Employers who use noncompete or nonsolicitation provisions should expect to see an increase in antitrust regulation and possibly civil litigation in light of President Biden’s recent Executive Order on Promoting Competition in the American Economy.
The Executive Order
Issued on July 9, the Executive Order highlights how industry consolidations have “increased the power of corporate employers” and made it harder for workers to negotiate better employment terms and wages. The EO aims to encourage competition across the United States, and among its many goals is the creation of “more high-quality jobs and the economic freedom to switch jobs or negotiate a higher wage.”
The EO also emphasizes how requiring “workers to sign noncompete agreements restrict worker’s ability to change jobs, which negatively impacts the workers, small businesses” and other sectors of the U.S. economy. The EO affirms the Administration’s policy to enforce antitrust laws to combat “the harmful effects of monopoly and the abuses of market power,” especially in labor and agricultural markets, including health care markets.
Finally, President Biden called on the Federal Trade Commission (FTC), the Attorney General, and the heads of other agencies “to enforce the antitrust laws fairly and vigorously.”
Future Considerations for Businesses and Employers
Based on the Biden Administration’s policy, we may see more government inquiries, civil suits and even criminal antitrust prosecutions against companies that agree with their competitors not to solicit or hire each other’s employees. While criminal violation contentions have not yet been tested or decided by the courts, defending such claims would be onerous, costly, and likely to cause harm to the reputation of the company and its executives. Defending civil suits can also be expensive, time consuming and negatively impact recruitment efforts in challenging labor markets.
In view of these developments, businesses are encouraged to be cautious concerning noncompete and nonsolicitation provisions. In particular, employers should:
- Determine whether the state in which they operate has any statutes or case law that may govern the legitimacy of noncompetition or nonsolicitation provisions.
- Avoid any agreement with a competitor or other employer not to solicit or hire each other’s employees where there is not a clear and legitimate business purpose for the restriction.
- Limit nonsolicitation and noncompetition agreements with other companies to certain business circumstances, such as sale of a company or assets, a contractual arrangement where one company is providing services to another with a legitimate need to prevent the buyer of services from hiring the seller of services’ employees during the course of the contract, an arrangement where intellectual property will be shared through services by employees who have knowledge of the intellectual property, or existing business arrangements where the provision is integral to the furnishing of services under a contract.
- Consider excluding from any nonsolicitation provision situations where an employee independently responds to an ad or job posting.
- Avoid entering into any agreement with a competitor to share wage or salary information and instead rely on general sources where data is aggregated and de-identified.
- Utilize noncompete or nonsolicitation provisions with employees only if the provision is tied to a valid business purpose and supported by consideration paid or provided to the employee, such as a promotion, salary increase or additional vacation.
- Refrain from imposing any requirement that candidates for employment notify their employers in advance about searching for other employment or plans to leave their current position.
- Avoid requiring prospective employees to obtain permission from a current employer to be hired.
Employers would be wise to monitor continuing developments in this area and consult counsel when designing any template employee agreements or entering into new business arrangements.
