An Overview of President Biden’s Executive Order on Non-Competes

How Does President Biden’s Executive Order on Non-Competes Affect Employers?

On July 9, 2021, President Biden issued an extensive Executive Order on Promoting Competition in the American Economy. Among other things, the Executive Order directs the Federal Trade Commission (FTC), through rulemaking, to ban or limit “non-compete agreements and other clauses and agreements that may unfairly limit worker mobility.” This client alert summarizes the Executive Order and explains what employers need to know about the status of their non-compete agreements.

Status of a Federal Ban on Non-Competes

The Executive Order does not immediately ban or limit non-compete provisions; however, it encourages the FTC to take steps to ban or limit non-compete agreements through administrative rulemaking. Notably, the scope of the Executive Order potentially extends beyond non-compete agreements because the FTC also is encouraged to limit “other clauses and agreements that may unfairly limit worker mobility.” Although these other clauses are not defined in the Executive Order, they potentially could include customer and employee non-solicitation clauses, no-hire provisions, and agreements between employer competitors not to solicit each other’s employees.

Legal experts anticipated the Biden Administration’s action since President Biden placed non-compete agreements in his crosshairs before the inauguration when his campaign website promised, “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.”

Traditional State Law Role

Traditionally, state laws have shaped the scope of non-compete agreements, and these laws vary widely in their respective regulations of non-competes. Several states, including California, Oklahoma, North Dakota, and the District of Columbia, prohibit most non-compete clauses. Other states’ legislatures have recently passed laws limiting the scope of permissible non-competes such as banning such provisions for low-wage workers, while the majority of states still enforce non-compete clauses to some degree in certain contexts.

What the Executive Order Accomplishes

The Executive Order establishes a White House Competition Council within the Executive Office of the President and will be comprised of officials from multiple government agencies. The Council will work across government agencies to “coordinate, promote, and advance Federal Government efforts to address overconcentration, monopolization, and unfair competition” in the American economy. More than a dozen federal agencies are directed to address a host of competition-related concerns across a wide range of industries. The Executive Order also encourages the Attorney General and the FTC to take steps to better protect workers from wage collusion among companies.

According to the Biden administration, non-compete agreements make it harder for workers to bargain for higher wages and better work conditions. On the other side, many employers and business owners rely on non-compete agreements to protect their proprietary information and employee training efforts; in other words, to keep employees from joining a competitor next door and using all of the information they learned from the former employer. If non-compete agreements are banned, companies will be forced to rely on complex trade secret misappropriation laws for protection of their confidential and proprietary information. It often is difficult for an employer to prove misappropriation (and prove damages) after an employee has left to join a competitor.

Bottom Line

While non-compete agreements with employees are not currently illegal as a result of President Biden’s Order, the FTC seems postured to take some action. It is unclear whether the FTC will issue a full ban, a partial ban, or take less aggressive measures, such as imposing uniform standards for restrictive covenants or banning non-compete provisions only for low-wage earners. However, any rulemaking process by the FTC will take months, if not years, to complete. Moreover, the FTC’s ability to promulgate rules limiting non-competes likely will be subject to legal challenges. It is not immediately clear whether the FTC has such expansive authority under the Federal Trade Commission Act to ban contractual non-compete agreements. It is also unclear whether the FTC has the constitutional authority to limit non-competes through the administrative rulemaking process without an act of Congress. Finally, a federal full or partial ban on non-competes would lead to conflict with many state laws regulating restrictive covenants and could trigger significant legal opposition from state’s rights advocates.

Quarles & Brady has a team of experienced attorneys that will continue to monitor the Executive Order’s initiatives. Employers should consult with counsel about strategies they can implement to protect their business in light of this fluid non-compete legal landscape, and should the FTC issue a full or partial ban. Please contact your local Quarles & Brady attorney or:

• Hans Riede: (202) 372-9529 / hans.riede@quarles.com
• Sarah Belger: (202) 372-9511 / sarah.belger@quarles.com
• Sarah Parks: (317) 399-2882 / sarah.parks@quarles.com