To Compete or Not to Compete: The Impact of Prohibiting National Non-Compete Agreements in Sports
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On January 5, 2023, the Federal Trade Commission (FTC) made a significant move by proposing a rule to ban employers from imposing non-compete agreements on their workers.[1] Furthermore, California has gone a step further by implementing a total ban on non-competes, even for contracts originating outside of the state.[2] The implications of these actions extend beyond the boardrooms and cubicles of traditional workplaces; they could also have a profound impact on athletics as a whole.
The Origin and Development of the FTC’s Proposed Rule
The FTC views non-compete clauses as detrimental to the labor market, causing lower wages and stifling innovation. The proposed rule, designed to ban non-compete agreements, covers not only employees but also independent contractors and unpaid interns. Additionally, it requires companies to revoke existing non-compete agreements. This represents a comprehensive ban with very few exceptions and would supersede an array of state regulations.
The proposal originates from President Biden’s 2021 Executive Order on Promoting Competition in the American Economy, emphasizing stronger enforcement of antitrust laws. In response to this order, both federal and state initiatives have emerged to limit and eliminate non-compete agreements.[3]
This groundbreaking proposed rule has faced significant scrutiny. According to a May 2023 report from Bloomberg Law, the FTC received over 27,000 comments, likely delaying the rule’s vote until April 2024.[4] In addition to the FTC’s actions, in May, the NLRB General Counsel issued a memo asserting that offering, maintaining, and enforcing non-compete agreements in employment contracts violates the National Labor Relations Act. Generally, the memo contends that non-compete provisions impede employees from exercising their Section 7 rights and hinder employment opportunities.[5]
Following this lead, several states have started enforcing their own regulations. In May 2023, Minnesota enacted a near-total ban on the use of covenants not to compete.[6] Then, in June 2023, the New York Assembly passed a law banning the use of non-compete agreements.[7]
California has long championed legislative efforts against the use of non-competes and has been a trailblazer in this regard. Molly Lens, co-head of O’Melveny’s entertainment, sports, and media group, said, “I wouldn’t be surprised if the FTC were looking at California law for guidance.”[8] Orrick partner Cathy Lui, a specialist in complex commercial litigation, added, “Several states have recently legislated on non-competes, primarily with a focus on protecting low-wage workers. The FTC’s proposed rule takes it a step further, and it was somewhat surprising to see the FTC aligning the rest of the nation with California’s legal framework.”[9]
Recent Californian Developments
California has long prohibited employers from restricting their employees. Section 16600 of the California Business and Professions Code states that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is . . . void.”
On October 13, 2023, California Governor Gavin Newsom signed two significant bills into law, Senate Bill 699 (SB 699) and Assembly Bill 1076 (AB 1076). Both laws prohibit employers from hindering their employees’ ability to join a competing business, even for an extended duration after their employment concludes. These changes take effect January 1, 2024.
SB 699 makes it illegal for a Californian employer or former employer to enforce a non-compete clause, irrespective of whether the contract was executed in another state or if the employee works outside state borders. AB 1076 mandates employers to notify current and former employees who were employed after January 2022, that any non-compete provisions in their contracts are rendered null and void, unless an exceedingly limited exemption is applicable. In essence, California extends their prohibition on non-competes beyond its borders.[10]
The application of one state’s laws in another also raises constitutional concerns, primarily related to the restriction of interstate commerce. [11] However, SB 699 might actually promote, not obstruct, commerce by enabling employees to practice freely. Litigation on choice of law is likely unless the FTC preempts it.
Potential Impact in Sports
In the realm of college football, universities constantly seek an edge over their rivals. One common approach involves enticing top-tier coaches with substantial multimillion-dollar contracts. While non-compete clauses in college football coaching agreements are less prevalent than in the corporate world, they do exist.[12] The FTC’s proposed rule, which lacks exceptions for high-level employees or those with sensitive information, would render these clauses unenforceable.
Also, many professional sports teams employ individuals who either work remotely or reside outside their employing team’s state. For instance, scouts may live in states different from their affiliated teams and thus, California’s legislation would extend its grip on these employees.[13]
According to the FTC’s 216-page notice, the rule generally would not affect other “restrictive employment covenants” such as NDAs and non-solicitation agreements unless those were so broad that they effectively functioned as non-competes.[14] In the absence of non-compete clauses, sports organizations might shift their focus toward enforcing non-solicitation clauses, which prohibit departing workers from luring clients, customers, or colleagues to a competing venture. Yet, some non-solicitation clauses have faced legal scrutiny, where they are assessed for potentially functioning as non-compete agreements by impeding someone’s ability to conduct business.[15] This legal gray area further complicates the landscape.
While coaching contracts seldom include non-compete clauses, they often feature liquidated damage clauses, enabling coaches to exit contracts early by paying a specified sum as liquidated damages to the university.[16] If the court interprets substantial liquidated damage clauses as de facto non-compete agreements, as it has done with rigorous non-solicitation agreements, coaches could potentially exit contracts without financial penalties.[17]
Additionally, the proposed shift in recognizing “student athletes” as employees under the National Labor Relations Act is a significant development, actively promoted by the NLRB and currently contested in the 3rd Circuit. This change raises various questions and possibilities.
Currently, the NCAA’s transfer portal, designed to facilitate student-athlete transfers between institutions, bears striking resemblances to non-compete agreements commonly used in the corporate world. Despite the NCAA’s assertion that student-athletes are not employees, the transfer portal’s regulations restrict the freedom of student-athletes to choose their next academic and athletic destination, akin to how non-compete agreements limit an employee’s choice of the next employer. This analogy underscores the urgent need for a comprehensive reevaluation of how the NCAA treats student-athletes, sparking considerations about their freedoms.[18]
The introduction of Name, Image, and Likeness (NIL) laws have ushered in a new era where college athletes can profit from their personal brand. Athletes who sign endorsement and NIL deals, including with California companies, are likely familiar with provisions that limit competition. Typically, these contracts narrow the athlete’s employment scope, preventing them from signing similar deals with competing businesses or those in the same industry category.[19] Several states, including Florida, Illinois, Louisiana, Oklahoma, South Carolina, and Texas, have enacted laws that restrict the duration of these contracts to a student-athlete’s enrollment at a specific institution.[20] Consequently, these NIL contract restrictions may also be subject to this evolving support of free competition.
Conclusion
The FTC’s proposed rule to ban non-compete agreements and California’s comprehensive ban, extending beyond state lines, have the potential to profoundly impact the sports industry. The effects may extend to athletes, coaches, and sports organizations. In college football, top-tier coaches could benefit from professional mobility. Meanwhile, non-solicitation clauses may become more prevalent and controlling. The extent to which legislation supports antitrust free competition remains a question, which could potentially lead to dangerously limiting non-solicitation or liquidated damages clauses. Likewise, the potential reclassification of “student athletes” as employees may indeed spark questions about their freedoms, especially in the context of the NCAA’s transfer portal which resembles corporate non-compete agreements. These changes will also have far-reaching effects on the influence and scope of NIL contracts.
Policymakers face the challenge of aligning these changes with broader legal principles, striking a balance between contract protection and fairness. It is a delicate tightrope that countless individuals in the sports industry must walk as they strive to achieve greatness in their chosen field. The path forward is uncertain, but one certainty remains: the conversation surrounding non-compete agreements persists. This dynamic environment calls for continued reflection, adaptability, and a commitment to preserving both the competitiveness and the integrity of sports.
Katelyn Kohler is a second-year law student at Suffolk University in Boston, specializing in Sports & Entertainment, Labor & Employment, and Intellectual Property Law. She holds dual degrees from Ithaca College in Business Administration: Sports Management and Legal Studies. With a passion for these fields, Katelyn is dedicated to pursuing a legal career that combines her love for sports and the law.
[1] https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking
[2] Senate Bill No. 699, https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202320240SB699; Assembly Bill No. 1076, https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202320240AB1076.
[3] Nina Krull & Mary A. Smith, The Future of Non-Compete Agreements, (Oct. 6, 2023), https://www.wtwco.com/en-us/insights/2023/10/the-future-of-non-compete-agreements.
[4] Dan Papscun, FTC Expected to Vote in 2024 on Rule to Ban Noncompete Clauses, (May 10, 2023, 4:32 PM EDT), https://news.bloomberglaw.com/antitrust/ftc-expected-to-vote-in-2024-on-rule-to-ban-noncompete-clauses.
[5] NLRB General Counsel Issues Memo on Non-competes Violating the National Labor Relations Act, (May 30, 2023), https://www.nlrb.gov/news-outreach/news-story/nlrb-general-counsel-issues-memo-on-non-competes-violating-the-national.
[6] See Krull supra note 3, (citing to Article 6 of the Labor Omnibus Budget Bill, SF3035, https://legiscan.com/MN/text/SF035/2023).
[7] See Krull supra note 3, (citing to Bill No. S3100A, https://www.nysenate.gov/legislation/bills/2023/S3100/amendment/A).
[8] Ashley Cullins, A New Era of Noncompetes May Shake Up Hollywood Contracts, The Hollywood Reporter (January 12, 2023, 12:03 PM), https://www.hollywoodreporter.com/business/business-news/ftc-noncompetes-hollywood-contracts-1235296702/.
[9] See id.
[10] See Joy Rosenquist, et al., California Reaches Across State Lines to Invalidate Employee Non-Compete Agreements (September 6, 2023), https://www.littler.com/publication-press/publication/california-reaches-across-state-lines-invalidate-employee-non-compete(noting California’s law can extend across state lines, rendering out-of-state contracts unenforceable through the concept of “extraterritorial application”). This presumption can only be challenged with clear opposing intent or reasonable inferences from the statute’s language, purpose, or history; given that the statute explicitly applies to out-of-state contracts and SB 699’s legislative intent highlights the hindrance of economic development by non-compete agreements, it forms a strong basis for countering opposing arguments. Id. (citing North Alaska Salmon Co. v. Pillsbury, 174 Cal. 1, 4 (1916)).
[11] See Id. (citing Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970)).
[12] Martin J. Greenberg, Restrictive Covenants in College Coaches’ Contracts, (2014) https://law.marquette.edu/assets/sports-law/Greenberg.711.pdf
[13] Michael McCann, California’s Noncompete Ban Expansion Reaches Sports, Yahoo News (Oct. 24, 2023), https://www.yahoo.com/news/sports/california-national-expansion-noncompete-ban-120000051.html
[14] See note 1; https://www.ftc.gov/system/files/ftc_gov/pdf/p201000noncompetenprm.pdf
[15] Sandeep Vaheesan, The Battle Against Non-Compete Clauses Intensifies: A Call for the FTC’s Resilience, Time (Jan. 23, 2023, 4:47 PM EST) https://time.com/6249347/fight-over-non-compete-clauses/.
[16] See supra note 12.
[17] Kenneth N. Winkler, FTC Proposed Ban on Non-Competes Could Have Huge Impact on College Football , https://www.bfvlaw.com/ftc-proposed-ban-on-non-competes-could-have-huge-impact-on-college-football/.
[18] Courtney Annway, NCAA Transfer Guidelines Look a Lot Like Non-Compete: Another Example of How Student-Athletes Are Treated as Employees (August 23, 2019) https://ublawsportsforum.com/2019/08/23/ncaa-transfer-guidelines-look-a-lot-like-non-compete-another-example-of-how-student-athletes-are-treated-as-employees/.
[19] See supra note 13.
[20] Jonathan L. Israel & Gregory A. Marino, Clearing the NIL Air: Is it Permissible for NIL Contracts to Provide for Termination If the Student-Athlete is Not Enrolled at a Specified School? (September 30, 2022) https://www.foley.com/en/insights/publications/2022/09/clearing-the-nil-air-contracts-termination.