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Analysis: FTC Encouraged to Ban or Limit Non-Compete Agreements in July 9, 2021 Executive Order; Breaks With Tradition, And Follows Trend of Heightened Antitrust Focus on Labor Markets

On Friday, July 9, 2021, President Biden signed Executive Order 14036, Promoting Competition in the American Economy, which includes—among 72 initiatives aimed at enhancing competition in the US—a directive encouraging the Federal Trade Commission to ban or limit employee non-compete agreements. 

Non-compete agreements—provisions most commonly found in employment contracts which prohibit employees from working for a competitor generally for a set period of time and/or in a set region—have historically passed legal muster (generally under state law or federal antitrust law) so long as they are narrowly tailored to address a legitimate business need. From an antitrust perspective, an employer's non-compete agreement with its own employees generally has been reviewed deferentially under the Rule of Reason:1 only after a plaintiff first meets its burden to show that a restraint on trade has anticompetitive effects in a relevant market, then defendant would be free to present the procompetitive business justifications for limiting an employee's job options (like the need to protect trade secrets) that outweigh any purported anticompetitive effects. In recent years, non-compete agreements have come under increased antitrust pressure.

 

The President's July 9, 2021 Executive Order asks the FTC to implement rules to limit or ban employers' non-competes with their employees. 

The July 9, 2021 Executive Order outlines a robust set of 72 initiatives that may shift the competition paradigm across a number of industries. One such initiative directed at the FTC "encourage[s]" the Commission to "consider" exercising its rulemaking authority to curtail broadly the use of non-compete agreements.2

The Executive Order itself does not ban non-competes, nor does it directly order the FTC to do so. The contours of any potential FTC rule restricting non-competes are thus at the FTC's discretion and will not be known until the FTC promulgates a rule. 

Additionally, the Executive Order "encourage[s]" the Attorney General and the Chair of the FTC to "consider whether to revise the Antitrust Guidance for Human Resource Professionals of October 2016,"3 which was aimed at preventing antitrust violations in employee hiring and compensation decisions.4

The rationale for the Executive Order, combined with the requested limit on non-competes, suggests that the Executive Order's requested update to the 2016 Human Resource Guidance seeks to provide additional regulations of employers including the addition of new protections of employees in line with the Executive Order's request that the FTC limit non-competes. 

In its "Fact Sheet" published on the White House website to accompany the Executive Order, the Administration explains that an FTC rule to curtail the use of non-competes is necessary because non-compete clauses are being abused to prevent workers from achieving higher wages.5 According to the Fact Sheet, in certain towns in America where there are only a few employers, workers lack the power to negotiate salaries or "demand dignity and respect in the workplace."6 In his remarks before signing the Executive Order, President Biden said that one out of three businesses require workers to sign a non-compete agreement and one out of five workers without a college education is subject to a non-compete.7

 

A single, federal-level rule limiting employer-employee non-compete agreements is a marked shift in approach, but builds off of a recent trend of targeting enforcement in labor markets. 

Oversight and enforcement of employer-employee non-compete agreements has traditionally been left to the states. While many states evaluate employer-employee non-competes on fact-specific standards, currently three states—California, North Dakota, and Oklahoma—outright ban an employer from having non-compete agreements with its employees, and several other states have limited them.8

The Executive Order's directive for the FTC to consider banning non-competes entirely at the federal level, or imposing rules to curtail their use, is a break from the traditional regulation of employment non-competes at the state level. 

Although creating one, federal-level rule for non-compete agreements between employers and employees would be a significant change, the focus on employee rights and protecting employees in the labor markets has been gaining notable antitrust momentum. 

1.    In recent years, State Attorneys General have been aggressive in challenging employer-employee non-competes and employer-employer no-poach agreements. 

There have been a recent string of enforcement actions against employer-employee non-compete contracts brought by State AGs.9 For instance, the Attorneys General of Illinois, New York, and Washington have initiated widely-publicized investigations and cases against employers who they believed have abused non-compete agreements by subjecting low-wage employees to them.10

Enforcement regarding employer-employer (or, franchisor/franchisee) "no poach" agreements has been no less active. As of June 2020, the Washington State AG's investigation alone led at least 237 corporate franchisors to eliminate no-poach agreements from their franchise agreements, including businesses in the fast food, fitness, and restaurant industries.11 Private damages class actions have followed in the wake of these State AG cases.12

In addition to agreements not to continue non-compete or no-poach practices, settlements with state AGs for such agreements have also resulted in monetary penalties.13

State Attorneys General have expressed support for federal involvement in this space—in a 2019 joint letter, 19 State Attorneys General requested that the FTC use its "rulemaking authority to bring an end to the abusive use of non-compete clauses in employment contracts."14

2.    The Executive Order comes against the backdrop of federal antitrust agencies targeting labor markets through civil antitrust investigations, and by aiming to criminally prosecute so-called "no poach" horizontal agreements between competing employers. 

For many years, the federal antitrust agencies had not vigorously pursued antitrust enforcement against no-poach agreements among competing employers. This changed about 10 years ago, the Antitrust Division investigated a number of "high tech" companies for anticompetitive no-poach agreements and obtained civil consent decrees and settlements against a number of them.15

In the aftermath of the high tech no-poach cases, in 2016, the Obama Administration DOJ Antitrust Division and FTC issued a joint Human Resources Guidance, which warns that the "DOJ intends to proceed criminally against naked wage-fixing or no-poaching agreements" between two or more horizontal, competing employers because these "types of agreements [among employers] eliminate competition in the same irredeemable way as agreements to fix product prices or allocate customers" and are "per se illegal under the antitrust laws."16 The 2016 DOJ-FTC Guidance clarifies that this warning applies only to horizontal agreements among two or more competitors not tied to legitimate collaborative activity; "legitimate joint ventures" among competing employers, the policy noted, "are not considered per se illegal under the antitrust laws."17

The antitrust agencies reinforced their warning against no-poach agreements between two or more horizontal competitor employers untethered to legitimate collaboration several times during the Trump Administration. For example, in early 2018, then-Assistant Attorney General of the Antitrust Division, Makin Delrahim, announced that the Division had a handful of criminal antitrust cases in the works against horizontal employer competitors who had agreed not to poach each other's employees.18 Shortly thereafter, the Antitrust Division issued a "Spring Update 2018" reiterating its position and outlining several Division statements and actions that reinforced the message that the Division intends to proceed criminally against no-poach agreements between horizontal employer competitors.19

In January 2021, the Trump Administration DOJ Antitrust Division filed its first criminal antitrust prosecution involving allegations that a healthcare provider had entered into a "no-poach agreement" with horizontal competitors where the companies involved allegedly agreed to not solicit senior-level employees from one another.20 On July 15, 2021, the Biden Administration DOJ Antitrust Division achieved two more indictments against two alleged co-conspirators in the same investigation, a company and a former CEO.21

Enter the July 2021 Executive Order. The July 2021 Executive Order does not necessarily suggest that the per se standard and criminal liability that the agencies seek against horizontal employer-to-employer no-poach agreements should be applied to the vertical non-compete agreements between an employer and an employee. But the Executive Order on employer-employee non-competes appears to be an expansion of the DOJ/FTC's employer-employer no-poach approach in that it aims to promote competition in labor markets by similarly establishing a single, uniform rule at the federal level – with the scope and reach of that rule not yet fully clear.

 

An FTC rule curtailing employer-employee non-compete agreements would be squarely in line with the progressive Neo-Brandeis school of antitrust thought. 

Although the Executive Order breaks with historical enforcement tradition by encouraging federal enforcement in an area that had traditionally been left to the states, this approach aligns with the new antitrust school of thought that is quickly gaining momentum. The Neo-Brandeis school of thought22 holds "big is bad" as a core tenant and focuses on using antitrust enforcement for a wide range of practices that would protect small business, fight climate change, and address social injustices. Aiming to empower the employee to negotiate more favorable wages and employment contract terms fits with these goals.23

On January 9, 2020, during Commissioner Rebecca Slaughter's tenure as acting chair of the FTC, she remarked that non-competes are often "restrictions unilaterally imposed upon workers by their employers" and would strongly support the FTC undertaking a rulemaking proceeding on non-competes.24

Prior to Professor Lina Khan's nomination as Commissioner to the FTC and then taking on the role as Chair, then-Professor Lina Khan and FTC Commissioner Rohit Chopra wrote that non-compete clauses may be ripe for federal agency rulemaking to reach anticompetitive practices because they are often not litigated due to mandatory arbitration provisions or class action waivers and "deter workers from switching employers, weakening workers' credible threat of exit, and diminishing their bargaining power."25 Furthermore, Chopra and Kahn posited in their 2020 article, an FTC rule that would apply to all employers nationwide would allow for greater reach than ad hoc adjudication: 

"In theory, workers could bring lawsuits alleging that certain noncompete clauses are anticompetitive under the Sherman Act. In practice, however, private litigation in this area is effectively nonexistent. . . . Given the paucity of private litigation challenging noncompete agreements as antitrust violations, the FTC might consider engaging in rulemaking on this issue. A rule could grant clarity as to when noncompete agreements are permissible or not. Pursuing this through rulemaking will allow for a general rule that would give notice to a much larger set of market participants than addressing noncompetes through adjudication."26

The Executive Order thus gives the FTC a green light to do what Chair Khan and Commissioner Chopra had been advocating in academic publications. 

 

What would the Executive Order's non-compete provision mean for businesses?

First, watch this space. The Executive Order itself does not ban or limit the use of non-competes, but merely encourages the FTC to adopt a rule doing so. 

Earlier this month the FTC approved changes to its Rules of Practice, eliminating internal procedural hurdles and easing its path to promulgate rules to challenge unfair and deceptive practices, under Section 18 of the FTC Act.27 The FTC may thus be motivated to move very quickly on this issue. As of now, there is no further clarity on what the rule, if any, will look like. 

But because no-poach agreements and non-competes have already been subject to legal scrutiny in recent years—by State Attorneys General and the federal agencies alike—continue to be vigilant and put policies in place that align with current law. If your company has no-poach agreements, take a look to see how defensible the justification is (e.g., access to sensitive, proprietary trade secrets, IP, etc.). This may also be an area, in industries where non-competes are common and deemed essential, for trade association advocacy. A national rule can have unintended consequences.

Second, document the pro-competitive rationales for non-competes. As there are many pro-competitive justifications for non-compete clauses, it may be challenging for the FTC to set a bright-line rule banning all non-competes or whole categories of them. The rules may necessarily need to be different depending on the industry and type of work at issue—for instance whether the position requires highly skilled workers, salaries, etc. and the access to sensitive IP, trade secrets, etc. Therefore, it is important that companies conscientiously update non-compete policies in terms of breadth, duration, and reach, and also diligently document pro-competitive rationales for any such provisions (i.e., when there has been significant investment in workers or to protect trade secrets). Companies are well-advised to begin to consider whether non-compete agreements already in place will remain enforceable should an employee seek to leave. 

Third, regardless of the form the ultimate rule takes, as FTC Commissioners have recognized, rulemaking can effectuate changes in the legal landscape faster than legislation. Change may therefore come quickly and businesses should start to examine their current practices and the potential for change. 

1 See, e.g., Caudill v. Lancaster Bingo Co., 2005 U.S. Dist. LEXIS 24621, at *9 (S.D. Ohio Oct. 24, 2005) ("Courts have consistently held that noncompetition agreements are not per se illegal, and therefore, must be analyzed under the rule of reason.); id. at *13-14 ("Plaintiffs' allegations fail to justify a departure from the well-settled rule that non-competition agreements, specifically those arising from an employee-employer relationship, must be analyzed under the rule of reason.").
2 Exec. Order No. 14036,§ 5(g), 86 FR 36987 (2021) (hereinafter "Executive Order") ("To address agreements that may unduly limit workers' ability to change jobs, the 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."). 
3 Id. § 5(f). 
4 U.S. Dep't of Just. & Fed. Trade Comm'n, Antitrust Guidance for Human Resource Professionals, October 2016, (hereinafter "2016 Human Resource Guidance")
5 FACT SHEET: Executive Order on Promoting Competition in the American Economy, White House, July 9, 2021.
6 Id.
7 White House, President Biden Delivers Remarks and Signs an Executive Order, YOUTUBE (July 9, 2021).
8 Andrea Hsu, Biden Moves To Restrict Noncompete Agreements, Saying They're Bad For Workers, NPR (July 9, 2021).
9 See, e.g., Press Release, Illinois Attorney General, Madigan Announces Settlement With Jimmy John's For Imposing Unlawful Non-Compete Agreements (Dec. 6, 2016); Press Release, New York Attorney General, AG Underwood Announces Settlement with WeWork to End the Use of Overly Broad Non-Competes that Restricted Workers' Ability To Take New Jobs (Sept. 18, 2018); Press Release, Attorney General Bob Ferguson Stops King County Coffee Shop's Practice Requiring Baristas To Sign Unfair Non-Compete Agreements (Oct 29, 2019).
10 Id.
11 Press Release, AG Report: Ferguson's Initiative Ends No-Poach Practices Nationally at 237 Corporate Franchise Chains (June 16, 2020)
12 See, e.g., Arrington v. Burger King Worldwide, Inc., 448 F. Supp. 3d 1322 (S.D. Fla. 2020); Conrad v. Jimmy John's Franchise, LLC, 2021 U.S. Dist. LEXIS 33933 (S.D. Ill. Feb. 16, 2021).
13 E.g., Press Release, Illinois Attorney General, Madigan Announces Settlement With Jimmy John's For Imposing Unlawful Non-Compete Agreements (Dec. 6, 2016).
14 Letter from Keith Ellison, Minn. Att'y Gen., to Joseph Simons, Chairman Fed. Trade Comm'n (Nov. 15, 2019).
15 See, e.g., Press Release, U.S. Dep't of Just., Justice Department Requires Lucasfilm to Stop Entering into Anticompetitive Employee Solicitation Agreements (Dec. 21, 2021); Press Release, U.S. Dep't of Just., Justice Department Requires Six High Tech Companies to Stop Entering into Anticompetitive Employee Solicitation Agreements (Sept. 24, 2010).
16 2016 Human Resource Guidance, supra note 4.
17 Id. 
18 Matthew Perlman, Delrahim Says Criminal No-Poach Cases Are In The Works, LAW360 (Jan. 19, 2018).
19 Division Update Spring, 2018
20 Press Release, U.S. Dep't of Just., Health Care Company Indicted for Labor Market Collusion (Jan 7. 2021).
21 Press Release, U.S. Dep't of Just., DaVita Inc. and Former CEO Indicted in Ongoing Investigation of Labor Market Collusion in Health Care Industry (July 15, 2021).
22 Dubbed the "New Brandeis" school, the progressive antitrust movement is named after Supreme Court Justice Louis Brandeis who championed the ideas that corporate bigness posed risks to democracy.
23 Greg Ip, Antitrust's New Mission: Preserving Democracy, Not Efficiency, WALL ST. J. (July 7, 2021).
24 Rebecca Slaughter, Remarks at the FTC Workshop on Non-Compete Clauses in the Workplace, New Decade, New Resolve to Protect and Promote Competitive Markets for Workers (Jan. 9, 2020).
25 Rohit Chopra & Lina M. Khan, The Case for "Unfair Methods of Competition" Rulemaking, 87 U. Chi. L. Rev. 357, 373 (2020).
26 Id. at 373-74.
27 Press Release, Fed. Trade Comm'n, FTC Votes to Update Rulemaking Procedures, Sets Stage for Stronger Deterrence of Corporate Misconduct (July 1, 2021).

 

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