Blog By: Kara Legg
Making their way into the fabric of America’s economy through English common law, non-compete clauses are provisions of employment contracts that typically restrict an employee from engaging in competitive employment for a specific time after employment has ended.[i] The impact of these clauses on the American labor market and one’s freedom to work was recently questioned by the Federal Trade Commission (FTC). Earlier this year, the FTC sought public comment on a newly proposed rule to prohibit nearly all non-compete clauses from being included in any future employment contracts.[ii] If the rule is promulgated, it would be enforced by the FTC and would apply to non-compete clauses currently in effect.[iii]
The FTC asserts that its rulemaking power concerning non-compete clauses comes from Sections 5 and 6(g) of the Federal Trade Commission Act, which gives the agency authority to promulgate rules concerning “unfair methods of competition in or affecting commerce.”[iv] In the proposed rule, the FTC stated that its ultimate reason for drafting the proposal was the negative implications that non-compete clauses have on promoting fair competition, which was supported by extensive research.[v] In particular, the FTCis persuaded by research that followed changes in state law concerning non-compete agreements, which found that non-compete clauses place unfair restraints on American labor markets by stifling earnings and the growth of new businesses.[vi] Notably, the proposed rule would still leave some clauses in effect, like non-disclosure agreements.[vii] Nevertheless, a nationwide ban would effectively override state law that currently permits non-compete clauses.[viii]
The FTC’s proposed rule comes at a transformative time for non-compete clauses, and the trend toward banning these clauses has been evident for some years.[ix] Several nonpartisan bills have been introduced since 2018 which have sought to restrain the use of non-compete clauses, with the Freedom to Compete Act aiming to limit the enforcement of competition clauses on low-earning employees.[x] Additionally, several states have placed restrictions, and in some cases complete bans, on non-compete agreements in low-wage earning jobs.[xi] State law alterations such as these are what influenced the FTC to take action against non-competes when recent research negated the previously held assumption that non-compete clauses only apply to high-earning employees.[xii]
In July of 2021, President Biden issued an Executive Order calling upon the FTC to limit the use of non-compete clauses through its rulemaking power.[xiii] In this Order, Biden acknowledged the impact of non-compete clauses on the agricultural industry.[xiv] Specifically, the President noted that his administration has witnessed small farm operations struggle to effectively compete in an industry that has been drastically consolidated into a few large conglomerates.[xv] The Order explains how the consolidation of farming has left “small family farms” behind, making it increasingly difficult to succeed in a market that is controlled by corporations utilizing non-compete agreements.[xvi] In this way, the White House echoes the FTC’s findings that non-compete clauses stifle the agricultural industry by preventing employees from engaging in their own farming operations.[xvii] The FTC and the President seem to agree that banning these clauses would effectively break up the consolidated market and allow for higher wages, better jobs, and a more equitable market for consumers.[xviii]
Kentucky, a state with nearly 80,000 farms and a farming enterprise worth nearly $7 billion, has no statutory restrictions on non-compete clauses.[xix] Although it has been suggested that family-owned farms are declining across the nation, the latest USDA Census of Agriculture reported that 96 percent of farms in America are family-owned.[xx] Notably, 93 percent of farms in Kentucky are family or individual-owned.[xxi] With such staggering numbers in the state, Kentucky lawmakers should heed Biden’s remarks in his 2021 Executive Order and take notice of the findings in the FTC’s proposal. If small farms are at risk of being ousted by large corporate conglomerates, a ban on non-compete clauses has the potential to positively impact Kentucky’s economy and protect small family-owned farms.
When it comes to non-compete clauses in Kentucky, agreements are generally upheld if their spacial and durational restraints on competitive employment are reasonable.[xxii] In deciding cases on contested clauses over the years, Kentucky courts have placed broad restrictions on non-compete agreements in the state.[xxiii] In Calhoun v. Everman, the majority held that contractual agreements cannot place unlimited restraints on trade.[xxiv] In that same year, the court built upon its holding in Calhoun by stating that a non-compete clause cannot be unlimited in restraints on both time and location but can be unlimited concerning location if the restraints on time are limited.[xxv] Using a reasonableness standard, Kentucky has even upheld a non-compete agreement with as much as a 10-year restraint on competitive employment.[xxvi] Notably, in 2014 the Kentucky Supreme Court held that non-compete agreements must include consideration—beyond just maintaining one’s employment—to be enforceable.[xxvii] Even with this forward-thinking decision on the books, there is still more to do in protecting Kentucky farmers that may be subject to non-compete clauses.
Opponents of the FTC’s proposed rule suggest that the nationwide ban would be overly inclusive and that the legality of non-compete clauses should be left to the states.[xxviii]
However, even with states making strides in banning non-compete clauses in contracts for low-wage employment, there remain systemic, nationwide concerns about the fairness of non-compete clauses on individual workers and the American labor market as a whole.[xxix] With a legitimate interest in promoting the success of farmers in the state, the Kentucky Farm Service Agency should issue a public comment in support of the FTC’s proposal.[xxx] Taking such action today to support the banning of non-compete clauses could prevent the decline of family farms , and protect the state’s agricultural industry for decades to come.
[i] E.g., Matt Marx & Lee Fleming, Non-compete Agreements: Barriers to Entry … and Exit?, 12 Innovation Pol’y and The Economy 39, 41 (2012) (discussing the English history of non-compete clauses).
[ii] FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition, Fed. Trade Comm’n. (Jan. 5, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition [https://perma.cc/84VV-6K9R].
[iii] Id.
[iv] 15 U.S.C. § 45(a).
[v] Non-Compete Clause Rule, 88 Fed. Reg. 3482, 3485-88 (Jan. 5, 2023) (to be codified at 16 C.F.R. pt. 910).
[vi] See id. at 3486.
[vii] Josh Sisco & Nick Niedzwiadek, Biden’s regulators propose banning non-competes, Politico (Jan. 5, 2023, 11:48 AM), https://www.politico.com/news/2023/01/05/biden-ftc-regulations-employment-noncompetes-00076444 [https://perma.cc/75MG-M4R6].
[viii] SeeNon-Compete Clause Rule, 88 Fed. Reg. at 3515.
[x] See 1 Constangy Noncompete Law § 7.01, LEXIS (database updated 2023).
[xi] See id.
[xii] Non-Compete Clause Rule, 88 Fed. Reg. at 3486.
[xiii] See FACT SHEET: Executive Order on Promoting Competition in the American Economy, The White House Statements and Press Releases (July 9, 2021), https://www.whitehouse.gov/briefing-room/statements-releases/2021/07/09/fact-sheet-executive-order-on-promoting-competition-in-the-american-economy/ [https://perma.cc/FRJ9-CCCQ].
[xv] See id.
[xvi] Id.
[xviii] Id.
[xix] Michael Wexler, Robert Milligan & Kate Perrelli, 50 State Desktop Reference: What Businesses Need to Know About Non-Competes and Trade Secrets Law, Seyfarth Shaw LLP (2021), https://www.seyfarth.com/a/web/70844/2020-2021%2050%20State%20Non-Compete%20Guide.pdf [https://perma.cc/4JP9-H78V] (last visited Feb. 8, 2023).
[xx] Medium-Sized Farms Disappearing in Kentucky, WKU Public Radio (Apr. 15, 2019, 10:58 AM), https://www.wkyufm.org/agriculture/2019-04-15/medium-sized-farms-disappearing-in-kentucky [https://perma.cc/3HTK-3G3T].
[xxi] Id.
[xxii] See, e.g., Hall v. Willard & Woosley, P.S.C., 471 S.W.2d 316, 318 (Ky. Ct. App. 1971); Hammons v. Big Sandy Claims Serv., Inc., 567 S.W.2d 313, 315 (Ky. Ct. App. 1978); Charles T. Creech, Inc. v. Brown, 433 S.W.3d 345, 352 (Ky. 2014).
[xxiii] See, e.g., Calhoun v. Everman, 242 S.W.2d 100, 102 (Ky. Ct. App. 1951); Ceresia v. Mitchell, 242 S.W.2d 359, 363 (Ky. Ct. App. 1951).
[xxiv] Calhoun, 242 S.W.2d at 102.
[xxv] Ceresia, 242 S.W.2d at 363.
[xxvi] Johnson v. Stumbo, 126 S.W.2d 165, 171 (Ky. Ct. App. 1938).
[xxvii] Charles T. Creech, Inc., 433 S.W.3d at 351.
[xxviii] E.g., Dawn Mertineit, Non-Compete Regulation Should Be Left to the States, Not the FTC, Bloomberg L., (Feb. 3, 2023, 4:00 AM), https://news.bloomberglaw.com/us-law-week/non-compete-regulation-should-be-left-to-the-states-not-the-ftc [https://perma.cc/4HL9-9WUM].
[xxix] See Sisco & Niedzwiadek, supra note vii.
[xxx] Welcome to the Kentucky Farm Service Agency (FSA), Ky. Farm Serv. Agency, https://www.fsa.usda.gov/state-offices/Kentucky/index [https://perma.cc/39JN-DR56] (last visited Feb. 8, 2023).