The Effect of Promoting Competition in the American Economy on Non-compete Agreements

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On July 9, 2021, President Biden executed a broad Executive Order 14036 (“EO”) entitled Promoting Competition in the American Economy. Among other things, the EO will potentially have a great impact upon non-compete agreements.

According to the Fact Sheet explaining the EO, the EO is designed to “promote competition in the American economy, which will lower prices for families, increase wages for workers, and promote innovation and even faster economic growth.”

In terms of non-compete clauses, the EO is designed to make it easier to change jobs and help raise wages by banning or limiting non-compete agreements. While it does not impose any specific restrictions on non-competes, Section 5(g) of the EO encourages the Federal Trade Commission (“FTC”) to “consider … exercise[ing] the FTC’s statutory rulemaking authority under Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses in agreements that may unfairly limit worker mobility.”

The EO establishes a White House Competition Counsel (“WHCC”) to “work across agencies to provide a coordinated response to overconcentration, monopolization, and unfair competition in or directly affecting the American economy.” The WHCC will be assembled to make sure that the agencies use their authorities to further the policies set forth in Section 1 of the EO with particular attention to:

  1. the influence of any of their respective regulations, particularly any licensing regulations, on concentration and competition in the industries under their jurisdiction; and
  2. the potential for their procurement or other spending to improve the competitiveness of small businesses and businesses with fair labor practices.

So, what does this mean for non-compete agreements?

Currently there is no federal non-compete law that the FTC can build upon. Therefore, regulations will need to be drafted. The FTC’s rulemaking authority is a slow and lengthy process. Moreover, it is unclear whether the FTC has the authority to regulate non-competes, which are currently regulated by state law. Only three states, California, North Dakota and Oklahoma, generally prohibit non-competes (D.C. will prohibit non-competes entered into after the effective date of the statute, but no effective date has been established yet). Some states, like Illinois, Maine, Maryland, Massachusetts, New Hampshire, Rhode Island, Washington, and Virginia, have prohibited non-competes for lower wage workers. The EO does not change these state laws although it signals a greater likelihood of federal regulation of non-competes and likely encourages states to adopt or increase their non-compete prohibitions in anticipation or in advance of federal regulation.

If the FTC does decide it has the authority to regulate non-competes and desires to do so, what would the new regulations look like? It is possible that the FTC could restrict or ban altogether non-competes that affect interstate commerce. It could do this across the board in all industries or start with a more modest ban, limiting non-competes in the industries specifically highlighted in the EO (the EO specifically mentions the information technology sector, prescription drugs/healthcare, and the telecommunications sector as being in need for additional regulation.)

Employers should start preparing now for possible future governmental regulation of non-competes. Employers, especially those in the targeted industries, should review their current post-employment restrictions to determine if the restrictions are consistent with applicable state law. They should review restrictions and confirm that they appear reasonable and no greater than necessary to protect their legitimate business interests. Now also is a good time to consider whether restrictions may be viewed as “unfair” within the apparent meaning of the EO. Employers of low wage employees should pay special attention to their non-competes because of the possibility that the federal government may follow those states that prohibit non-competes for lower wage earners. All Employers should confirm that their intellectual property is adequately protected through confidentiality agreements, which would likely not be impacted by the EO, and non-solicitation provisions, which may be covered by future regulations.

Thus, while the EO is somewhat vague and contains no real teeth, it may have meaningful impact on post-employment restrictions in the near future. Employers should take steps now to improve the likelihood that their non-competes will be found enforceable and take appropriate steps available to protect their intellectual property in the event that non-competes are limited or even banned altogether.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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