The FTC's proposal earlier this month of a new rule that would ban most non-compete clauses is making headlines. The federal agency's proposal follows a recent trend among state legislatures (Virginia's General Assembly included) to limit a company's power to restrict its employees' future employment. While the underlying policy debate about whether it helps the economy to ban non-competes is interesting, my perspective is slightly different than a policy-maker's. Years of representing companies and high-level employees on both sides of non-compete disputes—including through trial—leads me to this headline: well-intentioned companies never really needed non-competes in the first place.
Even in states where non-competes are still legal, generally speaking, courts will only enforce a non-compete where the company proves it protects a legitimate business interest. The most common business interest companies invoke is protecting their trade secrets and other confidential information. As a result, in practice, to successfully enforce a non-compete, a company is usually tasked with persuading the court that: the company has trade secrets and other confidences, the former employee had access to them, and the non-compete is narrowly tailored to prevent the former employee from divulging those secrets and confidences to the company's competitors. That's generally easier than proving a violation of the trade secrets act or breach of a confidentiality agreement. However, without compelling evidence (think forensic proof that the former employee left for a competitor in the middle of the night carrying a thumb drive with source code), it's still not easy.
So, let's imagine a world without non-competes. And a company that recognizes the right of former employees to choose their own path in life, but also genuinely wants to protect its sensitive information from theft. That's what I mean by well-intentioned. Even without non-competes, the federal and state trade secrets laws and confidentiality agreements should protect the company from former employees breaking bad.
These laws will offer even more effective protection to those companies that take pro-active steps informed by skilled legal counsel, including:
- Having well-crafted confidentiality agreements for all employees that plainly and clearly define the company's "confidential information" so that employees actually know which information the company regards as confidential. If the agreement is written in a way for employees to understand, courts are likely to understand as well should that need ever arise.
- Training and educating employees on the importance of protecting the company's trade secrets and other confidential information. .
- Mandating adherence to company protocols limiting access to trade secrets and other confidences.
- Ensuring departing employees' prompt return of all company files, wherever they wound up. I've had cases involving documents on personal hard drives, in cloud storage, under the bed, and in the attic.
Whatever comes of the FTC's proposed non-compete ban, these are and will always be best practices. They will minimize the need for litigation, and will put companies in a stronger position in court should litigation become necessary.
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