Industry up in arms over FTC non-compete rule changes

Federal Trade Commission seeks to end non-competes

Industry up in arms over FTC non-compete rule changes

Insurance News

By Jen Frost

A Federal Trade Commission (FTC) proposal for a sweeping ban on non-competes has been met with blowback from within the insurance industry, with The Council of Insurance Agents & Brokers (CIAB) having issued a “yellow alert” and the leader of a global broker having thrown their support behind any legal challenge issued by the US Chamber of Commerce and having accused the FTC of overreaching itself.

Under its proposed rule changes, the FTC is seeking to:

  • Prohibit employers from entering into non-compete clauses with workers
  • Require employers to rescind existing non-compete agreements
  • Provide an exception to the rule relating to the sale of a business where the restricted party has at least a 25% ownership interest in the business entity

The rule changes would not include non-solicitation and non-recruitment restrictions, unless these were so “so unusually broad in scope” that they effectively function as a non-compete, the FTC said.

Non-competes are typically arranged by an employer and prevent a worker from taking up employment with a competitor or starting their own business, with restrictions typically limited by both time and geography. Some states, including California, North Dakota, and Oklahoma, already ban the use of non-competes, else impose limits on how they can be used.

In a notice of the proposed rulemaking, the FTC said that research has shown that “the use of non-compete clauses by employers has negatively affected competition in labor markets, resulting in reduced wages for workers across the labor force—including workers not bound by non-compete clauses.”

“This research has also shown that, by suppressing labor mobility, non-compete clauses have negatively affected competition in product and service markets in several ways,” it said.

Insurance stakeholders abolition of non-competes would have a negative impact

The announcement of rule changes prompted the CIAB to issue a “yellow alert” to its members in January.

“The Rule goes into effect 180 days after it is finalized and our team fully expects that it will, ultimately, be finalized,” the CIAB said at the time.

During a consultation period that ran to April 19, the FTC received more than 17,000 comments on the proposed changes, including many from individuals working in insurance as well as insurance businesses and organizations.

In its response to the FTC’s non-compete proposal, the National Association of Professional Insurance Agents (PIA) claimed that the rule changes would put a strain on independent agency owners.

“Independent agencies use non-compete clauses and agreements to protect against the theft of their business assets in part because, for many of them, it would be prohibitively expensive for them to rebuild their businesses after such a theft,” the group said in its response, signed by PIA counsel and director of regulatory affairs Lauren Pachman.

“If finalized as proposed, the ban would invalidate millions of private contracts and have a substantial but unpredictable effect on employer/worker relationships in nearly every industry across the United States.”

PIA also flagged the potential for “considerable litigation” to arise over the legality of the ban and the FTC’s “power to issue it”.

Gallagher claims FTC is in an “overreach position” on non-compete rules

In Arthur J Gallagher’s (Gallagher) mid-March investor meeting with management, Gallagher chairman and CEO Pat Gallagher criticized the proposed rules and the FTC play.

“We think the FTC is clearly in an overreach position,” Pat Gallagher said, pointing to smaller deals as likely to be most heavily affected.

“With the FTC in terms of our view of that, we do view that as a negative in our world, in particular in smaller plug-in acquisitions,” Pat Gallagher said. “One of the things that we're doing, of course, is taking new geographies on board with smaller players.

“We expect that when we buy that entrepreneur that they give the rest of their career to Gallagher and we capitalize that investment for them. And of course, we use non-competes.”

Further, Gallagher signalled that the broking giant was supportive of potential litigation around the rule changes, led by the US Chamber of Commerce.

US Chamber of Commerce labelled FTC non-compete rule changes “blatantly unlawful”

On January 5, the Chamber of Commerce slammed the FTC’s noncompete proposal as “blatantly unlawful” and has since taken umbrage with the latter’s claims that the legislation could increase wages by $300 billion per year and improve career opportunities for 30 million Americans.

“A sweeping regulation like banning non-competes should be based on sound data that is widely understood and vigorously vetted,” US Chamber of Commerce chief economist Curtis Dubay wrote in an article shared on the chamber’s website, dated January 26. “The data the FTC uses to argue for its ban of non-competes is none of those things, and as such should not be relied upon as the FTC makes the case against the agreements.”

Senators Elizabeth Warren and Sheldon Whitehouse wrote to the organization, alleging that the group’s “threat to sue the FTC to stop this important rule represents exactly the type of ‘frivolous litigation’ that your organization [the US Chamber of Commerce] claims to oppose.”

In a March response letter to Warren and Whitehouse, the US Chamber of Commerce set out its view that the FTC “lacks the statutory or constitutional authority to issue a competition rule”.

Not all insurance industry stakeholders gunning against rule changes

Despite insurance industry group opposition, among a mixture of comments from businesses and individuals claiming to work within insurance were some from people who argued that they had been negatively affected by non-compete clauses, including allegations that they had been left stranded in roles in which they were “underpaid”, would be unable to work in their industry without relocating if they did choose or were forced to leave, else had faced legal fees into the tens of thousands of dollars as a result of non-competes.

Meanwhile, when quizzed by analysts and investors on proposed rule changes during Marsh McLennan’s Q1 2023 earnings call, Marsh McLennan (MMC) president and CEO John Doyle took a less aggressive stance than rival Gallagher.

“I don't think there's a lot to report on here,” Doyle said.

While Doyle said MMC had offered feedback through “a number of different industry channels”, he flagged a “healthy” and “competitive” industry and environment.

“There really aren't non-competes in businesses for our producers, and if you read the trade press, you'd see a pretty active market for talent,” Doyle said. “It's a market that we're a net winner in, but nonetheless, there's an active market and talent moving around throughout the industry.”

What’s your view on non-competes in insurance and the FTC’s proposed changes? Have you been negatively affected by a non-compete clause? Would this change be damaging for you or your business? We’d love to hear from you.

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