On July 9, 2021, President Biden signed an Executive Order which directed the Federal Trade Commission to curtail the use of non-competes nation-wide in order to help promote competition and expand the economy. At the moment, only three states forbid the use of non-compete clauses in employment agreements: California, North Dakota and Oklahoma. Nearly one dozen states – including Massachusetts – have put tough restrictions on the use and enforcement of non-compete agreements irrespective of which employees are required to sign same.
White House Press Secretary Jen Psaki made the following statement on the issue last Wednesday:
[R]oughly half of private sector businesses require at least some employees to enter [sic] noncompete agreements, affecting over 30 million people. This affects construction workers, hotel workers, many blue-collar jobs, not just high level executives[.]
The Executive Order calls upon the Federal Trade Commission or FTC to adopt rules which would drastically cut the use of non-compete agreements nationwide. Congress has on many occasions tried but failed to pass legislation which would ban non-competes.
The Biden administration views these efforts as a means of establishing a government-wide approach to promote competition across the nation. The administration believes banning or curtailing the use of non-competes nationwide will facilitate “job fluidity” and increase competition among American businesses. Under the new regulations, there will be some narrow exceptions to non-compete use, but these exceptions have yet to be promulgated.
The FTC authority to do what the President has asked in the Executive Order regarding non-competes is somewhat questionable. Typically, the FTC enforces federal statutes passed by Congress and signed into law by the Chief Executive. It may also issue regulations attendant to enforcement of the acts of Congress.
In this instance, there is no federal law concerning non-compete agreements. Their use is exclusively governed by state law – either statutory as in Massachusetts since 2018 – or common law, which goes back centuries regarding non-compete enforcement.
Also questionable is the idea that non-competes stifle employment and thus hurt the national economy. Statistics on unemployment have shown that the Silicon Valley rate of unemployment – where non-competes are outlawed – has many times been in double-digits, while at the same time the unemployment rates in states allowing non-competes and their private enforcement, have been in low single digits.
Thus, the need for the FTC non-compete action ordered by the President, and its nationwide enforceability, remains the subject of debate.