For decades, the regulation of non-compete agreements was left up to individual states, which were free to develop their own laws governing their use. Recently, however, the Federal Trade Commission (“FTC”) has moved to effectively eradicate non-compete agreements nationwide, through a Notice of Proposed Rulemaking issued in January. Deemed a huge win for workers, the proposed rule leaves many companies and organizations looking for alternative ways to protect their intellectual property.

As companies think about how to make these changes, they need to be cognizant of a recent National Labor Relations Board (“NLRB”) decision that restricts the use of confidentiality and non-disparagement provisions in severance agreements. Here’s what employers need to know about the proposed rule and NLRB decision and what tools they can utilize to protect their intellectual property, such as patents and trade secrets, moving forward.

Background and Proposed Rule Banning Non-Compete Agreements

In addition to other restrictive covenants including non-disclosure or confidentiality agreements, employers have long used non-compete agreements to protect their interests in confidential and competitive information. For years, individual states have regulated the use of these agreements. While some states have effectively banned them, or limited their enforceability, they remain widely used.

In January, the FTC issued a Notice of Proposed Rulemaking that signaled the FTC’s intention to take broad, aggressive action to eliminate the use of non-compete agreements. The proposed rule was based on the FTC’s determination that non-competes constitute an unfair method of competition and violate Section 5 of the Federal Trade Commission Act. If enacted as written, the rule would effectively ban the use of non-competes and other employment agreements that the FTC claims effectively function as a non-compete (“de facto non-competes”). The rule would prohibit the use of these agreements and invalidate all such existing agreements. It also carries other onerous requirements including the issuance of mandatory written rescission notices. The rule provides for very few exceptions but would not apply to non-compete agreements that arise due to the sale of a business.

Many questions remain. While the FTC provided some examples of de facto non-compete agreements, including “overbroad” non-disclosure agreements and training repayment provisions, guidance is currently lacking. It is not clear where the FTC would draw the line on an “overbroad” non-disclosure agreement or another “de facto non-compete.” In the coming months, the FTC may finalize the rule, amend it, or propose an alternative based on the comments received.

Failure to comply with the rule (if enacted) could result in monetary penalties. Employers concerned about the impact of this rule on their intellectual property and business should review how employees are awarded access to certain data and information, as well as any existing protocols on non-compete agreements and non-disclosure agreements.

Alternatives

Non-Disclosure Agreements

One useful tool still available to companies to protect proprietary knowledge is an appropriately tailored non-disclosure agreement (“NDA”). The FTC’s proposed rule exempts “routine” NDAs from its scope. While NDAs are a topic of discussion in their own right, the rule permits NDAs that do not prevent workers from seeking or accepting employment with a person or operating a business after concluding their employment with an employer. The rule contemplates a scenario where a worker leaves their job with an employer and goes to work for a competitor, while remaining subject to restrictions in an NDA the worker signed with their employer. It also acknowledges that a worker may be prevented from disclosing certain information to the competitor, and such an agreement would not violate the proposed rule. The rule draws the line, however, at an NDA that defines “confidential information” so broadly as to prevent an individual from working in a given industry at all.

An appropriately tailored NDA should, therefore, cover only information relating to a specific purpose or subject with a clear scope of the information to be kept confidential. An NDA should be directly relevant to the parties’ actual business needs, with specific tailoring to reflect the business purposes for which confidential information is to be shared. It is important to note that NDAs are governed by individual state statutes, and many states have restrictions on what may and may not be the subject of an NDA. The proposed rule would not impact existing state laws that may affect the validity of an NDA.

Employers utilizing NDAs must also be aware of a recent NLRB decision limiting their use in connection with severance agreements. On February 21, 2023, the NLRB’s McLaren Macomb decision restored a long-standing principle that an employer may not offer severance agreements that require employees to broadly waive rights under the National Labor Relations Act (“NLRA”). This decision reinstated prior NLRB rules holding that a severance agreement violates the NLRA if its terms interfere with workers’ organizing rights. Section 7 of the NLRA affords non-supervisory employees the right to talk to each other about the terms and conditions of their employment. Employers may not interfere with, restrain, or coerce employees exercising Section 7 rights. The Act applies to all employees, union or non-union.

In the McLaren Macomb case, the employer offered severance agreements to furloughed employees that prohibited them from making statements that could disparage the employer or disclose terms of the agreement. The confidentiality and non-disclosure clauses were very broad. The NLRB found both clauses unenforceable because they were overly broad.

This decision has broad application. The NLRB held that simply offering employees a severance agreement containing “quid pro quos” – clauses where employees forfeit Section 7 rights in exchange for severance – is inherently coercive and potentially unlawful under the Act. Whether such clauses are enforceable now focuses on the language of the clauses. An employee’s acceptance of such an agreement will not render it lawful, and the circumstances surrounding the proffer are likewise immaterial. Future decisions or guidance from the NLRB may help clarify what, if any, non-disparagement and confidentiality provisions in severance agreements will be enforceable. The decision seemingly implies that narrowly tailored provisions may be enforceable. In the future, the NLRB may apply these principles to other agreements including settlement or separation agreements, or even communications which the NLRB believes “tend to interfere with” the exercise of Section 7 rights. Accordingly, employers have to review any agreement they have with non-disparagement and/or confidentiality provisions before proffering it to an employee or potential employee.

Trade Secrets

A second and related means of protecting confidential business information is to maintain trade secret status for an employer’s proprietary information. Even if the proposed FTC rule is enacted, trade secrets will continue to be governed by the federal Defend Trade Secrets Act (“DTSA”) and state laws prohibiting the misappropriation of trade secrets, many of which adopt or are modeled after the Uniform Trade Secrets Act (“UTSA”). Under the DTSA and UTSA, companies are required to take reasonable measures to maintain the secrecy of information for it to qualify as a trade secret. What constitutes reasonable measures to maintain secrecy may vary on a case-by-case basis, but may include:

• Protecting the information via appropriately tailored, enforceable NDAs or confidentiality agreements;
• Limiting access to the information to employees with a legitimate need to know the information;
• Protecting internal access to the information by password or other security measures;
• Limiting or terminating access to the confidential data after an employee ceases employment;
• Marking documents regarding the information as “trade secret” or “confidential”; and
• Enacting confidentiality and security policies and training employees as to limitations on the dissemination of confidential business information.

Patents

A third, and fundamentally different, means of protecting an employer’s intellectual property is to pursue patent protection. In contrast to a trade secret, a company must disclose its invention when seeking a patent, in exchange for a monopoly over the patented technology for the patent’s effective term. Whether an invention can obtain patent protection is subject to an entirely different set of requirements than a trade secret, including – at a basic level – whether the invention constitutes patent-eligible subject matter, is novel, is useful, and is non-obvious. This is only a basic overview of patent requirements, which employers would need to further explore with legal counsel if and when patent protection is desired for an invention.

Despite potential legal challenges regarding the FTC’s authority to enact and enforce this rule, employers should be prepared to move forward with implementation of this rule. Employers would also be wise to consult legal counsel to identify possible ramifications of this rule and identify ways to mitigate its potential harm, including protecting intellectual property through other means best suited to the company’s individual needs.