On April 23rd, 2024 the Federal Trade Commission (FTC) voted on and approved a new rule on the legality of non-compete agreements. Notwithstanding any current or future legal action to enjoin or over-turn this action (not likely successful), this new rule not only bans future non-compete agreements for 99% of most individuals in the workforce, it will make non-compete agreements currently in place, unenforceable as well. What does this mean for you as a business owner? It means fully utilizing other protection mechanisms to help safeguard your business and intellectual property, including copyright, proprietary information, trade secrets and know how. For employees, this means the ability to leave a current firm without cumbersome restrictions on staying in the same field or starting their own competing business.
The new FTC non-compete rule is set to take effect September 4, 2024. According to the FTC “Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once non-competes are banned,”. Regardless of the truth or falsity of this claim, the new rule will undoubtedly help to increase competition.
Non-competes are contractual obligations between an employer and an employee (and others), and often keep an employee from taking a new job, or in many cases, restrict the employee from leaving the company and starting his/her own competing business. In this way, the negative effects of the agreements often leave employees in a situation where they have to stay with the company they are at, relocate to an area outside of the geographic range of the non-compete if they wish to stay in the same field, or change their field of employment if they want to continue to make a living. None of these options are desirable for most employees.
From the business perspective, non-compete agreements help to ensure that an employer does not train their competitor in the years to come or keep them from losing valuable employees. The problem is, many non-compete agreements were so onerous that employees were taken advantage of or were threatened with the prospect of litigation. Sure, the courts and state legislatures began to step in to limit the scope of these agreements by making rules to ensure that the agreements were 'reasonable', but even so, according to the FTC, such agreements still stifle competition, contained unfair provisions, kept proper job-matching from occurring between employers and employees, and even lead to increased pricing for consumers.
WHAT DOES THIS MEAN FOR BUSINESSES?
Once effective, this new rule will force businesses to come up new mechanisms to protect their interests or require them to shore up their current protections. In most instances, the use of a properly drafted non-disclosure agreement, resort to current trade secret laws and the vigorous protection of copyrighted material will be enough to safeguard the employer's business and economic interests.
Non-disclosure agreements (NDAs) are designed to protect sensitive information or trade secrets that may be disclosed in the course of business dealings. An NDA, also known as a confidentiality agreement, is a legally binding contract between an employer and an employee (and even other's) that outlines information, materials or knowledge that the parties wish to share with each other for certain purposes, but wish to restrict from wider use or dissemination. An NDA is essential to prevent the misuse or unauthorized disclosure of sensitive data including trade secrets, business strategies, customer lists, proprietary technology, research and development data, and patents. Given the sensitive nature of the information protected by NDAs, and the potential impact if such information is misused or improperly disclosed, the involvement of an attorney in drafting or reviewing these agreements is a wise decision.
To extract the benefit of trade secret laws, an employer should seek legal advice from an intellectual property attorney. Trade secret protection does not just happen, it takes proper positive steps by the employer to ensure that the information provided to employees during the course of employment is safeguarded in a way that gives everyone notice that it is in fact being treated as a secret and should not be divulged to anyone except until strict guidelines. Implementing a trade secret protection program that includes policies and procedures for identifying, classifying, and safeguarding trade secrets is critical. Password protecting sensitive documents, divulging secret information to only those that need to know, locking tangible items in a room, and marking items as secret are some ways to help an employer keep its trade secrets. Exit interviews help to remind departing employees of their obligations.
Finally, employers should have and convey clear guidelines and rules for employees in the use and dissemination of company materials that are subject to copyright protection. Doing so will more easily allow the employer to reduce the chance that such materials can be used by a departing employee to compete against the employer. In addition, the employer can leverage any mis-use by a departing employee to keep any disputes from snow-balling into expensive litigation. Should such dispute head to litigation, the use of such practices can help the employer more easily establish that its material was subject to copyright protection, and can keep an employee from claiming it was done innocently. (Thereby, possibly warranting the remedy of punitive damages in some situations, which can help to recompense for litigation costs).
WHAT DOES THIS MEAN FOR EMPLOYEES?
For employees, this new rule eases the burden of leaving a job in which one does not want to stay. Employees are now free (within the constraints mentioned above in the business section) to start a business in the same field without fear that they will be threatened by a former employer. Remember, this does not mean you can keep, copy or disseminate and use protected intellectual property from your former employer, but it does mean that you can stay in the field you love and are knowledgeable in, and make a competing business and your own livelihood, thereby becoming a business owner yourself. Congrats!
With the new FTC rule comes a host of issues, decisions and actions that business owners will need to grapple with. Protecting business IP while not trampling the rights of employees can be a tricky path. For guidance, always seek the advice of a competent, licensed intellectual property attorney in your state. If you happen to be in or around Portland, Oregon, feel free to contact INTELLEQUITY at 503-877-0881 or visit our website at intellequityip.com. Best of luck!
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