Earlier this week, President Biden issued a sweeping Executive Order titled "Executive Order on Promoting Competition in the American Economy" that, among other things, charged the FTC with banning non-competes. Naturally, this EO leaves both employers and employees with several pressing questions, including the following:
- What is the current status of the law regarding non-competes? Are they all effectively banned?
- If they are banned, is that new law only for new agreements, or does it apply to invalidate existing agreements retroactively?
- Is this ban (assuming there is one) limited to non-compete clauses, or is it broader, applying to non-solicitation of clients and prospective clients, and non-poaching clauses as well?
What the Executive Order Does Say
First, and as an initial matter, let's be clear: the Executive Order does not change any existing laws regarding non-competes. Rather, if you look closely at the EO, it provides in general terms, both the Adminsitration's thought process and reasoning for the mandate it has given the FTC, stating as follows:
"Consolidation has increased the power of corporate employers, making it harder for workers to bargain for higher wages and better work conditions. Powerful companies require workers to sign non-compete agreements that restrict their ability to change jobs. And, while many occupational licenses are critical to increasing wages for workers and especially workers of color, some overly restrictive occupational licensing requirements can impede workers’ ability to find jobs and to move between States ...
"(g) 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.
(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."
What the Executive Order Doesn't Say - or Do
Critically, as set forth above, the Executive Order does not impose any legal ban on non-competes. Rather, it is just articulating and setting forth a roadmap as to where it wants the law to go, and has charged the FTC as the particular federal agency with the responsibility of using its rulemaking authority to make these changes happen.
At the risk of stating the obvious, the EO itself is incredibly vague as to what the exact changes in these laws it seeks. First and foremost, what constitutues "unfair" anticompetitive restrictions? Certainly, reasonable minds could differ rather sharply on that issue - as they have at numerous previous hearings that have been conducted on the matter.
What Employers and Employees Should Expect - and What They Should Do
As a practical matter, there are several steps that will need to take place before any substantive changes to non-competes can or will occur at a national level. Therefore, there is certainly no need for any rash action by either employers or employees at this stage regarding existing non-compete agreements. That being said, it is clear that the current trend and trajectory is against enforcement of these clauses. Therefore, if you are an employer who is onboarding new employees, I would recommend limiting the use of restrictive covenants to higher level employees, and even then, only using language to prevent solicitation of clients and employees, in order to avoid scrutiny from the various Attorneys General, or unfavorable treatment by the Courts.