Viewpoint: The Biden Administration Didn’t Ban Employee Noncompetes

Employers should still review and consider narrowing such agreements

By Hugh F. Murray III and Thomas F. Doherty July 20, 2021
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On July 9, President Joe Biden issued Executive Order 14036, which broadly addresses "promoting competition in the American economy." In the run-up to and aftermath of this action, some news outlets reported that the executive order would ban or did ban employee noncompete agreements. While the executive order indicated that such agreements had become too common, may be unfair and might inhibit competition, the executive order itself did nothing to change the enforceability of such agreements, which are generally governed by state law.

Employers should carefully consider the use of noncompete agreements, however, given the relatively broad range of discretion judges have in considering when and how to enforce employee noncompetes and the high-profile criticism of such agreements in the executive order. When they are necessary, employers should make such agreements as narrow and focused as possible in order to withstand scrutiny.

Aspirational Directive

Executive Order 14036 begins by extolling the virtues of a competitive economy for many constituencies, including workers, by stating that "a competitive marketplace creates more high-quality jobs and the economic freedom to switch jobs or negotiate a higher wage." The order then opines that some of those benefits disappear when too much economic power is given to a few people, noting that "[p]owerful companies require workers to sign noncompete agreements that restrict their ability to change jobs." Despite these statements, the executive order seems to recognize the current limits of federal power, at least on the part of the executive branch acting alone, as it relates to limiting employee noncompete agreements.

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A White House fact sheet noted that the administration wants to "help raise wages by banning or limiting noncompete agreements," but the entire substantive text of the executive order as it relates to such agreements reads:

To address agreements that may unduly limit workers' ability to change jobs, the Chair of the [Federal Trade Commission] FTC is encouraged to consider working 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 noncompete clauses and other clauses or agreements that may unfairly limit worker mobility.

There are, however, significant hurdles between this aspirational directive that the FTC consider steps to curtail some use of employee noncompete agreements and the promulgation of any new, legally binding restrictions on such agreements, including the following:

  • The FTC would need to first determine that it has the authority to address employee noncompete agreements.
  • Any FTC enforcement action or regulation is limited by statute to an act or practice that "causes or is likely to cause substantial injury to consumers, which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition."
  • Under the Administrative Procedure Act, the FTC would need to publish a proposed rule, solicit public comment and consider changes to its proposed rule based on such comment. That process typically takes a year or more.
  • Any adopted rule would almost certainly be challenged in court on a variety of grounds. Litigation to resolve such challenges would further slow the ultimate implementation of the rule.

In short, there are significant hurdles to any federal regulation that might restrict employee noncompete agreements, and there should be a lot of lead time for employers to review any possible regulations that attempt to do so. Again, nothing in the recent executive order actually restricts any such agreements.

However, the publicity around the executive order and the concerns that motivated the administration to issue the order may well have an indirect impact on employee noncompete agreements. Enforcement of such agreements is a matter of state law. Some states, such as California, Massachusetts and Texas, have specific statutes that make enforcement of such agreements impossible or particularly challenging. Even in states that generally allow noncompetes, there is often a bent to limit enforcement because of the impact on a worker's ability to change jobs and the general public policy against restricting trade.

Carefully Draft Agreements

Since noncompetes are now in the spotlight, more employees are likely to challenge restrictions and more courts may look at such agreements skeptically. Therefore, when drafting employee noncompete agreements, employers should take these measures:

  • Carefully follow the applicable state laws where the worker will be performing services.
  • Identify the employer's legitimate business interests that will be accomplished through the noncompete.
  • Consider having employees sign confidentiality agreements to protect legitimate trade secrets and other confidential information.
  • Limit the geographic scope of noncompete agreements to the market actually served by the employer and where the employee worked during employment.
  • Limit duration of the noncompete to as short a period as needed to protect the employer's legitimate interests.
  • Limit the use of noncompete agreements to employees who can do competitive harm to the employer because they possess trade secrets, confidential information, or company-generated relationships with customers and vendors.

As hostility toward employee noncompetes grows, employers that believe such agreements are an important part of their business model need to be even more careful when drafting such agreements to ensure they will hold up to increased scrutiny.

Hugh F. Murray III is an attorney with McCarter & English in Hartford, Conn. Thomas F. Doherty is an attorney with McCarter & English in Newark, N.J. 

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