With consolidation looming large in health care, tech, social media, internet platform providers, and other industries, non-compete agreements are receiving renewed scrutiny at the political and regulatory levels. This renewed scrutiny coincides with recent bad press concerning some national employers’ injudicious uses of non-competes to restrict low-wage and rank-and-file employees.
President Biden has now targeted non-compete agreements with his July 9, 2021 Executive Order on Promoting Competition in the American Economy. The Executive Order directs the Federal Trade Commission (FTC) and other federal agencies to impose closer scrutiny on non-competition agreements and other clauses that “unfairly limit worker mobility.” In the administration’s view, many of these agreements constitute barriers to economic growth and key long-term policy initiatives.
The Executive Order’s power to change employment law and regulation is not yet fully realized, as non-compete agreements are typically creatures of state law. The Executive Order does cite larger federal statutory and regulatory initiatives, which may aid federal agencies in curtailing non-compete agreements and similar provisions going forward. No doubt, the fruits of this Executive Order will receive a good deal of scrutiny through the courts.
Baker Jenner previously published a blog on key considerations for companies wishing to protect trade secrets and other proprietary business information through varying combinations of non-compete, non-solicit, and non-disclosure agreements. Experienced counsel is important in drafting agreements that will appropriately protect your business while planning for potential regulatory changes.
What are the aims of Biden’s Executive Order?
While President Biden’s Executive Order is consistent with his campaign pledges, the scope and scale of its implementation remain to be seen. Major considerations include the federal government’s constitutional authority, existing legislation, and what Congress may be willing to pass. It would, therefore, be a surprise if President Biden’s commitment to ban or seriously curtail all non-compete-type agreements could, or should, happen.
A few of these policy considerations may bolster larger reforms. In his introductory remarks related to the Executive Order, President Biden referenced research indicating one in five blue-collar workers are subject to non-competes and as many as one in three companies require at least some employees to sign a non-compete agreement. According to a 2019 survey released by the Economic Policy Institute, nearly 60 million American workers are presently subject to some sort of non-compete agreement. Whether these arrangements actually depress wages and otherwise trap employees in dead-end jobs remains to be established through regulatory or Congressional findings.
How does existing Georgia law affect non-competes?
Georgia law remains fairly restrained for employers wishing to implement non-compete agreements and other restrictive covenants. As mentioned in our previous blog post, non-competes must protect an identifiable and legitimate business interest and outline a reasonable time for their duration and geographic scope.
As presently stated, Georgia laws regulating non-compete agreements may offer a reasonable middle ground that reflects where federal action may land. Traditionally, Georgia law has been hostile to non-compete obligations. And while an amendment to the Georgia Constitution further opened the door to non-compete obligations, other entrenched Georgia laws concerning their enforcement remain.
Non-competes are more likely to be upheld if they focus on key employees, such as those in executive or management roles. Other roles conducive to non-competes include those with access to customer and vendor information and those that play a particularized role in the development of an employer’s intellectual property which, if disclosed or used for the benefit of a competitor, could cause the employer significant harm.
The bottom line is to not abuse non-compete agreements. There is significant room for nuance within state law that necessitates strategic legal counsel for entrepreneurs and businesses seeking to protect legitimate business interests. The objective is an enforceable non-compete, which is something an experienced lawyer can help draft and plan.
Antitrust—where the Executive Order possibly has the most teeth
President Biden’s Executive Order has, as one of its principal objectives, the increase of competition as the economy emerges from the COVID-19 pandemic. In that regard, the Executive Order targets “abusive business practices” as a major restriction on diversity in the types of business and commercial activities that are important to longer-term national economic prospects. The Executive Order references the synergistic effects caused by non-competes in the context of consolidating industries and sectors as at least one cause of depressed wages, increased consumer prices, and the overall reduction in marketplace options.
In citing consolidation and the negative impacts caused by an ever-smaller pool of companies in dictating major competitive outcomes, the Executive Order directly references a major area where federal law potentially has more muscle and broader scope of action: antitrust enforcement. Section 7 of the Clayton Act, for example, prohibits mergers when the newly created entity would probably “lessen competition” in a substantial way. The Sherman Antitrust Act prohibits business arrangements that would act in restraint of trade or monopolize a region, market, or industry.
Proactive, not reactive, legal counsel is imperative
Notwithstanding the recent Executive Order’s ability to derive enforceable regulation, high-level representation is your company’s greatest asset when it comes to protecting trade secrets and other proprietary information which help retain your enterprise’s competitive advantages. The contours of restrictive covenants under evolving laws and policies invite some degree of uncertainty without deliberate and proactive legal counsel.
Baker Jenner provides innovative business solutions for innovative businesses involved in highly regulated industries. Maintaining your company’s competitive edge while efficiently managing legal obligations is our purpose. We look forward to discussing your firm’s legal needs soon.
Baker Jenner LLLP
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