There is an interesting juxtaposition between the FTC’s proposal to ban non-compete agreements and the passing of the Protecting America’s Intellectual Property (PAIP) act. While the FTC suggests removing one tool used in mitigating risk of trade secret theft, the PAIP provides for presidential sanctions when such theft involves foreign entities.
FTC Ban on Non-Compete Agreements
Certainly non-compete agreements assist in the protection of confidential and trade secret information by providing a period where the person leaving employment cannot work for a competitor. These provisions rarely are the only protection since companies will have additional provisions limiting use or dissemination of confidential/trade secret information as well. That said, it is often difficult to know when confidential information is disclosed or prove theft of trade secrets once an employee leaves. The non-compete provides a framework for mitigating the risk of disclosure at least for a limited period of time. Most states restrict these clauses to reasonable periods of time or limited geographical areas to ensure that they do not prevent employment completely.
The FTC has proposed a complete ban of non-competes despite their almost universal approval by state governments. The FTC suggests that non-competes restrict employees from pursuing better employment opportunities or starting a competing business. The further offer that such restrictions reduce the competition for jobs and wages and reduce innovation. The Commission estimates that removing these restrictions would increase worker earnings between $250 and $300 billion per year. Personally, I believe that the Commission is painting the picture with a very broad brush and am curious about the financial impact of a larger available pool of employees resulting from the ban on the average worker earnings. Although equally simplistic to the FTC’s reasoning, it appears from a supply and demand standpoint that the ban could just as easily reduce worker salaries if employers have greater options.
The proposed rule provides an exception for agreements involving the sale or acquisition of a company. Specifically, the proposal states:
"The requirements of this Part 910 shall not apply to a non-compete clause that is entered into by a person who is selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity’s operating assets, when the person restricted by the non-compete clause is a substantial owner of, or substantial member or substantial partner in, the business entity at the time the person enters into the non-compete clause. Non-compete clauses covered by this exception would remain subject to Federal antitrust law as well as all other applicable law."
The rule indicates that an employer that enters into or maintains a non-compete is engaging in unfair methods of competition. To avoid unfair competition claims under the act, the employer must provide written notice that it is rescinding any existing non-compete clauses within 45 days of rescinding the clause. The proposed rule specifies that all employers must rescind these clauses within 180 days of publication of the rule.
In my personal view, a complete ban is inappropriate and fails to recognize the leverage provided by these clauses when negotiating an employ/executive exit or when faced with a theft of trade secret information. On the latter, it is often difficult to prove the theft, but moving to or starting a competing business provides a clear violation that can be enforced. I am suspect of the actual efficacy of the ban especially since states already narrowly interpret non-compete provisions in the courts. From personal experience, employees rarely turn away opportunities based on non-competes and instead look for practical solutions, such as demanding greater compensation to stay or a waiver of the provision. As a result, I question the reasoning behind the act as well. The proposed rulemaking is currently open for public comment. I encourage everyone to provide feedback on this rulemaking.
Protecting American Intellectual Property (PAIP)
The PAIP opens the door for the President to sanction foreign persons and entities engaged in the theft of trade secrets. The Act, which was signed into law on January 5th 2023, provides a host of sanctions that can be applied including denying access to funding, banking and foreign exchanges; blocking goods; denying/revoking work visas; stopping U.S. procurement contracts, and limiting the purchase of property by such foreign persons or entities. There is an exception allowing the President to waive the imposition of sanctions when it is a matter of National Interest. The Act also limits application with respect to matters of international intelligence, law enforcement, and the importation of goods into the U.S. The Act is provided for a limited time and includes a 7 year sunset provision.
Foreign theft of trade secrets certainly has been an ongoing concern of the U.S. government as reflected in the Economic Espionage Act and Defend Trade Secrets Act. This appears to be a further extension of the protections offered in those to prior acts and allows for the executive branch to be hands on with respect to the foreign powers behind the trade secret theft.
Conclusions
Overall, the PAIP Act and the proposed FTC ban appears to be the federal government giving with one hand and taking away with the other. Adding sanctions as a tool in cases of foreign trade secret theft is a welcome addition in terms of strengthening the ability to protect intellectual property. However, it is often difficult to prove a trade secret theft and a non-compete can be a useful tool in stopping an employee/executive from moving to or creating a competing entity with trade secret information. The FTC should consider the practical implications of the ban on obtaining injunctive relief, in such situations, and negotiating an exit under controlled circumstances that allow the employer to have greater assurance that trade secret or other confidential information will not immediately fall into the hands of a competitor.