On July 9, 2021, President Biden issued an executive order that has the potential to significantly impact the ability of Minnesota businesses to utilize and enforce non-compete agreements. According to a White House Fact Sheet issued in conjunction with the order, the purpose of President Biden’s Executive Order on Promoting Competition in the American Economy (the “EO”) is to encourage the Federal Trade Commission (“FTC”) to “ban or limit non-compete agreements.” Specifically, the EO states in relevant part:
To address agreements that may unduly limit workers’ ability to change jobs, the Chair of the FTC is encouraged to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.
While neither the EO nor Fact Sheet detail the ways in which the FTC will seek to limit non-competes, it is likely the FTC’s goals will be similar to those announced by the Obama Administration in 2016 when it issued a State Call to Action on Non-Compete Agreements (the “Call to Action”). At that time, the White House called on state policymakers to pursue one or more of the following objectives:
1. Ban non-compete clauses for categories of workers, such as workers under a certain wage threshold; workers in certain occupations that promote public health and safety; workers who are unlikely to possess trade secrets; or those who may suffer undue adverse impacts from non-competes, such as workers laid off or terminated without cause.
2. Improve transparency and fairness of non-compete agreements by, for example, disallowing non-competes unless they are proposed before a job offer or significant promotion has been accepted (because an applicant who has accepted an offer and declined other positions may have less bargaining power); providing consideration over and above continued employment for workers who sign non-compete agreements; or encouraging employers to better inform workers about the law in their state and the existence of non-competes in contracts and how they work.
3. Incentivize employers to write enforceable contracts, and encourage the elimination of unenforceable provisions by, for example, promoting the use of the “red pencil doctrine,” which renders contracts with unenforceable provisions void in their entirety.
Assuming the FTC pursues similar objectives, there are several steps Minnesota employers can take to prepare.
First, employers should review existing non-competition agreements to ensure that they are narrowly tailored to protect a legitimate business interest, such as preventing high-level employees from using training or trade secrets gained through their employment to unfairly compete with their former employer.
Second, where appropriate employers should consider using non-solicitation agreements instead of non-competes. This type of agreement, which is limited to preventing the solicitation of current and prospective clients, is generally more favored by Minnesota courts and may not be affected by the FTC’s new mandate on non-competes.
Finally, employers should review their internal policies and procedures to ensure that they are adequately protecting their trade secrets and confidential information. One of the ways to do this is by incorporating confidentiality and non-disclosure provisions into employment contracts. Like non-solicitation agreements, this type of provision is unlikely to be affected by the EO or the FTC’s actions. In fact, the Obama Administration’s Call to Action expressly encourages employers to use non-solicitation and non-disclosure agreements in the place of non-competes.
While the ultimate impact of President Biden’s EO remains to be seen, Henson & Efron’s experienced attorneys will be here to help Minnesota employers and employees understand and adapt to whatever actions the FTC takes to “curtail the unfair use of non-compete clauses.”
The purpose of this article is merely to provide general information and may not be construed as legal advice.