It has been ten years since a Jimmy John’s employee leaked a copy of a noncompete agreement that the company required employees (including store-level employees such as sandwich makers and delivery drivers) to sign. The noncompete restricted employees from performing any services for a business which derived more than 10% of its revenue from selling “submarine, hero-type, deli-style, pita and/or wrapped or rolled sandwiches” and which was located within three miles of any Jimmy John’s Sandwich Shop (one variation had a two mile limitation). Many were left wondering what Jimmy John’s believed was confidential or trade secret about sandwich-making. After word of the noncompete requirement became widespread, the Attorney General of Illinois filed suit, and the issue became headline news. Jimmy John’s ultimately “86-ed” its noncompete requirement. But the outrage over requiring a noncompete for sandwich-making employees spawned a deluge of state laws that altered the noncompete landscape, created a labyrinth of legislation, and left employers scrambling to keep their restrictive covenant agreements up to date.
Recently, the federal government joined the fray, and on April 23, 2024, the Federal Trade Commission (“FTC”) voted 3-2 to pass a Rule banning virtually all noncompete agreements. The ban was set to go into effect on September 4, 2024. However, on August 20, a federal judge in the Northern District of Texas set aside the Rule. Judge Ada Brown found that the FTC exceeded its statutory authority in promulgating the Rule and that the Rule itself was “arbitrary and capricious,” meaning that it was not reasonable or reasonably explained.
Judge Brown’s decision means that the Rule is set aside on a nationwide basis and will no longer take effect on September 4, as planned. The FTC has stated that it is considering an appeal and that “the decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.” https://www.ftc.gov/news-events/features/noncompetes.
Given the uncertainty of the FTC’s next moves and the existing morass of state laws, it is important for employers to continue to stay focused on their restrictive covenant agreements and how they are being used and consider the following best practices to protect talent, trade secrets, and employee temperament:
Plan for continued use of noncompetes, but on a limited and reasonable basis. As stated, the FTC’s Rule was blocked from going into effect. That does not mean that Congress might not attempt federal legislation concerning noncompetes (or that the FTC might not make another run at an alternate rule). I think future possible federal restrictions will follow the trend of the state laws that place limits on the types of employees with whom an employer can have enforceable restrictions (either by position or by salary threshold), require a certain amount of notice be given to employees about the need to sign a noncompete, and establish consideration requirements for noncompetes. For this reason, I recommend that companies closely examine the population of employees who are currently required to execute noncompetes, ascertain when in the recruiting process candidates are informed of the need to sign noncompetes, and figure out what consideration is being provided for the execution of a noncompetes—particularly those executed after employment is already underway.
Take your restrictive covenant agreement out for a checkup. As mentioned previously, the number of state laws regulating noncompetes has greatly expanded in the last few years. If your company’s restrictive covenant agreement has not recently been reviewed for state law compliance, it is worth doing so. It’s not just a matter of enforceability anymore—many of the new state laws include monetary penalties for noncompliance and a few even create private causes of action and provide for the recovery of an employee’s attorney’s fees. Restrictions should be reviewed to ensure they are narrowly drafted and do not exceed what is necessary to protect goodwill, trade secrets, confidential information, training, etc. Ask yourself: What services is the employee providing? What part of the business is the employee supporting? Is the employee client-facing and able to develop (or divert) goodwill? What is the geographic reach of the employee’s work? If a restrictive covenant agreement is narrowly drafted, it will pass muster in most states. Once you have landed on a reasonable, defendable basic agreement, attention can then be given to addressing state law outliers through appendices or state-specific agreements.
Carrots are as important (or more so) than contracts. What carrots are being provided to your employees? Some employers consider noncompete provisions as an important tool to retain talent. In my opinion, these employers are looking at noncompetes from the wrong point of view. Noncompetes prevent employers from employing talent in competitively dangerous positions —they do not guarantee that any individual employee stays employed or, perhaps more importantly, stays happily and productively employed. Retention of employees is about making the workplace an attractive place to be, in multiple facets. Compensation, benefits, culture, collaboration, communication, mentoring—these are the carrots that keep employees around long-term.
Trade secrets are more than a defined term in a confidentiality agreement. Companies need to act accordingly. All too often, companies are concerned about the language in their confidentiality agreements but do not pay sufficient attention to the realities of their organization. For instance, is there a consensus in your organization about what constitutes the company’s trade secrets? Trade secrets are valuable corporate assets that warrant attention well before walking into a courtroom. I recommend that companies occasionally conduct “trade secret audits” to ensure that their practices, policies, and people best position the company to protect trade secrets in and out of court. Time should be taken to interview stakeholders from various parts of the company to ensure everyone is aligned with what trade secrets exist. From there, examination should be given to the security measures in place to protect against the disclosure of the identified pieces of trade secret information. Is distribution on a need-to-know basis? Is electronic distribution encrypted? Are employees trained on best practices for protecting confidential information while working remotely or traveling? Are exiting employees’ email accounts subject to examination to make sure nothing has been misappropriated? Are confidentiality agreements consistently used and executed? The employment life cycle from recruiting to off-boarding needs to be put under a microscope from the standpoint of the security of trade secrets and other confidential information. Companies need to walk the trade secret walk, not just talk the talk.
It very well may be that at some point in the future geographically based noncompetition agreements cease to be an option in any state. In the meantime, there are practical measures (such as those mentioned above) that employers can take to best protect their legitimate interests against unfair competition.
Jacqueline (Jackie) Johnson is a partner at Constangy, Brooks, Smith & Prophete and co-chair of the Trade Secrets & Unfair Competition practice group. She is based in Austin and Dallas.