Protecting Your Business Assets: Los Angeles Employer Defense Attorneys on Alternatives to Noncompete Clauses
When we were growing up, parents, teachers, and other respected members of the community told us not to take what wasn’t ours — don’t steal, don’t cheat, and don’t copy someone else’s work. For a prolonged time, employers and employer defense attorneys in Los Angeles encompassed these basic life lessons in noncompete clauses. These clauses prohibited an employee from taking vital business information developed by a former employer and then disclosing and using that information while working for a subsequent employer who was in competition with the former employer.
This only seems fair. Businesses spend copious amounts of money developing products, cultivating clients, designing marketing plans, and creating other vital business processes in an effort to produce a better, more effective, and more profitable product. It is vital for a company to protect this essential lifeblood of its operations from being spoiled by former employees and executives. This information should be entitled to just as much protection as a trademark, copyright and/or patent held by the company.
However, on April 23, 2024, the Federal Trade Commission sought to shun these basic values in the business context by voting to ban essentially all noncompete agreements that employers frequently enter into with workers in an effort to protect these processes and confidential business information from being utilized directly by competitors.
How the FTC Ruling Impacts Employers
The FTC’s Noncompete Clause Rule alleges that the use of noncompete agreements is an unfair method of competition for employers and therefore prohibits employers from entering into noncompete clauses with workers, thereby putting in place a comprehensive ban on new noncompete clauses with all workers.
With respect to existing noncompetes — those entered into before the final rule’s effective date — the FTC adopted differing approaches for senior executives than for other workers. Existing noncompetes with senior executives can remain in force, and the final rule does not cover such agreements. For those workers who are not senior executives, existing noncompetes are no longer enforceable after the final rule’s effective date. Employers must notify workers with existing noncompetes that they are no longer enforceable.
There are some exceptions to this prohibition on noncompete clauses.
- The final rule does not apply to noncompetes entered into by a person pursuant to a bona fide sale of a business entity.
- The final rule does not apply where a cause of action related to a noncompete accrued prior to the effective date.
- The final rule further provides that it is not an unfair method of competition to enforce or attempt to enforce a noncompete or to make representations about a noncompete where a person has a good-faith basis to believe that the final rule is inapplicable.
The final rule does not limit or affect enforcement of state laws that restrict noncompete clauses where the state laws do not conflict with the final rule, but it preempts state laws that conflict with the final rule.
Potential Alternatives to Noncompete Clauses for Businesses
So, what are the available alternatives to noncompete clauses?
Trade Secret Laws
Trade secret law provides employers with a viable means of protecting investments in trade secrets. Trade secret law is a form of intellectual property law that is specifically focused on providing employers with the ability to protect their investments in trade secrets.
Nondisclosure Agreements
NDAs provide employers with another viable means for protecting valuable investments. NDAs are contracts in which a party agrees not to disclose and/or use information designated as confidential. In most states, NDAs are more enforceable than noncompetes. The final rule does not prevent employers from adopting garden-variety NDAs; however, it prohibits NDAs that are so overbroad that its function prevents a worker from seeking or accepting employment or operating a business. Permissible NDAs may prevent workers from disclosing or using certain information but it cannot prevent workers from seeking or accepting other work, or starting their own business, after their employment ends.
Patent Law
Where a technology, process, design, or formula is able to meet the rigorous standards for patentability, patent law provides companies with an alternative to noncompetes. During the period when patent protection is effective, patents grant the patent holder exclusive rights.
Invention Agreements
Tailored invention assignment agreements that give the employer certain rights to inventions created by the employee during their employment with a firm are another way in which to protect a company’s business assets. Like patent law, this tool, when appropriately tailored, provides employers with additional protection for some of their most valuable intellectual property interests.
Fixed Duration Employment Contracts
With respect to investments in worker human capital, fixed duration contracts provide an alternative to noncompete clauses. An employer can establish a term that is long enough for the employer to recoup its human capital investment, without restricting who the worker can work for, or their ability to start a business, after their employment ends.