By: Chris Fontan
On Friday, July 9, 2021, President Joe Biden signed his Executive Order on Promoting Competition in the American Economy (the Executive Order). In the Executive Order, President Biden directed various federal agencies to implement over seventy specific actions aimed at broadly increasing competition in the American economy by impacting a wide range of economic activity, including mergers and acquisitions, occupational licensing, anticompetitive behavior, and prices of medical devices and prescription drugs.
One of the specific activities the Executive Order seeks to address is the use by companies of non-competition agreements—that is, those agreements that limit the ability of individual employees to work for competitors after leaving their employer. In Section 5(g) of the Executive Order, President Biden encouraged the Federal Trade Commission (“FTC”) to utilize its statutory rulemaking authority “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” Interestingly, the Executive Order expressly states that its goal is to curb the “unfair” use of non-compete clauses. However, in remarks accompanying the Executive Order, the White House clearly stated that President Biden “encourages the FTC to ban or limit non-compete agreements” altogether.
During a public statement made at the signing of the Executive Order, President Biden denounced the “ridiculous” prevalence of non-competition agreements in the United States. As part of his argument in support of the Executive Order, the President alleged that:
- 1-in-3 American businesses required employees to sign non-compete agreements, and
- 1-in 5 American workers without a college degree are subjected to non-compete agreements.
President Biden argued these agreements, in many cases, were not implemented to protect any legitimate interest of the employer, but instead were put in place to “keep wages low.”
Impact of the Executive Order
A comprehensive rule governing non-competes would be an unprecedented step from the federal government. Historically, the regulation of non-compete agreements has been left to the states, many of which have recently passed legislation of their own. Recent state legislation has focused, among other issues, on restricting the use of non-competition agreements to employees above a certain compensation level. The Executive Order does not offer any details on whether these are the types of limitations President Biden would like the FTC to consider.
As written, the Executive Order “encouraged” the FTC to “ban or limit non-compete agreements”—far short of the type of sweeping prohibition that many felt President Biden would try to implement by executive action following his promises on the campaign trail. Instead, President Biden essentially asked the FTC to look at using its authority to address the issue. Moving forward, there are a wide range of potential avenues that American employers and employees could see, such as:
- The FTC may attempt to prohibit the use of all non-competition provisions.
- The FTC may attempt to prohibit the use of all non-compete provisions, as well as any other similar restrictive covenants—such as customer non-solicitation provisions or co-employee non-piracy provisions.
- The FTC may attempt to prohibit the use of non-compete provisions with respect to a specific subset of employees—such as blue collar or lower-wage earning employees.
- The FTC may attempt to regulate and restrict the method in which non-competition provisions are utilized—such as by requiring disclosure of a non-competition requirement to prospective employees in advance.
Despite the harsh rebuke contained in President Biden’s public statements and accompanying remarks, it seems unlikely that the FTC would pursue a complete ban on non-compete agreements. Such a move would be met by strong opposition from the business community. Non-competes are viewed as vital by many employers seeking to protect their trade secrets and goodwill, among other legitimate business interests.
The express use of the phrase “unfair use” in the Executive Order suggest that the FTC may take a more moderate approach of using its regulatory power to attempt to limit the use of non-compete agreements with blue collar or lower-wage earning employees. Even so, the administrative rulemaking process likely will take several months or even years. Additionally, many question whether the FTC has the authority to regulate non-compete restrictions in the first place. That issue will almost certainly be litigated.
For now, employers are encouraged to continue to review their non-compete agreements for compliance with state law, and to contact their labor and employment counsel for additional information concerning these developments. If you need Labor & Employment counsel, please contact any member of Brunini’s Labor & Employment Practice Group.