According to a report in the Wall Street Journal last week, the Federal Trade Commission is considering new regulations to prohibit the use of noncompetes and to target their use in individual cases through enforcement actions. Although President Biden issued a vague Executive Order early in his administration that “encourage[d]” the FTC to “consider” exercising its statutory rulemaking authority “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility,” no concrete action has been taken to date. That is not entirely surprising given that, until last month, the Commission was split 2-2 along partisan lines. What has since changed that may now make federal noncompete regulation a real possibility, however, is the appointment last month of Alvaro Bedoya to the FTC, giving the Democrats a 3-2 majority.
Lina Khan, the 33-year-old Biden-appointed Chair of the FTC, told the Wall Street Journal, “We feel an enormous amount of urgency given how much harm is happening against the workers. This is the type of practice that falls squarely in our wheelhouse.” Other Commissioners disagree. Commissioner Noah Phillips has said the agency doesn’t have legal authority to impose such rules, and Commissioner Christine Wilson said last year it was “premature” to pass a federal rule because many states had taken their own actions to address noncompetes. Indeed, noncompete regulation has been the province of the states for over 200 years.
Many lawyers who practice in the area of trade secrets and restrictive covenants – and regularly represent companies and individuals on both sides of these disputes – also disagree. Shortly after President Biden issued his Executive Order, almost 60 attorneys from across the country and the political spectrum – including Epstein Becker’s own Jim Flynn, Pete Steinmeyer, and Erik Weibust – signed a letter prepared by our friend (and EBG alumnus) Russell Beck suggesting that, even if they have the authority to regulate noncompetes (which is far from clear), the White House and FTC should leave the issue to the states, and recommending that if the FTC were to promulgate a rule or otherwise attempt to regulate noncompetes, it should be judicious and focus solely on abuses. Anecdotally, many more practicing attorneys agree with this sentiment.
Nevertheless, it appears that the Biden Administration and the FTC favor a broad federal prohibition on noncompetes. President Biden’s support of such a drastic measure is a departure from his statements as Vice President in 2016 when the Obama Administration issued its “State Call to Action on Non-Compete Agreements,” which encouraged state legislators to adopt policies to reduce the misuse of non-compete agreements and recommended certain reforms to state law books. Although he posted a lengthy message on his Facebook page at that time, linking to a White House survey that encouraged employees to share with the administration “how non-competes agreements or wage collusion are holding you down,” and expressing concern about “the improper use of non-compete agreements, where companies make workers promise when they are hired that if they leave the company, they can’t work for another company in the same industry,” then-Vice President Biden nevertheless stopped short of proposing a nationwide ban, instead promising that “the President and I will continue to fight for the dignity and respect of hardworking Americans,” including by “put[ting] forward a set of best practices and call to action for state legislators to make progress on reforms to address the misuse of non-competes.”
Whether he felt that he was being hamstrung by then-President Obama, or his position on the issue has since “evolved,” President Biden’s current position that the federal government should broadly prohibit noncompetes is not entirely surprising. During the 2020 presidential campaign, then-candidate Biden issued “The Biden Plan for Strengthening Worker Organizing, Collective Bargaining, and Unions,” which included a clear and unambiguous pledge to ban most noncompetes at the federal level should he be elected:
As president, Biden will ensure that workers receive the pay and dignity they deserve. He will: . . . 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. In the American economy, companies compete. Workers should be able to compete, too. But at some point in their careers, 40% of American workers have been subject to non-compete clauses. If workers had the freedom to move to another job, they could expect to earn 5% to 10% more – that’s an additional $2,000 to $4,000 for a worker earning $40,000 each year. These employer-driven barriers to competition are even imposed within the same company’s franchisee networks. For example, large franchisors like Jiffy Lube have no-poaching policies preventing any of their franchisees from hiring workers from another franchisee. As president, Biden will 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. (Emphasis added).
President Biden now appears to believe that he has the votes at the FTC to eliminate non-compete agreements. But, is doing so through executive action consistent with the will of the people, or even his own campaign pledge? (The former is a question that the Administration avoids to a certain extent by attempting to regulate noncompetes through executive action rather than working with Congress to pass comprehensive legislation, as suggested in his campaign pledge.) As evidenced through years of legislative debate and compromise, the issue is complex and there are no obvious fault lines, with businesses and industry groups taking strong positions on both sides of the issue. It is not easily captured in a pithy campaign slogan or a stirring populist speech.
Although legislators in many states have proposed similar bans within their jurisdictions over the years, no state has permanently done so since the late 1800s. Rather, every state that has considered banning noncompetes has ended up either doing nothing legislatively or enacting compromise legislation (Michigan passed a law banning noncompetes that was enacted in 1905 but repealed in 1985). For example, over the past few years Massachusetts and Illinois both passed more modest noncompete legislation following years-long, drawn-out legislative processes (in the case of Massachusetts, almost a decade), both of which began with proposals to ban noncompetes outright. And while the District of Columbia Council passed legislation in 2020 banning most noncompetes, it has yet to go into effect and may never (the current effective date is in October, but that date has been delayed multiple times already). And even the D.C. legislation has exemptions, including for government employees, casual babysitters, volunteers, and licensed physicians making more than $250,000 per year. In other words, despite having been tested time and again in what Justice Louis Brandeis termed our “laboratories of democracy,” no state has taken the drastic action that the Biden Administration is now contemplating for well over 100 years. The only conclusion one can draw is that it is not, in fact, the will of the people.
Of course, leaving the regulation of noncompetes to the states is not without its practical disadvantages, and necessarily results in a lack of uniformity from state to state that make it increasingly difficult to draft agreements that pass muster in all 50 states and the District of Columbia. While there are certainly pockets of activity across the nation directed at limiting noncompetes, often for low wage or non-exempt workers, there is no widespread desire to ban them outright. Several states, including Massachusetts, Illinois, Oregon, and Washington have set wage floors or other compensation requirements, and they and others have limited their applicability to certain classes of employees and in certain industries. Indeed, the Colorado General Assembly recently amended its noncompete statute to make a violation a misdemeanor, and sitting on the Governor’s desk for his expected signature is yet another amendment that would severely limit the use and enforcement of noncompetes in the state.
As a result, nationwide and multi-state employers must be diligent in keeping abreast of changes to state (and perhaps federal) law in this area so as not to find themselves in the crosshairs of civil and criminal authorities, or at the very least court rulings that their agreements are unenforceable. And this is made all the more difficult with the increase in remote workforces and the “Great Resignation” resulting from the COVID-19 pandemic. There is no easy one-size-fits-all answer anymore.
Fortunately, EBG has a deep bench of attorneys across the country who regularly counsel clients on these issues, draft and revise agreements, and litigate these issues when necessary. We have seen a barrage over the past few months alone of requests from companies to update their agreements to bring them into compliance with the laws of all states in which they have employees, and we have worked closely with each company to come up with tailor-made solutions for their workforce. While there is no need to reinvent the wheel each time, every company has different needs and risk tolerances, so some level of customization is required. We have several exciting new offerings in this regard that will be rolled out this summer and fall, so keep an eye on this blog for further updates.
As always, we will report here on any future updates to state or federal law concerning trade secrets, noncompetes, and other restrictive covenants.