The US Federal Trade Commission is consulting on a proposed new rule that would essentially ban all non-compete agreements between employers and employees in the states. The consultation runs until March 20 and whilst there remains a lot of uncertainty around this, the prospect of a ban on non-compete clauses in employment contracts is a real one. So where would that leave employers and what alternative protection could they rely on? We’ll ask a US lawyer about that.
The driver behind the FTC’s proposal is their concern that non-compete clauses stifle competition – they block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of accessing that talent pool. The agency estimates that by stopping the practice the new proposed rule could increase wages by nearly $300 billion per year and expand career opportunities for about 30 million Americans.
Employers insert non-compete clauses into employment contracts as a protection measure, to restrict a worker's ability to compete against their former employer after they leave, thereby protecting the former employer's confidential information or customer relations for a specific period of time. That’s the protection the FTC’s rule would remove, or weaken, and that’s why employers in the states are watching this very closely.
But, if the rule does come in, what alternatives would employers have to protect their confidential information and trade secrets?
Wisconsin lawyer Scott LeBlanc has been advising his clients on that point and earlier he joined me by phone to discuss it:
Scott LeBlanc: “Sue. So one of the things that we've talked about with clients which is kind of the point that the FTC has been trying to make in some of the literature that they put out around this is that, for the most part, appropriately tailored confidentiality, non-disclosure, obligations are still going to be okay if this rule were to go into effect as is currently proposed and, in some ways, those types of restrictions can be just as good as non-competes. The point of a non-compete, really and truly, is to avoid someone who has knowledge of a company’s long term strategy, they're confidential proprietary information, from being able to immediately go and jump to a competitor and use that information to their competitive disadvantage. So, a non-disclosure obligation covers that same concern. The nice thing about a non-compete is it doesn't require you to prove that the individual has actually used that information, but if you have evidence to suggest that the individual is using that information, whether it's sensitive pricing information, or business strategy, things like that, if you have the ability to be able to sort of find the evidence to support that, then a confidentiality clause should work to be able to prevent someone from going to work for a competitor and using that confidential information. So those restrictions still help - restrictions around what we call trade secrets here in the United States, which is particularly sensitive and important intellectual property that you've taken steps to protect, that still helps.”
Joe Glavina: “I gather you’ve been talking to your clients about making sure they have technology in place to help protect the business. Can you tell me about that - the context?”
Scott LeBlanc: “We often come up with situations in representing employers where an employee who is about to leave the company, or understands that they're about to be terminated, emails a bunch of documents to themselves, or you know, puts it onto a flash drive and goes off and takes it with them and there are software programmes, and security things, that you can have in place as an employer that you have to be able to monitor that to track that to know exactly what's happening to your information and that's really helpful when you have an employee who leaves that you think is taken information to be able to know exactly what's been taken, and that helps us, as lawyers, to be able to try and get that information back and hold the employee accountable and make sure that they're not actually using that information. So working with your information technology folks to make sure that you have good safeguards in place to be able to know when your information is being exfiltrated, being able to sort of I always, if an employer is thinking about terminating an employee, I always say you might want to have conversation with someone in your IT department to make sure that, you know, to keep them on watch, so that they don't do anything over the next two weeks before they find out that they're being terminated. So, just those kinds of things to make sure that you're not losing that data because, again, I think that confidentiality, non-disclosure, those types of obligations are going to become more and more important and the only thing that we're really going to be able to rely on if non-competes go away.
Scott has written a couple of articles on this subject which you may be interested in reading. One deals with the FTC’s proposed rule, as we’ve just been discussing, whilst the other deals with the move by a number of Senators who are pushing for legislation that would ban non-compete agreements.
In case you missed it, last week Scott LeBlanc talked to this programme about the scope of the FTC’s proposed new rule. He explained why a ban on non-competes would be a very big step and how the proposed rule looks backwards as well as forwards, so it would negate any prior non-competes that employers have entered into. Those programmes are: ‘ Ban on non-compete clauses in US would be a big deal’ and ‘FTC’s proposed ban on non-competes would be retroactive.’ We’ve put links to both of them in the transcript of this programme, as well as links to Scott’s written articles.
- Link to HRNews programme
- Link to HRNews programme
- Link to Husch Blackwell article on FTC’s proposed rule
- Link to Husch Blackwell article on Senators efforts to ban non-compete clauses