Employment & Labor Insider

On January 5, the U.S. Federal Trade Commission issued a proposed rule that, if implemented, would ban nearly all post-employment covenants not to compete between employers and employees. Jon Persky of our Boston Office provided a preliminary analysis of the proposed rule here. Although any final rule is almost certain to be subject to judicial scrutiny, to the extent it survives, it is worthwhile to consider how employers may adapt. 

The world of sports provides one avenue for consideration.

Professional sports leagues consist of individual club entities that operate the league as a joint venture. As part of that operation, the clubs have a variety of rules and structures that are restraints on the labor market for players, including drafts, salary caps, and free agency restrictions. Restrictions like this among competitors would ordinarily be in violation of Section 1 of the Sherman Antitrust Act, which prohibits parties from unreasonably restraining trade in a particular market.

Nevertheless, through substantial litigation between the 1970s and 1990s, the courts developed and clarified an exemption for multi-employer bargaining units like the teams in sports leagues. Generally speaking, the courts (including the U.S. Supreme Court) said that as long as a restraint was the product of collective bargaining between an employer and a union representing the employer’s employees, the restraint could not be challenged under antitrust law. This concept became known as the “non-statutory labor exemption” and underpins collective bargaining in professional sports today.

The purpose of the non-statutory labor exemption is to give primacy to the collective bargaining process established by the National Labor Relations Act in resolving employer-employee disputes. As explained by the U.S. Court of Appeals for the District of Columbia Circuit, “when federal labor policy collides with federal antitrust policy in a labor market organized around a collective bargaining relationship, antitrust policy must give way.”

The FTC’s proposed rule is grounded in antitrust policy. The FTC argues that “the use of non-compete clauses by employers has negatively affected competition in labor markets.” The validity of that statement is almost certain to be challenged in the courts.

But if the FTC’s view prevails, the rule may be subject to the non-statutory labor exemption in the right circumstances. Although union employees are not typically the focus of restrictive covenants, both unionization and the use of restrictive covenants have been on the rise in recent years. As a result, there may be union employees in certain roles or industries where employers might want to reasonably restrict their future employment. These employers might be able to include post-employment restrictive covenants in their collective bargaining agreements. 

Although the FTC is unlikely to agree, an employer in these circumstances would have at least a colorable argument that the non-statutory labor exemption applied.