Dear Doc:
I just heard that the Federal Trade Commission (FTC) has effectively outlawed all “non-compete” agreements. What will that mean for businesses that want to protect their competitive advantages?
Signed,
Every Fatcat, Ever
Dear Mr. Large Feline:
For many years, companies have forced their employees to sign agreements that restrict where and how they work after leaving the company. For instance, engineers were told that they could not work in the same industry for a period of time. Doctors could not open a practice in the same city as the one in which they formerly treated patients. Electricians, plumbers, carpenters…they all had legal restrictions on where and how they could work if they left their employers.
Now the FTC has found that these non-competition agreements are anti-competitive and, except for some very senior executives and in connection with the sale of an entire business, they have been deemed an illegal restraint of trade under federal law (See p. 561). Businesses will have to notify their employees that the agreements are no longer in force, and they may not put new agreements in place. The FTC estimates that this new rule will make it easier for workers to find new jobs, and also to negotiate raises.
The FTC also said that with this new rule:
- New business formation will grow by 2.7%, creating over 8,500 new businesses each year.
- Workers’ earnings will increase by $400-$488 billion over the next decade.
- Health care costs will be reduced by $74-$194 billion over the next decade.
- There will be an average estimated increase of 17,000-29,000 more patents each year.
But, despite these benefits, businesses still need to find ways to prevent their intellectual property from just walking out the door with departing employees. The Doc sees an increased reliance and emphasis on the traditional IP tools in this effort.
For instance, the federal Defend Trade Secrets Act (18 U.S.C. § 1836, et seq.) provides a federal cause of action when a trade secret is misappropriated. Employers will want to be sure that their nondisclosure agreements contain the necessary language and whistleblower clauses to preserve rights in trade secrets, and that they take actual steps to keep things secret. State trade secrecy laws also remain operable, and often overlap with the federal statute.
The Doc naturally believes that copyright law will play a larger role in preventing unfair competition by former employees. Employees who create copyrightable works automatically do so for the employer, but consultants retain ownership unless a written and signed agreement says otherwise. Registration of copyrights gives an important weapon to the owner, and even forms of copyrightable works that may not usually be registered, such as supplier lists, specifications, user documentation, customer lists, and the like may be important in preventing a former employee from taking valuable information to a competitor.
Patent protection will also become a more important tool for preventing a competitor from using the know-how that comes along when it hires away employees and consultants from another company. It will now be more important than ever to have an assignment of rights agreement with each employee and consultant involved in the creation of technology.
Does your business have any non-competition agreements with its workers? Give the attorneys at LW&H a call. You must take action under the new rule within 120 days of final publication in the Federal Register. You should also review your policies and agreements to be sure that you retain the legal tools useful in prevention of unfair competition.
Until next month,
The “Doc”
Lawrence A. Husick, Esq.