During his presidential campaign, President Biden’s website declared that “[a]s president, Biden will work with Congress to eliminate all non-compete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets, and outright ban all no-poaching agreements.” This campaign promise alarmed many American employers who rely on non-competition agreements as one important tool to help protect their businesses from unfair competition.
August 26, 2021 Practice Points
What You and Your Clients Should Know About President Biden’s Executive Order Regarding Non-Competes
Employers should pay close attention to recently enacted laws and pending legislation in the states where they do business.
By Jeremy A. Cohen, Marcus L. Mintz, and Erik Weibust
On July 9, 2021, President Biden issued an “Executive Order on Promoting Competition in the American Economy,” which addresses, among other things, non-compete agreements. It does not provide much substance, however, and as discussed below, the executive order fell short of the pledge set forth on candidate Biden’s website but may reflect just a first step toward eliminating or severely limiting the use of non-competes.
As an initial matter, by acting through an executive order, President Biden did not “work with Congress” to “eliminate all non-compete agreements.” He has not proposed or endorsed congressional legislation to eliminate non-competes but has chosen to address the issue through the regulatory powers of the Federal Trade Commission (FTC)—although there is debate about how broad those powers are in this area. While executive orders and regulatory rules are often enforceable, they can be less enduring because they are susceptible to change when a new president takes office, or even if the sitting president has a change of heart.
Even at that, President Biden’s executive order does not actually direct the FTC to eliminate non-competes. Rather, it states that “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.”
By merely “encouraging” the FTC chair to “consider” adopting rules to “curtail” non-compete agreements that are “unfair,” President Biden seemingly changed tack from his campaign promise to eliminate all non-competes, and left the question to the FTC chair as to what is an “unfair” non-compete and what consideration of curtailing such non-competes may mean.
The FTC chair on the receiving end of President Biden’s “encouragement” is Lina Khan, a former law professor who is a member of the “New Brandeis” antitrust movement and was one of the principal authors of the 2019 “Utah Statement,” which set forth a series of concrete proposals for the future of antitrust law and enforcement. One such proposal is that “[b]y rule or statute, non-compete agreements should be made presumptively unlawful.” From this, it is easy to envision Chairwoman Khan pushing for the FTC’s adoption of a rule making non-compete agreements presumptively unlawful. Assuming such a rule were to be adopted, the question would then turn to how employers overcome the presumption of unlawfulness.
Many states are also considering these issues. For example, although California is the best-known example of a state that has banned non-compete agreements with employees altogether, other states are taking steps to limit their applicability. For instance, several states now prohibit non-compete agreements for employees and independent contractors who fail to meet minimum compensation requirements. On the other hand, Florida’s pro-employer restrictive covenant law created presumptions of reasonableness and enforceability for post-employment non-competes and codified the protectable interests an employer must demonstrate for enforcement, including statutorily-defined trade secrets, confidential business information, and substantial customer relationships.
With the New Brandeis movement taking root at the FTC even as the states adopt their own approaches to regulating the use of non-compete agreements, it is worth recalling Justice Brandeis’s own reference to the states as “laborator[ies]” of democracy. The FTC may well examine the results of the experiments being conducted in the laboratories of California, Florida, and other states to see how these new rules are impacting competition, the protection of trade secrets and other confidential business information, and employee mobility before forging ahead with the adoption of rules of national applicability. Ultimately, President Biden’s direction to the FTC is cause for attention, but we are still awaiting proposed federal rules, let alone authority, that would affect the current status of non-compete viability. For now, employers should pay close attention to recently enacted laws and pending legislation in the states where they do business. Employers also should keep abreast of potential rulemaking from the FTC and take the opportunity to comment on any proposed rules.
Jeremy A. Cohen is a partner with Seyfarth Shaw in New York City, New York. Marcus L. Mintz is a partner with Seyfarth Shaw in Chicago, Illinois. Erik Weibust is a parnter with Seyfarth Shaw in Boston, Massachusetts.
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