Biden Issues Order aimed at business competition, which will limit use of non-compete agreements.
On July 9, 2021, President Biden issued a broad executive order designed to increase competition among American businesses, as well raise wages for American workers. The Order titled, “Executive Order on Promoting Competition in the American Economy,” contains over seventy-two different initiatives, and instructs over a dozen federal agencies to issue rules promoting business competition in such disparate areas as anti-trust, airline baggage fees, medical devices and the importing of generic drugs from Canada.
Of immediate interest is the portion of the Order instructing the Labor Department to issue rules limiting the use of employment non-competition agreements – documents which attempt to prevent a business’s employees from changing jobs to work for the business’s competitors. Currently, these “non-compete” agreements are primarily governed by state laws, which vary greatly across the country. Most states allow non-competition agreements in some form, although their enforceability varies greatly. In most states, employers are allowed to protect their “legitimate business interests,” which usually means confidential information, trade secrets, client good will and other information developed by the employer. The new Executive Order, although it does not contain specifics about final administrative rules, is expected to create a presumption that these agreements are not enforceable unless they are tightly tied to legal trade secrets, are used with highly-compensated executives, or in other narrowly-defined areas.
The White House press release on the Executive Order claims that lack of competition among businesses has increasingly become a problem, both because of consolidation and mergers, and because businesses share wage and pricing information (arguably in violation of federal anti-trust requirements). The press release claims that lack of competition costs the average American family $5,000 per year in lost wages and increased prices.
Interestingly, in 2016 Congress passed, and President Obama signed, the Defend Trade Secrets Act, which essentially federalized the Uniform Trade Secrets Act, and made it national policy that employers could legally protect their trade secret information. Thus, only five years later, the federal government seems to be moving in the opposite direction.
States in the upper Midwest vary greatly regarding enforceability of non-compete agreements. In Minnesota, Iowa and South Dakota, the agreements are generally enforceable, so long as they attempt to protect a reasonable employer interest and are reasonably limited in both geography and time. Wisconsin courts take a narrower approach and require higher showings of proof to establish a “legitimate business interest” and a reasonable limitation on employee competition. North Dakota essentially bans the use of non-compete agreements entirely. Thus, employers who do business throughout the Midwest have been required to carefully draft their agreements in order to maximize their effectiveness across state lines.
The Labor Department will presumably begin the formal rulemaking process before issuing any new regulations. That process allows for public comment and testimony, and generally takes at least several months. This blog post will be updated as more information becomes available.
Executive Order: https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/
FACT SHEET: Executive Order on Promoting Competition in the American Economy | The White House (Whitehouse press release on Executive Order)
PUBL153.PS (congress.gov) (Defend Trade Secrets Act of 2016)
Do you have a legal question regarding non-compete agreements or an employment related matter? Give Parker Daniels Kibort a call at 612.355.4100.