On January 5, 2023, the Federal Trade Commission (FTC) proposed a ban on non-compete agreements between an employer and its workers as an unfair method of competition. The FTC’s proposed ban is intended to promote competition and innovation by providing workers with more freedom to move between companies. However, this proposal has raised concerns about how it may affect businesses and their ability to protect trade secrets.
Non-compete agreements, also known as restrictive covenants, are agreements between an employer and a worker that prohibits, for a certain period after the employment is terminated, the worker from working for a competitor of the employer or starting a competing business. This employment restriction for former workers is used to prevent the former workers from using the business’s trade secrets, such as proprietary technology and customer lists, to benefit a competitor. Without the ability to use non-compete agreements, businesses may be less willing to share trade secrets with their workers, as businesses will not have the same level of legal protection to prevent their trade secrets from being given and used by their competitors.
Notably, under the FTC’s proposed ban, “workers” are broadly defined to include employees, independent contractors, interns, volunteers, and sole proprietors. This rather all-encompassing definition leaves employers unable to enter into a non-compete agreement with nearly everyone who would typically gain access to some or all of a business’s trade secrets. The ban also would apply retroactively and require employers to rescind existing non-compete agreements.
If the FTC’s ban on non-compete agreements goes through, (1) businesses may try to poach workers from their competitors to gain an edge on their competition; (2) competing businesses will incentivize workers to leave their current employer by providing more benefits, including a salary increase; and (3) employers may have to bolster the benefits provided to its current workers, rather than simply providing a nominal pay increase each year, to keep their workers from job hopping, as that is a way to gain a substantial salary increase.
Moreover, the FTC estimates that banning non-compete agreements will double the number of companies founded by a former workers in the same industry. Although this aligns with the FTC’s goal of increasing competition and innovation as businesses compete by developing new and improved products, services, and business models, this could allow for rife opportunities for trade secret misappropriation by former workers. Employers will now have one less tool to prevent former workers, including both former employees and independent contractors, from starting a competing business using trade secrets or other confidential information gained from their former employment.
Without the ability to use non-compete agreements, businesses will have to rely on other methods, such as trade secret laws, confidentiality agreements, and customer non-solicitation agreements, to protect their confidential information and trade secrets from being used by competitors or former workers. One concern is that trade secret laws, such as the Uniform Trade Secrets Act (UTSA), may not be as effective as non-compete agreements in preventing the disclosure of confidential information because of the high burden of demonstrating that the information disclosed is in fact, a trade secret. Further, confidentiality agreements, or agreements that set out what types of information are considered confidential, who has access to it, and the obligations of the receiving parties to keep the information confidential, may not be as enforceable as non-compete agreements. This is because confidentiality agreements are often vague or overbroad in scope, making it difficult to determine what information is covered and how it can be used. Likewise, confidentiality agreements may not provide the same level of protection as non-compete agreements because while confidentiality agreements can prohibit a worker from using, copying, or disclosing the confidential information covered under the agreement, these agreements cannot outright prevent a departing worker from engaging in activities that could harm the company’s business interests, such as working for a competitor or starting a competing business. However, if non-compete agreements are banned, businesses may start to use a combination of trade secret laws, confidentiality agreements, and customer non-solicitation agreements (i.e., agreements that prohibit, for a period of time, an employee or former employee from soliciting or doing business with the customers or clients of their former employer) to protect their trade secrets.
Overall, the FTC’s proposed ban on non-compete agreements could make it easier for workers to change jobs, increase their salaries, and increase competition, which are parts of the proposed ban’s intended purpose. However, an unintended consequence of banning non-compete agreements is making it more difficult for businesses to protect their trade secrets. While businesses may lose workers to competitors and startups, leading to a loss of competitive advantage and decreased economic growth, those same businesses could gain workers from competitors, resulting in an increase in innovation and economic growth. With the unpredictability of how this proposed ban will affect businesses’ trade secrets in the years to come, companies will have to aggressively rely on other methods to protect their confidential information and trade secrets, such as trade secret laws, confidentiality agreements, and customer non-solicitation agreements.
If you have specific questions on how this proposed ban on non-compete agreements may affect your business or trade secret protection strategy, please contact one of our trade secrets and intellectual property attorneys.
About the Authors:
Andrea L. Arndt is a Member in Dickinson Wright’s Austin office, where she focuses her practice on patent prosecution. She can be reached at 248-433-7677 or AArndt@dickinsonwright.com, and her biography can be accessed here.
An Associate in Dickinson Wright’s Las Vegas office, Brady Bathke focuses his practice on intellectual property litigation and enforcement, including patent, trademark, copyright, and trade secret law. He can be reached at 702-550-4418 or BBathke@dickinsonwright.com, and his biography can be accessed here.