July 15, 2021

Change Is On The Horizon

On July 9, 2021, President Biden signed an Executive Order “Promoting Competition in the American Economy” (Order) encouraging the Chair of the Federal Trade Commission (FTC) “to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority…to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” Ultimately, the Order seeks to push higher wages and better benefits for workers and to restrict, reduce, and even ban certain types of non-compete agreement; those that may unfairly limit worker mobility.

Restrictive covenants limiting competition in employment (e.g., an individual’s ability to freely move between one employment situation and another unencumbered) have been prohibited in California since the Cal. Supreme Court decision in the case Edwards v Arthur Andersen, LLP.[1] A decision which acted as the catalyst for development of one of the strongest non-competition bans in the country. [2] Many states have followed California’s lead by passing laws restricting the use of non-competition agreements.[3] These laws, like President Biden’s Order, focus on low-wage workers and workers in specific industries found to be more vulnerable than most to anti-competition restrictions.

It is important to note the Order alone does not immediately change existing laws concerning non-compete agreements. It does however signal a watershed change to the overall enforceability of such agreements. Nonetheless, employers outside of California should take the opportunity to review and evaluate the terms of any existing restrictive agreements/language currently in use to ensure its restrictions are reasonable under the circumstances and narrowly tailored. This effort could go a long way to increase the likelihood of enforceability down the road.

When considering the reasonableness of any restrictive agreement/language, employers should consider the reasons behind any existing restrictive agreements/language (e.g., protecting legitimate trade secrets or confidential information such as intellectual property or non-pubic market information relating to the business and/or its customers) and make sure they are explicitly stated and clearly articulated.

[1] 44 Cal. 4th 937 (2008).

[2] With very limited exception, California law prohibits any unlawful restraint of an individual’s profession, company, or company property.

[3] Non-competition laws have been passed in many states including Illinois, Louisiana, Maine, Maryland, Massachusetts, Nevada, New Hampshire, Oregon, Rode Island, Washington and Washington D.C.