The FTC noncompete ban is dead. Here are five steps employers should take now.
You no doubt have heard that on August 20, a federal judge in the Northern District of Texas set aside the Rule issued by the Federal Trade Commission that sought to ban virtually all noncompetition agreements as unfair methods of competition.
Judge Ada Brown found that the FTC exceeded its statutory authority in promulgating the Rule and that the Rule itself was “arbitrary and capricious,” meaning that it was not reasonable or reasonably explained. Judge Brown’s decision means that the Rule is set aside on a nationwide basis and will no longer take effect on September 4, as planned. With the Rule now vacated, employers all over the country drew a collective sigh of relief.
So, employers can return to life as normal, right? Perhaps, but companies are well advised to use this reprieve to examine their current practices with restrictive covenants. It is too early to predict what the FTC will do in response to Judge Brown’s ruling. The agency may appeal the decision, go back to the drawing board with a new rule, or pursue some other alternative. The FTC has already committed to continue addressing noncompetes through case-by-case enforcement actions. Adding to this uncertainty, state legislatures have been enacting statutes limiting the use of noncompetition agreements and other restrictive covenants.
First, the good news. In light of the court’s decision, employers will not have to comply with the FTC’s notice requirement, which would have required them to advise employees that their noncompetes are no longer enforceable.
But employers should consider taking these five steps now:
Step 1: Identify the restrictions that you currently have in place (and with whom). If your company was already mobilizing to send the notice required by the Rule, you may already have gathered information about the restrictions in place with your employees. If you haven’t already done that, this would be a good time to start. Auditing existing agreements will help you identify holes and enforceability vulnerabilities.
Step 2: Determine what changes need to be made. Once you know the universe of agreements in use, you should review the restrictive covenants and identify what, if any, changes need to be made and whether any agreements with current employees need to be replaced.
If you are a multi-state employer, this review should take into consideration the expanding number of state laws regulating noncompetes and nonsolicitation provisions. This is not just a matter of enforceability—many of the new state laws include monetary penalties for noncompliance. A few even create private causes of action and provide for the recovery of the employee’s attorneys’ fees. In some cases, this is true even where an employer merely presents an unenforceable agreement and the employee does not sign.
Step 3: Evaluate the way you are using noncompetes. Leaving aside the technical requirements of applicable law, is your company using restrictive covenants in a defensible way? In litigation, the burden is normally on the employer to establish a legitimate, protectable business interest supporting the need for a restrictive covenant. Employers with one-size-fits-all agreements with every employee, regardless of position or duties, may be vulnerable to arguments of overuse and abuse. Some employers believe that it is all right to overuse restrictive covenants because they have no intention of actually enforcing them against lower-level employees. However, the overuse could undermine the legitimacy of enforcement attempts even with higher-level employees. Do you really want to have your corporate representative on the witness stand trying to justify why a receptionist has the same restrictive covenant agreement as the CEO?
Step 4: Take another look at your confidentiality and nondisclosure agreements. Confidentiality and nondisclosure provisions are not “gimmes” any more. They also need to be reviewed for enforceability and reasonableness. The National Labor Relations Board has taken the position that overly broad confidentiality and nondisclosure provisions can have a chilling effect on employees’ exercise of rights under Section 7 of the National Labor Relations Act. Section 7 gives non-supervisory employees the right to discuss their terms and conditions of employment and take other protected actions. Confidentiality provisions may also implicate whistleblowing rights and the right to participate in investigations by federal and state agencies. Finally, some jurisdictions require nondisclosure provisions to have time limitations, with an exception for trade secrets. Severance agreements containing confidentiality or nondisclosure provisions may face the same scrutiny.
Step 5: Re-assess your company’s protection practices. Finally, employers should comprehensively evaluate their trade secret and confidential information protection practices – from initial recruiting to off-boarding. The most well-drafted confidentiality and restrictive covenant agreement will not save the day if the employer’s actual practices are lax. Employers should conduct periodic “trade secret audits” to ensure that they are in the best possible position to protect their trade secrets in and out of court. The audits should include interviews of individuals from various parts of the company, so that the employer can assess whether there is consensus on what constitutes a “trade secret.” From there, employers should assess whether they have appropriate security measures in place so that they are protected against the disclosure of the identified pieces of trade secret information.
Conclusion
Judge Brown’s ruling has, at least for now, derailed the FTC’s effort to kill noncompetition agreements nationwide. However, the now-defeated FTC action is unlikely to be the last attack that restrictive covenants face. Employers should plan accordingly.
