Biden's Executive Order encourages review of the use of noncompete clauses but stops short of proposing a ban
This article is part of a new McDonald Hopkins series on developments in restrictive covenant law that will dive deeper into how employers can protect their business interests in light of state - and potentially federal - limitations, strategies for revising employers’ non-compete and non-solicitation agreements, and other topics that will help businesses navigate the changing landscape of employee restrictive covenants.
Employers can breathe a small sigh of relief. Rather than proposing a ban, President Joe Biden’s July 9, 2021, Executive Order on Promoting Competition in the American Economy (the Order) “encourage[s]” the “Chair of the [Federal Trade Commission (the “FTC”)] . . . to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority . . . to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
While there was speculation that the Order would amount to a complete ban on noncompetition agreements, that is simply not the case. The Order does not impact the current state of the law or enforceability of noncompetition agreements in any context, including those between an employer and its employees, partners, or in the context of the sale of a business. Rather, it simply “encourage[s]” the FTC to “consider” using its authority to “curtail the unfair use of non-compete clauses.”
While it is difficult to predict what future rulemaking will look like or when, or if, it will be implemented, guidance can be drawn from the recent activity at the state level. President Biden’s Order follows a crowded field of state regulation in this space. In recent years, several states, including Illinois, Louisiana, Maine, Maryland, Massachusetts, Nevada, New Hampshire, Oregon, Rhode Island, Washington, and Washington D.C. have passed laws restricting the use of non-competition agreements, typically focusing on low-wage workers, and in some cases focusing on workers in specific industries. We can expect any proposed federal rules will have a similar focus.
President Biden is not the first to address the use and application of non-competition agreements at the federal level. Congress has proposed legislation that would curb the use of non-competition agreements. The current iteration of the Workforce Mobility Act, introduced in both the House and the Senate in February, seeks to broadly ban noncompetition agreements across all occupations and at all income levels – imposing an almost California- or North Dakota-like noncompetition structure on the rest of the country – and provides only very narrow exceptions for the sale of goodwill or ownership interest of a business or partnership dissolution or disassociation. Previous proposals have not gained much traction, and the current version has remained in Committee since February. There is no indication if or when the Act will advance for further consideration.
Employers should anticipate that the FTC and more states will look hard at the use of noncompete agreements in the future. Employers should use particular caution when attempting to impose non-compete agreements on low-wage workers, which is an often cited example of overreach in the non-compete landscape, and rightfully so (recall Jimmy John’s). The FTC has the authority to seek injunctive relief and financial penalties from companies that take anti-competitive action, and it may be more willing to use those powers in egregious circumstances during the Biden administration. That is why it is critical that employers ensure they have appropriate and enforceable restrictive covenants in place.
If you have concerns about your organization’s non-compete agreements, contact any member of the Trade Secret, Non-Compete, and Unfair Competition team. In the meantime, we will continue to monitor and report on new developments.
