On July 9, 2021, President Biden issued an Executive Order on Promoting Competition in the American Economy (the “Executive Order”), which directs the Federal Trade Commission (the “FTC”) to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” The Executive Order does not impact current state laws or enforceability of non-competition agreements, and as such, does not impact existing agreements. Instead, the Executive Order is a starting point for the FTC to ban or restrict the use of such agreements. The FTC has not yet responded to the directive. The FTC has previously considered these issues, as outlined in a past survey of recent trends published by Seward & Kissel.
The Executive Order reflects a long-held goal of President Biden’s: during his presidential campaign, he promised to “eliminate non-compete clauses and no-poaching agreements that hinder the ability of employees to seek higher wages, better benefits, and working conditions by changing employers,” and more recently in the Oval Office, President Biden publicly denounced the use of non-competes, calling their prevalence in the U.S. “ridiculous.”
President Biden’s Executive Order shines light on the many Congressional attempts to curb non-compete agreements. One such attempt is the Federal Workplace Mobility Act (the “FWMA”), a proposed law that has been introduced in Congress three times but has failed to pass. The FWMA, if revisited and passed, would narrow the allowable use of non-compete agreements only in extraordinary cases, such as the hiring of senior executives or in connection with the sale of a business.
It is unclear whether the FTC will take any action, and, if it does, whether it will take a broad approach and attempt to eliminate all employee non-compete agreements, or whether the FTC will focus on banning these types of restrictive covenants among lower-wage employees or in certain employment sectors. However, as a preliminary matter, the Executive Order invites several questions regarding the FTC’s authority, specifically whether the FTC has the power to enact such rules under Section 5 of the Federal Trade Commission Act (the “FTCA”) or whether enacting these types of rules would violate the Constitution’s non-delegation clause. Section 5 of the FTCA gives the FTC enforcement authority to prohibit “unfair or deceptive acts or practices in or affecting commerce,” but it is not clear if a non-compete agreement would qualify as such an act or practice under the FTCA. We expect the FTC’s authority to curb non-compete agreements to be challenged in the courts if these actions are taken.
Seward & Kissel will continue to monitor developments on the status, content and applicability of any future rules.
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If you have any questions regarding this Executive Order, or any other employment issues, please contact Anne C. Patin at (212) 574-1516, Julia C. Spivack at (212) 574-1373 or your relationship partner at the Firm.