July 13, 2021

President Biden Targets Non-Compete Agreements in New Executive Order on Promoting Competition

As part of “a whole-of-government effort to promote competition in the American economy,” President Biden’s July 9, 2021 Executive Order on Promoting Competition in the American Economy (E.O.) encourages the Federal Trade Commission (FTC) to ban or limit non-compete agreements. In doing so, President Biden continues — and potentially accelerates — what to date has been a piecemeal effort conducted almost exclusively at the state level to limit, and in some cases prohibit, the use of non-competes, particularly for low-wage workers.

What Is Driving the E.O. as It Relates to Non-Competes?

The Biden administration is clearly concerned about the perceived lack of labor mobility and what it sees as the artificial depression of wages, and it believes that non-compete agreements — particularly for employees at the lower end of the wage scale — contribute to these issues. Although the E.O. itself does not create new rules or prohibit or limit non-compete agreements, the “FACT SHEET” that accompanied the E.O. makes the administration’s intent clear: it wants the FTC “to ban or limit non-compete agreements.”

How Does the E.O. Impact Non-Compete Agreements?

The E.O. identifies non-compete restrictions as one way that companies stifle competition, and it encourages the FTC to ban or limit non-compete agreements. It also encourages the FTC to ban unnecessary occupational licensing restrictions that impede economic mobility.

To effectuate these goals, the E.O. encourages the Chair of the FTC 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.” Absent from the E.O., however, (and thus presumably yet to be determined) is what specifically should be curtailed, including: whether the restrictions are to extend across the entire labor market or focus on a particular segment (such as low wage workers); whether the restrictions will apply in a sale of business context; what exceptions may apply; what impact the rules will have on state law (which in many cases is well-developed); whether the restrictions should come in the form of an outright ban or mere procedural safeguards (such as notice requirements or payment provisions); whether the rules will apply to less onerous employee restrictions (such as customer non-solicitation restrictions), and the like.

Does the E.O. Have Other Employee-Focused Changes?

The E.O. also references the FTC and Department of Justice’s (DOJ) October 2016 Antitrust Guidance for Human Resource Professionals. That Guidance states, in part, that “[a]n individual is likely breaking the antitrust laws if he or she … agrees with individuals at another company to refuse to solicit or hire that other company’s employees.” The Guidance goes on to state that “the DOJ will criminally investigate allegations that employers have agreed among themselves … not to solicit or hire each other’s employees.” And, in fact, the DOJ has made good on its threat to bring actions, some of which are discussed in the Guidance. Others have been more recent and are discussed in this 2019 DOJ Antitrust Division posting.

The E.O. encourages the FTC and the Attorney General to consider whether to revise this Guidance, no doubt with an eye towards increasing its reach and possibly extending it to the non-compete space. It appears from the accompanying FACT SHEET that the administration also wants the Guidance expanded to limit how employers may share wage and benefit information with each other.

How Will Changes Occur?

The E.O. specifically charges the FTC with addressing non-competes. However, as discussed in a Faegre Drinker alert focusing on the E.O.’s impact on food and agriculture companies, the E.O. includes 72 initiatives by more than a dozen federal agencies. The E.O. also establishes a White House Competition Council (Council) within the Executive Office of the President, led by the Assistant to the President for Economic Policy and Director of the National Economic Council, who shall serve as Chair of the Council. In addition to the Chair, the Council is made up of the Secretary of the Treasury, the Secretary of Defense, the Attorney General, the Secretary of Agriculture, the Secretary of Commerce, the Secretary of Labor, the Secretary of Health and Human Services, the Secretary of Transportation, the Administrator of the Office of Information and Regulatory Affairs, and the heads of such other agencies and offices as the Chair may from time to time invite to participate.

While many different agencies will clearly be involved in the initiatives and efforts identified in the E.O., it is the FTC that is the focus in the non-compete space given its charge, as articulated in a July 7 White House Press Briefing, “to adopt rules that curtail non-compete agreements.” No such rules are in place yet (and likely will not be for some time), and the E.O. does not require any immediate action by employers or change current law. Change is likely coming though, and while we do not believe that the FTC will pursue an outright non-compete ban, we do expect that, at a minimum, the anticipated rules will target lower wage workers. Employers would thus be wise to begin to evaluate the scope of, and need for, non-compete restrictions generally, particularly for low wage, blue-collar, and other non-executive employees. Employers should also ensure that other safeguards are in place, such as protections related to the sharing, use, and taking of company confidential information.

Faegre Drinker will continue to monitor these developments and provide further updates when available.

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