Trade secrets and privileged information will still be protected from competitors, even as the Federal Trade Commission prepares to release a final rule that would bar companies from requiring employees to sign noncompete agreements.
The FTC issued a proposed rule in January 2023, and attorneys from Polsinelli Law Firm said they expect a final rule to be released in April.
Increasingly, states also are banning such agreements. Three states — California, North Dakota and Oklahoma — banned noncompete agreements in 2023, and last month, New York Gov. Kathy Hochul (D) vetoed a bill that would have banned most noncompete agreements in the Empire State.
“What the stance of the governor is, is that noncompetes are inappropriate for low- and middle-wage workers,” Eric Packel, chair of Polsinelli’s restrictive covenants and trade litigation unit, said Tuesday during a webinar.
Packel said he was caught “a little off guard” that Minnesota now also is thinking of banning noncompetes.
“I can’t say that Minnesota was on my radar as being the state that was going to have a noncompete ban, but I think it further highlights that there is this growing hostility towards noncompetes,” he said.
What employers need to know, Packel said, is that “You can still protect your confidential information, you can still protect your trade secrets, you can still take these measures, but we have to be more strategic now more than ever and more thoughtful about how we do it now more than we ever have before.”
The rule proposed by the FTC doesn’t prohibit nonsolicit clauses, but some “gray area” exists, noted Emma R. Schuering, a shareholder in Polsinelli’s Kansas City, MO, office.
“But it does have a carve-out that says that … if it acts like a noncompete, it looks like a noncompete, it is a noncompete, even if you don’t call it a noncompete,” she said. “So the proposed rule has this functional test language that gives whatever organization or entity would be evaluating the application of the proposed rule the ability to review things like a nonsolicit or [a nondisclosure agreement] … to see if it is effectively operating like a noncompete even if you don’t call upon it.”
The bottom line, according to Packel, is that companies use noncompetes and nonsolicits to cover ground that is not typically covered by statute. “But one of the things for employers to focus on is that trade secrets still are protected, both under federal law and, I think, in almost every state,” he said.
Employers must take steps to articulate the trade secrets or “secret sauce” that gives the company a competitive advantage, in order to protect it, Packel said.
