by There is an undeniable trend to limit or ban the use of non-compete agreements by employers. The Federal Trade Commission has proposed a nationwide ban, stating that non-compete agreements hold down wages and limit worker mobility. Last week, Minnesota joined the parade of states placing limitations on employers using non-compete agreements to protect their intellectual property. It rejected the approach taken in recent years by states like Washington, Illinois, Maine, and New Hampshire to limit the ban to agreements with employees making a certain wage level or less. Like California, North Dakota, and Oklahoma, Minnesota adopted an inclusive prohibition on the use of non-compete agreements. The new law provides exceptions only when the sale or dissolution of a business is involved.
Companies have long used non-compete agreements with employees as a tool to protect their trade secrets and other intellectual property in the event an employee leaves the company. There is no current federal law prohibiting this kind of restrictive covenant with employees, and until relatively recently, only California and North Dakota had an outright ban on the use of such agreements. Laws are changing, however, and employers may need to rely on other ways to protect their intellectual property from being misappropriated by departing employees.
What should an employer do if the option of a non-compete agreement is not available?
Federal Law: There are federal laws protecting intellectual property rights in general. Copyright and patent laws may protect the employer’s intellectual property. Congress passed the Defend Trade Secrets Act in recent years to protect businesses from misappropriation or theft of trade secrets. Educating employees about these protections is one way to discourage exiting employees from violating the employer’s rights.
State Law: Current limitations on non-compete agreements are found in state laws, and a good place to find options to protecting intellectual property without recourse to non-compete agreements is state law. The law limiting non-compete agreements may expressly exempt some agreements or situations from the prohibition. The circumstances regarding an individual or a group of employees can determine whether a non-compete agreement is enforceable in the state. Check whether the state’s prohibition affects agreements in place before the law was enacted. If not, the employer may be able to enforce an existing agreement. The Minnesota statute, for example, only applies to agreements entered into on or after July 1, 2023. There is no retroactive impact on agreements signed before that date.
Compare the individual employee’s circumstances to the terms of the statute. As noted, several states that place limits on non-compete agreements allow them for higher-paid employees. Look at what the relevant state law says about determining the wage cap. How is the employee’s wage determined for this purpose? What is excluded from that determination?
A state law that limits non-compete agreements may not affect other agreements that restrict an employee’s post-employment actions. State law may provide the ability to have enforceable confidentiality or nondisclosure agreements with employees that protect trade secrets after an employee leaves the company. Use the agreements that are available in the state to protect employer rights.
Steps to Take When Employment Ends: An exit meeting with the employee may be helpful. Talk with the employee about what obligations to the employer survive the period of employment. Explanations of company rights regarding intellectual property can be beneficial to everyone. Reminders about existing agreements can avoid problems.
One approach may not fit all situations. A friendly discussion may work with most people, but in some circumstances, other approaches may be needed. If there is a high level of concern about a particular employee, legal counsel may be able to provide more proactive options including:
- “Pay-Not-to-Play” Agreements: More typical in the entertainment or news industry than in other fields, employers sometimes ask the employee to sign an agreement not to work for a competitor for an agreed upon period after leaving employment in exchange for payment after termination. Legal counsel can advise if this kind of agreement is enforceable in specific instances.
- Contacting the New Employer: If you know that the employee is going to a competitor, discuss with legal counsel if there is the option of notifying the new employer of existing agreements or other protections. Some states have laws protecting against tortious interference with employment, so communication with a new employer may not be advised. Legal counsel can guide what can and cannot be said.
Employers should plan for changes in their options to protect their intellectual property and be prepared with strategies to take action without relying on non-compete agreements.
