Companies across the U.S. have been scrambling in the wake of the Federal Trade Commission's passage of a final rule banning noncompete agreements.
The rule, passed April 23, would outlaw noncompete agreements for employees, with exceptions for senior executives. If put into full effect, the ban would impact nearly every industry, including manufacturers, who rely on noncompete agreements to protect trade secrets such as product designs and proprietary production processes.
Four states — California, Minnesota, North Dakota and Oklahoma — have already banned noncompete agreements, while others have restricted its use. The passage of the rule has been hotly debated, with many businesses opposed for fear of exposing trade secrets, while many employees were in favor, claiming the ban would increase earning potential.
And while the rule has already been challenged in court, experts say manufacturers need to start preparing now for its potential impact on labor, operations and even innovation.
How will the rule impact manufacturers?
The new rule's expected effective date is Sept. 4, according to the FTC. While that date could be impacted by legal challenges, including a lawsuit already filed by the U.S. Chamber of Commerce, now is the time to begin taking stock of how severely the law will affect a workforce.
The first thing manufacturers should do is take an inventory of everyone in the company currently under a noncompete agreement, from the factory floor up to the C-suite, said Daryl Leon, a counselor with BakerHostetler who focuses on employment issues related to trade secret policies.
"Those are the folks that if the rule goes into effect a large portion of them will receive a notice that says their noncompete is void," Leon said. "That is a tangible step they can do right now so that they can move towards compliance."
For manufacturers, those covered could include everyone from factory line workers to engineers in research and development roles and sales personnel, according to Benjamin Dryden, partner at Foley & Lardner and vice chair of the firm's antitrust and competition practice group.
Dryden noted that noncompetes could have been used to protect innovative product ideas, assembly processes, or even training – an issue that could become even more pertinent as companies look to upskill workers to use artificial intelligence in manufacturing.
"Some manufacturers use noncompetes to protect investments in training," Dryden said. "Another use that we see all the time is sales personnel. The noncompete is protecting something else entirely – protecting your relationships."
Manufacturers should also examine who at their company could qualify for an exemption to the rule, which covers those in "policy-making" positions that earn at least $151,164 per year. This can include the company's president or CEO as well as any other office or "natural person" who has policy-making authority.
However, given that at many companies, individuals further down the organizational chart are in charge of lucrative and proprietary decisions and trade secrets, businesses may try to push for greater exceptions.
How can manufacturers prepare for the ban?
One way the ban could change the way manufacturers operate is regarding how teams and departments interact with one another.
Without noncompetes, companies may consider creating more boundaries between teams, so that trade secrets concerning new products or other ventures aren't as widely shared and vulnerable to getting leaked to competitors when a team member leaves.
The tradeoff, Dryden said, could be an incremental loss in innovation when teams can't collaborate as freely.
"That by definition adds more inefficiency and can diminish innovation, which is contrary to the goal the FTC is articulating here," Dryden said. "But I can see companies who are very concerned about losing their engineers to competitors taking steps like that."
"From the perspective of a particular company, you just will no longer be able to rely on the clean, self-executing fact that your R&D team is not going to up and join a competitor tomorrow.”
Benjamin Dryden
Partner, Foley & Lardner
Manufacturers should also be prepared to spend more on litigation and data protection, Leon noted. He cautioned that companies should ensure that when employees leave their position, they can't email spreadsheets outside the organization or load materials onto an external hard drive without a verification system.
"At least make sure they're not able to take with them anything beyond what's in their head," Leon said.
Companies should be prepared to increase their investments in trade secret litigation, which Dryden said he expects to increase in both "volume and nastiness."
With the future of noncompetes very much in limbo, manufacturers should look to other labor agreement tools to protect trade secrets, such as nonsolicitation agreements, nondisclosure agreements and other confidentiality forms. Such agreements could help companies continue to protect trade secrets, while keeping innovation flowing, Dryden said.
"I don't want to say the sky is falling and this is the end of innovation," Dryden said. "But from the perspective of a particular company, you just will no longer be able to rely on the clean, self-executing fact that your R&D team is not going to up and join a competitor tomorrow.”
