On July 9, 2021, President Biden signed the Executive Order on Promoting Competition in the U.S. Economy (the âExecutive Orderâ), a copy of which is available here. The College contains a myriad of proposals aimed at “promoting competition and innovation by businesses large and small, at home and around the world.” The order includes a stated effort by the Biden administration to prohibit or seriously restrict the use of non-compete agreements.
Overview of the Order’s non-competition provision
Among other initiatives, the Order encourages the adoption of strict restrictions, or even a total ban, on the use of non-competition agreements. Indeed, the order directs the Federal Trade Commission (FTC) to consider adopting rules aimed at “reducing the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit mobility. workers “. Although the College itself does not limit the use of non-compete, the College’s fact sheet lists âthe prohibition or limitation of non-compete agreementsâ as a considered objective of the Order. ‘Order. The Order justifies the need for these restrictions at the national level by asserting that the consolidation of competition “has increased the power of employers’ companies” to “require workers to sign non-compete agreements that restrict their ability to change. employment “.
The Order’s non-compete provisions should come as no surprise. Since taking office as Vice President of President Obama, President Biden has advocated for the elimination or implementation of significant limitations on the use of non-compete agreements.
Execution of the Order
This is not the first time in recent history that we have seen the White House exercise its executive authority to regulate the use of measures perceived to unfairly limit worker mobility. The Obama administration has taken aggressive action against companies accused of entering into non-poaching agreements between companies not to solicit or hire each other’s employees, culminating in the publication by the FTC and the Department of the Justice (DOJ) for their Comprehensive Antitrust Guide for Human Resource Professionals. The rationale or stated justification for these actions was that the no-poaching agreements violated federal antitrust laws. The DOJ under President Trump has continued to uplift the ante by pursuing civil and then criminal lawsuits against companies for alleged no-poaching deals, the subject of two previous alerts from Vedder Price, which can be found here and here. The DOJ under President Biden continued to issue indictments for no-poaching deals as late as last week.
Given this precedent of promoting employee mobility and sanctioning efforts to limit it, we anticipate that by developing rules to prohibit or restrict non-compete agreements, the FTC could follow a logic similar to that of the Obama administration; that is, at least some types of non-competition agreements are illegal. If the FTC follows the Obama administration’s playbook, once the new rules are final, the FTC can prosecute employers who use non-compete agreements in a manner inconsistent with the rules.
It is still unclear what the ultimate reach of the FTC rule will be, especially in light of inconsistent messages from the White House. Indeed, the fact sheet asks the FTC to consider a non-compete “ban”, the order simply asks the FTC to “reduce the abusive use non-compete clauses, âand White House statements following the order suggest that it is really meant to prevent the use of non-compete with blue collar workers and low-wage employees. The use of the term âunfairâ in the ordinance is certainly a nod to the FTC’s authority under Section 5 of the FTC Act to prohibit âunfair competitive methodsâ. Since 2015, the FTC’s policy has been to treat its authority to prevent anti-competitive behavior under Section 5 as no broader than under the Sherman Act, but in a 3-2 vote, it withdrew this policy on the same day the executive order was issued. This allows the FTC to take action against conduct that cannot violate antitrust laws (possibly including certain types of non-compete), at least unless and until the courts decide otherwise. So, while it remains to be seen to what extent the FTC will propose restrictions, the FTC will not consider itself constrained by antitrust laws in enacting them, and the current Democratic majority can be reasonably expected to pursue goals. consistent with those of Biden. administration.
Potential rejections and legal challenges
Unlike the Obama administration, which has focused primarily on non-poaching agreements between competitors, the executive order is likely to impact a much wider range of employers. Indeed, while the possibilities for the proliferation of non-poaching agreements are somewhat limited and linked to certain business arrangements or contexts, a significant portion of employers in the United States generally rely on non-competition agreements and non-solicitation to protect their legitimate business interests.
Given the wider impact of the ordinance, it is likely that the FTC rules will meet significant resistance from the business community in all sectors of the economy. As part of the FTC’s rule-making process, any draft rule implementing the ordinance will be the subject of public notice and comment. During this process, businesses and other stakeholders will have the opportunity to submit comments on the proposed rule, which must be addressed by the FTC before publishing its final rule. Although it is not guaranteed to have an impact, this process can result in changes to a proposed rule.
It is also possible that the ordinance and the corresponding FTC rule may be subject to legal review, including constitutional challenges. Historically, non-compete agreements are governed by state law. Many states have laws governing the lawful use of non-compete agreements and other restrictive covenants. Other states have decades of common law case law from state courts dealing directly with the enforceability of restrictive covenants. Thus, in the absence of federal legislation expressly preempting state law, there may be legal challenges alleging constitutional infringement and overbreadth on the part of the executive branch.
Federal legislation on non-compete agreements?
The order clearly demonstrates a willingness by the Biden administration to restrict or prohibit the use of non-compete agreements. The most direct way to achieve this goal would be federal legislation. Over the years, there have been many unsuccessful efforts to pass such legislation, and the current iteration of that legislation, the Workforce Mobility Act, has failed to gain traction in Congress.
While the Biden administration has yet to openly push for federal legislation on non-compete agreements, it would not be surprising to see such efforts in the near future. However, even though President Biden has been pushing for federal law to prohibit or limit non-compete agreements, given the current makeup of Congress and political tensions between workers and employers, it is not clear who ‘such legislation can be adopted by both the House of Representatives and the Senate. .