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Business

With potential change on the horizon for non-compete clauses, how can you protect your business’s confidential information?

iStock 1489216808 - Global Banking | Finance

With potential change on the horizon for non-compete clauses, how can you protect your business’s confidential information?

Picture206032024 - Global Banking | FinanceBy Anna Birtwistle, Partner, and Tom Cleeve, Associate, Farrer & Co

Over the last 12 months, “non-competes” – clauses which prevent an individual joining a competitor for a certain period following termination of employment – have been the subject of considerable debate in both the US and the UK. In particular, there have been several developments in the US’s approach to non-competes – but how significant are these? And will we see similar changes affecting UK policy moving forwards?

US reforms

On 23 April 2024, the US Federal Trade Commission (FTC) voted to ban non-compete provisions for the majority of individuals. Subject to any legal challenges, the ban will take effect 120 days from publication in the Federal Register, which is expected to take place imminently.

Although non-competes were already banned in certain states, most famously California, a federal ban is a significant step. This new ban will apply country-wide and overrule conflicting state laws. It is also wide-ranging and covers not only employees but also workers, independent contractors, and volunteers.

Assuming the ban comes into force, any individuals who are currently subject to non-competes will no longer be bound by them – save for a limited exemption for qualifying senior executives and it remaining permissible to include non-competes in business sales and franchisor/franchisee agreements. The ban excludes senior executives who earn $150,000 a year, are in policy-making positions, and have an existing non-compete in their employment contract. For those individuals, their current non-competes will remain enforceable. However, once introduced the ban will prevent new non-competes for all individuals regardless of seniority or salary.

The FTC’s ruling is already the subject of legal challenge by the US Chamber of Commerce and other trade groups. They have filed a lawsuit requesting that the ruling be declared unenforceable and that individual states be able to determine how non-competes are governed. As such, the ruling may not be enforceable until those lawsuits are resolved.

Proposed UK reforms

By contrast to the US, the proposed reform to non-competes in the UK does not go as far as an outright ban. Instead, in May 2023, the current Government announced its intention to limit the maximum length of non-compete clauses to three months and confirmed:

  • The three-month limit will only apply to non-compete clauses in contracts of employment and limb (b) worker contracts
  • The limit will not interfere with employers’ ability to use paid notice periods or garden leave, nor will it change the position of confidentiality, non-solicitation, or non-dealing clauses. It also won’t affect non-competes in equity arrangements, partnership agreements or shareholder agreements
  • The Government has ruled out introducing mandatory compensation for the period of non-compete clauses

Since the announcements last year, the Government has said nothing further on non-compete reform and the proposed 3-month limit has been thrown into further doubt in light of the upcoming general election on 4 July 2024.

So far, Labour has similarly made no mention of limiting or banning non-competes, notwithstanding their proposed significant shake up of UK employment law if elected; with examples including making unfair dismissal a “day one” right, creating a two-tier system of “worker” and “self-employed”, a ban on fire and rehire, and strengthening trade union rights.

Will the UK follow the US?

While it is possible that a Labour government would be influenced by the FTC’s recent ban, it is important to bear in mind that the UK and US labour markets have significant differences and the drivers behind the Federal ban in the US are not ones that necessarily apply in the UK.

Significantly, the prevalence in the US of non-competes is on a wholly different scale and the FTC argues that they are widely used against people who work in low wage positions, such as in the hospitality sector. In the UK, non-competes would not generally be enforceable for people in those positions and are usually restricted to more senior roles.

That said, the Government estimates that around five million employees are subject to a non-compete clause and a typical duration is around six months. The FTC also highlighted that non-competes are widely used in the US healthcare sector, whereas this is not the case in the UK.

How else can businesses protect confidential information?

The main aims of a non-compete are to protect a business’s confidential information and its client/customer base. They are a useful tactic in an employer’s armoury for preventing employees who have detailed knowledge of a company’s confidential information and connections from immediately joining a competitor following termination.

On the other hand, some argue that for this very reason they prevent innovation, particularly in certain sectors such as technology and pharmaceuticals.

It is important to remember that there are other ways for a business to protect confidential information and that prevention is better than cure. As such, a well-drafted employment contract and robust operating policies can still provide effective protection even without a non-compete.

For instance, businesses should think carefully about what types of confidential information they have and ensure a tailored definition is used in their contracts.

It is also effective to require employees to sign up to other forms of restrictive covenants such as non-solicitation of clients/customers and employees, non-dealing with clients/customers, and an obligation on an employee to inform the company if they are approached by or receive an offer from a competitor.

In day-to-day operations, it also essential to ensure that only those who require sight of the information have access to it (for example, by password protecting sensitive information and marking documents as confidential).

Alongside this, policies such as an IT Acceptable Usage and Data Protection Policy which cover how information and data-sharing is governed will further support information security. These policies should cover issues including the removal of documents from the office, sending company property to personal email addresses, and downloading information to external drives. A breach of such policies should be explicitly stated as a potential disciplinary offence. These can be bolstered further by monitoring employees’ use of company devices – particularly in the context of exiting employees.

Finally, businesses can also include longer notice periods and the right to put an employee on garden leave during this time in their contracts (although this can be costly as the company will need to either pay the employee for the entirety of the notice period or pay in lieu of such period).

As is clear, then, there are many other ways besides non-competes for a business to protect its confidential information. In respect of non-competes in the UK, for now the position is very much watch this space.

Global Banking & Finance Review

 

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