Could the FTC really ban noncompete agreements federally?

President Joe Biden campaigned on a promise of limiting the use of noncompete agreements, at least for low-level workers. That was a stretch goal, as noncompete agreements have traditionally been regulated by the states, not the federal government.

Nevertheless, last week Biden issued a sweeping executive order that included regulation of noncompetes by the Federal Trade Commission (FTC). The idea is that noncompetes reduce workers’ bargaining power by limiting their ability to leave their current company for a job in the same industry and market. This drives down wages and reduces competition.

Businesses, on the other hand, often use noncompete agreements to protect their investment in individual workers, to protect their trade secrets and intellectual property, and to prevent knowledge of their internal business from being brought to a competitor.

Could the FTC single-handedly ban noncompetes across the board? That seems unlikely, even though newly confirmed FTC chair Lina Khan has written in a law journal that noncompete clauses “deter workers from switching employers, weakening workers’ credible threat of exit, and diminishing their bargaining power.”

California, Oklahoma and North Dakota have already banned noncompete agreements as anti-competitive. Here in Texas, the courts have been somewhat skeptical about enforcing noncompetes that unduly limit the employment prospects of ordinary workers with no particular knowledge or access.

Texas noncompetes are contracts and must be reasonable in scope, reach and duration

It’s too soon to tell what effect Biden’s executive order will have because it merely orders the FTC to address noncompete agreements. The FTC, realizing that these agreements are common and can be crucial for businesses, may choose to regulate them loosely. The status quo may not change very much, especially for leadership and critical employees.

In Texas, employers must offer something besides continued employment in exchange for a noncompete agreement. This could be, for example, access to proprietary information.

In addition, Texas courts will not enforce an unduly limiting noncompete agreement on an ordinary employee who has no significant access to proprietary information or trade secrets. A noncompete agreement that unduly limits the job prospects of the employee may not be enforceable.

The agreement must be reasonable, from a court’s point of view, in scope, geographic reach and duration:

  • It may not prohibit all work in the industry
  • It may not restrict the employee’s rights for more than a reasonable period (a year or two)
  • It may not prohibit job-seeking in too broad of a geographical area

The FTC will probably focus on reining in excesses in noncompete agreements, such as applying them to entry-level workers, using them in states that completely ban them, or routine violations of existing laws by multi-state organizations.