New Executive Order May Have Dramatic Impact on Noncompete Agreements

President Biden’s new executive order could bring changes for employers that rely on noncompetition agreements to protect trade secrets. In a sweeping executive order, Biden asked the Federal Trade Commission (FTC) to ban or limit noncompetes. He argued that these agreements limit economic growth and prevent competition.

The stated goal of the order is “[t]o address agreements that may unduly limit workers’ ability to change jobs, the Chair of the FTC is encouraged to consider working with the rest of the Commission to exercise the FTC’s rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of noncompete clauses and other clauses or agreements that may unfairly limit worker mobility.”

The order itself, though, does not invalidate current noncompetes. It also does not contain language that makes banning or limiting them an objective of the FTC’s mission. So it is unclear what immediate impact the order will have on businesses that rely on noncompetes.

It is also not clear whether a final rule would include a full ban or merely limit when noncompetes can be enforced. As it stands, there is general consensus that noncompetes are inappropriate for low-wage workers. For example, sandwich chain Jimmy John’s agreed to stop requiring workers to sign noncompetes that banned them from working at one of the chain’s competitors for two years. As such, it is likely that a final rule will, at a minimum, limit the enforceability of noncompetes for workers on the lower end of the wage scale. The impact on high-wage earners with specialized skills is less clear. Worries about intellectual property and trade secrets may lead to pushback from the business community if the final rule limits noncompetes for higher-level employees.

Even a partial ban, however, could have a major impact on businesses. According to media reports, “[t]he White House estimates that noncompete agreements are used by roughly half of private-sector businesses for at least some of their employees, affecting between 36 and 60 million workers.”

A ban would likely affect small and mid-size businesses the most, since they may struggle to protect their trade secrets without the enforcement of noncompetes. Instead, companies will need to rely on laws regulating unfair trade practices to protect their business secrets – many of which vary across jurisdictions.

In the wake of the executive order, businesses should consider taking these steps:

• Review their current policies to assess whether noncompetes are needed for all positions.
• Consider adding limits to the duration, geography and scope of noncompetes if they are restricted but not fully banned.
• Consider state laws that ban or limit the use of noncompetes, as they may serve as a model for federal rulemaking. For example, California, North Dakota and Oklahoma have outright banned noncompetes. Other states, like Louisiana, require strict limits on their use, such as geographic and duration restrictions.
• Look at other ways to encourage valued employees to remain with the company, removing the need for a noncompete.

Please contact Michael B. Victorian or any member of Phelps’ Labor and Employment team if you have questions about how these developments might impact you and your employees.