How much attention should the IP community give to non-compete clauses?

Is the use of non-compete clauses a matter of IP concern? And if so, is the IP profession adequately placed to deal with it? This Kat, as a

young lawyer in the 1980’s practicing in the State of Ohio (where US presidents are elected, when not watching Lebron James play basketball), remembers the principal issues connected with non-compete clauses, at least under Ohio state law: the scope of the restrictions, based on activity, territory, and duration; the ability to apply the “blue pencil” test, which meant that part of the clause could be modified to satisfy restraint of trade concerns without invalidating the entire clause; and whether payment of separate legal consideration to the employee was required in order for the clause to be valid. None of these concerns was specifically related to IP and innovation.

Fast forward to 2016, where we find the issue of increasing importance, at least in the US. This is so, primarily as a result of the interest shown by the Obama White House, starting with the Executive Order of April 15, 2016 (“Steps to Increase Competition and Better Inform Consumers and Workers to Support Continued Growth of the American Economy”), extending to the May 5, 2016 paper from the White House (“Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses”) and continuing this week, on October 25, 2016, in light of the publication of a White House FACT SHEET (“The Obama Administration Announces New Steps to Spur Competition in the Labor Market and Accelerate Wage Growth”).

The White House first recognizes that non-compete clauses may be of value, writing that --

“The main economically and societally beneficial uses of non-competes are to protect trade secrets, which can promote innovation, and to incentivize employers to invest in worker training because of reduced probability of exit from the firm. “

Interestingly, the value of non-compete clauses is tied to their ability to protect trade secrets (more on this point below). In the main, however, non-compete clauses are not connected with protecting valuable trade secrets. As noted—

“Only 24 percent of workers report that they possess trade secrets. Moreover, fewer than half of workers who have non-competes report possessing trade secrets, suggesting that trade secrets do not explain the majority of non-compete activity.”

As a result--

“Although non-competes can play a beneficial role when used in a limited way, evidence suggests that in certain cases, non-competes can reduce the welfare of workers and hamper the efficiency of the economy as a whole by depressing wages, limiting mobility, and inhibiting innovation. “

The White House especially describes the case against the value of non-complete clauses in facilitating the creation of IP and fostering innovation, at least within the high-tech cluster context. Thus—

“When firms in a given industry are clustered, it makes it easier for their workers to share expertise and discoveries, some of which may not be protected by trade secret or intellectual property legal provisions. Economists refer to geographic clustering effects of factors like a large, deep pool of skilled workers, a more competitive market of suppliers, and information spillovers across workers and firms as “agglomeration effects.” While not necessarily in the interest of an individual firm, more rapid dissemination of ideas and technology improvements can have significant positive impacts for the larger regional economy in terms of innovation, entrepreneurship, and attracting more businesses and jobs to a region. Noncompetes that stifle mobility of workers who can disseminate knowledge and ideas to new startups or companies moving to a region can limit the process that leads to agglomeration economies. Overly broad non-compete provisions could prevent potential entrepreneurs from starting new businesses in similar sectors to their current employer, even if they relocate.”

This week’s White House Fact Sheet expresses concerns about the harmful effects of non-compete clauses more broadly, stating that--

“Across the country, businesses are eliminating non-compete agreements in favor of more targeted options. They are supporting a shift in non-compete policy because they recognize that fewer, more targeted non-compete agreements will likely increase their pool of available talent and improve innovation.”

What do we make of these pronouncements and the call for action on behalf of the White House with respect to reining in the use of non-compete clauses?

1. The expressed connection between non-compete clauses and trade secrets reinforces the conceptual conundrum that has plagued our understanding of non-compete clauses for decades: when does the legitimate, if any, restraint of trade, end, and where does the separate and distinct interest of protecting valuable trade secrets, begin? It is to be regretted that the White House report perpetuates this conflation of rights and interests.

2. What exactly is the rationale for continuing to give effect to non-compete agreements, once the issue of protecting trade secrets has been taken care of? The observation that there is a movement afoot for more “targeted non-compete agreements”, implying that the issue is merely one of degree, rather than of kind, sidesteps this question. Perhaps it is in the interests of re-starting the innovation engine to jettison non-compete agreements and focus on sharpening the distinction between an employee’s generalized skills, which are portable, and trade secrets belonging to the employer, which are not.

3. Should the IP community and its representative organizations be taking a more engaged position with respect to the use of non-compete clauses in the name of enhancing the creation and protection of IP? If so, training IP people in better dealing with this issue might need to become more front and center as an integral part of IP in-service training.