deals that restrict contracts an athlete might pursue with other brands. Coaches’ contracts sometimes contain noncompetes that limit their ability to join rivals, such as when Bobby Petrino was blocked from leaving one SEC school for another.
Noncompetes are also central to the administration of professional sports leagues. The PGA Tour’s ability to suspend golfers for joining LIV Golf was predicated on those golfers contractually agreeing the PGA Tour could block them. The same is true when pro tennis and pro rodeo leagues have barred athletes from joining competing leagues. The NFL’s ability to limit coaches from interviewing with other teams during the postseason could also receive scrutiny should a coach challenge those limitations.
The FTC contends noncompetes unreasonably interfere with workers’ ability to change jobs and, as a result, tend to suppress wages and impede the free market. The underlying logic is that when a worker can’t use a job offer from a rival to negotiate a higher salary, the worker’s employer could be less inclined to grant a higher salary. The agency claims noncompetes are an unfair method of competition and violate the FTC Act.
Many states already restrict and, in some cases, ban noncompetes. California not only bans noncompetes but, per a new law, expands the ban to remote workers who live, reside and do all their work in other states but whose employer is based in California. Other measures used by states include bans when the employee earns less than $100,000 a year, when the employee is a healthcare professional or when the noncompete lasts longer than a year.
The FTC proposed the ban last year, with the agency’s chair, Lina Khan, its primary advocate. But especially as evidenced by the five-member board voting 3-2 on the final rule, there are opponents to a ban. A ban prevents an employer and employee from negotiating a contractual term that, while limiting the employee’s freedom to change, might come in exchange for higher wage or better compensation to that employee.
Melissa Holyoak and Andrew Ferguson, the agency’s two Republican commissioners, said federal government structure prohibits the agency from enforcing limits it says are anticompetitive. “We are not a legislature,” Ferguson said at the meeting, according to Reuters. “I do not believe we have the power to nullify tens of millions of existing contracts.”
Last year, then-FTC commissioner Christine Wilson objected to the proposed ban, saying it “represents a radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a noncompete clause is unreasonable in duration and scope.” Wilson warned of unintended consequences and suggested the agency lacks authority under the FTC Act. She resigned from the commission at the end of March, 2023.
Expect to see attempts by businesses and other parties to challenge the rule as unauthorized under the language of the FTC Act and beyond the intent of Congress. One possible argument is that the ban violates Article I, Section 8 of the U.S. Constitution. This portion of the Constitution contains the Commerce Clause and entrusts Congress with authority to regulate interstate commerce, but the ban might be portrayed as attempting to unduly regulate local or intrastate commerce. A legal challenge might also assert that the ban would raise due process problems since it alters existing arrangements without the parties’ consent. Litigants could seek restraining orders and injunctions that delay the ban from taking effect.
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