Jul 15, 2021

Executive Order May Affect Non-compete Agreements

Written by: Duris Holmes

On July 9, 2021, President Biden signed Executive Order 14036 on “Promoting Competition in the American Economy.”  Of note are the order’s potential effects on contracts that contain non-compete clauses.  The order encourages the Federal Trade Commission to adopt rules “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” It remains to be seen if the FTC issues such rules and how they may be applied.  The order remarks on the use of non-competes by “powerful companies,” so it may be that the intent is to affect larger companies or those in certain sectors and particular “unfair” uses.  Several companies have been criticized in recent years for seemingly unnecessary or burdensome non-competes, such as a sandwich shop that prohibited its employees from working for a competing sandwich seller for two years after employment ended.

It is also uncertain how broad any new federal rules may be.  Will they ban non-competes entirely or impose certain limitations? Further, how will they impact state law, which has historically been the only regulation of non-competes?  At present, only three states ban non-competes, so a complete ban would be a substantial departure from the norm.

Though it is too soon to tell what may happen, businesses can plan ahead by making sure that their contracts explicitly say what state’s law applies and that they comply with that law.  Despite the past volatility in this area of the law in Louisiana, it is surprising how often contracts do not comply with statutory requirements.  Businesses should also make sure that they have “severability clauses” that allow the courts to enforce the rest of the contract in case the non-compete clause is unenforceable. 

Finally, businesses should pay special attention to protecting legitimate their trade secrets.  It is common to include trade secret protections in contracts that also contain non-competes.  This may be particularly important if the FTC issues rules that substantially impact or even ban non-competes because it is unlikely to affect trade secrets, which only got their own federal protection in 2016.