FTC Proposed Rule to Ban Noncompete Clauses:
3 Actionable Steps
Now that the FTC has announced its new proposed rule barring noncompete covenants, what next? Given the uncertainty around the Proposed Rule – including whether it is or is not actually adopted – there are a range of things that you can do in anticipation of either outcome. Some of these are:
First, you can expand your use of other, non-noncompete covenants, such as covenants against disclosure, the solicitation of customers (current and former), or the recruitment of co-workers. These provisions are often more particularly focused on relationships and what they mean to your business. But you need to be careful, as each state will still have its own law and public policy considerations. For example, the FTC touts “non-business agreements” as viable alternatives to a noncompete. These provisions bar workers from doing business with customers, and this type of provision is likely unenforceable in Georgia due to its restriction on the acceptance of business.
Second, many noncompete covenants cover conduct during and after the term of employment. The FTC rule will only target the post-termination restriction. It is not intended to impact restrictions on what the worker may do during the term of the relationship. With this in mind, it would be beneficial to split existing noncompetes into two separate provisions. This way, if the rule is passed as proposed, there will be less confusion as to what remains restricted after you provide the FTC’s mandated notice that the noncompete – or at least the post-termination portion – is rescinded.
Third, reading between the lines, it appears that the FTC may still allow specific injunctive relief that bars workers from working for competitors where otherwise authorized if trade secrets are at issue. This is likely because there are various other federal statutes that protect trade secrets and specifically authorize injunctive relief. For example, the FTC has recognized the existence of the “inevitable disclosure” doctrine, which allows the imposition of a “judicially-created restrictive covenant” as a means to protect trade secrets. The FTC did so without criticizing the doctrine or indicating whether it would violate the proposed rule. But again, this may vary on a state-by-state basis. Some states do not recognize the “inevitable disclosure” doctrine. And, while the FTC seems to take a liberal view of what might be a protectable trade secret, the FTC ultimately has no say in that determination. A properly protectable trade secret is instead subject to multiple requirements and conditions. Ultimately, it may be up to a judge or jury based on the systems and protections in place to protect such “trade secrets.”
If you don’t already use non-noncompete covenants, or if you think you might need to bolster the protections of your confidential information, now is the time. The benefit and rationale is simple: it is easier to do things now, before the FTC rule takes effect. If the Proposed Rule is adopted, workers may be more reluctant to agree to new contractual protections, especially after they learn of the Proposed Rule and get the required notice rescinding their existing noncompete covenant. And the good news is that regardless of what the FTC ultimately does, such efforts can still help you and your business.
If you want to discuss these items in advance of the FTC’s decision on its Non-Compete Rule, please contact one of the Firm’s intellectual property attorneys or labor and employment attorneys. We can discuss ways to implement additional protections, such as non-solicitation agreements or how to better handle your potential trade secrets.