New Executive Order Targeting Noncompete Agreements Foreshadows Significant Issues for Employers

Alerts / July 12, 2021

On July 9, 2021, President Biden issued a sweeping Executive Order aimed at promoting competition in the American economy. Within the Executive Order, President Biden specifically encourages the Federal Trade Commission (FTC) to regulate noncompetition agreements (generally referred to as “noncompetes”).

While the Executive Order appears to suggest changes to noncompetes in “labor markets,” it does not address specific limitations, instead calling on the FTC to issue rules to “curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit worker mobility.” By focusing on the “unfair” use of noncompetes and other restrictive covenants (such as, non-solicitation, no-poach, and garden leave agreements), the Executive Order appears to recognize that there are fair and appropriate uses for noncompetes. This remains to be seen. Policies implemented in enforcing a federal ban or limitation will need to contemplate the implications on an industry-by-industry or even employer-by-employer basis. Further, the FTC will need to carefully consider the scope of any ban or limitation and take into consideration employee positions, salary levels, length and scope of restrictions, and how employers can continue to protect the considerable assets in which they have invested.

Noncompetes are utilized by employers, for a specific length of time, to prevent employees from going to work for a competitor (usually in a specific geographic territory) in an effort to protect confidential information or trade secrets learned, or other assets gained, during their employment from being used for the benefit of another company. Opponents of noncompetes argue that they are being misused by employers to prevent workers from leaving for higher-paying jobs.[1] Approximately a dozen states have legislatively limited noncompetes for lower-salary employees in the past four years. Given this trend, FTC limitations or bans on noncompetes for lower-salary employees may be relatively uncontroversial, particularly for those companies already affected by state law restrictions. Conversely, limitations on noncompetes for C-suite executives and critical sales and technology employees will undoubtedly and profoundly impact businesses.

The Executive Order is the most recent move in the Biden administration’s focus on labor markets, and it comes on the heels of an uptick in the Department of Justice’s enforcement of no-poach/no-hire cases in both the criminal and civil arenas, as discussed here.

The Executive Order calls for the federalization of employment laws traditionally structured and enforced at the state level. And, there are questions as to whether the FTC has the authority to enact such a limitation or ban. In any event, a federal ban or limitation on noncompetes has far-reaching implications, with major consequences potentially affecting every industry in the United States. For example, a ban or severe limitation on noncompetes may encourage employees to seek training from one employer, then go to work for another employer after the initial employer has invested its time and resources in training the employee to work in the industry. Similarly, in the absence of a noncompete, an employee who has been exposed to an employer’s clients may not be prevented from introducing those clients, whom the employee would not have known but for the former employer, to a subsequent employer or for the employee’s own benefit if opening his or her own competing business.

The administration’s stated reason for the Executive Order is to encourage competition in the marketplace by, for example, providing employees the ability to leave a lower-paying job for a more lucrative one and increasing opportunities for small businesses. But the Executive Order foreshadows significant issues for employers relying on noncompete agreements to protect their legitimate business interests. Implementation of the Executive Order, therefore, will require a thoughtful and considered act of economic policymaking. Regulations in this arena will need to strike a balance between the overuse of noncompetition agreements by some employers and the legitimate use by other employers in protecting their proprietary information, clients and employee training.

Regardless, the Executive Order and the resulting FTC rules will certainly require all employers to carefully review existing noncompete agreements and revise or reissue them in accordance with current law. The BakerHostetler Noncompete and Trade Secrets team and Antitrust and Competition team are carefully monitoring this process and will be issuing updates as it develops.

Authorship Credit: Joyce Ackerbaum Cox, Meagan Martin, Ann M. O'Brien and John Siegal

[1] See People v. Jimmy John’s Franchise LLC, Circuit Court of Cook County, Illinois, No. 2016-CH-07746; In the Matter of the Investigation of Eric T. Schneiderman, Attorney General of the State of New York of Portfolio Media Inc., AOD number 16-106.

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