In part one of our series on noncompete agreements, we covered the basics of the FTC’s recent noncompete agreement ban. The ban has left a number of business owners concerned about the noncompete alternatives that are available to them if noncompetes are off the table.
With that question in mind, today we’re moving on to part two of this series, in which we’ll transition to discussing non compete alternatives.
The FTC’s Noncompete Ban: Recap
Before we discuss these alternatives, let’s recap the details surrounding the noncompete ban we covered in part one.
Noncompete agreements are a way of restricting employees from leaving their current company and working for a competitor for a certain period of time. Ideally, these agreements help protect a business’s trade secrets and intellectual property.
However, they have also been criticized for unfairly limiting employee mobility and increasing barriers to entry into the job market.
In response to these concerns, the FTC announced that noncompete agreements are now considered a form of unfair competition and will be banned under certain circumstances. This includes when used for low-wage workers and employees who are not privy to sensitive information.
Along with benefiting employees by allowing them greater freedom in their career choices, the FTC’s noncompete ban comes with other expected benefits as well:
- The ban is expected to create 8,500 new businesses annually.
- It could increase worker wages by $524 per year on average.
- Reduce healthcare costs by $194 billion over ten years.
- Boost innovation with 17,000 to 29,000 new patents annually.
- Senior executives are largely exempt from the ban.
Why Noncompete Alternatives are Necessary
With the news of the FTC’s ban on most noncompete agreements, businesses need to start considering alternative ways of safeguarding their interests.
So, why are noncompete alternatives necessary?
Beyond complying with the FTC’s ban, there are other reasons a business may consider alternative methods of protecting certain information.
Difficult to enforce
Depending on the state, noncompete agreements may not always hold up in court. This can leave businesses vulnerable if an employee decides to break the agreement.
Negative impact on company culture and loyalty
When employees feel like their employer doesn’t trust them or restricts them, naturally this can negatively impact morale and loyalty. This is particularly true for high-performing employees who may feel like they’re being punished for wanting to advance their careers.
Less flexible than noncompete alternatives
There isn’t necessarily just one right option when it comes to protecting trade secrets and intellectual property. Using a combination of different methods can provide businesses with more tailored and flexible protection.
Keeping in mind that noncompete agreements have been the go-to solution for protecting a company’s intellectual property and trade secrets for a long time, many businesses are understandably eager to find an alternative way to protect their IP and trade secrets.
However, with the ban in place, businesses need to start looking at alternative ways of safeguarding their interests.
Noncompete Alternatives to Protect Your Business
Before panicking about the noncompete ban, know there are other effective options to pursue. The two most common are trade secret laws and non-disclosure agreements.
Trade secret laws
Trade secrets, which include practices, designs, formulas, processes, and other information a business wants to protect to secure its competitive advantage, are safeguarded by state and federal trade secret laws.
These laws help protect a company’s information without limiting employee mobility, and better yet, they aren’t in violation of the FTC’s ban.
The potential limitation of this option is that the burden of proof lies with the business.
To classify something as a trade secret, there are a few key requirements it must satisfy:
- The information must be confidential in nature and not something that is generally known or easily accessible
- Economic value must also be established to prove that keeping this “trade secret” has financial implications.
- The business must take reasonable measures to protect the information.
Notably, two states have not adopted the Uniform Trade Secrets Act: Massachusetts and New York. From state to state, there are also certain modifications to the Uniform Trade Secrets Act.
With that in mind, it’s best to consult with a business attorney if you choose to pursue this noncompete alternative.
Non-disclosure agreements (NDAs)
Another promising option is one you might be more familiar with: non-disclosure agreements or NDAs. These legal contracts help protect confidential information by prohibiting parties from disclosing it to others, or they risk facing legal consequences, including financial penalties.
Unlike noncompete agreements, NDAs are often used for a specific project or collaboration between parties. They can be unilateral or mutual. A unilateral agreement means only the recipient must keep the information confidential. For mutual agreements, both parties are bound by the contract to keep information private.
Unlike noncompetes, which tend to be between employees and employers, NDAs are often used between businesses or prospective employees.
For example, if a company needs to share sensitive information with another party before they go forward with doing business together, negotiating a contract, or any other relationship.
With an NDA in place, the sensitive information they share is protected under this contract.
Non-disclosure agreements might also include non-solicitation clauses, which prevent employees from reaching out to former clients of their previous employer for a certain period of time.
Finding the Right Noncompete Alternative for Your Business
When it comes down to choosing between trade secret laws and NDAs, there isn’t necessarily one “better” option. In fact, what’s right for your business might be a few different noncompete alternatives rather than one single solution.
One thing is for sure, however: working closely with Denver business lawyers is the way to go if you want to protect your business in the most effective way possible.
To learn more about noncompete alternatives and how to protect your business, contact Contiguglia Law Firm today.
Our experienced Denver business attorneys can help you navigate this noncompete ban and find the best alternative. In some cases, you might even find out the ban does not apply to your existing noncompetes, in which case alternatives might not be necessary.
Report back to our blog soon for part three of this series, where we’ll tell you more about the effect the ban could have on the US economy.
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