President Biden issued a new lengthy executive order (EO) on July 9, 2021, aimed at promoting competition in the United States. While that sounds great, everyone needs to keep in mind that this new EO also is aimed at noncompete agreements used by many employers across the country. Specifically, Section 5(g) of the EO encourages the chair of the Federal Trade Commission (FTC) to use the FTC’s statutory rulemaking authority “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” This new EO appears to be consistent with a “state call to action” that President Obama issued in 2016 and that we blogged about here. However, this new EO engages a federal agency rather than calling for action by states.
Background on Restrictive Covenants
Noncompete agreements, as well as related agreements such as nondisclosure agreements, non-solicit agreements, and no-poach agreements, have long been used by employers across the country. Such agreements serve an important economic purpose to protect a business’s confidential information, an employer’s methods and training, and a company’s customer and client contacts. We blogged about these various types of restrictive covenant agreements here. Many companies depend heavily on such agreements to build and protect their businesses.
It is not clear what the new EO can or will do. Regulation of noncompete agreements has long been the province of state laws — which can vary widely. While Alabama law strongly enforces noncompetes, California law will not enforce them at all. So, what the FTC’s encouraged regulations might do are unknown. The introductory language of the EO’s “Fact Sheet” notes that many workers in construction and retail industries are required to sign noncompetes and that these agreements make it harder for these workers to switch to better paying jobs. Thus, one of the aims of the EO may be to target the use of noncompetes for hourly or lower-paid workers.
Wait and See
We will keep an eye on the FTC’s response to the EO and other developments at the federal level. For example, the proposed Workforce Mobility Act of 2021 would limit the use of noncompete agreements to the sale-of-business context. As of now, the bill has been introduced in both houses of Congress and is in the committee-review stage.
For now, employers should continue to use restrictive covenant agreements thoughtfully and based upon a legitimate company interest. Noncompetes for managers and sales employees always have a greater likelihood of being enforced than noncompetes for hourly workers, no matter how skilled they are. For example, a restrictive covenant simply designed to prevent a worker from taking his or her personal skill set somewhere else faces – and will likely face on the federal level – greater challenges than a noncompete for a sales worker with access to all sorts of confidential information. We will keep you posted in the coming months of any and all shots fired at the federal level.