Noncompete clauses in advertising—how FTC's proposed ban could impact the industry

The U.S. Federal Trade Commission’s proposed new rule banning non-competition clauses in employee contracts could have wide implications across the ad industry, where those types of agreements are common. The FTC proposed the rule because it said noncompetes suppress wages, hamper innovation and block entrepreneurs from starting their own businesses. It projected that, by eliminating noncompetes, U.S. wages could increase nearly $300 billion per year and open career opportunities for about 30 million Americans. Currently, more than 30 million U.S. workers—18% of the country’s workforce—are required to sign noncompetes, according to the National Employment Law Project. Linda Goldstein, partner and chair of law firm BakerHostetler’s advertising, marketing and digital media practice, said most corporations are opposed to the proposed rule because they rely on noncompetes to prevent employees from taking intellectual property and talent to direct competitors. “It would have a huge impact on the ad industry because noncompetes are pretty much a standard clause in any senior-level executive compensation or employment agreement,” Goldstein said. “Right now, with how the FTC has composed it, they’re not really considering different circumstances. They’re contemplating something extremely broad here.” Ad Age events Sign up for events and awards Learn more here Goldstein said she anticipates that companies, as well as the U.S. Chamber of Commerce, will fight back against this proposed rule. The U.S. Chamber of Commerce argued in 2021 that the FTC “lacks legal authority to promulgate a rule that would ban noncompete clauses.” Goldstein noted that FTC actions typically take several years to come to fruition, anyway, and it’s unclear what its final proposal will be. Ad Age spoke with eight marketing and agency execs for this story; most of them agreed that this is a nuanced situation where they see the need for noncompetes in certain circumstances but also feel companies shouldn’t be enforcing restrictive policies that prevent people from making a living. “It’s a very dynamic issue,” Anomaly Founding Partner Jason DeLand said. “As we get more and more into the post-Covid world of everyone having a side hustle, it’s getting very, very difficult to enforce noncompetes.” Others are more in favor of getting rid of noncompetes entirely, as they hurt especially young and diverse ad professionals who often jump around to other companies to gain new experiences and rise up in their careers. “The abolition of noncompetes would have a tremendously positive impact on the marketing and advertising industry at large,” said Lola Bakare, a CMO advisor and “Responsible Marketing” author .“Non-competes get in the way of equitable value exchange. They enable something one click short of indentured servitude. Not ideal.” Some common noncompetes Noncompetes vary widely, but they typically prevent ad agency and marketing executives from leaving their employer and going immediately to a direct competitor—think, on the brand side, a Coca-Cola marketer going to PepsiCo, or from McDonald’s to Burger King. They also can include nondisclosure and non-solicitation clauses that prevent senior executives from taking intellectual property to a competitor or poaching talent and, in an ad agency’s case, clients, for a certain period of time. “The noncompetes we see coming out of the agencies primarily concern c-suite level staff and the grace period between leaving a current agency and going to a competitive one,” agency NBZ Partner Co-Founder Simone Oppenheimer Mandel said. The executives who spoke for this story said this grace period in noncompetes usually extends between six months and two years. They said sometimes they can last as long as five years, though that is rare and considered egregious. Noncompetes also extend to agency executives starting their own shops; the entrepreneurs whom the FTC are trying to protect usually are prevented from poaching clients and staff from their former employer for a certain amount of time. Ad agency executives have increasingly been leaving top shops and holding companies to start their own businesses. Some of the hottest creative agencies in recent years are startups including Gut— which was founded in 2018 by the co-founders of WPP shop David, Anselmo Ramos and Gaston Bigio —and WPP-backed Cartwright, founded in 2020 by agency veteran and former Stagwell-owned 72andSunny Executive Creative Director Keith Cartwright. Two ad agency chief executives who spoke on condition of anonymity said they generally don’t enforce strict noncompetes on their employees and doubt many agencies would, as it’s common for people to move around between different shops. One of the agency execs said they sometimes offer senior executives a signing bonus on top of their annual salary—for example, a $50,000 signing bonus on top of a $500,000 a year salary—to agree to not resign for one year and to not go to certain direct competitors or solicit key people for six months after they do leave. “They can say ‘no’ and then they don’t get the signing bonus,” the agency exec said. Web3 marketing trailblazers Entries are open for our first official Web3 honorific Enter here Noncompetes can ‘get nasty’ For the most part, the people who spoke for this story said executives are reasonable and willing to negotiate noncompete clauses. But there are instances, especially on the marketing side, where brands go far to prevent their IP from being shared with direct competitors; their clauses can be restrictive and unwavering. “I’ve seen them get nasty,” one chief marketing officer of a quick-service restaurant company said, speaking on condition of anonymity. “I saw a CEO join a company who had a non-poach [agreement] and a couple weeks later hired a CMO from the same organization and that organization from which they were hiring sent a cease and desist.” The CEO decided not to pursue the recruit anymore upon receiving the cease and desist, the CMO said. The CMO said they understand companies being wary of executives stealing all their talent or using the skills and knowledge they obtained on the job to get a better opportunity with a rival, but in a small industry, it’s also common for people to stay in touch and want to work with former colleagues they’ve built relationships with. “The poaching thing is a gray area,” the CMO said. Twenty-eight states already have implemented the “right to work” law, eliminating noncompetes that would prevent someone from making a living. Goldstein said the more narrow the noncompete agreement, the more likely it will hold up in a court currently; meaning Coca-Cola, hypothetically, can enforce a noncompete clause preventing its employees from going directly to work for rival PepsiCo. A company typically cannot get away with preventing employees from leaving to work for any other company in their category, she said. Brands have tried though. The CMO said they’ve seen broad noncompetes where companies have tried suppressing employees from going to another company in the same industry. The candidate may feel forced to agree to something like that if they need a job, they said. “I’ve always been able to work with a company and come to an agreement,” the CMO said. “But it’s all about leverage. If the candidate has a job and is moving to a new opportunity, they have leverage. If they’ve been out of a job for a few months, sometimes they don’t.” Two ad agency executives said they’ve encountered clients trying to force the agency’s senior people to agree not to work with a competitor for a certain amount of time if they left the partnering agency for another. They said those are more rare. It is common for agencies to agree to not service two competing brands. What a brand deems a competitor will vary. “It’s hard for me to say, ‘hey agency you can’t do business with any other QSRs,’” the CMO said. “I’m not going to deprive you guys of making money.” Goldstein said the FTC’s proposed rule doesn’t seem to extend to non-solicitations or nondisclosures, as of yet, and likely wouldn’t affect agreements between agencies and brands around client conflicts. “But the devil will be in the details,” she said. “We’ll have to see more of the details after this is finalized.”

Noncompete clauses in advertising—how FTC's proposed ban could impact the industry

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