New Biden Executive Order Places Increased Focus on Noncompete Agreements and Antitrust Enforcement

July 27, 2021 | Insights

By Gary Fowler, Edwin Buffmire, & G. Scott Fiddler

On July 9, 2021, as part of an executive order announced to promote competition and increase wages for workers, President Biden directed the Federal Trade Commission to consider two key areas affecting employers: first, “to ban or limit noncompete agreements”; and second, to revise the Antitrust Guidance for Human Resource Professionals of October 2016 (the “2016 Antitrust Guidance”).

Notably, because the action asked only the FTC to “consider” such changes, it did not, in and of itself, change existing law. However, it reflects a growing trend to use antitrust law in the employment context that has been part of all three past administrations. Employers—and HR professionals—should be familiar with these laws to ensure that they do not accidentally trip the antitrust wire of both civil and criminal (and personal) liability.

Indeed, two recent federal criminal indictments by the Department of Justice highlight the increased scrutiny that enforcement officials will be placing on employment practices. In one case, the Department of Justice alleges that a large outpatient medical facility provider enforced its no-poach agreements, including by instructing recruiters to not recruit from a competitor and refraining from soliciting senior level employees of a competitor, among other alleged conduct that the Department argues violates the antitrust laws. In another matter, the Department of Justice obtained indictments against the former owner of a therapist staffing company, and others, for alleged wage-fixing of physical therapists in north Texas arising from an alleged agreement with other companies to reduce the wages they paid therapists and therapist assistants. Defendants in both actions are fighting back against the government’s allegations of any illegal conduct, and the courts may ultimately determine whether the alleged conduct occurred and whether it violated antitrust laws.

The application of antitrust laws in the employment context reflects two fundamental principles. First, federal and state antitrust laws have always applied to the labor market. As the 2016 Guidance reminded Human Resource Professionals, “From an antitrust perspective, firms that compete to hire or retain employees are competitors in the employment marketplace, regardless of whether the firms make the same products or compete to provide the same services.” Second, noncompetes are subject to antitrust principles. Indeed, the statute that allows noncompete agreements in Texas—codified at Tex. Bus. & Comm. Code §§ 15.50-52—is an express exception to Texas’ prohibition of illegal restraints of trade found in Tex. Bus. & Comm. Code § 15.05. As the Texas Supreme Court recognized in DeSantis v. Wackenhut Corp., “As a general rule, unreasonable restraints of trade, including unreasonable covenants not to compete, contravene public policy.”

Because covenants not to compete are permissible only as an exception to the general rule that unreasonable restraints on trade are illegal, it is not surprising that recent administrations have looked to enforcement through the Department of Justice or the Federal Trade Commission to curb abuses in the use of noncompete agreements. In 2016, the sandwich shop Jimmy John’s entered into two antitrust-suit consent decrees under suits brought by New York and Illinois attorneys general agreeing it would not enforce noncompete agreements against low-wage earners at its shops.

Similarly, the announcement by the Biden administration focused on the use of noncompete agreements against low-wage workers, rather than executives, research developers, or those employees who have access to or develop trade secrets.* For example, in announcing the executive order, President Biden said, “At least one in three businesses require their workers to sign a noncompete agreement. These aren’t just high paid executives or scientists who hold secret formula for Coca-Cola so Pepsi can’t get their hands on it. A recent study found one in five workers without a college education is subject to noncompete agreements.”

* Section 5(g) of the Executive Order directs that Chair of the FTC “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.”

Of course, many employers who have such “form” noncompetes with all of their employees generally do not attempt to enforce them except when there is an actual threat to their business interests. But the Biden administration’s concern is that such agreements, even when not enforced, lower wages by potentially intimidating both employees and potential new employers from hiring low-wage workers. And while the emphasis appears to be on banning noncompetes for low-wage earners, the FTC may draw the line much closer to that adopted under California law, where employment noncompetes are generally prohibited.

Another part of the executive order should not be overlooked. To better protect workers from wage collusion, the executive order also directs the FTC to consider whether to “revise the Antitrust Guidance for Human Resource Professionals of October 2016.”

Employers and HR professionals should be familiar with the 2016 Antitrust Guidance, particularly so in light of this renewed emphasis. Among other things, the 2016 Antitrust Guidance reminds employers and HR professionals of both personal and criminal liability for agreements among employers that restrict hiring or “poaching” workers. The guidance notes the following two examples of when individuals and their employer are likely breaking the antitrust laws:

  • Agreeing with individual(s) at another company about employee salary or other terms of compensation, either at a specific level or within a range (so-called wage-fixing agreements), or
  • Agreeing with individual(s) at another company to refuse to solicit or hire that other company’s employees (so-called “no poaching” agreements).

The 2016 Guidance noted prior civil enforcement actions against an Arizona health care association to set a uniform bill rate schedule for temporary and per diem nurses and against Silicon Valley tech companies that entered into “no poaching” agreements with competitors. All of these civil actions resulted in consent decrees to end the alleged activities.

How might the FTC or DOJ seek to implement the executive order and revise the 2016 Antitrust Guidance? Of course, that remains to be seen but employers and HR professionals should expect significantly increased antitrust enforcement in this area, which is already beginning to take place. Further, the executive order’s directive for the FTC to consider limiting or banning noncompetes and the 2016 Antitrust Guidance could lead the FTC to address noncompetes in a revised antitrust guidance, a subject that the 2016 Guidance expressly avoided.

What should employers do now? First, employers should ensure that recruiters and others involved in hiring know that any agreement among employers to fix or limit wages or not hire a competitor’s employees is a landmine best avoided. Second, employers should use noncompetes appropriately. For example, while it is probably okay for an employer to require all employees to sign a nondisclosure agreement, noncompetes should be limited to those employees who have received truly specialized training; those with knowledge of trade secrets or confidential information; or those who may use the company’s goodwill against it. Third, both executive teams and their human resources departments should ensure that their internal antitrust compliance policies and procedures are up to date, understood by all, and implemented appropriately in light of the significantly increased risk exposure in this area.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for informational purposes only and does not constitute legal advice. For additional assistance related to these issues, please contact the authors or an attorney in Jackson Walker’s Labor & Employment or Antitrust practices.