President Biden Asks FTC to Enact New Rule Limiting Non-Compete Agreements

On Friday, July 9, 2021, President Biden issued an Executive Order that seeks to promote competition in the American economy.  Among the 72 initiatives set forth in the Executive Order, President Biden asked the Federal Trade Commission (“FTC”) to consider enacting a rule “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”  In a corresponding press release, the White House claimed that roughly half of private-sector businesses require at least some of their employees to enter into non-compete agreements, impacting somewhere between 36 to 60 million American workers, and that these non-competes suppress wages and inhibit worker mobility by making “it harder for them to switch to better-paying options.”  While the Executive Order does not specify what type of rule President Biden would like the FTC to enact, the press release confirmed that President Biden “[e]ncourages the FTC to ban or limit non-compete agreements.”

It is unclear when the FTC will begin to evaluate any proposed rules banning or limiting non-compete agreements, much less when any rule would go into effect.  The enforceability of non-compete agreements has historically been left to the courts and state legislatures.  Throughout the last decade, numerous states have enacted legislation outright prohibiting the use of non-competes or significantly restricting the circumstances in which they can be used.  There have also been several high-profile cases where companies have been scrutinized for requiring non-competes for low-wage workers (see Jimmy John’s former non-competes with its “sandwich artists”).  President Biden’s Executive Order follows this trend at the federal level.

Bottom Line

So should employers read the writing on the wall and toss their non-compete agreements into the trash bin?  Not necessarily.  It seems unlikely that the FTC will enact a rule that bans all non-competes outright, as that would lead to a storm of legal challenges by business groups.  It is more likely that the FTC will focus on prohibiting non-compete agreements with low-wage workers, or potentially seek to limit the circumstances in which they can be used and the length of the restriction.  Our advice to employers looking to have non-competes will continue to be the same – only use them when they are necessary to protect your legitimate business interests, trade secrets, and customer relationships (as opposed to blanket non-competes that every employee must sign), and limit the scope of your non-competes to the geographic area in which the employee works and lean towards using customer-based restrictions for most employees.  Following these general principles will likely lead to having a court enforce your non-compete agreement if ever necessary and, if the FTC outright bans or severely restricts non-competes, the silver lining may be that it will be just that much easier for you to hire your competitor’s employees.