The US President last week signed an Executive Order that has been interpreted by many as intending to make contractual non-compete clauses unlawful across all American States. If this dramatic move holds up, what could it mean for workers? What does it mean for the global economy? And could it spell the beginning of the end of for non-competes in Britain too?
Why all the fuss?
Buried within President Biden’s Executive Order of 9 July 2021 was a directive that the President promised on the campaign trail but few thought he would actually enact – an apparent federal ban on the non-compete clause. This is no small move.
As it applied to employees, the Order calls for addressing agreements “that may unduly limit workers’ ability to change jobs”. It encouraged the Federal Trade Commission to use its statutory authority to curtail “the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
On its face, the US President has just outlawed the non-compete clause in US commercial practice. Or has he?
Some saw the inclusion of “unfair” and “unfairly” to be important caveats, seriously qualifying the President’s political promise to ban all such restrictions. Others saw the breadth of the powers given to the FTC to curtail “other clauses” as an indication that the pendulum could swing even further towards reform and spell the end for non-solicit and non-poach provisions too.
What are the arguments for and against the non-compete?
Only time will tell what precisely President Biden’s Executive Order means and whether it can be sustained. If it is as broad-reaching as employee advocates hope, the outcome will be that US companies across all states are federally banned from using the non-compete, certainly in the manner in which we have become accustomed.
Some will see it as a victory for David over Goliath, but the situation is not nearly as clear-cut as all that. This need not be seen as a zero-sum game. Whilst it is true that certain employers may feel exposed as a result of the change, the statistics show that commercial interests at large are likely to benefit. A rising tide lifts all boats, as the same economic interests would tell us in respect of other debates around free trade.
Who has not heard it said that there is little risk of being sued on your non-compete if you are a low-level worker or work in a traditionally ‘non-professional’ sector? A company will not bother with the effort and expense, so the common thinking goes, of injuncting a worker who earns less than a six-figure salary or has had minimal access to sensitive or confidential information. While this is generally true, the reality is that restrictive covenants can be lawfully required of everyone from the chief executive to the canteen staff. The possibility remains that it may be used as leverage or, as is sometimes the case, as thinly-veiled retribution against any worker.
On both sides of the Atlantic, well-reported stories circulate of low-paid workers being sued by former employers precisely because they signed pro-forma restrictions to secure a job. In the US, Timothy Gonzalez, “an hourly labourer who shovelled dirt for a fast-food-level wage” was sued after leaving one environmental drilling company for another.[1] We can all think of examples from our own practice, though perhaps not as dramatic as that of Mr Gonzalez, where low-level managers have been (or felt) threatened by a non-compete restriction buried at paragraph 17 of their terms of employment but hitherto unread by them.
This is hardly surprising since research in the US suggests that only 1 in 10 workers when presented with a restrictive covenant seek legal advice. More problematic, 70% of those with non-compete agreements were only asked to sign them after receiving their job offer, and 47 percent were asked on or after the first day of work[2].
The statistics also confirm that the prevalence of the non-compete has a dramatically negative effect on worker mobility. Importantly, there is a knock-on effect on the economy as a whole, a demonstrable impact on information flow, a chilling effect on entrepreneurship and start-up businesses, and an increase in recruitment costs generally[3].
Frankly, the figures show that non-competes affect all commerce, even those workers who have not signed one. Where it can be shown that there are negative effects to the entire economy – beyond the old, dual mischiefs of preventing competition or blocking the worker from plying her trade – is that not reason enough to place strict limits on how and when the non-compete might be wielded? It is certainly worth the debate.
A common refrain (including, predictably, in the past week[4]) has been that President Biden’s move will detriment small and medium-sized businesses, specifically those which rely on trade secrets and confidential information. It is curious that such arguments usually originate from the representatives for much larger entities or their lobbyists who, we must assume, are magnanimously more concerned about their smaller rivals’ wellbeing than the impact on their own bottom line…
Of course, it matters much less who makes the argument than the fact that to many ears – and in the face of the data, it rings somewhat hollow. Vitally, is it still used as justification to avoid any sensible reform. Confidential information is regularly protected by standalone clauses which will continue in place. Springboard injunctions continue to offer protection even if the broad-brush non-compete vanishes. Non-poach and non-solicit clauses offer adequate protection in the vast majority of cases. After all, America’s economic powerhouse, California, is home to many of that nation’s largest companies including most of the tech giants. The state has operated a perfectly workable, near-total ban on non-competes for many years that can serve as a lesson against melodramatic doom-mongering.
But surely we are worrying ourselves unduly about restrictions that are very rarely litigated, I hear you cry? With respect, it is not enough – I would suggest – to look merely to the number of claims per year. Admittedly, to do so might reveal a surprisingly small number where the restriction is enforced by litigation and it is no surprise that most of those are against high-ranking or high-earning individuals where the cost-benefit justifies the company taking expense action.
However, it is short-sighted to ignore the fact that an express threat or even the prospect of expensive litigation is just as effective as a sword of Damocles, hanging like an ever-present deterrent over any worker. The chilling effect on worker mobility, competition and entrepreneurship from the mere fear of action by a former employer may be enough to achieve the same effect. To put it another way, Goliath need not charge into battle if the mere thought of him suiting himself up is quite enough to ‘encourage’ David to pack up and head home before the battle gets going.
The future
The debate is often framed as an all or nothing. Of course, it doesn’t have to be that way. For example, would it not be an effective compromise to dramatically reform the non-compete such that low- and middle-paid workers are not caught?
Only time will tell what President Biden’s Executive Order means. The same will be needed to see whether it can survive likely court challenges. Some commentators remind us that an Executive Order, not being legislation through Congress, could be just as easily reversed by the next President.
However, it seems the debate has begun in earnest. If the US system has a sea-change in the way many predict, it must reasonably be assumed that a similar conversation in this jurisdiction is inevitable. In a globalised world, commercial practice in the US, especially when it affects the practices of the world’s money-makers, has a knock-on effect.
Global companies rely on their workers being able to and wanting to move between jurisdictions. That is particularly true of Britain and the US. It is hard to see how sustaining the non-compete in this jurisdiction when America takes such a different direction of travel would allow that to continue uninterrupted.
Equally, information-reliant sectors such as professional services and big tech enjoy – and rely on – a relatively fluid movement of workers. Will legislators in the UK Parliament see the benefit of prohibiting or reforming the non-compete in the hope of avoiding a brain drain of workers to a freer and more attractive American system. Will they see the benefit in creating as attractive an environment for start-ups as, for example, in California?
Even before Biden’s move, wheels had started turning in Britain. In December 2020 the government launched a consultation, “Measures to reform post termination non-compete clauses in contracts of employment”. The FT published an article the same month linking a drive to nurture start-ups and “emulate the success of Silicon Valley” by possibly curbing non-compete clauses in the UK[5]. The consultation closed in February 2021 but the outcome has not yet been reported.
Before we get too excited, the government made similar rumblings in 2016 only to take the matter no further. Perhaps this time round the disruption to the labour market caused by Covid-19 may prove to be the impetus needed. In the end, the free market may drive the change. Whether the non-compete as we know it is viable in 2021 and beyond is doubtful. For the many economic reasons set out above, some reform will be no bad thing. Not whether change is desirable but how far that change goes is where the debate ought to focus.
What do you get when you combine a medieval dyer, a baker and an arms dealer? No, not the beginning of a hilarious joke. Instead, you get a fascinating jaunt (everything’s relative) through the history of the non-compete in English law as far back as 1414 to the present day. Check back next week when we will be publishing Jeremy’s follow-up piece, a canter through the history of restrictive covenants in English law.
[1] How Non-Compete Clauses Keep Workers Locked In (The New York Times, 13 May 2017)
[2] The Chilling Effect of Non-Compete Agreements (Marx & Nunn, Boston University and The Hamilton Project, Brookings Institution, May 2018)
[3] Mobility Constraint Externalities (Starr, Frake & Agarwal, SSRN, Aug 2017)
[4] E.g. https://www.forbes.com/sites/edwardsegal/2021/07/09/how-bidens-proposed-ban-on-non-compete-agreements-would-impact-companies/?sh=58d59cea74e0
[5] https://www.ft.com/content/61e5269b-07d1-49d3-afa4-8bafaebead41
This post was written by Jeremy McKeown, a tenant of 12KBW.
employment & discrimination 
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