On July 9, 2021, President Biden issued his Executive Order on Promoting Competition in the American Economy. Earlier in the day, the White House issued a press release announcing that the anticipated order would, “[m]ake it easier to change jobs and help raise wages by banning or limiting non-compete agreements and unnecessary, cumbersome occupational licensing requirements that impede economic mobility.” Now that the executive order has been issued, employers are wondering: are noncompete agreements with employees now illegal as a result of President Biden’s order? Short answer – No – but employers should be on alert.
More aspirational in nature, President Biden’s order creates a new White House Competition Council and directs federal regulators to address a long list of different competition-related concerns – only one of which is noncompete agreements. In essence, President Biden’s executive order directs the Federal Trade Commission (FTC) to pursue a rulemaking process that would ban or limit the use of noncompete agreements as a matter of federal law. At this time, it is unclear whether the FTC will propose very broad limitations that could potentially ban all employee noncompete agreements, or whether the agency will take a more targeted approach, limiting regulation to restrict the use of noncompetes with lower-income employees (as several states have done), or certain employment sectors.
This is not the first time the FTC has been asked to examine possible regulations regarding the use of noncompete agreements with employees. Back in January 2020, triggered in part by a Petition for Rulemaking by a group of academics, labor, and public interest organizations, the FTC held public workshops regarding the use of noncompete agreements. More than one meeting was held and a wide variety of different proposals were discussed at that time, but no action was taken to enact a specific rule or rulemaking process.
What may be different this time around is that the Biden administration has been more directly critical of noncompete agreements and has taken the position (at least at the outset) that noncompetes should be banned or at least heavily restricted. For example, President Biden’s campaign website declared, “As president, Biden will work with Congress to eliminate all non-compete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets, and outright ban all no-poaching agreements.”
Until actual proposed rules are presented, there is no way to know if the push to limit the use of noncompete agreements will go as far as the campaign rhetoric would indicate. What the order does do is establish a White House Competition Council within the Executive Office of the President to coordinate, promote and advance a whole series of different initiatives. The chair of the FTC will be part of the Council and is specifically “encouraged to consider work 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.”
There are many miles to go yet, and many bridges to cross before we know whether the law surrounding noncompete agreements will be changed dramatically. First, there are very significant open issues concerning whether or not the authority granted to the FTC under Section 5 of the Federal Trade Commission Act is so expansive that it would allow for the FTC to essentially establish a new set of legal criteria for what is a permissible contractual restraint on an employee despite the fact that there are existing laws such as the Sherman Antitrust Act, which already govern competition and have been interpreted to allow for noncompete agreements.
Second, there is also a significant constitutional issue to be addressed under the non-delegation doctrine as to whether this exercise of executive authority constitutes executive over-reach and invades the provenance of the legislature. The previously cited press releases President Biden made during his campaign said he would “work with Congress …” on these issues, not that he would pursue them as executive action. Legislative proposals have been made to address noncompete agreements and that is the body that many believe is best to debate the complex issues raised by a proposed regulation of such agreements.1 When the FTC previously looked at regulating employment noncompete agreements, both of these significant legal hurdles were raised by Commissioner Noah Joshua Phillips and others as a major concern.
Finally, there is a significant issue of federalism and states’ rights that will have to be addressed. Across the United States there are individual state legislatures developing and implementing state law limitations on the use of noncompete agreements with employees that address the most compelling concerns – like use of noncompete agreements with low-wage workers. Under circumstances where many of the concerns raised regarding noncompete agreements are already being addressed by the new waive of state laws sweeping the nation, the argument for aggressive use of federal power to override the hard work and balancing of interests the states have already put into their evaluations of this issue could trigger some stiff opposition from those who advocate for states’ rights.