Biden Executive Order takes aim at banning all noncompete agreements

President Joe Biden recently issued a sweeping Executive Order (EO) containing, among many other things, a proposal to ban noncompete agreements in the United States. The EO, unveiled in early July, seeks to promote competitive markets across the country. Although big tech companies are the main focus, the order could affect every private-sector employer with a noncompete agreement.

How noncompetes work

Noncompete covenants may include agreements not to solicit customers, not to solicit (or poach) employees, not to work for a competitor in a competing position, and to forego ownership interests or other relationships with a competitive business. The agreements are most often used with executive, sales, engineering, and customer service employees.

State laws primarily determine whether noncompete agreements are enforceable. During the past five years, some 16 states have enacted legislation addressing the agreements. While each state’s scheme is unique, an agreement’s enforceability generally depends on:

• Scope of the employer’s protectable interest; and
• Range of the restrictions on the employee (e.g., in terms of geography, time, and class of the prohibited occupations).

By convention (and sometimes as dictated by state statute), courts are reluctant to enforce noncompete agreements on lower- to middle-range wage earners. In the absence of a high salary or knowledge of bona fide trade secrets, many courts will refrain from enforcing agreements that in essence preclude employees from working in the industry where they live.