Potential Impacts of President Biden's Sweeping Executive Order on Employee Covenants

On Friday, July 9, 2021, President Biden signed an Executive Order (EO) targeting anti-competitive practices in a number of ways. In particular, the EO focuses on contractual provisions in certain employment agreements that restrict the ability of an employee to move from one job to another for a certain period of time. Such restrictions are commonly known as non-competition (or non-compete) clauses, and many employers rely on such agreements to protect legitimate business interests, including the confidentiality of trade secrets as well as investment in employee training and development.

The EO directs the Chair of the Federal Trade Commission (FTC) to consider “exercis[ing] the FTC’s statutory rule-making 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.” While Taft will be following developments with respect to such rulemaking closely and publishing further updates, there are certain issues which employers should take note of at this time:

  1. It is unlikely that the EO will affect agreements that are already in place. Any new rules issued by the FTC would apply to arrangements entered into after the rules have been finalized. With that in mind, employers that have employees who are not currently subject to non-compete agreements might want to consider whether to implement some form of contractual protection for their interests in the near future — the sooner the better.
  2. The EO gives no guidance as to what constitutes an “unfair” use of a non-compete clause. Many states already have statutes or case law addressing this issue. In those states which allow some form of a non-compete clause, the key is to determine whether the employer has a protectable interest and whether the restrictions in the non-compete clause are narrowly crafted in terms of language, geography, and time to protect just that interest. Before any new rules are promulgated, employers might want to start reviewing the scope of their existing non-compete agreements to determine whether the scope of the restrictions they are currently imposing might be considered too broad for future agreements. If so, the employer should begin to develop a strategy to narrow the scope of its restrictions while still protecting its legitimate concerns.
  3. The EO also mentions “other clauses or agreements” that limit employee mobility. Could this include non-solicitation agreements or agreements that require an employee to repay tuition reimbursement or a bonus if he or she leaves the current employer within a certain time frame? While these agreements could be considered in the FTC’s new rulemaking, they are typically considered more enforceable and viewed as less “unfair” by courts. Some employers might want to consider whether these types of agreements are sufficient to address concerns about protectable interests and use them in place of a non-compete agreement in the future.
  4. It is fair to say that any broad attempt to ban non-compete agreements by agency rulemaking efforts would likely be challenged vigorously by business advocacy groups in federal court. There are current discussions in Congress about imposing limitations on non-compete agreements at the federal level by statute, but any attempt to do so without such specific statutory authority would be less likely to survive judicial review.

The Taft Employment and Labor Relations practice group will monitor and analyze this situation to determine if regulations are issued by either the FTC or the Justice Department in furtherance of this July 9, 2021 EO. In the meantime, if you have any questions, please contact us.

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