On July 9, 2021, President Biden issued the Executive Order on Promoting Competition in the American Economy (the “Order”). This sweeping Order affirms that it is the policy of the President’s Administration to enforce the antitrust laws to combat concentration and abuses of economic power in a number of markets, including: labor, agriculture, healthcare (including i.e., hospitals, insurance, hearing aids and prescription drugs), repair, real estate brokerage, alcoholic beverage distribution, cable, internet, air travel, financial services, rail transport, and ocean shipping. This Order, among other things, mandates and/or encourages cabinet members and agency officials, including Federal Trade Commission (FTC) officials, to conduct studies, issue reports, and consider rulemaking to ramp up enforcement of antitrust and related laws in these sectors of the American economy. The Order also reaffirms the authority of the Department of Justice (DOJ) and FTC to challenge previously consummated mergers in all industries, including those that received clearance under the Hart-Scott-Rodino Act, and to review, and likely strengthen, the Horizontal and Vertical Merger Guidelines.
Even if your company is not an internet giant, small farm, healthcare provider, railroad, airline or transoceanic shipper, or contemplating a merger, two particular sections regarding the labor market are important to note. These sections contemplate a rule curtailing employee non-compete agreements in all industries and a change to the Department of Justice (DOJ) and Federal Trade Commission (FTC) guidance regarding benchmarking exchanges of employee compensation information.
Non-Compete and Related Provisions
Section 5(g) of the Order states:
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.
Non-competes that restrict worker mobility have been under attack in recent years. A number of lawsuits by putative classes and state officials have challenged these provisions, particularly in the fast-food industry. Some states, including California, have passed legislation that bans nearly all such provisions. The Order now urges the FTC, under its statutory rulemaking authority, pursuant to Section 5 of the FTC Act, to consider a rule banning some or all non-competes and related clauses and agreements.
Does this Order change existing law? Not really. While Executive Orders can direct certain actions of the executive branch, the validity of non-compete and related agreements are governed by various state laws. It is also not certain whether the FTC has the authority under Section 5 of the FTC Act to regulate these clauses and agreements. Introducing a new rule will also require several steps, including notice of the potential rulemaking and requests for public comments before the publication of a final rule. This could be years away. However, the Order could indirectly influence litigation in the near term. In adjudicating non-competes and related provisions, courts examine various factors (such as reasonableness, whether such clauses protect a legitimate business interest and equitable considerations) on a case-by-case basis. It is not inconceivable that a Presidential Executive Order and subsequent FTC proclamations could influence some courts, particularly when making decisions that could put workers out of a job.
How broad could the rule be? The Order appears to encompass not only employee non-competes but also agreements and clauses limiting a worker’s ability to solicit his or her former employer’s customers and employees. However, any resulting rule may not include an outright ban because the Order discusses agreements and clauses that “may unfairly limit worker mobility.” This indicates that certain non-competes and non-solicitation provisions may not be covered in any resulting rule. For example, high-level employees who have access to sensitive information that could enable a competing employer to unfairly compete could fall outside of any potential rule.
What can/should your company be thinking about now? Although the Order does not change existing law on this issue, there are a number of actions employers can take to prepare for the possibility that non-competes and related provisions are banned or severely limited sometime in the future—and these actions will nonetheless help employers protect against unfair competition even if a ban or limitation never emerges.
- Identify the specific trade secrets and other confidential information (product formulas and designs, pricing information, customer specifications, customers lists, etc.) that would enable a former employee to unfairly compete against your company if he or she worked for a competitor.
- Reexamine and, if appropriate, strengthen your confidentiality agreements and employee handbooks to make clear that improper access or use of those trade secrets or other confidential information is prohibited and could subject the violators to disciplinary measures, including termination.
- Restrict access to those trade secrets and confidential information by, for example, restricting computer access to identified employees, keeping it under lock and key, and clearly marking such as confidential.
- Monitor access to such information to identify improper access and use and have means of flagging potential misuse. For example, your company may want to review questionable patterns in terms of copying confidential information or emails to private accounts or competitors’ email domains.
- Include a Defend Trade Secrets Act employee notice of immunity provision in employment agreements and related documents so that your company may be eligible to collect exemplary (up to double) damages and attorney’s fees in the event any trade secrets are misappropriated.
- Take prompt legal action against violators. State and federal laws governing unfair competition, misappropriation of trade secrets, and breach of contract can still afford some level of protection beyond non-competes and related agreements. Moreover, a consistent and effective litigation strategy will certainly send a clear message to your workforce to think twice before misusing your trade secrets and confidential information to unfairly compete against you.
Exchanges of Wage Information
Section 5(f) of the Order states:
To better protect workers from wage collusion, the Attorney General and the Chair of the FTC are encouraged to consider whether to revise the Antitrust Guidance for Human Resource Professionals of October 2016.
The Antitrust Guidance for Human Resource Professionals of October 2016 (“2016 Guidance”) provided guidance on, among other things, information exchanges among competitors (which, in the labor context, include all companies regardless of the industry competing to hire workers). That 2016 Guidance stated that antitrust risk arising from surveys of employee compensation can be mitigated if:
- a neutral third party manages the exchange;
- the exchange involves information that is relatively old;
- the information is aggregated to protect the identity of the underlying sources; and
- enough sources are aggregated to prevent competitors from linking particular data to an individual source.
According to the Fact Sheet issued in advance of the Order, the 2016 Guidance may harm workers because it appears to allow “third parties to make wage data available to employers—and not to workers—in certain circumstances without triggering antitrust scrutiny” and that such exchanges “may be used to collaborate to suppress wages and benefits.”
Does this Order change existing law? No. The Order only proposes revising the 2016 Guidance on minimizing antitrust risk from compensation exchanges, by potentially by adding a fifth element—making survey results available to workers. However, information exchanges, whether or not they follow the criteria listed above, are illegal only if they result in collusion or otherwise reduce competition on wages or compensation.
What can/should your company be thinking about now? Now is a good time to look at the benchmarking data you may be using to set employee compensation. A number of recent class action lawsuits have recently challenged information exchanges among competing employers, including direct and third-party exchanges. If you are using a third party, such as a trade association or human resources consultant to conduct compensation surveys, consider whether they are following the 2016 Guidance and how they plan to address any revised Guidance resulting from the Order.
For information about the Executive Order on Promoting Competition in the American Economy, best practices to avoid antitrust risks in the labor market, antitrust compliance programs, or other services provided by Dykema’s Antitrust and Trade Regulation Group, please contact Howard Iwrey.