How Much Will the FTC’s New Noncompete Ban Impact Fashion?

In the competitive world of finding and securing top-talent to lead fashion and luxury brands, noncompete clauses have come to play a significant role in how the industry’s biggest companies maintain their market-dominant positions. Traditionally reserved for scenarios in which companies were looking to safeguard proprietary information amassed by their highest-tier talent, companies across industries have increasingly looked to noncompete clauses to do more than protect technical know-how. In fact, it is relatively common to see noncompete provisions inserted into individuals’ contracts as part of a competitive power-play aimed at keeping them in their roles and maybe more importantly, preventing them from jumping ship to a competitor brand, thereby, impacting the mobility of employees at varying levels of the totem pole. 

That is going to change in the U.S., at least, where the Federal Trade Commission (“FTC”) voted in favor (3-2) of issuing a final rule to ban most new noncompete agreements, including those of senior executives. Specifically, the antitrust and consumer protection-focused agency’s final rule provides that it is “an unfair method of competition – and therefore a violation of section 5 [of the Federal Trade Commission Act] – for persons to, among other things, enter into noncompete clauses with workers on or after the final rule’s effective date.” For noncompete agreements entered into before the new rule takes effect, the FTC’s rule adopts a different approach for senior executives than for other workers. “For senior executives, existing noncompetes can remain in force,” but makes existing noncompetes with other workers unenforceable after the effective date of the new rule. 

The final rule approved by the Lina Khan-chaired FTC broadly defines a noncompete clause as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from: (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” And just as was the case with the proposed version of the noncompete ban that the FTC introduced back in January 2023, the final rule “broadly applies to noncompete agreements affecting virtually all workers – including employees, independent contractors, externs, interns, volunteers, apprentices or sole proprietors,” law firm Cooley states in a client alert. “There are narrow exceptions, including for existing agreements with senior executives.” 

The rule is expected to come into effect in late August or early September of this year but not without pushback. As of Wednesday, at least two lawsuits had been waged against the FTC, with the U.S. Chamber of Commerce and Texas-based accounting firm Ryan taking issue with the newly-finalized noncompete ban on the basis that the rule is, among other things, an example of government overreach.

The Noncompete Ban & Fashion, Luxury Firms

Putting aside the potential success of such litigation (a fight that may ultimately reach the Supreme Court), the impact that the FTC’s new noncompete ban will have on the fashion industry may be somewhat minor given that most of the biggest players in this space operate largely in Europe – and execute contracts with their top talent (both in terms of creative directors and C-level leaders) there. That is not to say, however, that these same companies do not maintain ranks of executives in the U.S., who will be subject to the FTC’s new rule. 

Against this background, it is also worth considering the state of noncompete protections in the European Union and the United Kingdom, where the majority of big-name fashion/luxury brands are headquartered. A look at the state of play outside of the U.S. is also warranted as the state of the law may also be slated to change in Europe, where noncompete clauses are generally enforceable and can be widely utilized – subject to strict conditions for the validity of such provisions. “Most European jurisdictions have long-standing restrictions on non-competes,” a note from Littler attorneys Lisa Coleman and Daniel Pollard asserts. “Generally, courts apply very similar legal principles that require [noncompete] provisions to be limited in time, scope and (in some cases) limited to employees who meet a certain salary threshold.” 

Despite such limitations, the use of noncompete agreements – and ones that potentially reach too far (i.e. fail to adequately specify a compensation, as well as time, sectoral and geographical limits) – are common among EU states, including Italy, according to research from Tito Boeri, the head of the Economics Department at Bocconi University. 

The same is true for the United Kingdom. However, change appears to be afoot, as the UK’s Department for Business and Trade stated in a policy paper in May 2023 that the government has plans to limit the length of non-compete clauses in employment contracts to a three-month maximum. The shortened timeframe for such clauses, which has not yet been put into effect, would be a contrast to the current state of some noncompete provisions utilized in the UK, which “can be quite lengthy, sometimes lasting beyond 12 months,” Penningtons Manches Cooper attorneys note. 

Notwithstanding existing and/or impending legal guardrails, regulators in Europe are paying increased attention to the use of noncompete clauses. “Given the ongoing war for talent in certain industries, the issue [of overbroad noncompete clauses] will nevertheless most likely gain traction, and attract more attention from competition watchdogs in the same way that it already has in the U.S.,” Sheppard Mullin’s Anton Gerber states. He asserts that while “competition watchdogs of EU member states seem to have grown an appetite to tackle the issue,” much of the focus of European enforcement action to date “has been on agreements between companies not to poach each other’s employees rather than on clauses included in individual employment contracts.”

An indication that their focus may be shifting to employees? In February 2024, the European Commission was revealed to be investigating companies in the food delivery, grocery, and other consumer goods in two EU member states over their alleged use of no-poaching agreements aimed at limiting the ability of employees to jump ship to competitor companies. (In the U.S., the Court of Appeals for the Second Circuit has taken on a no poaching case waged against Saks Fifth Avenue and handful of luxury brands over their alleged scheme to control the wages and certain job conditions of luxury retail employees.)

“Given the ongoing war for talent in certain industries, the issue [of noncompete agreements] will most likely gain traction,” per Gerber, who states that companies active in Europe that “intend to deter their staff from moving to competitors should carefully assess compliance with national employment legislation and take a cautious approach when considering no-poach agreements with business partners.” 

Aside from rising regulatory attention in the EU and the UK, which stand to impact fashion/luxury’s biggest names, for large global employers, especially those headquartered in the United States, the impact of the FTC’s impending ban may reach beyond their home turf. These companies’ appetites for imposing noncompetes on their global workforce is “likely to be heavily influenced by what they do in their home market,” according to Coleman and Pollard. For this reason, when the FTC rule comes into effect in the U.S., “then over time, U.S.-headquartered companies might become less likely to try to impose noncompetes within Europe.”