On July 9, 2021, the Biden Administration issued a sweeping Executive Order called Promoting Competition in the American Economy (Order). Although it does not immediately change the current legal landscape governing non-compete agreements (or any other aspects of U.S. antitrust enforcement), the Order encourages the Federal Trade Commission (FTC) to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility”. In the wake of the Order and other calls for more rigorous enforcement of employee non-compete and similar restrictive covenants, many within the business community wonder if a federal crackdown on non-compete agreements is coming. We address this issue below, and discuss steps employers may want to consider in light of the potential changes ahead.
According to the Fact Sheet accompanying the Order, roughly half of private-sector businesses require at least some employees to sign post-employment non-compete agreements, affecting an estimated 36 to 60 million workers. On multiple occasions over the past decade-plus, there have been calls for federal agencies to investigate and curtail the use of such agreements. President Biden’s Order is the most recent, and potentially significant, development in this area. He had vowed during his campaign to “eliminate all non-compete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets.” The Order is a further step towards fulfilling his campaign promise.
According to the White House, the Order “includes 72 initiatives by more than a dozen federal agencies to promptly tackle some of the most pressing competition problems across our economy.” One provision in the Order takes direct aim at non-competes:
. . . the FTC is encouraged to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.
The language in the Order is not as strident as the wording in the Fact Sheet (which encourages the FTC to “ban or limit” non-compete agreements). But it certainly is expansive, targeting any “other clauses or agreements that may unfairly limit worker mobility.” We do not know if the FTC will follow the President’s lead and issue regulations addressing non-compete and similar agreements. But, at a minimum, we anticipate that employee non-compete, non-solicitation, no-rehire, and similar restrictive covenants will receive closer scrutiny by the Biden Administration, and that stricter enforcement of such agreements is very possible.
What happens now?
It’s hard to tell. The Order does not impact current law regulating non-compete and similar restrictive covenants. And while bold in its proclamation, the Order is vague in details. It is unclear whether the FTC or other federal agencies will engage in new rulemaking to regulate non-compete and similar restrictive covenants. With or without new regulation, the FTC (and DOJ) could devote more resources to scrutinizing non-compete and other agreements viewed as restraining competition for workers, and could potentially expand the circumstances under which such agreements are deemed anticompetitive. Given the ongoing calls by some for the antitrust agencies to apply federal antitrust laws more broadly and rigorously to non-compete and similar restrictive covenants, the FTC and DOJ may also consider revising the Joint Antitrust Guidelines for Human Resource Professionals to directly address non-competes and other restrictive covenants in employer-employee agreements. Or, the FTC may decide to issue new regulations that directly restrict the scope and/or use of such restrictive covenants.
Although the FTC has very rarely issued regulations targeting what it perceives as anticompetitive practices, advocates of more zealous antitrust enforcement want the FTC to aggressively deploy its rulemaking authority. Even if the FTC goes down that road, it often takes months—sometimes years—for federal agencies to complete the rulemaking process and resolve any legal challenges. Federal regulations issued by government agencies also typically do not carry the same force of law as formal legislation from Congress.
In any event, the Biden Administration has clearly signaled it wants the federal government to join the growing number of states waging war on non-competes.
Practical takeaways for employers
While it remains unclear whether the FTC (or other federal agencies) will initiate new rulemaking, we do believe the FTC is likely to pay closer attention to non-compete and similar restrictive covenants—a true crackdown could also be coming. Although a California-like outright ban on post-employment non-compete agreements is unlikely, proactive employers who utilize non-compete and similar agreements may want to re-evaluate their practice. Here are some examples of issues businesses may want to consider when reviewing their use of non-compete and similar post-employment restrictive covenants:
- What business interest is the company trying to protect with a non-compete agreement? Are the activities restricted by the non-compete tailored narrowly so they impose no greater restraint-on-trade than is necessary to protect the business interests identified by the company?
- In a related vein, for which employees are non-compete agreements necessary? Are low wage earners required to sign non-compete agreements? What is the business justification for such restraints?
- Are the non-compete restrictions reasonably limited in duration and geographic scope? Does the non-compete agreement contain an industry-wide ban, or would it prevent the employee from being able to earn a living?
- Do the restrictions prevent an employee from doing business with clients or customers with whom the employee had a pre-existing relationship before coming to work for the company?
- Are there alternative provisions to a non-compete (e.g., confidentiality, non-solicitation, non-interference) that would provide adequate protection?
- Have you considered whether statutory or common-law protections provide sufficient protection of the company’s business interests?
Keep in mind: using restrictive covenants is just one of many business-protection strategies. And while the states have historically been more active than the federal government in restricting the use of employee non-competes, individual state laws governing non-compete and similar restrictive covenants vary widely across the country. Some states (like California, North Dakota and the District of Columbia) virtually ban them entirely. Other states (like Illinois, Maine, Massachusetts, New Hampshire, Rhode Island, and Washington) prohibit non-compete agreements for low-wage workers. While other states only require restrictive covenants be reasonably limited in scope and duration. We recommend employers who utilize non-competes stay abreast of applicable state laws, which are ever evolving. It is also important to periodically review the non-compete and similar agreements your company uses—especially now that workers may be more likely to move around the country due to remote-working arrangements.
If you would like any guidance, assistance or advice regarding your organization’s use of employee non-compete and similar restrictive covenants, or if you would like to discuss alternative business-protection strategies, please contact a member of Reed Smith’s Labor and Employment Practice Group.