On January 5, 2023, the Federal Trade Commission (“FTC”) proposed a new rule that would ban employers from imposing non-competes on their workers. Under the rule, a non-compete clause means “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.”
If the rule becomes law, it could have huge implications for workers in all industries – including college athletics.
Although the use of traditional non-competes in employment agreements between universities and college football coaches is not widespread, they do exist. The University of Arkansas Razorbacks’ employment agreement with head football coach Scot Pittman contains a non-compete that prohibits Pittman from seeking or accepting a head coaching or assistant position at any other Southeastern Conference (“SEC”) school for the duration of the contract unless he is fired without cause. The University’s employment agreements with its former head football coaches Bobby Petrino and Bret Bielema similarly barred them from coaching other football teams in the SEC.
In addition to non-competes, universities include other types of clauses in college football coach agreements designed to restrict competitive activity such as: non-disclosure covenants, non-solicitation covenants, consent to interview clauses, and liquidated damage provisions.
So, the question arises, are non-competes and other restrictive covenants in college football coach agreements subject to this proposed ban? The answer appears to be yes as to non-competes. The FTC’s rule is a broad-based ban on the use of non-competes in the employment context. The rule makes no exception for high-level employees or employees with access to trade secrets or highly sensitive information. Thus, it would apply to almost all workers – including coaches. The only exception is for non-competes with the seller of a business.
Notably, there are aspects of the FTC’s rule that could impact the enforceability of other types of clauses, such as liquidated damages. To better understand the implications of the FTC’s rule, it is helpful to explain the origin of the rule and its scope.
How Did We Get Here?
Arguably, a sub sandwich. In 2014, non-competes drew national attention when sub-sandwich chain Jimmy John’s imposed non-compete covenants on its sandwich makers. Jimmy John’s stopped its use of non-competes after it was sued by the Illinois and New York Attorney General’s offices. Nonetheless, the controversy heightened hostility towards non-competes and led to Federal legislation being introduced in Congress. None of the legislation, however, garnered sufficient bipartisan support.
Because legislation never caught traction, in 2016 the Obama White House called on state policymakers to take action to reduce its perceived misuse of non-compete agreements. Specifically, the White House’s “Call to Action” encouraged states to impose at least one of the following actions:
Ban non-compete clauses for categories of workers, such as workers under a certain wage threshold; workers in certain occupations that promote public health and safety; workers who are unlikely to possess trade secrets; or those who may suffer undue adverse impacts from non-competes, such as workers laid-off or terminated without cause.
Improve transparency and fairness of non-compete agreements by, for example, disallowing non-competes unless they are proposed before a job offer or significant promotion has been accepted (because an applicant who has accepted an offer and declined other positions may have less bargaining power); providing consideration over and above continued employment for workers who sign non-compete agreements; or encouraging employers to better inform workers about the law in their state and the existence of non-competes in contracts and how they work.
Incentivize employers to write enforceable contracts, and encourage the elimination of unenforceable provisions by, for example, promoting the use of the “red pencil doctrine,” which renders contracts with unenforceable provisions void in their entirety.
In 2018 and 2020 the Federal Trade Commission (“FTC”) held full-day workshops on non-competes to determine whether there is a legal and empirical basis to promulgate a rule curbing or banning non-competes.
Then, in 2021, making good on his campaign promises, President Biden issued an Executive Order that encouraged the FTC to take unspecified action against unfair non-competes and other agreements limiting employee mobility. In response, the FTC first issued its Strategic Plan for Fiscal years 2022-2026 that included express references to non-competes.
Now, nearly eighteen months after the Executive Order, the FTC has published its proposed rule banning non-competes. Surprisingly, the scope of the proposed rule would bar non-competes for almost all workers, exceeding the Obama Call to Action that encouraged limits on only certain workers, such as low-wage earners.
Does the New Rule Apply to Other Restrictive Covenants, such as Non-disclosures, Customer Non-solicits, and Non-recruitment Covenants?
The exact scope of the rule is not clear yet. In addition to banning non-competes, the rule prohibits “de facto” non-competes or contractual provisions which prevent or have the effect of preventing an employee from working elsewhere after his/her employment ends. The rule provides the following examples of de facto non-competes:
Non-disclosure agreements which are so broad that they prevent an employee from working in the same field elsewhere; and
Training repayment provisions which require the worker to repay training costs if the worker leaves within a certain time period and if the obligations are not reasonably related to the costs the employer incurred in training the worker.
These examples suggest that narrowly tailored customer non-solicits, non-recruits, and nondisclosures will not be impacted by the ban. Whether other types of clauses contained in coach agreements, such as liquidated damage clauses, will be deemed de facto non-competes and covered by the rule is unclear.
What are Liquidated Damage Clauses and Why Could they be Barred by the FTC’s Rule?
Liquidated damage clauses are common in college football coach agreements. These clauses permit the coach to terminate the employment agreement early without cause but render the coach liable to the university for an amount specified in the contract which is denominated and agreed to as liquidated damages.
By example, the agreement between the University of Georgia and its head football Coach Kirby Smart contains a liquidated damage clause. Specifically, the Agreement provides that if Coach Smart were to resign prior to the end of the term he would owe the school $5 million if it were to happen between the 2022 and 2025 seasons. The liquidated damage amount decreases over the course of the contract, dropping to $4 million for the 2026 and 2027 seasons, $3 million for the 2028 season, $2 million for the 2029 season, and $1 million for the 2030 and 2031 seasons.
The Ohio State University’s agreement with its head football coach Ryan Day was extended in 2022 and contains a similar liquidated damage clause with varying sums of money based on how far into the contract’s term Day’s termination occurs as follows: Prior to Jan. 31, 2023: $5 million, 2024: $4.5 million, 2025: $4 million, 2026: $3 million, 2027: $2 million, 2028: $1 million, 2029: $750,000.
Historically, liquidated damage clauses have not been considered as non-competes in the eyes of the courts or subjected to the same degree of scrutiny as non-competes. However, the FTC’s rule applies to contractual provisions which prevent or have the effect of preventing an employee from working elsewhere after his/her employment ends. The FTC’s disdain for non-competes coupled by its recent enforcement actions suggests that it could view hefty-liquidated damage clauses as de-facto non-competes or provisions that have the effect of preventing coaches from leaving one program to coach another. At the very least, liquidated damage clauses for assistant and position coaches could be at risk if they appear so high as to deter free mobility.
Recent activity by the FTC supports such an aggressive approach. The FTC released the proposed rule a day after it settled complaints alleging that three companies and two individuals violated § 5 of the FTC Act by imposing and enforcing anticompetitive employer/employee non-competes. One FTC complaint alleged that Prudential Security used individual lawsuits to enforce non-competes, which required low-wage security guards to pay a $100,000 penalty if violated. The FTC seemed troubled by the liquidated damage clause.
The proposed rule requires employers to rescind any existing non-competes and to notify their workers and former workers that their non-competes are no longer in effect. The deadline to do so would be within 180 days of publication of the final rule. Therefore, if the FTC took an aggressive approach and barred liquidated damage clauses, coaches would have free reign to terminate their employment agreements at any time without the university having meaningful recourse. The financial ramifications could be significant. Without contractual safeguards, universities would likely choose to pay their coaches less. In the coming years we would likely see a coaching carousel.
Could the FTC’s Actions Impact College Football Players?
The FTC’s proposed rule will clearly impact agreements between universities and coaches, but what about the rule’s impact on player mobility in the era of transfer portals?
Currently, as “student-athletes” college football players are not protected by employment laws that apply to workers. They are also not required to sign non-compete covenants with their university. Ironically, this may change if the National Labor Relations Board (“NLRB”) is successful in its push to declare certain players employees under the National Labor Relations Act (“NLRA”).
In September 2021, the employment status of athletes garnered a media frenzy when NLRB General Counsel Jennifer Abruzzo issued a memorandum expressing her position that certain collegiate athletes are employees under the National Labor Relations Act, and, as such, are afforded all statutory protections. More recently, in December 2022, the NLRB announced that it is pursuing a lawsuit against the University of Southern California, the Pac-12, the NCAA by the National Players Association claiming that football and basketball players are misclassified as “student-athletes” and should be considered employees.
If certain college players are deemed employees under the NLRB and other laws, they would likely be treated as employees in all regards including restrictive covenants. Thus, interesting questions arise as to the implications of the FTC rule on players such as:
Could college football players be bound by non-competes?
Could college football players be bound by non-disclosure, non-solicitation covenants or liquidated damage provisions?
If the FTC modifies its proposed rule to limit the ban to low-wage earners, would college football players who earn NIL money be considered low-wage earners?
If college football players could be bound by non-competes, would universities in States where non-competes are illegal (such as California) have a recruiting advantage?
Would employment status impact transfer portal rules in the future?
Looking to the Future
Like all rules issued by regulatory agencies, the FTC’s proposed rule will go through a “notice and comment” period. During this 60-day period, various stakeholders and members of the public may submit feedback or comments on the proposed rule. Sometime after the 60-day period, the FTC will likely issue a final version of the rule, which could differ from the language of the proposed rule. A final rule would likely not by published for several months.
Is the FTC Allowed to Regulate and Ban Non-competes?
The United States Supreme Court has recently reined in the authority of agencies to regulate in areas that materially impact the economy in the absence of clear congressional authorization. Once the final rule is issued, it will almost certainly be challenged as beyond the FTC’s authority.
In fact, FTC Commissioner Christine Wilson issued a scathing dissenting statement when the proposed rule was published. She asserted that non-compete clauses are an inappropriate subject for rulemaking and that the rule “represents a radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a non-compete clause is unreasonable in duration and scope, given the business justification for the restriction.”
In the months to come, expect a lot of debate and lingering uncertainty about the merits and validity of the rule.
Ken Winkler is a shareholder at Berman Fink Van Horn in Atlanta, where he counsels employers and business owners on employment law and compliance, including workplace issues such as harassment (#MeToo) and discrimination; ADA, FMLA, and other employment laws governing the workplace; employment restrictions (non-competes); and employment and business litigation. Ken obtained his law degree (1993) and B.S.B.A (1990) from The Ohio State University. You can read his blog, SportsFansGuide2HR, and connect with him via LinkedIn and Twitter @kwinklerbfvlaw.
Footnotes:  Pittman's contract holds SEC non-compete clause. Tom Murphy & Matt Jones, Pittman’s Contract Holds SEC Non-Compete Clause, Arkansas Democrat Gazette (July 25, 2020, 2:15 AM), https://www.arkansasonline.com/news/2020/jul/25/pittmans-contract-holds-sec-non-compete-clause/.  Jason Kirk, Bobby Petrino’s Arkansas Contract: On His Buyout and SEC West Non-Compete; Atlanta SBNATION (Dec. 9, 2010, 6:24 PM), https://atlanta.sbnation.com/georgia-bulldogs/2010/12/9/1867054/bobby-petrinos-arkansas-contract-buyout-sec-west-non-compete.  See First Amendment to Employment Agreement (https://htv-prod-media.s3.amazonaws.com/files/first-amendment-to-employment-agreement-fully-executed-bret-bielema-redacted-111517-1510777379.pdf).  Benjamin I. Fink, Employer Alert: Non-Competes are Under Attack in Certain States, Berman Fink Van Horn (Jan. 16, 2020), https://www.bfvlaw.com/employer-alert-non-competes-are-under-attack-in-certain-states-2/.  Thomas Neumann, Kirby Smart’s $112.5M UGA Contract Contains Massive Guarantees, Sports Illustrated (Aug. 4, 2022), https://www.si.com/college/2022/08/04/kirby-smart-uga-bulldogs-contract-guaranteed-money.  See Head Coach Employment Agreement (https://media.bizj.us/view/img/11501416/ryandaycontract-executed5-31-19-151677.pdf); Russell Steinberg, Ryan Day Salary, Contract & Buyout Breakdown at Ohio State, Boardroom (last updated Nov. 28, 2022), https://boardroom.tv/ryan-day-contract-salary-buyout-ohio-state/.  Decision and Order, Prudential Security, Inc., et al., FTC Docket No. C-XXXX, https://www.ftc.gov/system/files/ftc_gov/pdf/2210026prudentialsecurityproposedorder.pdf.  Office of Pub. Affairs, NLRB General Counsel Jennifer Abruzzo Issues Memo on Employee Status of Players at Academic Institutions, National Lab. Rel. Board (Sept. 29, 2021), https://www.nlrb.gov/news-outreach/news-story/nlrb-general-counsel-jennifer-abruzzo-issues-memo-on-employee-status-of.  Dan Murphy, NLRB to Pursue Unlawful Labor Practices Against USC, Pac-12, NCAA, ESPN (Dec. 15, 2022), https://www.espn.com/college-football/story/_/id/35259868/nlrb-pursue-unlawful-labor-practices-usc-pac-12-ncaa; NLRB to Pursue Unlawful Labor Practices Against USC, Pac-12, NCAA, Conduct Detrimental (Dec. 15, 2022), https://www.conductdetrimental.com/news/nlrb-to-pursue-unlawful-labor-practices-against-usc%2C-pac-12%2C-ncaa.  Chelsey Cox, U.S. Chamber of Commerce Threatens to Sue the FTC Over Proposed Ban on Noncompete Clauses, CNBC (Jan. 12, 2023, 6:12 PM), https://www.cnbc.com/2023/01/12/us-chamber-of-commerce-threatens-to-sue-the-ftc-over-proposed-ban-on-noncompete-clauses.html.