Is the Biden Administration Getting Rid of the Employee Non-Compete Agreement?
August 6, 2021 | Daniel J. Donnellon
The short answer is: No, not at all, despite what you may have read in the Media. But many businesses have had concerns after the Administration’s recent “Executive Order on Promoting Competition in the American Economy.” The Executive Order (available HERE) establishes a Competition Council encouraging a “whole-of-government” approach across Congress, Federal Agencies, and the White House, to focus upon 72 initiatives allegedly addressing the most pressing competition problems in the American economy. The initiatives are broad ranging from Agriculture to Net-Neutrality. One specific initiative, however, Sec. 5(g) has raised eyebrows among business leaders who rely on carefully drafted, legitimately necessary, covenants that prevent employees from taking their know-how developed by the employer to a direct competitor. The provision encourages the Federal Trade Commission (“FTC”) to use its statutory rulemaking authority to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
Legitimate, narrowly crafted non-compete clauses are often the subject of injunction litigation and can serve a vital role in protecting an employer’s intellectual property and ensure its competitive advantage. See Donnellon, D.J. Injunctions and Restraining orders in Ohio 2020 Edition, Ch. 4 (Amazon KDP 2020). When I conduct an Intellectual Property Audit for business clients, I often recommend implementing non-compete agreements because they can be an important part of “promoting competition” even though they will, indeed, limit worker mobility.
Recently, American businesses have been using non-compete clauses, particularly for low-level hourly workers, as threats to restrain employees and deter legitimate competition. Often unbeknownst to the worker, those non-competes would often be unenforceable. There are plenty of cases involving an employer “weaponizing” non-compete litigation as an anti-competitive act. Imagine hiring an entry level recent college grad, forcing them to sign a one-year non-compete, firing them after 6 months, and telling them they cannot work in the only field in which they have ever had experience. It happens all too often. A few years ago, a “Venti” coffee chain came under fire for having its “baristas” (aka the people who hand you coffee and cannot spell your name) execute non-compete agreements. Such employees are barely more than minimum wage, typically have high turn-over, and were told they could not take a job at another coffee-selling business even if they were fired. Several states have restricted the use of non-compete clauses for employees earning less than $40,000 or so annually. (The dollar amounts and restrictions vary by state, but are largely designed to allow mobility for lower-level employees.) Now, the Biden Administration wants to use the power of the federal government to make the protections uniform instead of the current state-by-state solutions.
Several businesses have wondered about how this Executive Order may adversely affect their ability to maintain a competitive advantage.
- To begin with, it is important to understand that this Executive Order is essentially a “policy statement” with no legislative authority. But wise business leaders and their counsel should monitor the actions of the FTC, and potentially Congress, in response.
- It is doubtful the FTC’s rule-making authority would allow it to make broad restrictions retroactive. FTC restrictions, therefore, would likely apply to agreements or covenants entered into after it announces such restrictions. Thus, businesses that have not undergone an Intellectual Property Audit to explore whether non-compete clauses could protect them, and businesses that do not currently use this potentially important tool, should promptly evaluate whether implementing such restrictions would be beneficial. It is critical to have experienced counsel involved before having employees execute non-compete provisions. The use, and particularly the enforcement, of non-compete clauses varies by state. In general, non-compete must protect a legitimate business interest of the employer and be narrowly tailored in terms of geography, duration, and definition of “competitor” to protect only that legitimate business interest. A business that currently uses non-compete agreements should consult counsel to ensure the restrictions are not too broad or may be otherwise treated as unenforceable.
- Ironically, the language of the Executive Order is itself extremely broad instructing the FTC to target the “unfair use” of non-competes without trying to define what constitutes “unfair.” Arguably, one could consider any restriction on worker mobility “unfair” to the employee, but the FTC is likely to balance the legitimate business interests protected with the narrow restrictions on the employee. As a result, any restrictions eventually enacted are unlikely to affect a business that properly uses non-competes after consultation with counsel.
- The language of the Executive Order also broadly goes beyond the straightforward “non-compete clauses” to include potential restrictions on “other clauses or agreements that may unfairly limit worker mobility.” This could be referring to bonus forfeitures or repayment of educational expenses triggered by an employee terminating the relationship before the expiration of a certain duration. Courts generally only find such restrictions unenforceable when they are punitive or Draconian. But having some uniformity and guidance for such “other clauses or agreements” could be beneficial to the employer who wishes to include them.
Bottom line: the non-compete agreement in the American business world remains currently intact. When such experienced attorneys draft properly enforceable agreements or clauses, courts enforce them injunctive remedies. Thus, they remain a powerful tool to preserve intellectual property and competitive advantage. Consult experienced counsel to obtain an Intellectual Property Audit and/or to explore such protections for your business.