FTC pushes forward with sweeping non-compete ban

Existing non-compete agreements also face the chop after landmark FTC vote

FTC pushes forward with sweeping non-compete ban

Insurance News


The Federal Trade Commission (FTC) has voted 3-2 to ban non-compete agreements, in a move expected to have ramifications for tens of millions of Americans.

Under the non-compete ban, employers will be restricted from using future non-competes. Existing agreements, except for those that apply to senior executives, will be voided.

The rule is expected to go into effect 120 days after it is published in the Federal Register.

Democratic FTC commissioners voted for the ban, while Republicans were against. Republican Commissioner Melissa Holyoak argued that the final rule “exceeds congressional authorization and will likely not survive legal challenge.”

FTC Chair Lina Khan said “plain reading” of the law that established FTC clearly gives it authority to promulgate the rule.

Around one in five, or 30 million, American workers are subject to non-compete clauses, according to the FTC.

FTC non-compete ban bad for business, insurance associations warned

The FTC received more than 26,000 comments when it sought feedback on the measure last year, with around 25,000 in favor of a ban. Among responses, insurance associations including the American Property & Casualty Insurance Association (APCIA) and the National Association of Professional Insurance Agents (PIA) warned of negative consequences for the acquisitive insurance industry.

“APCIA is concerned that the current proposed rule invalidating non-competes will impact tens of millions of workers across all major industries, including the financial services sector and insurance,” APCIA said in its FTC non-compete rule change feedback submission.

Other insurance stakeholders flagged concerns around the impact of the elimination of non-compete agreements in a business sale setting.

“The primary concerns the Commission raises in the context of traditional employee-employer non-competes, including unequal bargaining power and wage suppression, simply do not translate to a seller-buyer context,” attorneys at Ogletree, Deakins, Nash, Smoak & Stuart commented on behalf of a “major insurance broker” during the public submission stage.

What is a non-compete agreement?

Non-compete agreements are typically used by employers or buyers when an employee leaves or an owner sells a business:

Purpose and Duration of a non-compete agreement

  • Non-compete agreements are used to protect a business’s proprietary information and its access to clients
  • They are typically enforceable for a set period post-employment.

Geographical and scope limits of a non-compete agreement

  • Non-compete agreement enforceability typically depends on reasonable geographical limitations
  • The scope of the prohibited activities is another factor in determining how and when a non-compete agreement applies.

State variability when it comes to a non-compete agreement

  • The legality of non-compete agreements varies by state
  •  Some states like California largely prohibit the use of non-compete agreements except under specific conditions.

Some insurance workers backed an FTC non-compete agreement ban

Some individuals, purporting to be insurance workers affected by non-compete restrictions, were pro a ban.

“As a retail insurance broker with 30 plus years experience, I have experienced, firsthand, the uncompetitive nature of insurance non-compete agreements,” said one anonymous commentor on the FCA rule. The individual claimed that a former employer had used a non-compete to make them “effectively an indentured servant.”

CEOs at some of the biggest insurance brokers last year voiced mixed views on FTC’s non-compete rule change

Major insurance broker opponents to the ban have included Arthur J Gallagher (Gallagher) CEO and chairman Pat Gallagher. The Gallagher CEO said in March of last year that the FTC was in an “overreach” position.

The insurance broking business viewed the potential non-compete ban as a “negative in our world, in particular in smaller plug-in acquisitions,” Pat Gallagher told investors during an earnings call.

Other insurance broking leaders were less concerned by the potential impact of federal non-compete ban rule changes.

“I don’t think there’s a lot to report here,” Marsh McLennan (MMC) president and CEO John Doyle told investors during a Q1 2023 earnings call. In his assessment, the MMC chief pointed to insurance’s active talent market and a lack of non-competes for producers.

Why has the FTC voted to ban non-compete agreements?

According to the FTC, a non-compete ban is expected to deliver:

  • A non-compete ban would boost workers’ earnings by nearly $300 billion a year, the FTC has set out.
  • The FTC has calculated that its non-compete ban will save consumers $148 billion annually on healthcare costs.
  • A non-compete ban would also double the number of businesses founded by former workers within the same industry, as per the FTC.

FTC non-compete rule promises a national approach

The FTC rule would see a nationwide restriction on non-compete clauses, which typically prevent individuals from setting up or working for competing firms on the end of their employment.

Previously, state courts have taken a mixed approach to non-compete agreement restrictions. In many cases, a non-compete agreement may be thrown out if it is found to be overreaching. That could be based on the seniority of an employee or because terms are too broad, for example encompassing too big of a geographic region or failing to stipulate a reasonable timeframe.

“The higher up you go on the food chain, the more likely it is that a non-compete will be enforced against you,” said Hill Ward Henderson shareholder Gregory Brown. The Tampa, Florida based attorney was speaking to seniority levels in a business.

Self-styled “business divorce” attorney Brown has previously warned that a sweeping non-compete ban “goes too far”.

“The notion that we need a rule that bars non-competes in their entirety to protect low-level employees misses the mark,” he told IBA last July.

Image credit: Harrison Keely CC BY 4.0

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