In early July, President Biden issued a series of initiatives via Executive Order with the intention of promoting economic growth throughout the country. One of these initiatives, the “Executive Order on Promoting Competition in the American Economy,” applies specifically to the use of non-compete agreements. The initiative directs the Federal Trade Commission (FTC) to develop rules which would make using non-compete agreements more difficult for employers.
Non-Competes Are Under Fire
President Biden has not been shy to state his position on non-compete agreements. The President described these agreements as “ridiculous” when he claimed that they are typically used only to reduce wages and prevent healthy competition. In reality, non-compete agreements are designed to protect a company’s trade secrets, proprietary systems, and confidential information from being used by a competing company, including a newly formed company by a former employee. When used reasonably, these agreements are justifiable and valuable; but many legal experts and economists have argued that these agreements often go too far, and are used more to limit competition than anything else. In fact, many states throughout the country have already imposed limitations on non-compete agreements in order to prevent abuse by employers.
FTC May Create Many New Rules
The President’s initiative directs the FTC to create rules which may limit the use of non-compete agreements, or even ban these agreements in certain contexts. So far, the FTC hasn’t developed any rules relating to non-compete agreements, but this may change in the near future. If the FTC does ban certain aspects of non-compete agreements, or limit their enforceability in some way, it will mark a critical turning point in American business culture. Traditionally, these agreements are used frequently in many industries, especially accounting and finance, and new rules could alter this landscape significantly.
Part of the impetus behind the focus on non-compete agreements has to do with how they have expanded in use. It has been reported that approximately 1 in 5 workers who signs a non-compete agreement does not have a college degree. This means that at least some portion of non-competes are directed at lower wage, hourly workers who historically would not have access to trade secret and proprietary information requiring protection. The goal of the President’s initiative appears to be promoting competition and economic growth generally, but also to unburden lower wage workers.
Because the FTC hasn’t imposed new rules on non-compete agreements, the scope of any changes to company policies regarding non-competes is uncertain. However, given the President’s statements, and the text of the initiative, we can reasonably conclude that the rules will at least target non-competes involving lower wage workers. Employers who currently use non-compete agreements for their hourly, lower wage workers who do not have access to trade secret or proprietary information valuable to a company’s competition should begin to evaluate limiting this practice and aligning the use of non-compete agreements to situations where protections are reasonable and appropriate. If these same employers believe that such agreements are integral to their business, they should begin considering steps to address the possible impact of a limitation or ban.
Contact The Frazer Firm for More Information
We will have to wait and see exactly how non-compete agreements will be affected by the upcoming rules. In the meantime, to learn more about protecting your business with a non-compete agreement or evaluating the effect of an existing non-compete agreement, reach out to the experienced business attorneys at The Frazer Firm today.
An Examination of Fiduciary Duties in a Closely–Held Corporation When business relationships turn sour, they can often become as bitter and…