This past January, the Federal Trade Commission (the “FTC”) published a proposed rule (an “NPRM”) on its website, which would effectively prohibit non-competition clauses (“non-competes”) in certain instances. The proposed rule would make it an “unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with a worker; maintain with a worker a non-compete clause; or represent to a worker that the worker is subject to a non-compete clause where the employer has no good faith basis to believe the worker is subject to an enforceable non-compete clause” (NPRM, at pg. 69).
Image from FTC press release site, Jan. 6, 2023
What is a Non-Compete?
As defined in the proposed rule, a non-compete clause is “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” (Id. at 4).
Non-competes generally protect a legitimate business interest, such a trade secrets, proprietary information, market capacity, or methodology – something that gives that company a competitive edge. Certain professions are exempt from the restrictions of non-competes due to the universal public service or nature of the work and the profession. These include, but are not limited to physicians, attorneys, and licensed clinical social workers. You can find a list here that elaborates on where non-competes are not permitted for various reasons.
Non-Competes in Texas
The criteria for a Texas non-compete to be enforceable are laid out in the Texas Business and Commerce Code. An enforceable non-compete must be:
- part of or connected to an otherwise enforceable agreement like an employment agreement; and
- reasonable in scope, time, and geographic area; and
- does not impose restraints greater than necessary to protect the employer’s interests.
Non-competes typically restrict an employee’s ability to work in a specific industry or geographic area for a certain period of time after leaving their current employer. They may even restrict a former employee from soliciting the employer’s clients or customers for a certain period of time after they leave that employer.
Terminology
Wording matters in who is covered under these agreements. The nuance between an employee and a worker or contractor(i.e. not an employee) is critical and may have different outcomes and repercussions. The Internal Revenue Servicedefines and employee as a person who works for an employer and the employer can control what will be done and how it will be done. The control is reviewed in three categories: behavioral, financial, and relationship of the parties.
Any person hired to perform work or services for another that falls on the “loose” end of the control spectrum, has general autonomy, and is not held to the stringent standards general employees are, is likely an independent contractor. This means they may ply their trade and perform work across industries and companies without most restrictions.
Restricted Mobility
Non-competes are often used to retain talent at companies, while preventing direct or indirect competition for a business in a particular geographic area or industry. The restriction of available talent in an area which directly competes allows the primary business to flourish without sharing in the profitability of that market. Opponents of the non-competes often state that the restriction inhibits a worker’s free movement to change jobs, industries, or location in order to seek better opportunities, as well as indirectly prohibiting innovation.
Alternatives to Non-Competes
Alternative methods to protecting the business and the intrinsic or extrinsic knowledge and training that is developed by and with employees is key. Restrictive covenants and clauses that limit risk exposure or capability of outside or external use after the employee leaves an employer. Redefined the scope and specific language in NDAs, non-solicit clauses, assignment agreements, etc.
The first way a company or employer can restrict or protect and insulate itself from the risk of not being able to enforce non-compete agreements or clauses is to create a non-disclosure agreement with very specific wording. The in-depth coverage in a confidentiality agreement or provision ensure that the employee and employer understand what exactly is and isn’t confidential, proprietary, and protected.
Four recommended sections to include in NDAs are:
1) a clear definition of what is included as “Confidential Information”; and
2) the purpose for which the receiving party may use such confidential information; and
3) the duration of the confidentiality obligations (between two to ten years is often viewed as fair depending on industry and type of information); and
4) the normal or expected exclusions from the confidentiality obligations (these may include publicly available information, information learned by receiving party through no wrongdoing by any other party, and information independently developed without access or knowledge of the confidential information).
Alternatively, a trade secret notice is used when proprietary information is a closely held secret like the Coca-Cola recipe and is under very limited instances disclosed, if ever. Putting employees on notice that certain information within the business is a trade secret allows federal and state level protection if that information is ever used without permission or disclosed without permission.
The second way to protect a business and its proprietary information or market advantage is to create a non-solicitation clause or agreement which prevent a former employee from taking clients, former clients, or other employees away from the company after they exit the company.
Three recommended sections to include and define in a non-solicit are to:
1) clear definition the prohibited activities, such as not soliciting clients, customers, or company personnel away from the company in any manner; and
2) definition the reasonable time frame for these restrictions (anywhere from six months to three years is a good baseline); and
3) reasonable definition of the geographic scope of the restriction (a company cannot broadly restrict a former employee anywhere the company operates or could operate).
The third restrictive pathway to protect a business in the absence of non-competes is to create a pathway for any intellectual property that is generated pursuant to the employee’s work at the company to become the sole property of the company. This is called an assignment agreement or an assignment clause. It means the employee must assign, or transfer, the rights to the created matter to the company, who will then own it indefinitely – not the employee.
Three recommended sections which may be key for any intellectual property assignment include:
1) clearly identified types of intellectual property that must be assigned; and
2) a provision which requires employees to promptly disclose inventions or creations to the employer; and
3) requirements for the employee to help the company to secure and protect intellectual property rights.
Finally, there are other ways to protect the business from a former employee after they have departed. These include items like non-disparagement and non-interference. The purpose of these two items is to ensure an employee cannot start creating havoc or problems for the company after they leave. These are applicable if the employee left on good terms, but especially if they left on bad terms such as being terminated.
If you are facing a non-compete, or want to protect your business’s brand, proprietary information, methods, practices, or trade secrets, but don’t know where to start, call Madan Law PLLC. We can review and assess what is applicable and provide guidance regarding existing provisions or proposals to ensure you have the freedom to operate, protect your business, and yourself. Let Madan Law PLLC help you #MakeYourMark.