A “non-compete” is, typically, a contractual covenant ancillary to an employment arrangement that that limits the ability of an employee to compete against an employer for a certain period of time, and in a certain capacity, following separation of employment. Such provisions are designed to protect certain proprietary information and business goodwill. It is important to note that non-compete provisions differ from “non-solicitation” covenants, which restrict an employee’s ability to solicit and/or do business with an employer’s clients. According to a recent article in the Wall Street Journal, approximately 32% of companies in the United States choose to require their employees to be bound by a non-compete provision regardless of position or pay.

Historically, the regulation of non-competes has been left to the individual states. Such state laws generally follow the principle that the restrictions on employees must not be any greater than necessary to protect the employer’s legitimate business interests. To determine whether a restriction is not greater than necessary to protect the employer’s legitimate business interests, state courts typically evaluate whether the non-compete provision is reasonable in time, geography, and scope, although the interpretation of what constitutes “reasonable” varies among jurisdictions.

Over the years, stark differences have emerged have emerged between various states concerning the enforcement of non-competes. For example, some states, like California and Colorado, have enacted strict, broad bans on non-competes, prohibiting most non-competes and only enforcing them under narrow circumstances. In March 2021, the District of Columbia enacted the broadest ban on non-competes, prohibiting employers from requiring or requesting that any covered employee sign a non-compete provision and rendering all non-compete provisions entered into after the ban’s effective date unenforceable. Other states, like Illinois and Maryland, have enacted partial bans on non-competes, restricting employers from enforcing non-competes against lower-wage workers. Over the last few months, a handful of states, including New Jersey, have enacted or proposed similar partial bans that rely on workers’ compensation to determine if they are enforceable.

On July 9, 2021, President Biden signed the Executive Order on Promoting Competition in the American Economy, which encourages the Federal Trade Commission (“FTC”) to employ its statutory rulemaking authority “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” Executive Order, Section 5(g). While the Executive Order appears to only encompass the “unfair use of non-compete clauses,” President Biden’s explanatory statement makes clear that the President is encouraging the FTC to ban or limit all non-compete agreements.

Whether the FTC has the authority to place any restrictions on non-compete provisions is unclear. The FTC enforces both consumer protection and antitrust laws. Section 5(a) of the FTC Act provides that “unfair or deceptive acts or practices in or affecting commerce . . . are . . . declared unlawful.” 15 U.S.C. § 45(a)(1). Unfair methods of competition include any conduct that would violate the Sherman Antitrust Act, and the Sherman Antitrust Act has generally been interpreted to allow non-compete agreements under certain circumstances – e.g. where their scope is deemed reasonable.

After balancing President Biden’s encouragement of a total ban of non-competes with the states’ partial bans on non-competes, it is unclear how the FTC, if it ultimately has authority, will address and/or limit non-compete agreements. Therefore, companies are encouraged to continue to review their non-compete provisions for compliance with state law while continuing to monitor new developments at the federal level.

Key Takeaway #1: The Executive Order has not taken effect. The text of the Executive Order has not been released, and the Executive Order only calls for the FTC to take action. It’s still unclear if and when the FTC will take action and impose any regulations on non-compete agreements.

Key Takeaway # 2: It is unclear what authority, if any, the FTC currently to act on this Executive Order. While the FTC has authority under Section 5 of the Federal Trade Commission Act to enforce consumer protection and antitrust laws, it is unclear whether it has authority to establish new criteria for permissible restrictive covenants on employees. The Sherman Antitrust Act has been interpreted to allow non-compete agreements. Similarly, regulations regarding restrictive covenants have been left to the states to control.

Key Takeaway # 3: State laws are changing and employers are encouraged to review their non-compete provisions for compliance with state law.

If you would like further information about the new proposed rule or would like assistance in reviewing your non-compete agreements, please reach out to one of the author(s) listed in this alert.