The Federal Trade Commission’s proposal to ban noncompetes could complicate how companies handle even their routine nondisclosure agreements, Aaron Levine and Matt Todd of Polsinelli said in an analysis.
Although the FTC has noncompetes in its sights, the proposed rule it released in early January wraps in NDAs to the extent they function as a noncompete agreement.
“A nondisclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the worker’s employment with the employer [might be] a de facto noncompete clause,” the FTC said.
The FTC is going after noncompetes as unfair competition under Section 5 of the FTC Act because their use is holding down pay, opportunity and innovation by increasingly keeping even lower-level employees tied to their jobs, the agency said.
For in-house counsel, the inclusion of NDAs would complicate compliance because of the difficulty of knowing what is, and isn’t, acceptable.
The agency’s one example of a noncompliant NDA is a case that’s so extreme that it’s “comedic,” Levine and Todd said.
The case involves a securities company whose NDA bans employees from saying anything about securities, making the NDA a de-facto noncompete since no ex-employee could take a job in the securities industry without violating it.
“Certainly, the FTC does not mean to suggest that any NDA short of [this overly broad example] would be ‘appropriately tailored’ under its functional rule,” they said.
It’s easy to imagine a scenario in which an employee, even subject to a reasonable NDA, can’t take advantage of an offer for a better job, they said. That’s because any prudent measure a possible employer would take to avoid inducing an NDA breach and misappropriating a trade secret would leave the employee stuck in his current job.
This is the case even if the intent of the NDA is to protect documents and data the employee has access to and not necessarily to keep the employee from using his trade-secret knowledge.
Levine and Todd lay out a case in which a competitor invites the employee of another company to interview for a job but after learning of his NDA, declines to extend a job offer out of fear of violating the Defend Trade Secrets Act.
“The competitor seemingly avers that there is no realistic manner for [him] to work at [the company] with the NDA in place,” they said.
The decision not to hire away the employee is the kind of prudent action any company might take, but it could prompt the FTC to investigate the NDA as a functional noncompete. That in turn could lead the employee’s company to withdraw the NDA and let the employee go to the competitor rather than be subject to federal oversight in a consent decree under the ban.
The company “folds” and withdraws the NDA, in other words, “and its valuable trade secrets … walk out the door,” the attorneys said.
That leaves companies uncertain over how to write an NDA that won’t raise FTC noncompete concerns while still protecting their trade secrets.
“Greater care will be needed in drafting NDA[s] such that they are more narrowly drawn,” they said. “Such NDAs may also need to be regularly reviewed and revisited to ensure that they align with an employee’s current access to company information, rather than writing such language generally as a one-size-fits-all provision.”
The FTC is taking comments on its proposed ban until mid-March.
There’s no timeline on when it will release a final rule, or if it does. Although with President Biden’s support of the ban in his State of the Union speech in early February, the chances are good the FTC will move forward with a rule.
In the meantime, in-house legal leaders can benefit from taking a look at whether their NDAs could be construed as functioning as noncompetes.
“We are left with vague platitudes that ‘good’ NDAs merely limit the way that a worker competes with their former employer while ‘bad’ NDAs prevent a worker from competing altogether,” Levine and Todd said.
In practice, this might be a distinction without a difference, but it will fall to in-house counsel to figure it out.