President Biden Signs Executive Order Encouraging Bans on Non-Compete Agreements

On July 9th, President Biden issued an Executive Order in the spirit of promoting competition within the American economy, in hopes to lower prices of consumer goods and resources, increase wages for workers, promote innovation, and accelerate economic growth. This Order addresses nationwide threats of corporate power and anticompetitive practices, as the percentage of industries dominated by large companies continues to grow and the rate of new business formations steadily declines. Competition decline coincides with concerns for slowed productivity growth, business investment and innovation decline, and widened income, wealth, and racial inequality. The President is attempting to “level the playing field” for American workers, taking decisive action to reduce the trend of corporate consolidation, increase competition, and deliver concrete benefits to America’s consumers, workers, farmers, and small businesses.

Most notably, the Executive Order criticizes the use of non-compete agreements as an obstacle to American workers, driving down wages and limiting employees’ ability to reenter the workplace when changing jobs. Non-Compete agreements act as a “barrier to competition,” under which one party agrees not to enter into or start a similar profession or trade in competition against another party, usually outlining restrictions based on time, geography, and area of business. Non-compete agreements are a type of restrictive covenants as they restrict the worker’s ability to move freely between employers and competitors within industries. Non-competes exist to protect employers from their departing employees who could potentially use protected information they learned throughout their employment to compete against their former employers. While at first, the purpose of non-competes was to provide the employer with an additional level of protection, these agreements have transformed into a manipulative tool to control former employees and eliminate threats of competition. Because most employees cannot afford the high costs of litigation, the mere threat of litigation for breach of a non-compete agreement usually results in the employer being successful in shutting its former employer’s new employment or prospective employment.  These realities are increasingly getting the attention of state legislators who seek to reform the way non-competes can be used by employers.

This attack at non-compete agreements follows research suggesting that industry consolidation is decreasing advertised wages by as much as 17%, and tens of millions of American workers are being forced into non-compete agreements. Non-compete agreements are increasingly popular among all or most industries, oftentimes trapping employees in underpaying positions. Most notably, the overuse of non-compete agreements was criticized when Jimmy John’s, the national fast-food chain restaurant, began having employees sign non-compete agreements restricting their sandwich makers from working for competitors. In President Biden’s remarks, he referenced a similar hypothetical non-compete between McDonald’s and Burger King that would disallow a McDonald’s worker from taking a job at a nearby Burger King, asking “Come on. Is there a trade secret about what’s inside that patty?”

Although President Biden is only issuing a recommendation to the Federal Trade Commission (“FTC”) to place a ban or restrictions on non-compete agreements, this Executive Order includes 72 initiatives for more than a dozen federal agencies to “promptly tackle some of the most pressing competition problems across our economy.” These initiatives favor the employee, attempting to make it easier for employees to switch between jobs, as well as encourage employers to raise wages in the spirit of competition. The White House, as noted in their fact sheet, said that “higher prices and lower wages caused by lack of competition are now estimated to cost the median American household $5,000 per year… Inadequate competition holds back economic growth and innovation.” These initiatives to restrict or limit non-compete agreements would increase worker mobility, but it is unclear still how far the FTC will set guidelines consistent with the Executive Order and in which direction. If the FTC chooses to act in response to the Presidential Order, it would be the first federal regulation of non-compete agreements, which have historically been subject only to individual state regulation.

Among initiatives suggested in the Executive Order include proposed strategies to tackle rising healthcare costs, regulate domestic commercial airlines fees, corporate consolidation of the agriculture industry, and the restoration of net neutrality. In efforts to activate many of these initiatives, the Order establishes a White House Competition Council, led by the Director of the National Economic Council, to monitor progress on finalizing the initiatives laid out and coordinate the federal government’s response to the rising power of large corporations in the economy. It is still unclear what action will be taken in response to the Executive Order, but it is likely the FTC and other federal agencies will take strides to overall shift power from large corporate conglomerates back to the working employee.

The Executive Order comes at a time where some states have passed comprehensive non-compete reforms. New Jersey has proposed legislation that will dramatically change the way non-competes can be utilized by employers and would provide employees certain rights to level the playing the field in situations where employers attempt to use these agreements inappropriately and not for legitimate business purposes.  Our employment lawyers will continue to keep a close eye on non-competition legislation and provide updates if and when it is passed.