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Will the Federal Trade Commissions’ Ban on Non-Compete Agreements Leave Employers Unprotected?

The Federal Trade Commission (FTC)  recently passed a new rule banning non-compete agreements. According to the FTC, this new rule will restore the imbalance between employers and employees to allow employees to let the market determine their salaries. They also tout the rule as a triumph that will allow the formation of 8500 new start-up companies every year while still leaving employers with adequate protection of their proprietary processes and products. While this definitely equals a step toward restoring balance in the bargaining between employee and employer, whether the employer will truly still be protected by the means left is questionable.

Federal Trade CommisionThe FTC Ban on Non-Compete Agreements

The recently passed rule banning noncompete agreements will go into effect on September 4th, 2024. This rule bans employers from requiring employees to enter into a noncompete agreement.

Who Does the FTC Non-Compete Ban Apply to?

Going forward, all employers are banned from entering into new non-compete agreements with prospective employees. All employers will further be required to notify employees who have signed a non-compete agreement in the past to notify them in writing that it will not be enforced should they chose to leave with the exception of senior executive employees who signed non-compete agreements in this past.

Who Is Not Covered by the FTC Non-Compete Agreement Ban?

Senior executives who already entered into non-compete agreements with their employers in the past are not covered by this rule. Their agreements remain in effect. Additionally, the FTC Ban does not apply to lawsuits over non-competes that accrued before the ban took place nor to a non-compete agreement signed in conjunction with the sale of a business. These last two exceptions make sense because they do not affect the negotiating power between an employer and a prospective employee.

Are Employers’ Products and Intellectual Property Still Protected?

The FTC has indicated their belief that trade secret laws and non-disclosure agreements still provide employers the protection they need for “proprietary and sensitive information.”  But while trade-secret laws and non-disclosure agreements are tools that aim to prevent competitive use of certain products, methods, and information by allowing after-the-fact enforcement, they do not have to pro-active effect that a non-compete agreement provides employers.

What is a Non-Disclosure Agreement?

A non-disclosure agreement is a written contract between an employee and employer that says if the employee leaves, he will not use certain information or disclose it to others who may use it to compete in the same line of business. It may encompass all sorts of private and/or proprietary information such as product specifications, methods of doing work, research, testing data, or even client lists. Trade secrets are commonly covered in non-disclosure agreements as well. The goal is confidentiality and protection. Historically, to prevent an unreasonable restriction on competition, the courts have construed these narrowly to require they have a reasonable restriction on geographic area and on the length of time the person cannot compete.

How Are Trade Secret Laws and Non-Disclosure Agreements Enforced?

The most common methods of enforcement, when violations of trade secrets or non-disclosure agreements happen, are to file a civil lawsuit against the offending parties or submit the case to arbitration if an arbitration clause exists in the employment contract. The latter is a breach of contract by the employee, the former can be enforced against a new employer stealing trade secrets and the former employee. However, the biggest problem here is that many things such as business models and/or ways of doing work are not always discernable from the outside. For example, how a business finds prospective clients or saves money in certain areas is something businesses keep quiet about to get a competitive advantage. You cannot see how this is happening from the outside because they do not disclose it.

In some instances, the original employer can never know whether the intellectual property has been misappropriated. But if employer “A” trains someone to generate business in a new and unique way and that employee then goes out on his own to form a new competitive start-up, is he really going to ignore the skills he learned and find some new way to do business? Non-compete agreements fill that gap by creating a buffer level of protection that prevents the employee from going straight out and using the information against them. Thus, while the FTC has balanced the playing field, and there are other avenues for employers to protect proprietary information, enforcement is going to be harder in many cases and the remedy is entirely after the damage has been done.

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