Federal rumblings point to increased interest in limiting non-competes

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On July 9, 2021, President Biden signed an “Executive Order on Promoting Competition in the American Economy” (EO 14036).[1] The EO sets forth a number of priorities and initiatives of the Biden administration aimed at protecting competition in light of the market consolidation that has taken hold in many segments of the American economy over the past several decades, including in health care markets. In particular, the EO takes aim at companies requiring workers to sign non-compete agreements and encourages the FTC to limit the use of certain non-competes. Specifically, Section 5(g) of the EO states:

To address agreements that may unduly limit workers’ ability to change jobs, the Chair of 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 EO follows Biden’s December 2020 announcement that he plans to “work with Congress to eliminate all non-compete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets, and outright ban all no-poaching agreements.”[2] However, the EO issued in July does not have binding effect or require any particular agency action with respect to non-competes, instead only “encourag[ing]” the FTC to take action to curtail the unfair use of non-competes or other clauses unfairly limiting worker mobility. Although the EO has no immediate legal effect on the use of non-competes, the EO’s directive to the FTC to consider an administrative rulemaking on the issue is yet another signal in a recent trend pointing to increased interest at the federal level to limit the use of non-competes in the workplace. 

It is also possible that the EO finds a receptive audience at the FTC. Over the last few years, several FTC commissioners have made public—and critical—statements on the use of non-competes in the workplace. For instance, in January of last year, the FTC organized a workshop to address non-compete clauses in the workplace for the express purpose of determining whether the FTC should use its rulemaking authority to regulate their use.[3] A bipartisan group of U.S. Senators submitted public comment in response to the announcement, calling on the FTC to take action to limit the use of non-competes. [4] Then-acting FTC commissioner Rebecca Slaughter’s prepared remarks for the workshop directly addressed the impact of non-competes on physician practices, raising the question of whether imposing non-competes on physicians by an employer hospital means the hospital’s “business interest is being promoted at the expense of patients.”  [5] Prior to the FTC’s non-compete workshop, Rohit Chopra and Lina Khan, FTC commissioner and now-current FTC chair, respectively, presented a critical view of non-compete clauses in a 2019 law review article, implying that non-compete clauses in employment contracts may be “ripe for rulemaking.” [6] Despite these publicly expressed views, no definitive action is officially under consideration by the FTC to restrict the use of non-competes at this time. 

Additionally, there have been several recent attempts to limit the use of non-competes in the workplace through federal legislation. For instance, the U.S. Senate is currently considering the Workforce Mobility Act of 2021 (WMA), S. 483, [7] following previous versions of the bill introduced in 2018 and 2019.[8] The WMA is a bipartisan-sponsored Senate bill which would severely restrict the use of non-competes in general, place enforcement responsibility with the FTC and Department of Labor (including potential civil fines up to $5,000 per week for a reported violation), and provide for a private cause of action.[9] Section 3 of the WMA broadly prohibits any person from entering into, enforcing, or threatening to enforce a non-compete agreement “with any individual who performs work for the person and who in any workweek is engaged in commerce or in the production of goods for commerce (or is employed in an enterprise engaged in commerce or in the production of goods for commerce),” subject to several exceptions.  Exceptions are limited to certain non-competes agreed to as part of the sale of goodwill of a business, sale of ownership interest in a business, or partnership dissolution or disassociation. Additionally, Section 4 of the WMA explicitly carves out agreements between employers and individuals to prohibit the sharing of the employer’s “trade secrets,” as defined at 18 U.S.C. § 1839, either during or after employment. A comparable bill by the same name was also introduced earlier this year in the U.S. House of Representatives with bipartisan cosponsors as H.R. 1367. [10] Given that the WMA was previously circulated in Congress in prior years—and the lack of movement since the WMA’s re-introduction in February—it is unclear whether the current iteration of the WMA has a substantial likelihood of passage. 

However, given past public statements by FTC commissioners critical of non-compete clauses in employment agreements, new pressure from the Biden administration, and the possibility of Congressional action, there is at least some risk in the coming years of federal action to limit the use of non-competes in the workplace.

[1] https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/

[2] https://joebiden.com/empowerworkers/

[3] https://perma.cc/8ERZ-7HNZ.

[4] https://www.murphy.senate.gov/imo/media/doc/FTC%20non-competes%20letter%201.8.2020.pdf

[5] Rebecca Slaughter, Remarks at the FTC Workshop on Non-Compete Clauses in the Workplace, “New Decade, New Resolve to Protect and Promote Competitive Markets for Workers” (Jan. 9, 2020), https://www.ftc.gov/system/files/documents/public_statements/1561475/slaughter_-_noncompete_clauses_workshop_remarks_1-9-20.pdf  

[6] Rohit Chopra & Lina M. Khan, The Case for "Unfair Methods of Competition" Rulemaking, 87 U. Chi. L. Rev. 357, 373 (2020), https://www.ftc.gov/system/files/documents/public_statements/1568663/rohit_chopra_and_lina_m_khan_the_case_for_unfair_methods_of_competition_rulemaking.pdf

[7] https://www.congress.gov/117/bills/s483/BILLS-117s483is.pdf

[8] https://www.congress.gov/115/bills/s2782/BILLS-115s2782is.pdf; https://www.congress.gov/116/bills/s2614/BILLS-116s2614is.pdf

[9] https://www.murphy.senate.gov/newsroom/press-releases/murphy-young-reintroduce-bill-to-protect-american-workers-limit-non-compete-agreements; https://www.congress.gov/117/bills/s483/BILLS-117s483is.pdf

[10] https://www.congress.gov/117/bills/hr1367/BILLS-117hr1367ih.pdf

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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