Navigating the rising wave against non-competes

Non-competes and other restrictive covenants faced a tidal wave of criticism this year, from the White House to state legislatures. The Federal Trade Commission (FTC) is not waiting to finalise or debate its proposed non-compete ban before stepping up enforcement against businesses.

The FTC has already filed at least four enforcement actions this year “against companies that use harmful non-competes”, as the agency put it in one press release. The FTC is targeting what it considers overly restrictive agreements.

The National Labor Relations Board (NLRB) is also riding the wave, as are state legislatures. Non-competes were even called out in this year’s State of the Union speech, the traditional testing ground for executive branch policy.

And while non-competes have received most of the headlines, the criticism is impacting related restrictions such as non-disclosure agreements as well.

What does all this mean for life sciences businesses? Regardless of whether the FTC’s proposed ban goes into effect, the trends are clear: companies need to update their policies to protect their competitive advantages and sensitive information.

For life sciences companies in particular—who often possess a treasure trove of highly valuable and proprietary information—now is the time to ensure the latest best practices are followed to protect trade secrets and defend against unfair competition.

Recent trends involving non-competes and employee restrictions

The government wave against non-competes first rose early in 2023, with the FTC publishing a proposed rule in January that would declare most non-compete restrictions in the US illegal. The proposal would also preempt any state laws that are inconsistent.

The FTC received a massive number of comments on the proposal, and there have been reports that its final decision may not come before April 2024. Based on the recent Supreme Court ruling in Biden v Nebraska—in which the justices struck down a federal programme without “clear congressional authorisation”—some believe the justices would strike down the FTC’s ban if it is finalised.

The FTC has said it has the authority to implement the proposal because of its power to regulate unfair methods of competition under Section 5 of the FTC Act. It is pointing to that authority for its enforcement actions so far, primarily targeting manufacturers of glass containers that have particularly restrictive agreements.

The NLRB added to the wave in late May, when its general counsel issued a memo saying non-competes violate Section 8(a)(1) of the National Labor Relations Act. The memo said there could be “limited exceptions” for narrowly tailored restrictions “to address special circumstances”. While Section 8(a)(1) does not apply to managers and executives, the memo is essentially an invitation for mid- to lower-level workers to file unfair labour practice complaints with the NLRB.

Even if the FTC or NLRB efforts ultimately stall or are struck down in litigation, some state legislatures are taking action. As of this writing, New York Governor Kathy Hochul has a bill awaiting her signature to make New York the fifth state to ban non-competes, joining California, Minnesota, North Dakota and Oklahoma.

Minnesota joined that list on May 24. Additional states have limited non-competes in recent years by, for example, only allowing them for highly compensated employees. New York’s bill does not have that kind of carve-out. Even more alarming for some, it does not expressly save non-competes in the aftermath of selling a business.

The rising wave is impacting other types of employee restrictions as well, which are commonly called restrictive covenants. Earlier this year, a federal court in Georgia struck down a non-disclosure agreement for being overbroad in trying to protect confidential information, including trade secrets. “While the definition certainly includes some things that may be considered ‘trade secrets’ or ‘confidential information’ … the definition also includes a plethora of information that is publicly available from other sources,” the court wrote.

How this can play out in bet-the-company litigation for a life sciences business

Life sciences is a key industry relying on non-competes, trade secrets, and other measures to protect scientific and technological investments. Joint ventures and other types of collaborations can be common in the industry, which increases the need for companies to establish solid protection of how they share knowledge.

It is not unusual, after all, for an employee to switch companies within a joint venture or other collaborative efforts without effective restrictions. Beyond that, the complexity of the American regulatory environment for life sciences, including manufacturing and logistics, only adds to the value of trade secrets and employee restrictions.

All of the above can add up to litigation that threatens the fundamental viability of a life sciences business. Take the case of a pharmaceutical technology startup our firm represented within the past year.

A key hire had a non-compete with her prior startup, which also had non-disclosure and non-recruitment terms. The new startup believed those restrictions were irrelevant given the different customer base the new startup was focused on.

The prior startup contended otherwise and filed a temporary restraining order (TRO) against the founder and the new startup. The claims focused on alleged theft of talent and information. If successful, the TRO would have essentially forced the new company out of business.

The arguments came down to whether the new startup was truly a competing business, whether it was targeting the same customer base as the prior startup, and whether it was using genuine confidential knowledge or trade secrets.

The new startup was able to avoid a shutdown and resolve the matter because of its careful efforts to ensure none of the data from the suing company existed on its platform or infected its own processes.

Practical tips for life sciences companies

Given the increased scrutiny by government agencies and the growing number of states that have passed, or are poised to pass, legislation limiting or banning enforceability of non-competes, life sciences companies should: