Will Non-Competes Go Extinct?

On July 9, 2021, President Biden signed an executive order with a number of initiatives. One of them asks the Federal Trade Commission (FTC) to curtail the unfair use of non-compete clauses and other clauses that unfairly limit worker mobility. The words of the order are:

“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.”

This is his first step to fulfill a promise made in 2020 when President-Elect Biden proposed his  plan for strengthening worker organization, collective-bargaining and unions.

“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.”

Banning non-compete agreements is not new

Presently, non-compete agreements are controlled by individual states. There is no federal non-compete law. Three states – California, North Dakota, and Oklahoma – prohibit non-compete agreements. For example, California prohibits contracts that restrain anyone from engaging in a lawful profession, trade or business. A recent court of appeals decision interpreting California law stated that it has been applied to employment agreements in a manner highly protective of former employees. In this case, the Court refused to enforce an agreement that required a post-employment patent assignment. The Court found that such an agreement restrained future employment under California law.

What the FTC is likely to do

President Biden‘s order directly specifies the curtailment of the unfair use of non-compete clauses. So, what’s unfair? States that allow non-compete clauses try to make them fair by requiring them to be reasonable, looking at the length of time, geographic reach, and the restricted subject matter. They also look at the employees’ access to sensitive information and involvement in research and development. Many courts already view non-compete agreements as unfair and either narrowly construe them or refuse to enforce them.

With this backdrop, there seems to be a few possible results from President Biden‘s order. First, he singled out the use of non-competes for low-wage workers as being particularly troubling.

This suggests the possibility of prohibiting their use with low-wage employees. One of the criticisms of non-competes with low-wage workers is that it’s just a way to prevent them from changing jobs. They are not in a position to know that their non-compete is likely unreasonable.

In my opinion this is the approach that the FTC will take. It is the least controversial.

Another possibility might be the prohibition of non-competes with respect to certain individuals who have no real access to sensitive information or unique training.

A middle ground might be to require non-competes to be tailored for the employee’s position within the company. This would be similar to what many state courts now require to be reasonable. Many businesses draft a non-compete with various levels of restriction depending upon the employee’s position within the business. With higher-level employees, or those having direct access to highly confidential information, receiving a much broader and stricter non-compete.

The third approach, the most sweeping change, would be eliminating all non-competes, except those to protect trade secrets. This is what President Biden suggested in his President-Elect statement. Even though trade secrets are protected under state and federal law, enforcing a non-compete would be easier than proving trade secrets have actually been taken, so there is some advantage. But this would be a substantial change to most state laws.

The takeaway

It will be some time before the FTC acts. Whatever they decide, it may then take years to be interpreted by the courts. What should be done now is to review your employment agreements. Determine what you absolutely want to protect. Consider more than one clause so that your top-level protections are tightly drafted for reasonableness, and clearly point to trade secrets and other proprietary information. Next, provide different levels of restriction for different employees. Keep reasonable in mind. Having a planned and tightly-focused agreement should avoid Court review and still be within future FTC guidelines.

With over 30 years of experience, Dickinson Wright’s William H. Honaker has extensive knowledge and expertise in all aspects of patent, trademark, trade secret and copyright matters including litigation in a broad range of technologies/industries. For his clients, many of which regularly land on the annual Fortune 500 list, he evaluates patents, trademarks and copyrights along with advising clients on the protection of inventions, trademarks and copyrightable subject matter. Bill is a highly sought-after IP attorney in part due to his proprietary client communication and project management system, The Harmony System. Connect with Bill on LinkedIn and follow him on Twitter.

Non-compete stock photo by G.Tbov/Shutterstock

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