President Biden recently received news coverage for targeting non-compete agreements (for example, in the New York Times). As a result of the media buzz, I have been asked if President Biden banned non-compete agreements. While the short answer is “no,” President Biden’s action will likely improve employee mobility and lead to future legal change.
On July 9, 2021, President Biden signed an Executive Order that states, “the Chair of the FTC [Federal Trade Commission] 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.” On its own, this Executive Order does not prohibit non-compete agreements. In fact, it is not entirely clear exactly what it does. Instead of providing certainty, the Order creates several new questions surrounding the scope of what the FTC will—and can—do, and when the FTC will act.
The next step is for the FTC to define and promulgate new rules. It is currently unclear whether the FTC will prohibit non-compete agreements for low-wage workers or for all workers, or if it will allow non-compete agreements for employees who possess trade secrets or other confidential information. States have recently tried to strike a balance between banning non-compete agreements for certain employees while maintaining business protections for confidential information. It is also unclear whether the FTC will target non-solicitation agreements as part of its future regulations.
A key component of any new rules will be an enforcement mechanism. Even though some states have prohibited non-compete agreements, some companies continue to use them to chill employee mobility. The Economic Policy Institute issued a report in late 2019 indicating that approximately 45.1% of business in California use non-compete agreements, even though they are not enforceable in that state. In response to such enforcement concerns, a new non-compete law in Illinois allows employees to recover their attorneys’ fees and empowers the Attorney General’s office to intervene to protect competition.
Another important—and unresolved—question is the scope of the FTC’s authority. While the agency has rulemaking and interpretive authority over certain federal statutes, it is not clear that it could unilaterally make such a change to the American business landscape. The FTC will not be passing legislation in the U.S. Congress, and states have already developed either common or statutory law regarding non-compete agreements.
In January 2020, the FTC held a workshop to examine “whether there is sufficient legal basis and empirical support to promulgate a Commission Rule that would restrict the use of non-compete clauses. . . .” There likely will be legal challenges to any new FTC rules. Due to these concerns, it is possible that the FTC adopt narrow (and non-controversial) rules to prohibit non-compete agreements for low-wage workers. Doing so would present an opportunity for bipartisan support for non-compete agreements. Companies want to hire new workers easily, and to avoid a new hire that leads to expensive litigation, incentivizing them so support prohibiting non-competes for at least some workers.
It is further unclear when the FTC will act. The FTC will have to determine and promulgate rules, provide notice of the rules, and respond to any legal challenges. This process could take months to years to finalize.
What is certain, starting from at least the Obama Administration, is that the area of non-compete law is rapidly changing. The Obama Administration, coupled with stories regarding non-compete agreements for minimum or low-wage workers, sparked a national dialogue around these agreements, and several states have recently passed laws to curtail and limit the enforcement and application of non-competes. The FTC’s involvement should continue this conversation to help employee mobility while allowing companies to protect key information.