What You Need to Know
- The president’s order is designed to promote competition and limit unfair corporate business practices that hinder economic growth.
- Noncompete agreements can hurt a worker’s ability to change jobs at will. Most states, therefore, limit their use.
- The order encourages the FTC to ban or limit noncompete agreements; it's controversial because this has always been regulated by the states.
President Joe Biden recently issued a far-reaching executive order (EO) encouraging the Federal Trade Commission to ban or strictly limit the use of noncompete agreements on a nationwide basis. While the order does not ban noncompetes outright, the White House fact sheet on the order lists “banning or limiting noncompete agreements” as one of its objectives.
Biden’s executive order is designed to promote competition and limit unfair corporate business practices that hinder economic growth. If the FTC acts, however, this order could have a significant impact on small-business clients that rely on noncompetes to protect their trade secrets, IP, customer lists and other confidential business information. Small-business clients should be advised as to the scope of the order — and consider acting now to protect themselves if necessary.
Background on the Use of Noncompete Agreements
Noncompete agreements are typically used to prevent employees from taking jobs with competing businesses in a certain geographic area for a limited amount of time. Employers often rely on these agreements to prevent former employees from disclosing trade secrets and proprietary business information to a new, competing employer. These agreements are designed to prevent both intentional disclosure and the unintentional disclosure that is often inevitable when the employee starts working for a new employer.
While there are other legal methods of protecting this information (such as nondisclosure agreements, trade secret law, etc.), noncompete agreements are typically the most effective because they simply prevent the employee from entering a situation where the former employer could be harmed.
Noncompete agreements, however, are often criticized because they can hinder a worker’s employment prospects and ability to change jobs at will. Most states, therefore, limit their use. State laws typically require noncompete agreements to be reasonable in geographic scope, duration, and the type of work the employee is prevented from accepting.
When a noncompete agreement is overly broad, state courts can get involved to modify the agreement (providing more limited protection to the employer), render the overly broad provision not enforceable or throw out the entire agreement. The possibility of court intervention often motivates employers to draft agreements with narrow provisions specifically designed to protect confidential business information while not unfairly limiting the employee’s ability to change jobs.