The Federal Trade Commission in January published a proposed rule that would make it illegal for employers to require employees to sign noncompete agreements as a condition of employment. The rule may never take effect—a coalition of business groups plans to file a lawsuit to block it—but many employers long ago quit using non-compete agreements.
Reason: Other less draconian measures can just as effectively protect a company’s intellectual property, such as trade secrets, proprietary work processes, customer lists, supplier lists, accounting records, and other information that might be valuable to a competitor.
That’s the ostensible purpose of an agreement not to compete—to prevent employees from jumping ship and taking proprietary information with them when they go to work for a competitor. But two other kinds of agreements can often accomplish that objective: nondisclosure agreements and confidentiality agreements.
The noncompete controversy
The FTC has called noncompetes an “often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.” The FTC contends they are unnecessary in most cases. Many employment lawyers agree.
Attorney Jon Hyman of Wickens Herzer Panza in Cleveland urges employers to ask three questions when contemplating asking employees to sign noncompete agreements:
- Are they worried about the theft or disclosure of confidential information? In that case, maybe a nondisclosure agreement is all they need.
- Are they worried about the employee poaching customers, employees, or vendors? Then a nondisclosure agreement that also includes a nonsolicitation pact might be in order.
- Or is what the employee provides so unique that the business genuinely will be irreparably harmed by the employee jumping to a competitor? Then, and only then, is a broad noncompetition agreement called for (plus a nondisclosure and nonsolicitation agreement).
In many cases, Hyman says, asking front-line workers to sign noncompetes is overkill. He cites the example of a Jimmy John’s sandwich franchisee that famously got called out for requiring every employee to sign a confidentiality and noncompetition agreement that prohibited them (for two years following employment) from working at any business that derives at least 10% of its revenue from sandwiches within three miles of any Jimmy John’s.
“It’s one thing to bind your high-level employees to a noncompete,” Hyman says. “It’s another to require the same of your low-level sandwich makers. The lower down the food chain you move, the harder it becomes to enforce these agreements because you lack a protectable interest.”
Here’s a look at alternatives to non-competes.
Nondisclosure agreements may help protect your organization’s trade secrets if you have genuine secrets to protect. However, many companies don’t. If yours is one of them, instead consider having employees sign a nondisclosure agreement, or NDA.
Answer these questions to see if you should have workers sign NDAs. The more affirmative answers, the more legitimate an NDA may be.
- Is knowledge of the information greatly limited outside of the company?
- Is knowledge of the information purposely limited even within the company?
- Does the company take reasonable measures to protect the secrecy of the information?
- Is the information very valuable to the company and its competitors?
- Did it cost a great deal of time, money or effort to develop the information?
- Would it be hard for others to obtain or produce the information?
Confidentiality agreements are closely related to nondisclosure agreements. Generally, they explain with great specificity the kind of proprietary information employees agree not to divulge to outsiders, including future employers.
To make a confidentiality agreement stand up in court, an employer must be able to prove two things:
- The information taken was indeed confidential.
- The employer took adequate steps to keep the information confidential.
To truly protect your intellectual property, you will need to do more than have employees sign confidentiality agreements. At a minimum, take these steps:
- Use carefully drafted confidentiality agreements that are as specific as possible. Identify the categories of information deemed to be confidential. Give employees meaningful guidance on this point.
- Adopt employment policies detailing how confidential information is to be handled.
- Train employees on the secure handling of confidential information.
- Consistently enforce confidentiality policies and agreements to encourage employee vigilance in securely handling information and to position the company to have greater legal protection in the event of the need for a lawsuit.
- Use exit interviews and other processes to ensure that departing employees return any confidential information. Remind departing employees of their ongoing legal obligations.
Call your attorney!
None of this is a do-it-yourself project for HR. Contact your attorney to conduct a careful review of your intellectual property concerns and your risks should proprietary information leak to outside entities. Have your lawyer handle the task of drafting nondisclosure agreements and confidentiality agreements.
Whether you decide to implement an NDA, a confidentiality policy, or both, be sure to define what you consider proprietary or confidential information. Offer some examples. Make it clear, however, that the information covered in the agreement or policy isn’t limited to those examples given.
Final note: In addition to protecting your own interests, you must make sure employees you hire are not bound by any noncompete, nondisclosure or non- confidentiality agreements. As part of your onboarding process, it’s considered a best practice to require new hires to affirm that they are not subject to any of those agreements. If they are, have them sign an agreement that they will abide by them and not tell you about any of their previous employer’s trade secrets.