The FTC just issued a final rule banning post-employment non-compete clauses, and it’s shaking things up, especially in the non-scripted TV world. How will this impact talent deals? Join Weintraub attorneys Scott Hervey and Shauna Correia as they discuss what this means for networks and on-air talent on the latest installment of “The Briefing.”  

Get the full episode on the Weintraub YouTube channel here or listen to this podcast episode here.

Show Notes:
Scott

The FTC recently issued a final rule banning post-employment non-compete clauses in agreements between employers and their workers. While this is causing consternation with the standard corporate GC set, in-house counsel of television networks that are heavy into non-scripted television are quietly expressing concern. Why? Well, post-term exclusivity provisions are huge in the non-scripted television industry, and they’re used to prevent non-scripted talent from jumping ship. I’m Scott Hervey from Weintraub Tobin, and today I’m joined by my partner, Shauna Correia. We’re going to talk about this FTC ban and how it will impact non-scripted talent deals on today’s installment of “The Briefing” by Weintraub Tobin.   Shauna, welcome to “The Briefing.”  

Thanks for having me, Scott.  

Okay, so Shauna, why don’t you tell us what this ruling actually says?  

This 540-page rule that the FTC came up with prohibits an employer from entering into or attempting to enter into any post-employment non-competent clause with a worker in the United States. The definition of worker is very broad. It applies to all-natural persons, so that’s direct and indirect relationships with employees and independent contractors. There are a couple of important but narrow exceptions. First, it does not apply to senior executives, which is defined as individuals making over $151,164 in annual compensation and are in a policy-making position for the company like a CEO or president, and the non-compete agreement was in place before the rule took effect. Second, it doesn’t apply in connection with a legitimate sale of a business. Third, it doesn’t apply to a small number of industries, which include nonprofits or specific industries like air carriers or ground transportation or banks that are not governed by the FTC but are regulated by some other governmental agency. But the vast majority of industries are covered by this.  

What about existing non-competes?

It’s important to note that this rule will not take effect for 120 days from today, May 7th. We have until September 4th before it becomes law. But assuming the rule takes effect, unless this worker is a senior executive, the rule as written will apply to retroactively ban enforcement of existing non-competes. Also, to note, if a cause of action for a breach of a valid non-compete has accrued prior to the effective date of the rule, that can still be enforced.  

Companies that have non-competed agreements in place, they’re also required to send out a notice of non-enforcement, correct?  

Right. Employers are going to be required to send out a clear and conspicuous notice to all workers that have a non-competent provision in their contract, and the notice will have to tell the workers that the non-compete provisions will not and cannot be legally enforced.  

A company can’t satisfy this by, say, putting a notice on its website, can’t it?  

No. The rule will require individualized communication, but it’s pretty open. It can be by email, mail, or even text message. I think the key is that you want to have proof that the notice went out. The FTC rule does provide model language that can be used.  

Okay. Well, now let’s talk about how this rule defines a non-competent clause and how that could impact what we normally see in participant agreements in non-scripted television.  

Sure. The rule defines a non-competent clause as a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from seeking or accepting work in the United States with a different person, where such work would begin after the conclusion of the employment, or two operating a business in the United States after the conclusion of the employment that includes this non-competent term or condition.  

The rule makes it clear that it would ban the enforceability of other contract clauses that have the same effect as a non-competent clause. The FTC provided an illustration, an NDA between an employer and a worker, written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with that employer.  

Correct. Unlike under California state law, it doesn’t specifically ban non-solicitation provisions, but a super broad NDA like the example you gave, or for example, a non-solicitation clause, could be invalidated because the rule bars any provision or policy that functions to prevent someone from competing once their job for the company is done.  

Okay, so let’s see how this could impact participant deals in non-scripted television. So generally, in contracts with principal talent or participants in a non-scripted program, there is an exclusivity clause that generally requires the talent to be exclusive to the producer or the network. When these provisions are challenged in negotiation, networks like to argue that on-air talent becomes well known because of the network’s investment and reputation and that the network must be able to use this exclusivity provision to protect this investment. The scope of exclusivity can be very broad. For example, as an on-camera performer in all media, that’s a scope of the exclusivity. Or it could be narrower as an on-camera performer in unscripted television. Depending on the leverage the talent has, the talent could negotiate some carve-out, such as allowing the talent to participate in other types of non-scripted television, such as competition shows or something that is different than the format of the program that they’re being hired, or they can negotiate to allow for internet programming, such as a YouTube series. Now, to get this would require some leverage, and that’s not something that most participants that aren’t already celebrities have. Most of the average participants in non-scriptive television would start out with a very broad exclusivity provision.  

The language in the exclusivity provision ends up essentially prohibiting this type of competition post-term.  

That’s right. The term of the exclusivity generally spans the period of time the producer has options on the talent services. So, generally, a talent agreement gives the producer the option to hire the talent back for subsequent seasons. Usually, it’s for five, six, or seven seasons. The option period language you usually see is something like 12 months from the initial airing of the previous season of the program.  

So effectively, how long could that be?  

So, let’s look at the time period after the camera stops rolling. From the end of principal photography until the time that the show actually airs, could be as long as 6 to 12 months. Then you have the run of that particular season, so that could be an additional 6 to 12 weeks, depending upon the number of episodes ordered to production. Then you have the option window, the 12-month span from the first airing of the last episode of that season. So effectively, that period could be as long as 20 months to two years plus. The commission specifically declined to provide an exclusion to the rule for on-air talent. So, it’s clear that the commission intended this rule to be applicable to persons who participate in programming on air. Do you believe such an exclusivity provision, the type that we just talked about, would be interpreted as a non-competent clause?  

Yeah, I think so because, as you described it, it would be seen as prohibiting that on-air talent from effectively doing any other work during this time, which could be, like you said, 20 months to 2 years.  

Well, let’s get it clear: prohibit them from doing any other work as an on-camera talent. Most of the time, these participants do something else. They have some other job or skill or expertise that may have something to do with being on camera.  

Yeah, I think, as written, this would be seen as prohibiting on-air talent from effectively doing other work for another employer during this time, at least as on-air talent.  

Currently, there are some legal challenges to the rule. Let’s focus largely on the lack of statutory authority of the FTC to enact this type of rule. However, if the rule is upheld, I can see networks, maybe in an attempt to get around this prohibition, revising how on-camera talent is paid. Instead of paying the talent over the course of production, which is how they’re normally paid, I can see a network stretching the payment all the way out to the very last date when the vast majority of the talent’s work is performed and making the last payment due on the date that the producer’s option would have to be exercised. I could see networks arguing that this is an intern prohibition and not a post-term and thus it doesn’t fall under the FTC’s rule or isn’t prohibited by the FTC rule.  

Yeah. As you mentioned, there are these legal challenges right now. The US Chamber of Commerce and two private entities have already filed suit to enjoin this law from being enforced, both on grounds that it’s retroactive, arbitrary, exceeds the bounds of the FTC’s authority delegated from Congress, constitutional grounds, you name it. We’ll have to see what happens there. But to your point, I agree with you, networks are going to get creative to achieve their goals, and there’s room for that. In fact, the FTC itself seems to suggest that what is traditionally known in the old labor as garden leave could work here, which would mean, though, talent being paid the same pay and benefits to stay on the payroll for the whole exclusivity period while really not doing any work. As you say, that may just end up meaning the network stretching the same dollars of pay over longer period of time. Or there’s other options, maybe really beefing up the nondisclosure provisions and things like that to prevent leaks of information about the show before it’s air and things like that.  

I think the network’s focus really is going to be locking in the talent to that particular network and not allowing them to do another show for another network. I can see a network stretching out the pay because they’re paid by the episode. They’re not paid by the week or by the month. Stretching out that pay and making the last payment due on the date that the producer’s option to pick up their services for next season would otherwise expire.  

Yeah, and to be clear, nothing about the rule prohibits exclusivity provisions during employment. So, I would think that that would be viable.  

Yeah, interesting, interesting. Okay, well, let’s keep track of this and see what happens. And if we start seeing networks revising the way in which non-scripted talent are paid, if this rule, in fact, comes into effect as law, then we’ll have another subject to talk about. But thanks for joining us today, Shauna.  

All right. Thanks a lot.  

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