A few weeks ago, our All Things HR Blog took time to tackle frequently asked questions about the enforceability of restrictive covenants in Michigan, including employee non-compete restrictions. We decided this would be a good week to expand on that topic.
Many readers likely noticed recent headlines blaring out that on July 9, 2021, President Biden issued an Executive Order about non-compete agreements (the “Order”). Many of the headlines gave an immediate impression that the President’s Order on Promoting Competition in the American Economy will ban or limit the use of non-compete agreements. While the Order includes language expressly targeting non-compete clauses, it also includes many broad prescriptions, suggestions, and encouragement of action on matters of economic policy and government agency oversight.
The non-compete segment, which received much commentary, is contained in a single sentence:
“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.”
In fact, this same section “encourages” the Chair of the FTC, the Attorney General, and other agencies to review and consider a lot of different matters, in addition to the use of agreements that “may unduly limit” a worker’s chances of moving around to other jobs.
The Order does not, however, mandate the FTC to ban non-competes or to find that in all circumstances a non-compete clause will unduly limit worker mobility. It also does not mandate that the FTC proceed with rulemaking for the regulation of the use of non-compete restrictions. Instead, it suggests that the FTC Chair should consider working with the FTC to assess issuing rules related to the applicability of non-compete clauses. The full Order to the FTC is to:
“(g) … 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…. (h) To address persistent and recurrent practices that inhibit competition, the Chair of the FTC, in the Chair’s discretion, is also encouraged to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority, as appropriate and consistent with applicable law, in areas such as: (i) unfair data collection and surveillance practices that may damage competition, consumer autonomy, and consumer privacy; (ii) unfair anticompetitive restrictions on third-party repair or self-repair of items, such as the restrictions imposed by powerful manufacturers that prevent farmers from repairing their own equipment; (iii) unfair anticompetitive conduct or agreements in the prescription drug industries, such as agreements to delay the market entry of generic drugs or biosimilars; (iv) unfair competition in major Internet marketplaces; (v) unfair occupational licensing restrictions; (vi) unfair tying practices or exclusionary practices in the brokerage or listing of real estate; and (vii) any other unfair industry-specific practices that substantially inhibit competition.”
This language arguably may include other restrictive covenants that are currently enforceable in most jurisdictions, such as customer and employee non-solicitation provisions, no-hire provisions, and non-servicing provisions.
If we were inclined to place a bet on this, we would say it is more likely than not that the FTC will initiate this rulemaking process, but also that it will take considerable time before any rulemaking developments are announced.
Regardless, coverage of the Order has overshadowed the fact that in recent years, a number of state legislatures have actively reviewed, and at times made, substantive changes in their non-compete laws. As we said last week, the enforceability of any non-compete clause depends primarily on state law because it involves the interpretation of a contract, which, in this context, is a state law issue. We again emphasize that it is crucial for employers to take into account where an employee works and lives and where the employer operates.
Therefore, employers who operate in states other than Michigan – or in multiple states – need to remember that this area of the law has been ripe for new legislative developments and that different states may have different rules regarding the validity and enforceability of non-compete restrictions.
While we do not have space in this blog to fully cover all changes, we can highlight examples from several states:
- California – Under the California Business and Professions Code non-compete agreements are void except in very limited circumstances. Similar prohibitions apply in North Dakota and Oklahoma.
- District of Columbia – On January 11, 2021, the Washington, D.C. Mayor signed an Act banning all non-compete agreements for employees working in D.C., including restrictions on an employee’s outside business activities while still employed and requiring employers to provide certain notices. The Act’s effective date is not yet set, but will most likely be October 1, 2021.
- Massachusetts – Among other restrictions, non-compete durations are limited to 12 months, agreements may be entered into with exempt employees only. They cannot be enforced if an employee is laid off or terminated without cause, and Massachusetts state law must essentially be applied to the interpretation of such restrictions.
- Illinois, Oregon, and Washington – These three states set employee earnings thresholds for non-compete restrictions. In addition, Oregon and Washington set specific limits on the duration of non-compete restrictions.
Even if the FTC engages in rulemaking, it remains unclear what level of regulation it may pursue. Note the Order encourages regulation only of “the unfair use” of non-compete clauses and other restrictive covenants. This choice of language might suggest that not all use of such agreements is “unfair.” As such, companies should continue to monitor the FTC’s actions in this regard as well as state laws, where the most significant strides are being taken against these types of agreements, and be prepared to act responsively if and when the FTC does move forward on its EO directive.
While your company’s noncompetition agreements may well be reasonable and enforceable, given the recent spate of state law developments, it is important to make sure that you are periodically having such agreements reviewed by your counsel for any necessary changes.