American employers have used non-compete agreements for decades to limit employees’ ability to work. In 2019, non-competes were estimated to limit up to 60 million American workers’ employment mobility. Like most robust political discussions, both sides – employers and employees – have strong arguments for and against non-competes. Employers have a legitimate interest in protecting trade secrets and customer relationships. Employees, however, argue that this practice limits wages and even unfairly restrains employees’ ability to work. Enforcing or limiting non-competes has historically been left to state judicial and legislative discretion. However, a recent July 9, 2021, Biden administration Executive Order (“the Order”) asserts federal authority over non-competes and may change everything we know about them.
The Order seeks to limit the ability of employers to use non-compete agreements to restrain an employee’s freedom to work. The full scope of this unprecedented action on non-competes and how it will impact Texas employers and employees is unclear. What is clear is that both employers and employees should carefully monitor the impact of the Order and consult with employment attorneys with any questions or concerns that arise with non-competes.
Biden’s Order is very broad and states:
[T]he Chair of the 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 non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.
The FTC is a federal entity that has statutory power to promulgate rules “to address unfair or deceptive practices that occur commonly.” So, for now, both employers and employees will have to take a ‘wait and see’ approach for what exactly this means for employers, employees, and non-competes. Until the FTC promulgates explicit rules under the Order, be certain that employees and former employees will use the Order to argue that their particular non-compete is an unfair limit on worker mobility, tracking the language in the Order. The anticipation of this argument will create new challenges for employment attorneys representing both employees and employers.
The Order could be used to limit or invalidate non-competes in several ways. For example, one FTC rule could limit the geographic scope of a non-compete or provide guidance on determining whether such a limitation is unfair. Another rule may limit the time for which a non-compete is valid or give guidance on determining whether a specific time period is fair. Should the FTC invalidate all non-competes that it deems unfair, there will need to be clear guidelines as to whether that rule retroactively affects pre-existing non-competes and for what period of time. Any new FTC rules on non-compete fairness will also give guidance on what types of future non-competes will be considered fair.
One thing is guaranteed: litigation is coming. Biden’s Order intends for the FTC to curtail the unfair use of non-competes which it concludes restrains workers’ mobility. The FTC’s rules may be useful for creating a more uniform system of judgment. However, in the interim, we are left with a somewhat vague and very broad Order and the ever-varied and evolving state law on what is and is not a valid or enforceable non-compete agreement. This is becoming a complex and intensely disputed area of the law. So, naturally, employers and employees will have several questions on non-compete agreements. Our attorneys are well equipped to answer them. Call an employment lawyer today if you have any questions about your non-compete agreements.