Russell Beck and Erika Hahn
BridgeTower Media Newswires
President-elect Biden announced a policy to ban most noncompetes. What does it say, what does it mean, and what should companies do about it (now)?
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What does it say?
The announcement provides as follows:
"Eliminate non-compete clauses and no-poaching agreements that hinder the ability of employees to seek higher wages, better benefits, and working conditions by changing employers. In the American economy, companies compete. Workers should be able to compete, too. But at some point in their careers, 40% of American workers have been subject to non-compete clauses. If workers had the freedom to move to another job, they could expect to earn 5% to 10% more - that's an additional $2,000 to $4,000 for a worker earning $40,000 each year. These employer-driven barriers to competition are even imposed within the same company's franchisee networks. ... As president, Biden will work with Congress to eliminate all non-compete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets, and outright ban all no-poaching agreements."
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What does it mean?
There are a lot of issues to unpack. Eight will be discussed here. (There are more, but these eight are the most important.)
- First, lumping noncompetes and no-poach agreements together is mixing apples and oranges.
While noncompetes have some impact on a person's job mobility, they reflect a balance between mobility and allowing companies to efficiently share information and customer goodwill with their employees without fear that the information or goodwill will be taken to a competitor who did not have to invest the resources to develop it.
In contrast, no-poach agreements (which are not agreed upon by the parties directly affected by them) usually hinder movement of employees without protecting corresponding legitimate business (and societal) interests.
Further, noncompetes do not typically prevent employees from joining a competitor; rather, they restrict the role that the employee can undertake for the competitor. No-poach agreements, in contrast, often effectively prevent employees from working for the other contracting companies in any capacity.
- Second, the statement that "40% of American workers have been subject to non-compete clauses" confirms the expected: Many people have signed a noncompete. But how does that affect employees? The answer runs the gamut from beneficial impacts (see below), to no impact on career plans, to restrictions on permissible conduct at a new job, to taking a job that is different from a preferred job, to taking a temporary career detour. In our experience, most matters fall closer to the "restrictions on permissible conduct at a new job" side of the spectrum.
- Third, the assumption that "[i]f workers had the freedom to move to another job, they could expect to earn 5% to 10% more" comes from a 2016 Treasury Department report. However, while the Treasury report relies in part on objective, verifiable resources (including our firm's "50-State Noncompete Chart"), it also relies on "[r]esearch on non-competes [that] is still at an early stage."
Indeed, the Treasury report acknowledges that "[t]he literature on the effect of non-competes on wages is small, consisting largely of case studies, surveys of specific professions ..., theoretical papers, and a recent analysis based on a broad online survey."
Of course, if noncompetes were in fact the root cause of comparatively depressed wages, one would think that California - the state trotted out as the poster child for banning noncompetes - would have the highest median income (all things being equal). But it doesn't. It has the 10th. And, the eight states and D.C. with a higher median income than California all enforce noncompetes.
In fact, Massachusetts - which is usually held up as the whipping boy to California's success in Silicon Valley - has a median income that is $7,150 higher than California (i.e., roughly 10 percent higher). And, Massachusetts' cost of living index (131.6) is 20 percentage points lower than California's (151.7).
- Fourth, the announcement groups all workers together, disregarding that the data (preliminary as it is) shows that while some workers (low-wage workers in particular) may suffer adverse wage impacts from noncompetes, other workers actually benefit from noncompetes. For example, noncompetes appear to systematically increase earnings for CEOs and physicians.
- Fifth, the announcement ignores benefits of noncompetes, which (according to the Treasury report and academic research) include: protecting trade secrets; protecting goodwill; increased training; increased innovation; better employee-employer matching; 9.7 percent higher wages and increased job satisfaction when employees are provided a noncompete before accepting the job offer; fewer, but better startups; greater worker productivity; and less risky behavior.
- Sixth, the Treasury report relies in part on employee-reported data, the trustworthiness of which is at best dubious. For example, "only 24 percent of workers report that they possess trade secrets." While employees certainly report such things, our experience also reflects that employees frequently do not fully appreciate what a trade secret is. And the drafters of the Treasury report were aware of that: "this is based on worker self-reports; employers may disagree."
- Seventh, the statement that "Biden will work with Congress to eliminate all non-compete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets, and outright ban all no-poaching agreements" is a bit unclear.
As a threshold matter, trade secrets are anything but a "narrowly defined category." In 2016, Congress passed the Defend Trade Secrets Act, stating that "trade secret theft ... harms the companies that own the trade secrets and the employees of the companies" and the federal law "applies broadly to protect trade secrets from theft ... ."
As Congress and President Obama agreed, they are so vital to the economy that it was necessary to add a federal private right of action - on top of noncompetes - to help protect them.
Further, despite the announcement's reliance on the Treasury Report, this statement may suggest that the Biden administration plans to ignore the Treasury report's ultimate conclusions and recommendations - as well as those of the Obama administration's follow-up report and resulting Call to Action - all of which called for a rational response, as opposed to a throw-the-baby-out-with-the-bathwater response, focused on addressing the abuses, rather than proper use, of noncompetes.
- Eighth, the announcement ignores the potential unintended, unstudied consequences of a ban, including the impacts on small companies with limited resources to protect themselves from competitors who hire their employees to unfairly compete and the impact on the remaining employees, whose interests are aligned with the company, its survival, and its success.
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What to do about it
While a near complete ban may not be imminent, protecting trade secrets, confidential business information, goodwill, and other recognized legitimate business interests does not happen by accident. It takes planning.
And, when one of the key tools is in the crosshairs, companies need to focus more closely on the remaining options, which can work together to form a cohesive back-up plan when noncompetes are not available - or even when they are simply not necessary or enforceable in the particular circumstances.
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Key tools beyond noncompetes
Key among the tools to protect a company's legitimate business interests are the following agreements:
- Nondisclosure agreements restrict a person's use of confidential information and trade secrets. They are a fundamental building block to protecting trade secrets, and most courts view them as the price of admission before they will step in to help protect the company's trade secrets (or the related goodwill and confidential information that frequently go hand in glove).
While nondisclosure agreements were generally considered enforceable without much scrutiny, the recent 1st Circuit decision in TLS Mgmt. & Mktg. Servs., LLC v. Rodriguez-Toledo, 966 F.3d 46, 57 (1st Cir. 2020), potentially upends that paradigm. Significantly over-inclusive NDAs are now at risk of being unenforceable in their entirety.
Accordingly, companies should review their NDAs and make sure they do not attempt to protect information that (1) constitutes general knowledge, (2) is otherwise publicly available, or (3) was received from third parties (such as from clients).
And, while they're at it, they shouldn't forget to comply (or make an informed decision to not comply) with the Defend Trade Secret Act's whistleblower notification requirements. 18 U.S.C. §1833(b).
- Nonsolicitation agreements prohibit the solicitation of a company's customers (and sometimes referral sources, suppliers and others), but do not typically otherwise restrict the former employee at a competitor. Nevertheless, nonsolicitation agreements are sometimes drafted so broadly that courts will consider them to effectively constitute a noncompete, and refuse to enforce them (in part or in full) on that basis.
When customer goodwill (and potentially related confidential information) is at issue, a properly drafted nonsolicitation agreement offers meaningful protection, but it is not a prophylactic, and oftentimes violations occur without the former employer's knowledge.
- Variations include agreements prohibiting former employees from causing a customer or other party to terminate or reduce its relationship with the former employer, or that prohibit the former employee from servicing the customer. Known as noninterference and no-service agreements, respectively, they provide more protection than nonsolicitation agreements but are harder to enforce.
- No-recruit/no-raid agreements prohibit the solicitation of a company's employees. Enforcement actions involving these agreements have become more routine than in the past, and the law is developing to hold these agreements to a standard similar to those of nonsolicitation agreements.
- A variant of no-raid agreements that are an absolute ban on the hiring of a company's employees - as opposed to just a bar to their solicitation -are called no-hire agreements. While they provide more protection than no-recruit agreements, they are harder to enforce.
- Alternative forms of noncompetes may not be captured by a federal ban and would therefore remain subject to state law only.
- Garden leave/notice covenants generally compensate an employee while they are restricted. There are essentially two types, each with its own variations: (1) the traditional version, in which the employee provides notice of resignation for a specified (typically, lengthy) period, during which that person remains employed (but does no work) and, as a consequence, continues to be bound by fiduciary duties (including to not compete); and (2) a model in which the employee is paid some amount of compensation during the restricted period of a traditional noncompete.
- Forfeiture-for-competition agreements and compensation-for-competition agreements operate by requiring employees to either forfeit certain benefits or pay some amount of money (often a percentage of revenues) if they engage in competitive activities.
- Invention assignment agreements require employees to assign inventions and improvements to the company's intellectual property, and both protect the company's investment in its intellectual property and preserve the benefits of new developments that arise as a consequence of work being done for the company. They tend to be enforceable, assuming they follow applicable limitations.
- Springing/"time out" noncompetes are a remedy by which a court, in effect, creates a noncompete for someone who has engaged in unlawful conduct, such as breaching a nondisclosure agreement or nonsolicitation agreement, misappropriating trade secrets, or breaching his or her fiduciary duties to the employer. While employees are permitted to compete in the first instance, they essentially forfeit that right if they engage in otherwise unlawful behavior.
Although this is a remedy, not a separate agreement, it can be expressly identified in an agreement to put the employee on notice. There is no case law about its enforceability at this point, but clients have used it for years before it was incorporated in the Massachusetts Noncompetition Agreement Act, and it's never needed to be tested.
In the end, which agreements make sense will depend on the particular circumstances of the company, the industry, the business interests, and the employee at issue. Careful consideration should be given - now - to make sure that the appropriate protections are in place, regardless of what happens to noncompetes moving forward.
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Company policies
These agreements should be supplemented with all appropriate policies, including, in particular, policies governing the proper use of company-owned equipment and technology (often called computer use policies) and personal devices (BYOD policies), trade secrets and confidential business information policies, and codes of conduct.
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Training, training, training
What are the three most important steps to protecting a company's trade secrets, other confidential information, and goodwill? Training, training, training. It's crucial to making the protections work.
Even with the best of agreements in place, protecting legitimate business interests comes down to training - starting before a new employee walks in the door, continuing during the employment cycle, and repeating at the end (where it starts for the new employer).
It is critical to preventing information from entering the company and contaminating the company's existing information and research, as well as to making sure the company's information isn't taken from the company.
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Takeaways
Now is the time for companies to review and update their overall legitimate business interest protection strategy, including (1) their agreements, to ensure that they are sufficiently protective without going too far; (2) their applicable policies; and (3) their training program for preventing the infiltration and exfiltration of their information and goodwill.
Doing so should help both to reduce the need for enforcement actions and increase the likelihood of success if and when they do need to enforce their rights or defend their conduct.
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Russell Beck is a founding partner of Beck, Reed, Riden in Boston. He litigates and advises on trade secret, noncompete agreement, and employee mobility matters nationally and assisted the Legislature with the 2018 noncompete and trade secrets laws. Erika Hahn is a paralegal at the firm. She has been a substantial contributor and editor on a book on Massachusetts noncompete law, a book on trade secrets law, and various other publications.
Published: Tue, Jan 26, 2021
