In a blow to the business community, the Federal Trade Commission (FTC) has announced that it has proposed a rule that would outlaw the use of employee non-compete agreements to protect businesses from the unfair use of its confidential business information.  The rule will prevent employers from requiring employees to sign non-compete agreements, and it will invalidate all existing non-compete agreements on a national level.

 For decades, the matter has been left to state legislatures.  Texas has had legislation allowing the use of non-competes to protect businesses from the loss and unfair use of the agreements since 1989.  While non-compete agreements may be seen as prohibiting employees from freely changing jobs, a strategic use of those agreements benefits businesses in a number of very important ways, among other things:

• They prevent employees from taking important company information, such as customer lists, pricing strategies, growth strategies, marketing strategies, trade secrets and intellectual property to a competing business and allowing those competing businesses from unfairly competing;

• They protect a company from the loss of the benefit they expect from their investment in employee training and inclusion of employees in the company’s strategy development;

• They protect companies from employees taking confidential information and using it to start a competing business, often relying on the same customers that their former employer developed and relies on, often gutting the employer’s business overnight.

Employee advocates claim that confidentiality statutes such as the Trade Secrets Act and Economic Espionage Act protect companies from the unauthorized use or misappropriation of confidential information; however, proving, to a degree required by the courts, that an employee stole or is using the confidential information is often next to impossible.  While those types of statutory confidentiality requirements sound like they would be beneficial, they simply do not have the teeth of a non-compete agreement.

  While the rule is not final, and there will be challenges by the U.S. Chamber of Commerce and perhaps others, those challenges will take time.  That means that businesses should take steps now to implement systems that will protect their confidential information from misappropriation and unfair use.  Those steps can include:

1. The systemic use of confidentiality agreements and policies (separate from any existing non-compete agreements) signed by all employee;

2. The compartmentalization of company information so that only those that need to know some or all of the information in order to do their job have access to it;

3. The implementation of data security measures to prevent downloading of information on the server, downloading and accessing files from personal computers, and elimination of bring-your-own device policies;

4. The implementation of data tracking, multi-factor access, and encryption measures and controls so you can know who has your information and when they got it; and

5. Labeling sensitive and confidential information as “Confidential” and limiting access to it.