On July 9, 2021, President Biden signed the sweeping Executive Order on Promoting Competition in the American Economy, which outlined over 70 wide-ranging initiatives aimed at promoting competition and workers’ interests. One of these initiatives “encouraged” the Federal Trade Commission (“FTC”) to use its statutory rulemaking authority “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” While efforts to curtail the use of non-competes are not new, this latest executive action could signal increased momentum towards nationwide restrictions banning or restricting the use of non-competes for workers in a wide range of industries.
Although the Executive Order refers to the “unfair” use of non-compete clauses, the White House’s explanatory fact sheet makes clear that “the President encourages the FTC to ban or limit non-compete agreements." A nationwide rule regarding non-competes would be an unprecedented move by the federal government.
Historically, the regulation of non-compete agreements has been left to the states, many of which—e.g., Nevada, New Jersey and Oregon—have recently passed legislation limiting the enforcement of non-competes by setting minimum compensation levels and time limits on the period of restriction. The Executive Order and accompanying fact sheet do not offer any details on whether these are the types of limitations the FTC should consider, but they represent common compromises that are short of an outright ban on non-competes.
Federal efforts to restrict the use of non-competes trace back to 2015. Over time, various bills have been introduced in the House of Representatives and the Senate; some of these bills had bi-partisan support or Republican sponsorship. For example, in a February 2021 bill called the Workforce Mobility Act, legislators sought to ban the use of all non-competes except in the context of the dissolution of a partnership or the sale of a business. In January 2019, more narrowly-crafted legislation—the Freedom to Compete Act—sought to prohibit the use of non-competes only with regard to non-exempt employees.
There has also been momentum to restrict the use of non-competes at the administrative level, with the FTC holding a public workshop on January 9, 2020 to consider whether there is a sufficient legal basis and empirical economic support to promulgate a Commission Rule that would restrict the use of non-compete clauses in employment contracts.
The FTC’s administrative rulemaking process regarding non-compete agreements likely will take several months, if not longer, to come to fruition. However, employers should consider reviewing their workers’ non-compete agreements for compliance with state law and with consideration of future possible federal action limiting the enforceability of such agreements.
