Employers have been banned from adopting or enforcing clauses restricting workers’ ability to move to competitors, marking a pivotal change to the employment landscape that could improve working conditions in Hollywood.
The Federal Trade Commission on Tuesday voted 3-to-2 to ban noncompetes, which typically prevent workers from taking a new job at a rival company or starting a new business in the same field for a certain amount of time after they leave a company. On top of possibly raising pay for workers across the board by allowing them to freely solicit offers from competitors, the move could also complicate hiring in an industry rife with firms concerned about protecting confidential information and trade secrets.
“The new FTC rule shines a klieg light on how best to retain quality employees in the industry — noncompetes are on their way out, so companies need a better solution,” says Anthony Oncidi, co-head of Proskauer’s labor and employment department.
The ban, which faced opposition from the agency’s two Republican commissioners, is expected to become law in roughly four months, or 120 days after it’s published in the Federal Register, the daily journal of the United States government. When that happens, companies that subject their employees to noncompetes will be required to provide notice to workers who are bound by such provisions in their contracts that they cannot enforce those terms. Clauses affecting senior executives can remain in effect, though employers will be prohibited from imposing new noncompetes.
In a statement, FTC chair Lina Khan said that the ban will “ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”
The move has already been met with a legal challenge. Shortly after the measure passed, a tax services and software provider sued to block the ban. The company, titled Ryan, in a lawsuit filed in Texas federal court, claimed that it will place an “extraordinary burden” on businesses seeking to protect their intellectual property and retain top talent. Without noncompetes, companies could hire competitors’ employees solely to steal proprietary information, it alleged.
In passing the measure, the FTC found that noncompetes constitute an unfair method of competition in violation of Section 5 of the FTC Act, which prohibits unfair or deceptive practices affecting commerce. Under Khan, the agency has taken bold steps aimed at regulating corporations, particularly technology companies but also pharmaceutical, construction and grocery firms.
With the ban, the FTC estimates that the average worker will see their pay increase by more than $500 per year under a regime in which they would be able to field competing offers from rival companies.
In a statement, SAG-AFTRA said noncompetes “unreasonably constrain our members in taking new employment.” It continued, “The time has come to bring an end to the use of these anti-competitive clauses that artificially restrict employees from participating in a free market.”
The union, in comments to the FTC, said that noncompetes are essentially used to suppress wages in Hollywood. Whereas they were traditionally limited to the most sought-after talent who agreed to include such clauses in their contracts in exchange for higher pay and more favorable terms, the “landscape of employment contracts in our industry has shifted dramatically” over the past two decades, it said.
SAG-AFTRA explained, “We often speak with lower paid employees, some who earn as little as $11.00 an hour, who are forced to turn down employers willing to offer higher salaried positions, in a city that has become their preferred home, because their current employer enforces a noncompete clause.” It argued, citing a study from Cornell professor Matt Marx, that prohibiting noncompetes could help level pay disparities between men and women since the latter are more likely to honor such provisions.
Even if a noncompete is unenforceable, the threat of litigation has often served as a deterrent for workers looking to switch jobs and for companies considering hiring a competitor’s employee. By the time a lawsuit is resolved by a court, the damage is done, despite the noncompete likely having expired by that time.
Molly Lens, co-head of O’Melveny’s entertainment, sports and media group, downplays the impact of the move on the entertainment industry since it’s “long operated under a ban of post-employment noncompetes.” She stresses, “While this will be a sea change for some of the country, it won’t be for Hollywood” since it’s “ahead of the game.”
Still, the ban could stimulate competition among companies for the most talented employees. In entertainment and tech, there’s a long history of firms colluding by adhering to anti-poaching pacts intended to keep pay down. In 2017, Disney paid $100 million to settle a class action brought by animators and visual effects workers. DreamWorks Animation, Sony Pictures Animation and 20th Century Fox’s Blue Sky Studios similarly settled.
In a statement, the U.S. Chamber of Commerce also said that it will sue. It likened the ban to a “power grab” that will “undermine American businesses’ ability to remain competitive,” adding that the decision sets a “dangerous precedent for government micromanagement.” Like Ryan, the group stressed potential loss of proprietary information to competitors.
Those concerns were echoed by Endeavor in comments to the FTC. Rather than banning noncompetes, it argued in favor of imposing post-employment commission-sharing arrangement for client-facing employees. Under this regime, all commissions associated with transactions consummated by agents at the firm while they still work there would remain at that company, which would continue to see a share of commissions even after workers leave for a period of three to five years.
A workaround to the ban may come in the form of fixed-term employment agreements, which allows employers to sue workers for breach of contract if they leave before the expiration of the term. These provisions were the subject of lawsuits filed by a host of companies in 2020 — including 20th Century Fox Film, Activision and Viacom — over Netflix poaching their employees. Courts largely found in favor of plaintiffs in these cases, rejecting arguments from the streamer that the contracts are unenforceable because they’re essentially noncompetes, which aren’t allowed in California.
“Recently, we’ve counseled clients looking for alternatives to noncompetes that are interested in and adopted fixed-term employment agreements,” Oncidi says. “It wards off other employers from wanting to hire somebody who has one. Why? Because that other employer could be sued for tortious interference with that contract.”
Another weapon in companies’ arsenal: non-solicitation clauses, which bar exiting workers from urging clients or other employees to join them in their next endeavor. Such terms could increasingly be subject to litigation in the courts, some of which have found that they violate state laws, says Lens.
One question that has yet to be answered is whether the noncompete ban will also effectively bar terms in contracts that require talent to return for follow-up projects. The Motion Picture Association and Independent Film and Television Alliance submitted comments to the FTC arguing that certain provisions its members include in contracts shouldn’t be implicated by the new rule.
Consider a production whose success is uncertain when creators first enter into a contract to be in the project, it said. To address timing issues if a second season or sequel is greenlit, agreements with some talent are struck to include options for them to return. Without that flexibility, it claimed that there would be fewer series renewals and those that did get renewed would stall, possibly becoming prohibitively time-consuming to produce.
“The studio is also then better able to make significant financial investments which are supported by the knowledge that options have been negotiated with key creative personnel,” wrote MPA associate general counsel Dan Robbins in comments to the FTC. “If the studio is unable to negotiate options, the production of franchise sequels will be disrupted or eliminated entirely in some cases.”
The MPA argued these options provisions don’t meet the FTC’s definition of a noncompete clause because they don’t prevent employment with a different entity after a certain obligation is met but rather provide for “certainty of terms with the same employer.”
April 24, 11:11 a.m. This story has been updated with SAG-AFTRA’s statement to The Hollywood Reporter applauding the ban.