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FTC Faces Calls for IP Carveouts in Noncompete Ban Rulemaking

Jan. 17, 2023, 10:00 AM

The FTC’s proposal to ban noncompete agreements is triggering intellectual property attorneys’ concerns that it fails to include trade secret protection exceptions that President Joe Biden had pledged.

Intellectual property and trade secrets experts—and the companies they represent—will likely push the issue, including some exceptions to the ban, to the forefront during the Federal Trade Commission’s 60-day comment period and subsequent deliberations. One of the solutions they likely will pitch would be to permit noncompete agreements for workers making more than a certain amount per year.

The FTC’s notice of proposed rulemaking would make illegal all employee agreements that prevent them from working for an employer’s competitor after they leave. On the campaign trail, Biden vowed to eliminate noncompetes but carve out a few exceptions for protecting trade secrets that employees may take to their next employer. But the FTC’s notice includes only one exemption to the ban, for the founders and significant shareholders of acquired companies.

Companies have long used noncompetes, along with a patchwork of other restrictive deals like non-disclosure agreements and non-solicitation agreements, to protect their intellectual property when knowledgeable employees jump to competitors and risk taking sensitive information with them. Noncompetes cover as many as one in five American workers, the FTC estimates.

“The intellectual property and trade secrets implications are likely to be the greatest concern to most businesses,” said Adam Acosta, a partner at White & Case LLP.

The FTC pushed back against the claim that its proposal would hamstringing IP protections.

Companies have “robust” laws to protect their trade secrets besides noncompete clauses, including legal enforcement of nondisclosure and nonsolicit agreements, agency spokesperson Douglas Farrar said in a statement.

“The FTC’s proposal finds that whatever marginal benefits noncompete clauses may have beyond the other trade secret protection laws on the books, they are exceeded by the substantial harm those clauses do to the economic freedom of workers and the competitiveness of innovative new businesses,” he said.

Amassed Knowledge

The proposed ban would upend companies’ approach to protecting their proprietary information, several IP and trade secrets attorneys said. Businesses across the economy would be forced to lean on other mechanisms, such as expensive, time-consuming, and harder-to-prove trade secrets litigation instead, they said.

“This is an absolute disaster when it comes to intellectual property protection,” trade secrets attorney James Pooley said. “And it’s absolutely contrary to the stated objective of this administration of robust trade secrets rights.”

In-house counsel will need to ramp up their entrance and exit interviews with sensitive personnel to forestall potential leaks, said Matthew Murphy, a partner at Axinn Veltrop & Harkrider LLP. Companies may slow internal development by instituting firewalls between teams working on related projects.

Industries working on cutting edge technology—such as Silicon Valley companies, biotech, and pharmaceutical manufacturers—will pay particularly close attention as the rulemaking process unfolds.

Engineers or scientists in those industries often amass so much knowledge—even in rejected ideas during R&D—that they might unintentionally expose trade secrets to their new employers, said Erik Weibust, a member of the firm Epstein Becker Green PC.

Noncompete and nondisclosure agreements are key tools for preventing employees from taking proprietary information to competitors, IP attorneys say.

They acknowledge the reason for the ban, agreeing that noncompete agreements can be abused. But without them, it becomes more difficult to protect valuable information, including research, business plans, customer lists, and more—information often compiled at great cost, they say.

Under the FTC’s proposal, companies also may not be able to rely on nondisclosure agreements to achieve the outcomes they sought through noncompetes. The agency’s proposal said that overbroad non-disclosure agreements that functioned as noncompetes could also be banned.

“There will be a focus on trying to navigate NDAs and client non-solicitation agreements, saying ‘Fine, if the FTC says I can’t use noncompetes, we’ll be aggressively litigating NDAs,’” said Rebecca Baker, a partner at Vinson & Elkins LLP. “The Catch-22 is that NDAs could be construed as noncompetes if they function that way. But with the super confidential keys to the kingdom information, companies have to be able to protect that information somehow.”

Proactive States

If the FTC were to consider certain carve-outs on the noncompete ban, the agency could look to states that have taken steps to curb such abuse.

Some states, including California, ban noncompetes outright, while others limit them to employees above an income threshold.

Courts in some states are empowered with substantial discretion to either strike excessive provisions or invalidate entire agreements.

“I think the states are doing a good job of policing abuses,” trade secrets attorney John Marsh of Bailey Cavalieri LLC said. “There’s a wide range of different philosophies.”

There’s “virtual unanimity” among trade secrets and noncompete legal practitioners that noncompete agreements shouldn’t be used against low-wage workers, Marsh said.

Requiring companies to provide recruits a pre-hire notice of a noncompete agreement—as some states require—is also broadly considered a fair practice, he said.

California has already demonstrated that eliminating noncompetes entirely leads to more trade secrets litigation, Pooley said.

Trade secrets claims are far more cumbersome and expensive to resolve than contract disputes. Noncompete agreements offer proactive protections in safekeeping proprietary information. But protecting such information through trade secrets litigation often happens after the damage has been done, Weibust said.

Plaintiffs have to prove information was a trade secret—commercially valuable, with sufficient effort to keep it a secret— that it was stolen, and that it has or would cause damage. In some cases the presence of NDAs is a factor in determining whether information is a trade secret. The ban on overbroad NDAs could further complicate that, attorneys said.

“This is a situation where someone is using a very blunt instrument when a more surgical one is more than satisfactory,” Marsh said.

To contact the reporters on this story: Dan Papscun in Washington at dpapscun@bloombergindustry.com; Kyle Jahner in Washington at kjahner@bloomberglaw.com

To contact the editors responsible for this story: Roger Yu at ryu@bloomberglaw.com; Adam M. Taylor at ataylor@bloombergindustry.com