The FTC’s Proposed Rule Might Make your NDA an Unenforceable Non-Compete
The FTC's proposed rule on banning certain non-competes underlines the need for vigilant attention
In the ever-evolving landscape of business regulatory compliance, a recent development has the potential to reshape the way businesses approach confidentiality agreements with its employees. On January 5, 2023, the Federal Trade Commission (FTC) proposed a rule that aims to ban certain post-employment non-compete clauses in employment contracts. This proposed rule not only focuses on traditional non-competes, but also raises questions about the enforceability of Non-Disclosure Agreements (NDAs) that could be interpreted as de facto non-competes. This article delves into the intersection between NDAs, non-competes, and the implications of the FTC's proposed rule.
Understanding Non-Disclosure Agreements (NDAs)
NDAs are legal contracts designed to protect sensitive information, often referred to as trade secrets or proprietary information, from being disclosed to unauthorized parties. They are commonly used to safeguard a company's intellectual property, business strategies, client lists, and other confidential data. NDAs create a legal obligation for parties who sign them—usually employees, contractors, or business partners—to maintain the confidentiality of the disclosed information.
A typical NDA between an employer and employee might contain a restriction on the employee’s ability to disclose any confidential information learned by the employee—including trade secrets, client information and names, systems, software, and other important information—after employment.
Traditionally, a non-compete (also known as a ‘restraint on trade’) agreement made between an employer and employee is interpreted under state law. Each state has its own view on restraints on trade. In Florida, the legislature has declared that, EXCEPT as expressly permitted in the statute, “[e]very contract, combination, or conspiracy in restraint of trade or commerce in this state is unlawful.” Section 542.18, Florida Statutes.
Florida statutes specifies that restraints on trade (such as non-competes) must be reasonable in time, scope, and geographic range. In addition, the person seeking to enforce the non-compete has the burden of establishing the “legitimate business interest” which they are seeking to protect.
By way of example, a typical non-compete between an employer and employee might state that the employee is prohibited from engaging in business competitive to the employer anywhere within a certain mile radius of the employer’s office, and for a period not to exceed twenty-four (24) months.
The Nuance of Non-Compete vs. Non-Disclosure Agreements
While the primary purpose of NDAs is to prevent the unauthorized disclosure of sensitive information—and not to prohibit the employee from working for a competitor—certain elements within these agreements can inadvertently resemble non-compete clauses. Traditionally, and as discussed above, non-competes explicitly prohibit individuals from engaging in competitive activities within a certain geographical area and for a specific period after leaving a company. Where things get muddy is when an NDA restricts disclosure of certain confidential information in such a way that it makes it extremely difficult or unreasonably burdensome for the employee to obtain gainful employment in their industry. For example, if the NDA restricts disclosure of information that is generally available to the public, or which could be obtained through a third party in a lawful manner, then it is probably overbroad and, as such, may be considered a “de facto” non-compete.
The FTC's proposed rule targets such de facto non-competes by scrutinizing the extent to which NDAs could hinder a person's professional mobility or employment opportunities post-termination. This shift in focus highlights the potential challenges faced by businesses that rely on broad NDA clauses to maintain a competitive advantage.
Key Considerations for Businesses
Businesses that regularly use NDAs as a means to protect their proprietary information should take heed of the potential implications of the FTC's proposed rule. The rule's stated intention is to foster a competitive labor market by preventing undue restrictions on employees' ability to seek new job opportunities. However, in practice this may have a negative impact on businesses in a broad range of industries. Consequently, businesses should carefully review and potentially revise the language within their NDAs in order to avoid inadvertently creating de facto non-compete clauses that are rendered unenforceable by the FTC.
Drafting NDAs in Light of the Proposed Rule
To ensure NDAs do not become re-classified as a potentially unenforceable, businesses can adopt the following practices:
- Specificity: Clearly define the scope of prohibited activities in the NDA. Avoid vague language that could be interpreted as prohibiting any competitive activity.
- Exceptions: Your NDA should provide for reasonable exceptions to its restrictions. For example: If the recipient employee obtains certain information from a public source, without any violation of applicable law or the NDA, then they should not be restricted from disclosing such information.
- Time and/or Geographical Limitations: If any restrictions are necessary, ensure they are reasonable in terms of duration and geographical scope. For example, limit restrictions to a reasonable time frame and a specific geographic area where the business operates.
- Focus on Protection: Emphasize the protection of confidential information rather than inhibiting future employment opportunities. Highlight that the NDA aims to prevent the unauthorized disclosure of trade secrets.
In the intricate balance between protecting proprietary information and fostering a competitive labor market, businesses must navigate the evolving landscape of NDAs and non-compete clauses. The FTC's proposed rule on banning certain non-competes underlines the need for vigilant attention to the details of your business’s standard form employment documents. Careful drafting and consideration of NDA language is necessary in order to ensure compliance with potential future regulations. Seeking an experienced business attorney is crucial in this regard.
NOTE: At the time of writing, the FTC’s Proposed Rule has not gone into effect; and it is now likely that it will not go into effect (if at all) until 2024. This article provides guidance in the event that the Proposed Rule does go into effect. The reader is strongly advised to consult with legal counsel regarding the current status and effect of the Proposed Rule.