Biden's Executive Order Raises Concerns Over Non-Compete Agreements
In the last year of his administration, President Obama issued a “State Call to Action on Non-Compete Agreements,” identifying those agreements as having “the potential to hold back wages and entrepreneurship.” President Obama called upon states to reduce their “misuse.”
On July 8, President Biden renewed that call to action as part of a wide-ranging Executive Order (EO) on Promoting Competition in the American Economy, this time encouraging federal agency action. The EO expressly encourages the Federal Trade Commission (FTC) “to ban or limit non-compete agreements”—a reference which includes non-solicitation agreements, and likely no-poaching agreements as well—claiming that doing so will “make it easier [for workers] to change jobs and help raise wages.”
The EO is a policy initiative, not a mandate imposing new legal restrictions on businesses, and the EO itself provides no details. Nevertheless, if past is prologue, any future action by the FTC (or other federal agencies) will likely begin with previous recommendations of the Obama administration.
The Obama administration encouraged states to pursue a non-exhaustive list of “best-practice policy objectives,” including banning non-compete agreements for certain categories of workers such as public health and safety workers and low-wage employees (restaurant workers often being offered as an example of the latter).
Those objectives also included improving the “transparency and fairness” of such agreements by, for example, disallowing non-compete agreements unless provided at the time of a job offer or significant promotion, and requiring that enforceable agreements provide employees with consideration (i.e., additional pay or benefits) other than continued employment.
Those Obama-era objectives also promoted the judicial use of the “red pencil doctrine,” a legal doctrine declaring agreements with unenforceable non-compete provisions void in their entirety. The majority of states allow courts to “blue pencil” (i.e., rewrite) non-compete provisions if needed to make them enforceable.
President Biden’s EO asserts that “roughly half of private-sector businesses require at least some employees to enter non-compete agreements, affecting some 36 to 60 million workers.” But like the Obama administration, the current administration (and the federal agencies acting under it) will likely conclude that “noncompete agreements should be the exception rather than the rule.” One piece of good news for employers is that the Biden administration appears to agree with the Obama administration that greater legal protection is still reasonable for trade secrets.
Non-compete agreements have historically been a matter of state law, as the Obama-era guidance recognized, but President’s Biden’s EO expressly contemplates federal regulation. The FTC is authorized to enforce, through both administrative proceedings and court actions, the Federal Trade Commission Act, which prohibits “unfair methods of competition” and “unfair or deceptive acts or practices.” However, Lina M. Khan, newly sworn in as the FTC Chairwoman, has noted the “paucity of private litigation challenging noncompete agreements” under the act, and offered her opinion that regulatory rulemaking process by the FTC “could grant clarity as to when noncompete agreements are permissible or not.”
It is unclear how soon the FTC (or any other federal agency) will act pursuant to the EO, and one can expect significant legal (and perhaps even legislative) challenges to actions taken pursuant to the EO. Nevertheless, employers that rely on, or are contemplating, such agreements should keep a close eye on the FTC’s activity in this area.
Please call for specific advice on your Company’s restrictive covenants and the unique scenarios which you encounter because every situation is different, and the information provided in this alert is not legal advice on any specific situation.