One of the main concerns of general counsel as they wait for the Federal Trade Commission to finalize its proposed ban on noncompete agreements is how to apply other types of agreements, including non-disclosure and non-solicitation agreements, to protect their interests without the FTC seeing these agreements as de facto noncompetes.
The FTC “has provided little guidance as to when an NDA will cross that line,” said John Chun, a partner at Herrick, Feinstein.
In its proposed rule, the FTC said it will look at whether non-disclosure and non-solicitations are functioning as noncompetes, potentially violating the ban.
This risk puts the onus on companies to justify why their use of these alternative agreements don’t amount to “de facto” noncompetes, said Chun.
For companies that don’t want to risk that their use of non-disclosure and non-solicitations will run afoul of the ban, there’s another option they can look at – a negotiated cooling-off period, often called garden leave.
The typical cooling off period is six months, during which departing employees are paid not to work for a competitor, said Chun.
Stride Bank, based in Enid, Oklahoma, a jurisdiction that already doesn’t permit noncompetes, uses garden-leave periods, said Shelly Connolly, senior vice president and director of human resources at the bank.
The company does a “deep diagnostic” of intellectual property assets held by an employee prior to departure, and any attempt by an outgoing employee to print, save or delete information prior to departure is tracked, she said.
Then, once the employee leaves, they could be subject to the cooling-off period.
Although garden leave could be a solution for some companies, it could be costly, especially for early-stage companies.
“[With] companies that aren’t necessarily well-funded, how are they going to be able to pay off these people who may want to … go to a competitor?” said Damian Cavaleri, a partner at Hoguet Newman Regal & Kenney. “How are they going to deal with investing in those people as strong employees, but also giving them enough incentive to stick around … and being able to pay them if they want to leave to go to a competitor or start their own company?”
If a cooling-off period isn’t the right solution, companies will need to rely on non-disclosure and non-solicitations, which means making sure they’re targeted as narrowly as possible to protect the company’s interests. That way, the company is best positioned to argue to the FTC they’re not functioning as noncompetes.
Debbie Berman, partner at Jenner & Block, recommends general counsel undertake due diligence on what trade secrets need protecting and who among the company’s employees could take those secrets with them were they to leave for a competitor.
Once that due diligence is complete, the company can look at confidentiality and non-solicit agreements to see if they can be narrowed to just what’s needed to protect company secrets from high-risk employees.
“The old days of having the broadest agreement you could have to cover anything that basically keeps someone from leaving are gone,” said Berman.