Are Non-Competes Doomed after Executive Order 14036?

ABSTRACT: In July 2021, President Biden recommended that the FTC develop rules curtailing the unfair use of employee non-compete agreements. How will the new rules affect the enforceability of such agreements?

On July 9, 2021, President Biden signed Executive Order 14036. The EO has inspired headlines warning that non-compete agreements as we know them are doomed. These prognoses are premature. The EO itself does not affect non-compete agreements in employment, but merely recommends that the Federal Trade Commission begin the rulemaking process with the principles of the EO in mind.

Section 5(g) instructs that “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.”

The overall tenor of the EO is that the consolidation of large corporations unfairly restricts competition. To date, the enforceability of non-compete clauses has been almost entirely governed by state law, and state laws dramatically vary on this subject. For example, California law is rather hostile to these provisions, while the laws of Missouri, Illinois, and Kansas are more in the mainstream, allowing restrictions that are appropriately limited in scope and duration.  While we have no idea what the FTC’s proposed regulation will look like, we can begin to guess by examining state laws on non-compete agreements generally.

Missouri

In Missouri, non-compete agreements are enforceable to the extent they protect a legitimate business interest, such as confidential information, trade secrets and customer contacts, and are reasonable in temporal and geographic scope. Importantly, customer contacts are protectable only as to those employees who actually interact with customers and can influence customers’ decisions. Whelan Security Co. v. Kennebrew, 379 S.W.3d 835 (Mo. banc 2012). A related restrictive covenant, the non-solicitation clause, which prevents employees from snatching up their former co-workers, is presumed enforceable for up to one year, where its purpose is to protect company loyalty, customer goodwill, and related interests. See Mo. Rev. Stat. § 431.202. For more information on Missouri non-competes, see our blog posts Non-Compete Agreements in Missouri: The Missouri Supreme Court (Once Again) Explains it All from December 2012 and Sometimes You Just Can't Compete from April 2020.

Illinois

Illinois common law generally resembles Missouri with regard to non-competes. However, in Illinois, non-competes with “low-wage employees,” an employee who earns the greater of the federal, state, or local minimum wage or $13.00 per hour, are explicitly prohibited by statute. “Illinois Freedom to Work Act,” 820 ILCS 90/5.

Kansas

The landscape in Kansas is also similar to Missouri. In Idbeis v. Wichita Surgical Specialist, P.A., 112 P.3d 81, 279 Kan. 755 (2005), the Supreme Court of Kansas established guidelines for enforcement that drafters of non-competes should note. In pertinent part, the Court held that non-competes are enforceable if they are not intended to avoid ordinary competition, do not create an undue burden on employees, and does not harm the public welfare.

What about e-Commerce?

In the Internet Age, geographic restrictions on non-competes sometimes seem irrelevant. A company headquartered in Kansas City, Missouri, may have a sales representative located in Juneau, Alaska, selling products to customers in Key West, Florida. A geographic prohibition of a 50-mile radius does not make sense. Can’t a company just prohibit its employees from going to work for a competitor?

These types of non-compete agreements, where a company identifies competitors and seeks to prohibit employees from switching teams, are likely to be an area of focus in the FTC regulations. Particularly in the post-pandemic Big Tech world, where remote work is becoming the norm, companies may seek to protect their employees from being raided by Silicon Valley with global non-competes. The tension is obvious: how will the FTC limit monopolistic raiding behavior by the Googles and Facebooks of the world and protect employees’ freedom of movement?

Employers and practitioners would do well to examine Sigma-Aldrich v. VIkin, 451 S.W.3d 767 (Mo. App. E.D. 2014). There, the Court held invalid a global non-compete that would have forbidden an employee to

“engage in, provide any services or advice to, contribute my knowledge to or invest in any business that is engaged in any work or activity that involves a product, process, service or development which is then competitive with, the same as or similar to a product, process, service or development on which I worked or with respect to which I had access to Confidential Information while with the Company anywhere the Company markets or sells any such product or service.”

The Court held that this broad prohibition sought to protect itself from regular competition. For more on Sigma-Aldrich, see our blog post Court of Appeals Affirms Denial of Sigma-Aldrich's Request for Injunctive Relief Against Former Employee. The Court instructed employers to evaluate the employee’s specific duties, use of trade secrets in their work, and then identify the protectable interest at stake, then to narrowly tailor the non-compete to protection of those interests. As always, a one-size-fits-all approach to non-competes simply does not work.

FTC’s Rulemaking Authority

Generally, a properly promulgated agency rule will preempt conflicting state laws on the same subject matter. But as an administrative agency, the scope of the rule is strictly confined to the agency’s statutory authority. The FTC can only issue a rule “where it has reason to believe that the unfair or deceptive acts or practice which are the subject of the proposed rulemaking are prevalent […],” that is “information available to the Commission indicates a widespread pattern of unfair or deceptive acts or practices.” 15 U.S.C.A. §15a(b)(1)-(3).

When can we expect this new rule to go into effect? Section 18(a) of the Federal Trade Commission Act includes rulemaking procedures that exceed those of the Administrative Procedures Act. The FTC is required to publish an Advanced Notice of Proposed Rulemaking in the Federal Register with information about the rule’s purpose and invite interested parties to comment. The FTC must also seek input from certain House and Senate committees. Then at least 30 days later, the FTC may issue a Notice of Proposed Rulemaking. 

Enforceability of Current Non-Competes After FTC Regulation

The logic of the EO is somewhat circular, given the law of restrictive covenants in Kansas, Missouri, and Illinois. By law, the FTC only has authority to regulate where there is widespread unfairness. Restrictive covenants are only enforceable to the extent they are reasonable and protect an employer’s legitimate interest in protection from unfair competition. So in theory, a non-compete that is enforceable under Missouri, Illinois, or Kansas law should also be enforceable under the FTC regulations.

Protecting Your Business Interests

There is no reason for the EO to scare businesses into abandoning non-compete agreements. However, the EO is an important reminder that now is a good time for employers to re-evaluate their non-compete agreements. Are they targeted at a protectable interest, such as customer contacts, trade secrets, and goodwill? Importantly, the EO does not address trade secrets, and Missouri, Illinois, and Kansas have already enacted the Uniform Trade Secrets Act. Employers whose businesses are dependent on trade secrets and proprietary information should consider a trade secrets agreement separate from its non-compete agreement. 

Ultimately, we will not know what the FTC seeks to regulate until their proposed rule is published. Baker Sterchi Cowden & Rice attorneys will be closely monitoring and reporting on developments in this blog.