Athlete Endorsements in the Wake of New FTC Regulation

The Federal Trade Commission (FTC) voted Tuesday to approve a ban on non-compete agreements, effectively stripping American companies of the ability to bar employees from leaving for competitors in the same industry.[1] The FTC considers the new ban, which was passed by a narrow 3-2 vote, a victory for worker mobility and economic freedom. In a statement issued with the final rule, the FTC declared that non-compete agreements have stifled innovation, restricted job mobility, and undermined fair competition. 

The impact of this ban extends beyond the realm of traditional employment to the sports and entertainment industry, where endorsement contracts often include non-compete clauses. Athletes and entertainers, who have historically faced limitations on their ability to endorse competing brands simultaneously, stand to benefit from the freedom afforded by the FTC's ruling. 

Unlike traditional employment contracts where non-competes may serve to protect trade secrets or customer relationships, endorsement contracts can limit the earning potential and career opportunities of athletes and entertainers. These clauses typically restrict an endorser athlete from engaging in promotional activities with competing brands during and after the term of the contract. Clauses will often list specific names of potentially competing brands with which the endorser cannot partner because doing so would negate the value of the deal. These clauses can be followed by catch-all language that prohibits the athlete from endorsing any product across entire industries or market sectors rather than just specifically enumerated brands. Depending on the drafting of these clauses, they can serve as formidable barriers, limiting the earning opportunities for these influential figures. 

Diving into the language of the new rule, the FTC’s press release from Tuesday stated that the final rule “provides that it is an unfair method of competition—and therefore a violation of section 5—for employers to, inter alia, enter into non-compete clauses with workers on or after the final rule’s effective date.”[2] Further, “[t]he final rule provides that, with respect to a worker other than a senior executive, it is an unfair method of competition for a person to enter into or attempt to enter into a non-compete clause; to enforce or attempt to enforce a non-compete clause; or to represent that the worker is subject to a non-compete clause.”[3]

The FTC uses some very broad definitions for key terms in the new rule which makes it applicable to athlete endorsers. “Non-compete clause” is defined in part 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.”[4] 

Moreover, this rule does not just apply to statutorily defined employees, as “employment” simply means “work for a person” under the new rule, and the term “worker” is defined as “a natural person who works or who previously worked, whether paid or unpaid, without regard to the worker’s title or the worker’s status under any other State or Federal laws, including, but not limited to, whether the worker is an employee, independent contractor, extern, intern, volunteer, apprentice, or a sole proprietor who provides a service to a person.”[5]

Because athlete endorsement deals are typically constructed as independent contractor agreements, the rule should apply given the new language. “Work for a person” is so broadly defined that it is sure to include the types of work that an athlete would do for a company or brand in an influencer deal. The exclusivity clauses that limit the competitor brands an athlete could work for would also probably be found “to prevent a worker from... accepting work... with a different person” because the clauses cut off potential new work opportunities under contractor agreements. 

Critically, the final rule would only ban prohibitions that “begin after the conclusion” of the original employment term. Accordingly, companies seeking athlete endorsements would need to ensure that any potential exclusivity clauses they have in place do not extend beyond the term of the employment agreement. This could potentially lead to companies negotiating for longer terms in their endorsement deals because there can no longer be continuing obligations for the athlete to fulfill.

In a contract between NBA legend Shaquille O’Neal and Papa Johns released on the SEC’s archives, we can see a potentially problematic provision under the new rule.[6] The highlighted section of the above paragraph limits Shaq, through his loan-out company, from working with other competitor brands for the term and an additional year after the expiry of the term. This arrangement might receive different treatment because Papa Johns is limiting the ability of ABG-Shaq, LLC to use O’Neal rather than placing any employment restrictions directly on Shaq himself. But given the broad definitions of the new rule, Shaq still might be able to argue he is doing “work for a person” even if he is entering into the agreement through his LLC. This limitation on his ability to accept other work after the term of the agreement has expired seems to be the type of restriction the FTC’s new rule is meant to outlaw.

Another contract found on the SEC’s archives between former NBA star Paul Silas and Healthcare Distribution Specialists LLC uses an exclusivity clause that would probably be unaffected by the new final rule.[7] By limiting the employment restrictions to the term of the agreement, it falls outside the scope of the new regulation.

The new rule will take effect in four months unless it is blocked by legal challenges and pro-business groups have already declared their opposition, citing concerns about protecting proprietary information and intellectual property. While the ban on non-compete agreements does not preclude other methods of safeguarding sensitive information, such as nondisclosure and confidentiality agreements, critics question the FTC's authority to enact such a sweeping and retroactive prohibition. A lawsuit from a tax services company, Ryan, was already filed in federal court on the same day the FTC announced the final rule, seeking to have the rule blocked under the Administrative Procedure Act.  

While it's hard to imagine that companies like Nike and Adidas would agree to a deal with an athlete knowing that its rival was already sponsoring them, the FTC’s ban on non-competes could still disrupt the ecosystem of athlete endorsements. Smaller brands might not care about other competitors after they cash in on associating a player’s likeness with their products, and maybe bigger brands would put up less resistance to seeing their star athletes flip sides the moment a deal is over.  The rule surely raises questions about the dynamics of brand partnerships within the sports industry. Whatever the outcome may be, navigating this new normal for endorsement deals will require lawyers to strategize when drafting their agreements with athletes and entertainers in the future.

Caleb Clifford is a third-year law student at USC Gould School of Law with an interest in labor, employment, and IP law. He was the president of USC’s Sports Law Society and can be found on (X) @Cliffnotes_ and LinkedIn (Caleb Clifford).

Sources:

[1] https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes

[2] Id.

[3] Id.

[4] https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf

[5] Id.

[6] https://www.sec.gov/Archives/edgar/data/901491/000115752322000422/a52685406ex10_1.htm

[7] https://www.sec.gov/Archives/edgar/data/1470915/000107878212001913/f8ka080212_ex10z1.htm