What is to be the fate of non-compete agreements?

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Fair competition is a good thing – it’s the engine behind “Economics 101” supply and demand forces at work across virtually all markets.  However, unfair competition is a bad thing, and not just in the strict sense of tortious business practices but in the more general sense of any conduct that is condoned or at least not prevented that has an anti-competitive effect.

 

Antitrust law stands for the general proposition that if a single player in a particular market gains too much power, that is bad for competition and thus bad for consumers.  In the United States, antitrust law is a collection of federal and state laws, most notably the Sherman Act, that regulate the conduct and organization of businesses and are generally intended to promote competition and prevent monopolies, price-fixing, etc.  Antitrust lawsuits brought by the U.S. Department of Justice, state attorneys general, class action plaintiffs, and others against companies such as Google, Apple, Microsoft, Facebook, and Amazon have made headlines in recent years.  Just last week, on July 7th, 36 state attorneys general filed another antitrust lawsuit against Google, now four in total that the company is facing, here specifically relating to Google’s new policy to go into effect in September forcing all app developers who want to use the Play Store to pay a 30% commission on sales.

 

Antitrust law and its push-pull among the largest companies in the world and the governments they are subject to is one thing when it comes to promoting competition, but there it’s really a power shift or balancing between global titans.  What about the “little guy”?  How are start-ups and small to midsize companies expected to compete and eventually enter the world stage with the size and inertia of these larger companies?  Well, in part, that inertia can work for and against such huge companies, as they are typically not as nimble or adaptable as smaller enterprises.  But when it comes to good ol’ fashion competition, there are still mechanisms beyond antitrust law at play that can be to the “little guy’s” advantage or at least “level the playing field” somewhat, from advertising and consumer protection laws to minimum wage and other labor laws to business regulatory and other laws.

 

A good starting point in all of this is awareness – about competition’s effects, both good and bad, and about what’s being done to foster the good competition and thwart the bad.

 

Just on July 9th the Biden Administration unveiled a comprehensive 31-page Executive Order entitled “Promoting Competition in the American Economy” and containing 72 specific initiatives spanning more than a dozen federal agencies – the full “Fact Sheet” can be viewed at FACT SHEET: Executive Order on Promoting Competition in the American Economy | The White House.  This Executive Order, if nothing else, shines a spotlight on the need for policies and practical steps to curb anti-competitive practices and promote healthy competition, which again fuels a healthy and growing economy across all sectors, including healthcare, financial services, agriculture, telecommunications, and more – the Order’s stated purpose is “to promote competition in the American economy, which will lower prices for families, increase wages for workers, and promote innovation and even faster economic growth.”  The Fact Sheet goes on to state that “higher prices and lower wages caused by lack of competition are now estimated to cost the median American household $5,000 per year.”

 

The comprehensive Executive Order addresses topics affecting businesses of all sizes and industries ranging from professional licensing subject to state authority, to equipment purchase agreements that void the warranty if any repair is done by the purchaser or an independent repair shop, to early termination penalties in telecommunications contracts as well greater scrutiny, specifically, of telecommunication company mergers that could have an anti-competitive effect or be adverse to consumers’ interests.

 

One particular legal aspect as affecting competition addressed in the Order is “non-compete agreements.”  Indeed, in reciting the overall objectives of the “Promoting Competition in the American Economy” Order, the first bullet is: “Make it easier to change jobs and help raise wages by banning or limiting non-compete agreements … that impede economic mobility.”

 

In name and effect, non-compete agreements that employees are often required to sign as a condition of employment are effectively a commitment for at least a period of time and/or within a geographical area to not work for a competitor or otherwise compete with their former employer.  In the context of the Order’s stated objective of promoting the economy and competition, it is said once again that such non-compete agreements “make it harder for [workers] to switch to better-paying options.”  While this may be true to some extent, legitimate, properly limited non-compete agreements serve the important purpose of safeguarding and preventing the misappropriation or misuse of valuable and hard-earned confidential, proprietary, and trade secret information of a business by a former employee in direct competition with that business.  Accordingly, the policy considerations and recognition and enforcement of non-compete agreements and clauses vary significantly from state to state and run the gamut from being outright prohibited or “void as against public policy” as in California to being enforceable if properly tailored or limited in scope to protect the competing interests of both employers and employees, such as here in Tennessee, though still somewhat disfavored as a “restraint on trade” and generally interpreted strictly in favor of employees.

 

As for the Executive Order’s actual handling of non-compete agreements, specifically, the sole admonishment is that “the President … Encourages the FTC to ban or limit non-compete agreements.”  Notably, the Order “encourages” the FTC to take such action, not “directs” it as with other parts of the Order addressing other issues and agencies.  So, it remains to be seen how much “teeth” this Order will even have or what action the FTC will take, when at the end of the day this is a state law issue.  But again, the Order at least has shown a light on the issue of non-compete agreements and other aspects of the economy and marketplace that may be seen as anti-competitive, and certainly the general trend continues to be toward favoring employees and disfavoring unfair competition in all forms, including non-compete agreements, particularly those that are overbroad or unreasonable.

 

In the end, the “Promoting Competition in the American Economy” Executive Order may do little more than raise awareness of these issues and foster discussion and greater attention to healthy, fair competition over time, and that’s a good thing.

 

If you are an employee that has signed or been asked to sign a non-compete agreement or an employment contract with a non-compete clause, or you’re an employer who hopes to still have reasonable non-competes in place with key employees to protect your legitimate business interests, we invite you to call or email us to schedule a free initial consultation, during which we can discuss your particular issue and see what makes sense from there.