Besides Grabbing Headlines, What Does President Biden’s Executive Order Directing the FTC to Place Limits on Non-Compete Agreements Really Mean for You or Your Business?

On July 9, President Biden issued an Executive Order on “Promoting Competition in the American Economy.” The Order directs the Federal Trade Commission to develop proposed rules that would purport to limit enforceability of certain non-compete agreements.

It is part of a larger initiative by the Biden Administration to promote competition in the American economy and allegedly remove barriers to economic growth.

Because the Order has been highly publicized, it has created a lot of confusion among business owners and high-level employees who are parties to non-compete agreements. And, there has been much debate about whether a widespread limit on non-competes will truly help businesses. In the spirit of clearing up some of this confusion, below are some key takeaways about the Order and the status of non-compete law.

1. The Law on Non-compete Agreements Has Not Changed. 
President Biden’s order does not create any change regarding the law governing your non-compete agreements. Rather, the Order simply directs the FTC to make a proposed federal rule placing limits on non-competes. But, the agency’s rulemaking process can take months or even years. There is also a question of whether the FTC has authority to regulate this area of law through rulemaking. A sweeping federal rule would be significant from historical treatment of this area and will be tied up in court challenges even upon approval of a rule. 

2. A Federal Rule Attempting a Complete Ban on Non-compete Agreements is Unlikely. 
It is presently unclear what level of regulation the FTC will attempt. But, it does not appear that the FTC will issue a complete ban on non-compete agreements. Many businesses and unfair competition lawyers, like myself, consider non-competes to be essential for employees who possess trade secrets and confidential information. This is for good reason, because documented studies show that “59 percent of ex-employees admit to stealing confidential company information” when they leave their job.  The harm caused by this loss can be substantial. Thus, when used appropriately, noncompetition agreements can be an extremely effective tool to prevent the harm caused by this type of information exfiltration.

Instead, the FTC may take a narrow approach by banning non-compete agreements for low-wage workers rather than for everyone. Several states have already done so, because these workers typically have less ability to move outside the geographic area specified in the non-compete.

3. Many Believe that the FTC Does Not Have Authority to Regulate Non-Compete Agreements. 
The enforcement or limitation of noncompete agreements has always been regulated by the individual states throughout the history of American law. Each state has its own laws about the agreements, and these laws vary widely by state. Three states (California, North Dakota and Oklahoma) have banned employee noncompete agreements altogether. A dozen other states prohibit them with low-wage workers. Most states, including Ohio, enforce agreements that are tied to protection of a legitimate business interest and reasonable in time, scope, and geography. 

Non-compete agreements are subject to the laws of individual states until the FTC issues new federal rules. Even in states where they are legal, however, courts may refuse to enforce non-compete agreements that are overly broad. For this reason, it is important for businesses to ask their legal counsel to review the agreements and ensure they comply with state law.