President Biden Directs the FTC to Curtail the Use of Non-Compete Clauses: Are Changes on the Way?

On July 9, 2021, President Biden signed a sweeping executive order aimed at promoting competition in the economy. The order includes 72 initiatives that President Biden says will address pressing competition problems and promote long-term growth across the economy. Among the initiatives is a direction to the Federal Trade Commission (FTC) chair to “consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority … to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” The executive order builds on a campaign promise to 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.”

In his remarks and the order, President Biden did not outline exactly what direction he hopes the FTC will take, but his remarks noted that one in three companies requires non-competes, and they are not just for “high-paid executives” but for “construction workers” and “hotel workers.” He noted “one in five workers without a college degree is subject to non-compete agreements.” It is possible the FTC might focus its rulemaking on lower wage workers. Several states, including Illinois, Maryland, Oregon, and Virginia, have already enacted bans on non-compete agreements for lower wage earners.

The order merely offers a recommendation to the FTC and does not currently change any existing law regarding non-compete clauses. The order is likely to be well received by the majority of commissioners. The newly confirmed FTC Chair Lina Khan (D) and Commissioner Rohit Chopra (D) co-authored an article in which they stated the FTC might consider rulemaking on non-compete clauses, which “deter workers from switching employers, weakening workers’ credible threat of exit, and diminishing their bargaining power.” Commissioner Rebecca Kelly Slaughter (D) has previously criticized the use of non-compete clauses and stated that she is “enthused about the provisions [in Biden’s executive order] that target anticompetitive practices that harm workers, and hope the FTC will act swiftly on the pending petition for rulemaking to address noncompete restrictions.” Commissioner Noah Joshua Phillips (R) has expressed concerns about non-compete clauses, particularly for low-wage workers, but in 2020 stated that he is concerned about whether the FTC has authority to engage in rulemaking on the subject.

The order does not indicate the extent of the proposed limitations on non-compete agreements beyond use that is “unfair.” If Chair Khan and the FTC move forward with the recommendation to curtail non-compete clauses, it seems likely that any rule-making will be focused on traditional non-compete clauses, rather than non-solicitation or confidentiality clauses.

Key Takeaways

While employers should be aware changes might be coming based on FTC action, these changes are not imminent and there is no change to the law today. Any rulemaking by the FTC will likely be the subject of litigation challenging its authority to issue a rule.

Despite the executive order, non-compete clauses remain a matter of state law, and the executive order does not necessarily mean employers must reexamine their non-compete clauses. Employers may want to take the opportunity to look at recent changes to non-compete laws (including the District of Columbia’s and Oregon’s) and be prepared for employee inquiries on what the executive order means for any non-compete clauses.

Ogletree Deakins will continue to monitor and report developments with respect to regulations related to non-compete agreements and will post updates to the firm’s Unfair Competition and Trade Secrets blog.