{"id":157093,"date":"2023-02-26T12:15:55","date_gmt":"2023-02-26T17:15:55","guid":{"rendered":"https:\/\/ipwatchdog.com\/?p=157093"},"modified":"2023-02-25T19:19:27","modified_gmt":"2023-02-26T00:19:27","slug":"trusting-talent-imagining-future-without-noncompete-agreements","status":"publish","type":"post","link":"https:\/\/ipwatchdog.com\/2023\/02\/26\/trusting-talent-imagining-future-without-noncompete-agreements\/id=157093\/","title":{"rendered":"Trusting the Talent: Imagining a Future Without Noncompete Agreements"},"content":{"rendered":"

\u201cThe ultimate solution to reduce risk to a company\u2019s information assets is in nurturing the relationships it forms with those who have access.\u201d<\/p>\n<\/div>\n

\"noncompete\"<\/a>It\u2019s getting pretty rough out there for employers who want to control their employees\u2019 behavior. Think back to March 2020, when the pandemic was just beginning and we took a look<\/a> at this new phenomenon of widespread remote work. We imagined managers wistfully recalling the Renaissance, when artisans could be imprisoned, or even threatened with death, to make sure they didn\u2019t breach confidence. Well, in modern times at least, companies can use noncompete agreements with departing employees to avoid messy and unpredictable litigation over trade secrets.<\/p>\n

Maybe not for long. As we learned last month, the FTC is on the warpath<\/a> about noncompetes, and it may not be long before the entire country is forced to emulate California and just do without. Whatever happens with the FTC proposal, it\u2019s pretty clear that noncompetes are also under attack by the states, where new laws limit their effectiveness.<\/p>\n

So, it\u2019s probably wise to at least prepare ourselves for a world in which noncompete agreements, at least for the rank and file, are forbidden. Welcome to sunny California, where we\u2019ve been living under that regime since 1872, thanks to a statute<\/a> that prohibits contracts \u201cby which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.\u201d When you can\u2019t prevent staff from jumping to the competition, what does a business have to do to maintain control over its trade secrets?<\/p>\n

The Downside of Noncompetes<\/strong><\/h2>\n

We\u2019ll get to that, but first let\u2019s console ourselves with the recognition that maybe life without noncompetes wouldn\u2019t be so bad. First, noncompete agreements are not a perfect solution for protecting a company\u2019s confidential information. Where they are allowed, courts often limit coverage to what is \u201creasonable\u201d in duration, geography and subject matter, to the minimum required to protect the company\u2019s interest. And some courts require the employer to continue to pay salary during the noncompete period, while the former employee prepares plans to open a competing business the day that the restriction expires.<\/p>\n

Second, noncompete agreements can introduce resentment and contention into the company\u2019s relationship with its workforce. This can have the perverse effect of increasing risk to confidential information, as employees search for workarounds to evade legal restraints. Third, administering a system in which these agreements have varying effect in individual states or foreign countries can be a nightmare for the HR department. And fourth, too-heavy reliance on noncompetes can lead the company to neglect the important task of managing the confidential relationship (more on that below).<\/p>\n

In California, we don\u2019t have to worry about those issues, and some would say that the state has done pretty well, creating the world\u2019s fourth largest economy, largely resulting from innovation produced by Silicon Valley. True, there is general recognition that a lot of valuable information is compromised through the free movement of high-level managers and engineers (the euphemism applied to that loss is \u201cspillover effects\u201d). Still, the general assumption is that the resulting information flows provide a rising tide that lifts all boats. Lest we forget, California also leads the nation in trade secret litigation, which should come as no surprise \u2013 take away noncompete agreements and a lawsuit may be your only ultimate tool.<\/p>\n

The Overbroad NDA as a Noncompete<\/strong><\/h2>\n

Well, at least we can rely on the old standby of the employee non-disclosure agreement (NDA), or Confidentiality Agreement. Sorry, but I have a bit of bad news on that front. As we know, the FTC has proposed a \u201cfunctional test\u201d for banning NDAs that are the equivalent of a noncompete because the effect is to block the employee\u2019s ability to find competitive employment. But the FTC didn\u2019t pluck this idea out of thin air, and even if its proposed rule never becomes law, we\u2019re still going to have to deal with the risk that a \u201cgarden variety\u201d confidentiality agreement could be struck down, or even made the basis of a claim that the company is engaged in unfair competition.<\/p>\n

How can this be? Employee NDAs are built on the noncontroversial assumption that the law already implies an obligation of confidentiality when an employee is entrusted with sensitive information. The contract simply reinforces that notion, providing notice and helping to demonstrate that the company has exercised \u201creasonable efforts\u201d to protect its trade secrets, a required showing in any lawsuit to enforce its rights.<\/p>\n

The problem stems from how companies define the information that employees are required to maintain in confidence after they leave. Naturally, these definitions are a bit broad and vague, because at the outset of the relationship it\u2019s impossible to know exactly what secrets the employee will be exposed to. But some companies (rather, their lawyers) have decided that it\u2019s a good idea to expand the scope of the NDA in ways that actually do have much of the effect of a noncompete. Two cases illustrate the riskiness of this approach.<\/p>\n

In the first one, TLS Management v. Rodriguez<\/a><\/em>, the employee worked for a tax planning and consulting firm, leaving to engage in his own tax practice. The employer sued to enforce his NDA, which covered \u201call information . . . regarding TLS business methods . . . any other information provided to\u201d the employee, and \u201cany other information\u201d he might learn during employment. The only exception was for information disclosed by TLS to the general public. The court struck down the agreement because it extended to the employee\u2019s \u201cgeneral knowledge\u201d and other information that was publicly available.<\/p>\n

More recently, a California appellate court, in Brown v. TGS Management<\/a><\/em>, reversed an arbitrator\u2019s decision enforcing an employee NDA that similarly defined \u201cconfidential information\u201d to include anything \u201cused or usable in, or originated, developed or acquired for use in, or about or relating to\u201d the employer\u2019s business. The exceptions provided in the contract were so narrow (for example, information previously known to the employee \u201cas evidenced by Employee\u2019s written records\u201d) that the court saw them as proof that the NDA was designed to block legitimate competition.<\/p>\n

Drafting the NDA with Clarity<\/strong><\/h2>\n

What should companies do to preserve the utility of confidentiality agreements and avoid their being interpreted as noncompetes? First, look carefully at the definition of covered \u201cConfidential Information\u201d and make sure coverage is directed at information of the company or its customers that deserves the label because it provides some sort of commercial advantage. Second, clarify the definition with exceptions that acknowledge the employee\u2019s control over their own skill and general knowledge. Third, include language that allows a judge, when enforcing the agreement, to adjust its restrictions as necessary to make it reasonable (sometimes called \u201cblue penciling\u201d).<\/p>\n

But these mechanics of drafting the NDA are only a part of the effort. While they may be necessary to avoid reclassification as a noncompete, they are not sufficient to establish and maintain control over your trade secrets. Having the new employee sign a restrictive contract is just an initial step in managing the relationship for clarity and understanding about confidentiality.<\/p>\n

Managing a Relationship of Trust<\/strong><\/h2>\n

Whatever is in your contract, you will be entrusting this individual, perhaps over many years, with access to some of your most competitively sensitive information. The contract alone can\u2019t bear the weight of that continuing responsibility when the employee leaves. The perfect NDA will not help you much if by that time you have not communicated well and frequently what that sensitive information is, and how you expect your employees to behave to protect it.<\/p>\n

In between the contract at onboarding and the exit interview at departure is where the trust-building happens. Although \u201cConfidential Information\u201d can\u2019t be defined with specificity in the NDA, the company can, through thoughtful training and guidance, help the employee to understand what sort of secrets are most important to the business. That understanding, consistently reinforced, becomes the foundation for a \u201cculture of confidentiality\u201d in which employees who leave are prepared to do what\u2019s right, rather than argue over the wording of their NDA.<\/p>\n

We can find surveys<\/a> showing employees willing to share their employer\u2019s confidential information \u2013 but this usually results from misunderstanding and mixed signals, not malicious intent. So, the ultimate solution to reduce risk to a company\u2019s information assets is in nurturing the relationships it forms with those who have access. If you can\u2019t use noncompete agreements, you also can\u2019t file a trade secret misappropriation lawsuit against every departing employee. Your primary protection comes instead from their clear appreciation of the trust that has been placed in them.<\/p>\n

Image Source: Deposit Photos
\nAuthor: Premium_shots
\nImage ID: 17928103 \u00a0<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

It\u2019s getting pretty rough out there for employers who want to control their employees\u2019 behavior. Think back to March 2020, when the pandemic was just beginning and we took a look at this new phenomenon of widespread remote work. We imagined managers wistfully recalling the Renaissance, when artisans could be imprisoned, or even threatened with death, to make sure they didn\u2019t breach confidence. Well, in modern times at least, companies can use noncompete agreements with departing employees to avoid messy and unpredictable litigation over trade secrets. Maybe not for long. As we learned last month, the FTC is on the warpath about noncompetes, and it may not be long before the entire country is forced to emulate California and just do without. Whatever happens with the FTC proposal, it\u2019s pretty clear that noncompetes are also under attack by the states, where new laws limit their effectiveness.<\/p>\n","protected":false},"author":109117,"featured_media":148421,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"content-type":"","footnotes":"","_links_to":"","_links_to_target":""},"categories":[6998,228,3,48],"tags":[53601,247,5531,49,1295,72208,74654,8728],"yst_prominent_words":[28664,17349,17088,58494,17348],"acf":[],"_links":{"self":[{"href":"https:\/\/ipwatchdog.com\/wp-json\/wp\/v2\/posts\/157093"}],"collection":[{"href":"https:\/\/ipwatchdog.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/ipwatchdog.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/ipwatchdog.com\/wp-json\/wp\/v2\/users\/109117"}],"replies":[{"embeddable":true,"href":"https:\/\/ipwatchdog.com\/wp-json\/wp\/v2\/comments?post=157093"}],"version-history":[{"count":3,"href":"https:\/\/ipwatchdog.com\/wp-json\/wp\/v2\/posts\/157093\/revisions"}],"predecessor-version":[{"id":157096,"href":"https:\/\/ipwatchdog.com\/wp-json\/wp\/v2\/posts\/157093\/revisions\/157096"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/ipwatchdog.com\/wp-json\/wp\/v2\/media\/148421"}],"wp:attachment":[{"href":"https:\/\/ipwatchdog.com\/wp-json\/wp\/v2\/media?parent=157093"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/ipwatchdog.com\/wp-json\/wp\/v2\/categories?post=157093"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/ipwatchdog.com\/wp-json\/wp\/v2\/tags?post=157093"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/ipwatchdog.com\/wp-json\/wp\/v2\/yst_prominent_words?post=157093"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}