by Chris Way

NonCompetes Are Dead; Now What? Alternative Protections in Light of the FTC Noncompete Ban

The non-competition agreement has long been a staple in businesses’ efforts to protect themselves from various threats posed by various people with inside access to the business’ most sensitive information. On April 23, the Federal Trade Commission killed the non-competition agreement, banning both the future use and the enforcement of current noncompetes.

This has the potential to send shockwaves through the business community as businesses scramble to find other ways to protect themselves from the serious harm that those with access to sensitive information can pose.

But what if I told you all is not lost? There are other ways to protect your business from a key employee’s attempted theft of your intellectual property, your client, your business strategies, and more.

The noncompetition agreement has certainly been one way to do it. But we can achieve the same outcomes using other methods.

NonCompetition Agreements: Generally

To understand how the alternatives to noncompetes work, let’s begin with understanding how a noncompetition agreement works. A noncompetition agreement prevents someone with access sensitive information or company assets from working for a competitor or starting a competing business for a certain period after leaving the company. The idea is to protect the company’s customer relationships, trade secrets, and other confidential information.

A noncompetition agreement generally has three scopes: a functional scope, a geographic scope, and a temporal scope. Translation from legalese, it restricts a worker from doing a certain competing activity or job in a certain region for a certain amount of time.

Once you understand what a noncompete accomplishes and how, you can understand what to do next.

A noncompete protects relationships and trade secrets. It does this by barring a worker from doing an activity where stealing those relationships and trade secrets would be the most effective, working for or starting a competitive business.

While you may not be able to use a noncompete, we can use a concept popularized in the 2011 film Moneyball to obtain its benefits through a few other pieces. You may not have the noncompete on your team anymore, but we can rebuild a noncompetition agreement in the aggregate. To do so, we just accomplish the noncompetition agreement’s what and how through other means.

Tool 1: The NonSolicitation Agreement

The nonsolicitation agreement is a cousin of the noncompete. A nonsolicitation agreement restricts a former employee from soliciting or doing business with the company’s current clients or employees for a while after leaving. Unlike non-competes, they don’t stop the person from working for a competitor outright.

A nonsolicit focuses on protecting the company’s customer relationships and talent pool. A nonsolicitation agreement stops a worker from poaching your clients and team worker can leave your company and work for your biggest rival.

Instead of barring a worker from working in a competing business, it bars the worker from taking the valuable items to a competing business. As this is half of a noncompete’s purpose, we have half of our performance in one agreement. But a nonsolicitation agreement doesn’t protect our core intellectual property. For that, we need something else.

Tool 2: Nondisclosure Agreement

A nondisclosure agreement, or confidentiality agreement, is a worker’s agreement to keep company information and trade secrets… confidential. An NDA can apply during employment and continue even after a team member has left. A nondisclosure agreement is a critical tool in protecting trade secrets, often one of the most valuable forms of intellectual property a business has. Your business’ competitive advantage likely comes from a great deal of trade secrets rather than other forms of intellectual property like patents or trademarks.

Trade secrets include anything that provides value to your business by not being known and is something you actively keep secret. This could be a formula or recipe, your customer list, your production process, code underlying your software, your pricing strategy, your marketing strategy, and so much more.

With a confidentiality agreement, you build the second half of the noncompetition agreement’s purpose, protecting your intellectual property.

With a nonsolicitation agreement and a nondisclosure agreement working together, you have rebuilt the noncompetition agreement.

Tool 3: Deferred Compensation

Nonsolicitation agreements and nondisclosure agreements are restrictive. They are a stick telling someone “you better not do the bad thing.” This is important. But there’s another way to protect our interests as business owners. Often, one of the most effective ways to get someone to work with you and cooperate is to make sure their interest aligns with yours. That’s the goal of our third tool, deferred compensation.

Deferred compensation arrangements can take many forms. A deferred compensation plan is any agreement, method, or arrangement between service recipient and service provide to pay the service provider some compensation in the future. It’s payment tomorrow for service today.

Deferred compensation plans provide significant optionality, and can be customized to meet your needs, with some important legal and tax caveats. However, because of their flexibility they can be designed to promote retention based on your needs and the needs of your key workforce. Deferred compensation can provide incentive and reward based on length of service or hitting performance goals.

In this way, deferred compensation provides a strong alternative to a noncompetition agreement. A noncompete prevents a worker from leaving. Deferred compensation makes them want to stay.

Rebuilding in the Aggregate

Noncompetes may be dead, but that doesn’t mean your business is left completely exposed. While a business may no longer be able to stop a worker from leaving for a competitor, or starting a competing business, businesses can still get to the root of the problems that a noncompetition agreement addresses. These problems are the poaching of key relationships and theft of key information. We can restrict these with a nonsolicitation agreement and a nondisclosure agreement. And we can create a world a key team member does not want to leave with deferred compensation.

Your next move? To realize that you have plenty of moves. Explore how you can use these options to rebuild your noncompete in the aggregate. As you plan remember, Way Law is here to help!