Executive Order Takes Aim at Covenants-Not-To-Compete

In South Dakota, contracts in restraint of trade, which includes covenants-not-to-compete, are generally unenforceable as against public policy. However, state law specifically carves out four situations in which covenants-not-to-compete may be enforceable: (1) the sale of the goodwill of a business; (2) the dissolution of a partnership; (3) an employment contract or relationship; (4) contracts of a captive insurance agent. As a result, South Dakota law treats covenants-not-to-compete, particularly in the course of an employment contract or relationship, more favorably than many other states.

A recent executive order, however, seeks to change all that. In July 2021, President Biden signed an executive order that sets forth seventy-two initiatives to address corporate consolidation and to increase competition. One of those initiatives calls upon the Federal Trade Commission to ban or limit covenants-not-to-compete. On the one hand, the White House maintains that covenants-not-to-compete limit competition by making it harder for the tens of millions of Americans who are required to sign them as a condition of getting a job to switch to better-paying positions. On the other hand, the business community argues that covenants-not-to-compete are an important and necessary tool to protect their company’s goodwill, confidential information, and customer relationships.

Practically speaking, the Executive Order has limited immediate effect. After all, President Biden’s ability to unilaterally influence the policies and decisions of independent agencies is fairly limited, and any actions that are taken will be subject to judicial review. Thus, whether President Biden will be successful in implementing the change for which he advocates rests in large part on the agencies’ ability to implement and defend new rules and guidelines.

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