News outlets have run wild with coverage of President Biden’s July 9, 2021 Executive Order (the “EO”), encouraging the Chair of the Federal Trade Commission (“FTC”) to work with the “rest of the Commission” to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” The EO specifically calls out non-competition agreements entered into between an individual person and a company that would restrict where a person can work after leaving a job. Note that these non-competes are distinct from those entered into between companies as part of acquisitions, which are already scrutinized by the FTC, and no-poach agreements, which restrict one company’s ability to hire another company’s employees and have been a focus of criminal antitrust enforcement activity.
In our view, coverage describing the EO as having an immediate sweeping impact on laws regulating non-competition agreements is somewhat overblown and, at any rate, premature. Let’s get a few facts on the table:
- The EO does not seek to ban non-competes. Instead, it encourages consideration of “curtail[ing]” “unfair” non-competition agreements. However, the EO provides no definition for the term “unfair” — a term that would necessarily play a key role in any rulemaking.
- The EO does not say under what authority the FTC would “curtail” unfair non-competition clauses. While rulemaking is the obvious method, the means are still unclear. In early 2020, the FTC held a workshop to consider whether it had a legal basis to restrict the use of non-competition agreements in employer-employee contracts. As part of that workshop, prepared remarks by FTC Commissioner Noah Phillips pointed out that the FTC has issued an antitrust rule just once in its history — in the 1960s. It did not relate to employer-employee non-competition agreements, was never enforced, and was rescinded in the 1990s. The EO does not provide any additional guidance on how the FTC could execute its goals.
- We’ve been here before — as has President Biden. In 2016, an Obama administration executive order directing federal agencies to address undue burdens on competition, coupled with papers by the White Houseand Treasury on the “overuse and misuse” of non-competition agreements, failed to result in any changes to federal law with respect to the enforcement of such agreements. Later in 2016, the Obama White House put out a call to action to state law makers to address these issues. Indeed, as you know, the body of law regulating common employer-employee non-competition agreements continues to be at the state level.
- The EO anticipates further agency action, although it does not effect an immediate change in the law on non-competes. A July 9, 2021 Statement of the FTC says that in the “coming months,” it will consider whether to issue new guidance or propose rules to clarify the types of activities that may constitute “unfair methods of competition.” Employers should stay tuned.
To be clear, we’re not predicting the future. It is possible that the Biden administration will issue further executive orders or engage in other lawmaking activity with a more concrete impact. For example, similar to recent actions taken by the District of Columbia, the federal government could focus in the first instance on non-compete clauses in federal procurements and government contracting involving federal dollars. Moreover, the general goal of this portion of President Biden’s EO (to curtail the use of non-competes) may resonate with Lina Kahn — the newly appointed Chair of the FTC. Khan co-authored a law review article in 2020 advocating for the FTC to engage in competition rulemaking. Khan is known for advocating for the progressive enforcement of antitrust laws and, as our antitrust team wrote last month, has pressed for the FTC to engage in notice and comment rulemaking to define “unfair methods of competition” under the Federal Trade Commission Act.
Even absent concrete guidance, now is an excellent time to do an “inventory” of your company’s use of non-competition agreements. Some key questions to ask:
- Are the non-compete clauses in the company’s agreements really necessary in every instance?
- If they are necessary, are the restrictions narrowly tailored such that the scope of restricted activity, geographic reach, and durations are no broader or longer than necessary?
- Are lower-paid employees covered by the restrictions and, if so, is such coverage really necessary to protect the company’s legitimate business interests?
As we have reported, disfavor towards non-compete agreements continues to grow. We have reported on DC’s 2021 ban on non-compete agreements and the recent decision by the Pennsylvania Supreme Court striking down a non-compete clause in a commercial agreement as unjustifiably overbroad.