The Great Resignation is coming. Unprecedented numbers of employees are expected to change jobs, and more than half of them will take confidential company information. Worse, 40 percent of them will use that information at their new job.
Companies frequently protect their trade secrets from this type of exfiltration with narrowly tailored noncompetes that prevent employees from taking jobs in which they are likely to use their former employer’s confidential information. These agreements are an important part of an effective trade secret protection program.
However, on July 9, President Biden issued an “Executive Order on Promoting Competition in the American Economy” calling for the Federal Trade Commission to “to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
Context is helpful
Employers and employees are generally aligned in protecting trade secrets for their mutual benefit at the beginning of and during the employment relationship.
However, an employer’s interest in protecting its trade secrets and an employee’s interest in engaging in future employment may clash when the employment relationship comes to an end.
This potential conflict is complicated by the fact that, although the departing employee is at the end of one employment life cycle, the employee is typically simultaneously at the beginning of the next, in which the former employer’s risk of compromise or loss of its trade secrets corresponds directly to the new employer’s risk of infiltration of those same trade secrets in a way that contaminates its work.
Noncompetes, nondisclosure agreements, other restrictive covenants, and proper training throughout the employment life cycle are important tools to protect a company’s trade secrets. But noncompetes have been under siege.
Prior federal efforts
Since 2015, there have been multiple federal efforts to regulate employee noncompete agreements, stemming from the reported use of noncompetes by the Jimmy John’s sandwich chain for the people making the sandwiches.
Those efforts began in 2015 with a bill — sponsored by Sens. Chris Murphy, Elizabeth Warren, Richard Blumenthal, Sheldon Whitehouse and Al Franken — to prohibit the use of noncompetes for “low-wage employees.”
In 2018, Sens. Murphy, Warren and Ron Wyden pushed the envelope further, introducing the “Workforce Mobility Act of 2018” to impose a federal ban on the use of all employee noncompetes.
In 2019, Sen. Marco Rubio introduced the “Freedom to Compete Act” to amend the Fair Labor Standards Act of 1938 to ban noncompetes for most nonexempt workers. Later in 2019, Sens. Murphy and Todd Young filed another “Workforce Mobility Act,” again proposing to ban the use of virtually all employee noncompete agreements.
None of those bills passed.
Facing a slow legislative process, the Federal Trade Commission was enlisted in 2019 to address noncompetes through its regulatory procedures. Following the directive, the FTC held a workshop on noncompetes in January 2020 (“Non-Competes in the Workplace: Examining Antitrust and Consumer Protection Issues”).
However, COVID lockdowns followed shortly thereafter, and the FTC’s work on the issue paused.
Current federal efforts
In December 2020 (i.e., following his election, but prior to his inauguration), President Biden signaled a plan to rein in the use of noncompetes, saying that he would “work with Congress to eliminate all noncompete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets.”
In February, Sens. Murphy, Young, Kevin Cramer and Tim Kaine introduced a new bill to again attempt to ban all employee noncompetes.
Between July 7 and July 9, Biden and press secretary Jen Psaki revealed plans to “encourage the Federal Trade Commission to ban or limit noncompete agreements,” directing their focus primarily on the protection of low-wage and blue-collar workers.
Later on July 9, Biden issued his “Executive Order on Promoting Competition in the American Economy.” The 46-page order mentions noncompetes in just two places:
“Powerful companies require workers to sign non-compete agreements that restrict their ability to change jobs.”
“To address agreements that may unduly limit workers’ ability to change jobs, the Chair of the FTC is encouraged to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
While it is certainly true that many “powerful” companies use noncompetes, so too do many small companies.
And while those agreements may impose some restrictions on a person’s ability to change jobs, there is a trade-off: The restriction on mobility is balanced against the need to protect the company’s recognized legitimate business interests and its remaining employees.
The second sentence raises four separate issues: (1) the president is “encouraging” (not mandating) FTC action; (2) the action that Biden urges is rulemaking, which assumes the FTC has the authority to make a rule concerning noncompetes; (3) the president is targeting the “unfair” use of noncompetes, not all uses of noncompetes; and (4) the president seems to be targeting not just noncompetes, but presumably no-poach agreements (as he previously identified) and perhaps other restrictions.
Most recently, on July 16, Sens. Maggie Hassan and Rubio reintroduced the Freedom to Compete Act to again try to prohibit noncompetes for workers who are not exempt under the FLSA, as opposed to pursuing a wholesale ban on employee noncompetes.
During roughly the same time that Congress has been attempting to effect noncompete reform, 24 (and D.C.) states have made changes to their laws over roughly the same period. Further, 25 states have been considering 66 bills this year alone.
Of the 24 states that have modified their noncompete laws, 10 have banned their use for low-wage and blue-collar workers (with varying methods of determining who qualifies for the exemption). See chart for summary of standards in each state.
Similarly, through recent legislative changes, states have been addressing the concern that employees report to a new job and learn, for the first time, that they will be subject to a noncompete.
Specifically, states are imposing notice requirements, with wildly varied approaches, ranging from requiring a copy of the noncompete to be provided by the earlier of 10 business days before commencement of employment or with a formal offer to within 30 days following termination.
Where do things stand?
Although states have, for the most part, been imposing various wage thresholds and notice requirements, the federal government has not yet taken action. Congress has not voted to ban noncompetes. Biden did not ban noncompetes though his executive order. And the FTC has not banned noncompetes. But they may.
While some of the recent proposed federal legislation proses a wholesale ban on all employee noncompetes, the latest bill proposes a more restrained approach. Like that bill, Biden’s comments suggest that any regulation will be balanced, focusing on regulating the abuses, rather than a throw-the-baby-out-with-the-bathwater wholesale ban.
However, that is far from a foregone conclusion.
What to do
Although regulation is likely at least a year off, Congress could move faster.
There are three things to do now.
First, if you want to be heard, reach out to the FTC and Congress.
Second, review all existing restrictive covenants, whether contained in employment agreements, RSU agreements, stock option agreements, long-term incentive agreements, or other agreements.
Also, review and strengthen as appropriate all policies and codes of conduct. But be mindful of other applicable laws, including, for example, D.C.’s forthcoming prohibitions on anti-moonlighting requirements.
Third, make sure that there is a culture of confidentiality at your clients’ companies. That is not to say that all information needs to be locked down. There is always a balance. If information is locked down too tightly, work becomes less efficient and people will find workarounds, likely resulting in even less security for the information.
Training is critical. If training is not being provided at all stages of the employment life cycle (at the time of onboarding, during the employment relationship, and at off-boarding), an employer is potentially facing exfiltration and loss of its own trade secrets, as well as exposing its own work to contamination by someone else’s information.
As tools like noncompetes are limited or taken away altogether, these other tools become all the more important. The goal in taking these steps should be to protect trade secrets (as well as customer relationships and other legitimate business interests) — not just being able to win a costly, time-consuming lawsuit after the fact. Preemptive measures are therefore critical. Take them now before there is a problem.
Russell Beck practices law in Boston. He litigates and advises on trade secret, noncompete agreement and employee mobility matters nationally.