FTC’s Proposed Noncompete Ban Puts Medtech Trade Secrets In the Spotlight

On Jan. 5, the Federal Trade Commission (FTC) took a significant step towards banning noncompete agreements between companies and workers. The FTC proposed a broad rule that would effectively ban all noncompete clauses in the employment context and require companies to rescind existing noncompete agreements. The rule’s sweeping scope could also implicate other restrictive covenants, like nondisclosure and nonsolicitation agreements.

The medtech industry has historically relied on noncompete agreements as one way of protecting intellectual property (IP) from misappropriation by a competitor. Noncompete agreements are contractual restrictions that prohibit employees from working for a competing company or forming their own competing company. Under current law, noncompete agreements are permitted in 47 states, and there is no existing federal law specifically governing the provisions of employee noncompete agreements.

Generally speaking, post-employment noncompete agreements are enforceable only if the employer has a legitimate business purpose for restricting the employee’s ability to compete. Most commonly, noncompete agreements are enforced to protect the employer’s confidential business information against disclosure to a competitor. Some states, like Massachusetts, have recently enacted laws that restrict the use of noncompete agreements in some circumstances and impose procedural protections for workers.

Noncompete agreements are a particularly effective tool to protect confidential information. Companies need to share their confidential information with employees so workers can perform their jobs. That confidential information could include R&D, business plans, customer lists, marketing strategy, or pricing information, to name just a few examples.

When a trusted employee with access to confidential information jumps ship for a competitor, that departure creates a risk of misappropriation of confidential business information. Particularly unscrupulous employees may intentionally gather and take with them information from their former employers and attempt to use that information at their new company. Even without nefarious intent, confidential information can inadvertently leak when an employee goes to a competitor. A new employee, eager to show value, might call upon the memory of a particular strategy that was used at his or her former employer. Noncompete agreements are meant to prevent the intentional or inadvertent misappropriation of confidential information by a departing employee.

What To Expect

The FTC’s proposal is a step towards a potential promulgation of a final rule to regulate noncompete agreements at the federal level. The proposed rule is a blanket ban on the use of noncompete agreements between employers and workers. First, the proposed rule will ban companies from entering into new noncompete agreements with workers for any reason. The proposed rule does not distinguish between classes of workers—it applies to everyone, including highly-paid executives and managers. Second, the proposed rule would require employers to rescind existing noncompete agreements with workers. This means that existing noncompete agreements entered into before the effective date of the proposed rule would be invalidated.

Third, the proposed rule would impose a “functional” test to determine whether contractual provisions are treated as “de facto” noncompete agreements. Nondisclosure or nonsolicitation provisions drafted so broadly as to functionally prevent an employee from competing with the employer would be treated as “de facto” noncompete agreements and therefore be banned. The proposed rule contains only one narrow exception for noncompete agreements entered into as part of a sale of a business, but only for owners of more than 25% of the seller’s equity.

Needless to say, the proposed rule would impact how medtech companies protect their confidential information, IP, and trade secrets in the employment context. If the proposed rule is ultimately enacted in its present form, companies will lose one of the available tools to protect confidential information.

The FTC is accepting comments on its proposed rule until at least March 10. It has already received thousands of comments from individuals, companies, and industry groups and thousands more are expected to submit comments before the deadline. After the comment period closes, the FTC could endorse a final rule, which may or may not track the current proposal.

The FTC claims it prefers a blanket ban like the one proposed, but the agency is also considering alternatives such as a “rebuttable presumption of unlawfulness instead of a categorical ban.” The FTC is also considering applying “different rules to different categories of workers.” Under that approach, the FTC could institute a rule with a categorical ban for some workers (e.g., low-paid workers) but impose a rebuttable presumption of unlawfulness for others (e.g., “highly paid, highly skilled workers such as executives”).

Various legal and industry organizations have criticized the rule. In a statement, the U.S. Chamber of Commerce called the regulation “blatantly unlawful,” and predicted the “unlawful action will not stand.” 

Besides the potential for modifying the proposed FTC rule, any proposed regulation—whether adopted as intended or with alterations—is likely to face prolonged legal challenges. There are many questions about the FTC’s legal authority to regulate noncompete agreements at all, and a sweeping ban that affects millions of contracts will surely face a court challenge.

What Should Medtech Companies Do?

It is still too early to know how this process will play out. The FTC may amend or even withdraw the proposed rule before it becomes final, and the inevitable court challenges will take some time to be resolved. While all of that plays out, medtech companies have confidential information to protect today.
During this comment period and expected legal challenge period, medtech companies should consider the following actions:

• Participate in the FTC comment period. Consider providing comments to the FTC, either individually or through an industry group. Well-informed comments from industry participants may influence the scope of a final FTC rule. Much of the academic literature relied upon by the FTC in its Notice of Proposed Rule Making has a progressive angle, focused on employee mobility. The FTC cites various anecdotal overreaches regarding noncompete agreements. Well-informed, well-drafted industry comment could have a significant impact on the final rule’s scope.
• Don’t tear up the noncompetes yet. For now, the FTC’s proposed rule is just a suggestion—it is not binding unless and until the agency adopts a final rule. It is likely that such a mandate will face significant legal challenges that could delay or block the rule’s enactment. In the meantime, noncompete agreements are enforceable in nearly every state. Given the significant protections that noncompete agreements provide, medtech companies should continue using noncompetes as a tool to protect confidential information. Employers may one day have to abandon noncompetes, but in the meantime, noncompetes remain a useful tool.
• Carefully review existing nondisclosure agreements. To protect proprietary information, ensure that any employee or business partner with access to the information is subject to a well-crafted nondisclosure agreement. The FTC’s proposed rule could limit the use of nondisclosure agreements if they are found to be so overly broad as to limit a worker’s ability to compete within the same industry, so avoid unnecessarily broad nondisclosure clauses in employment agreements that aim to capture more than what could be arguably described as specific material interest. However, the presence or absence of a nondisclosure agreement can be a determining factor in a later dispute over misuse of confidential information. Medtech companies should therefore ensure they have strong, well-crafted nondisclosure agreements in place with employees and business partners.
• Review and update processes for protecting confidential information. While it is not yet law, the FTC’s proposed rule puts a bullseye on noncompete agreements, continuing a trend in recent years of political hostility towards these pacts. Whether or not noncompete agreements are ultimately banned, medtech companies should ensure their other processes for protecting confidential information are following best practices including: Limiting access to confidential information, ensuring employees are properly trained on how to handle confidential information, review public disclosures, using available IT resources, and conducting exit interviews with departing employees. More information about best practices for protecting confidential information for medtech companies can be found in a column we wrote for last September’s issue, “Don’t Let IP Walk Out the Door.”

The proposed FTC noncompete ban faces an uncertain future, but medtech companies should promptly consider previously mentioned actions. These simple prophylactic measures can help medtech companies reduce the risk of IP and trade secret misappropriation by departing employees. 

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Gregory S. Bombard is a shareholder at international law firm Greenberg Traurig. Bombard represents medtech, biotech, life sciences, and technology companies in disputes over trade secrets, patents, licenses, and other IP issues. He can be reached at [email protected].

David J. Dykeman is a registered patent attorney with 25 years of experience in IP law and is co-chair of Greenberg Traurig’s Global Life Sciences & Medical Technology Group. Dykeman’s practice focuses on securing worldwide IP protection and related business strategy for high-tech clients, with particular experience in medical devices, digital health, robotics, wearables, life sciences, and information technology. He can be reached at [email protected].