There have been whispers of federal regulation of non-compete agreements for years. Multiple bipartisan bills aiming to ban non-competes have fallen to the wayside without traction. The Federal Trade Commission hosted a workshop in January 2020 (attended by our own Erik Winton) “to examine whether there is a sufficient legal basis and empirical economic support” to restrict non-competes.
Today, President Biden took another step toward federal regulation by issuing a sweeping Executive Order that, among many other competition-focused objectives, encourages the FTC to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
Although the White House Fact Sheet and most media reports characterize this portion of the Executive Order only with respect to “non-compete agreements,” the actual text goes further. It applies to non-compete provisions “and other clauses or agreements that may unfairly limit worker mobility.” This language arguably may include other restrictive covenants that are currently enforceable in most jurisdictions, such as customer and employee non-solicitation provisions, no-hire provisions, and non-servicing provisions.
To be clear, the Executive Order does not change the law of restrictive covenants by itself. Much remains to be done before a ban or limitation on such agreements by the FTC becomes a reality.
Again, the FTC already conducted a thorough examination of non-competes 18 months ago, and so far, nothing has come of it. Crucially, the FTC examined not only “why” it should consider regulating non-competes (a question hotly debated with ample evidence on both sides, despite the White House’s citation only to pro-regulation evidence), but also “how” the FTC could act.
Several panelists questioned whether the FTC could regulate this area of law through rulemaking even if it were inclined to do so. However, the Executive Order specifically encourages the FTC to “exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act” to regulate restrictive covenants. This process may require several steps, including publishing a detailed and specific notice of any proposed rulemaking, the draft text of the rule, and the reason for the proposed rule. Rulemaking potentially could be a years-long process.
Even if the FTC engages in rulemaking, it remains unclear what level of regulation it may pursue. Note the Executive Order encourages regulation only of “the unfair use” of non-compete clauses and other restrictive covenants. This choice of language might suggest that not all use of such agreements is “unfair,” in President Biden’s view? The ultimate scope of any rulemaking remains to be seen.
The Executive Order raises many questions and does not cause any immediate changes to restrictive covenant law. Even so, employers should start thinking about how to protect their business interests if the FTC were to ban some or all non-competition agreements or other restrictive covenants.
As many readers know, using restrictive covenants represents just one of several business protection strategies. Companies should discuss alternative strategies, policies, and best practices with their counsel. Attorneys in the Restrictive Covenants, Trade Secrets and Unfair Competition practice group are available to advise on these issues.