Blog By: Shelton Owen
The Federal Trade Commission started the new year with a bang, announcing in January that it was proposing a rule to ban U.S. employers from imposing noncompete agreements on its employees.[i] The agency criticized noncompete agreements as being “a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.”[ii] While the legal footing of the rule allegedly rests on a preliminary finding that it violates Section 5 of the Federal Trade Commission Act, the policy arguments accuse noncompetes of hindering innovation by stifling former workers from becoming potential competitors.[iii] FTC leadership believes there is a connection between these agreements and a downstream reduction in market players, which leads to higher prices for consumers.[iv]
The use of noncompete agreements is nothing new, with the first known case taking place back in 1414.[v] Throughout the past 200-plus years of regulation, the U.S. has tended to leave noncompete regulation largely up to states’ discretion.[vi] However, in the past few decades, the federal government has taken an increasingly active role in regulating areas which have traditionally been the province of the states [HT1] .[vii] Some practitioners criticize the federal government’s assertion of dominance and predict that the Supreme Court will probe how much legal weight the FTC’s opinion carries in an area traditionally left to the states.[viii] The FTC seems to imply that the states aren’t up to the challenge to curb concerns associated with noncompetes.[ix] However, a look back at legislation evidences a track record of competency.[x] A multitude of states have addressed the overuse of noncompetes for low-wage workers, imposed notice requirements, and enforced strict compliance penalties.[xi]
Some states have already taken it upon themselves to ban the use of noncompetes.[xii] In no act of coincidence, states like California have consequently experienced increases in the volume and magnitude of trade secret litigation.[xiii] A verdict in 2019 brought in a whopping $845 million in damages for the plaintiff whose two ex-employees formed a new competing company and used stolen trade secrets to score a mega business deal.[xiv]
The FTC claims that “the proposed rule would generally not apply to other types of employment restrictions, like non-disclosure agreements.”[xv] The use of the word “generally” creates a slippery slope. Given the inherent ambiguity within the new rule’s language, it appears that non-disclosure agreements protecting trade secrets could easily be invalidated if they satisfy what the FTC vaguely describes as a “de facto non-compete.”[xvi] The future of American agricultural business hangs in the balance if such expanded applicability of the ban were to occur.
Though the FTC was quick to jump to conclusions that the ban could bring about billions in increased wages and millions of career opportunities[xvii], the agency failed to consider the significant economic losses that stripping such protections would trigger. While the global economy has undoubtedly changed as the businesses of today take on strikingly different forms than those of the past, some core principles of business are unwavering.
Part of protecting a business is protecting the privileged information held by employees.[xviii] In the agricultural industry, trade secrets come in the form of “cultivation techniques, fertilizer or soil recipes, extract flavoring recipes, customer or vendor lists (if not disclosed to third parties), pricing lists, specialized product creation methods, business growth plans and strategies, and even marketing techniques.”[xix] From farm to table, “every organization has employees who could do damage if they left – whether it be an employee who has great relationships with suppliers, or a cheesemaker with an impeccable skill set or top-level management employees with knowledge of competitive confidential information.”[xx] Employers do not want to throw away money by training employees only to have them leave for a competitor, taking with them all the knowledge they have obtained.[xxi]
In a 2013 case, a former rice breeder for Ventria conspired with Chinese crop research scientists to steal trade secrets surrounding genetically-engineered rice.[xxii] The revolutionary technology took around $85 million to develop, with an estimated annual revenue of $1 billion.[xxiii] Fortunately, the law caught up to the criminals before they were able to “reverse-engineer it and ultimately undercut Ventria’s market . . . driv[ing] his company out of business.”[xxiv]
In the research and development stage of agricultural production, trade secrets are especially relevant.[xxv] The production of hybrid crops, a flourishing practice in recent years, involves extremely profitable breeding selection secrets.[xxvi] Companies recoup R&D costs by commercializing their novel methods and distinguishing themselves from competitors.[xxvii] Early-stage protection of IP has an impact that flows “further down the value chain including in the aspects of innovation, accessibility, price and sustainability.”[xxviii] Leveraging IP rights can play a key role in combating the pressing issue of food insecurity.[xxix] By providing a return on their investment, private parties are incentivized to invest in “genetically modified crops capable of greater yields with reduced fallow periods.”[xxx]
Sure, even in a world with the new FTC ban, a company can still bring suit for trade secret violations by former employees. However, this approach is simply cleaning up the mess instead of avoiding the spill in the first place. The U.S. should work efficiently to seal the lid before a can of worms is opened that cannot be undone. With the future of agricultural innovation and food security on the line, this is not a mistake we can afford to make.
[i] FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition, Fed. Trade Comm’n (Jan. 5, 2023), https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition [https://perma.cc/RPV8-C5UN].
[ii] Id.
[iii] See id.
[iv] See id.
[v] Russell Beck, A Brief History of Noncompete Regulation, Fair Competition L. (Oct. 11, 2021), https://faircompetitionlaw.com/2021/10/11/a-brief-history-of-noncompete-regulation/#:~:text=Noncompetes%20Have%20Been%20Around%20Since,he%20had%20been%20trained%20in. [https://perma.cc/5JAU-PAUJ].
[vi] Id.
[vii] See id.
[viii] See Dawn Mertineit, Non-Compete Regulation Should Be Left to the States, Not the FTC, Bloomberg L. (Feb. 3, 2023, 4:00 AM), https://news.bloomberglaw.com/us-law-week/non-compete-regulation-should-be-left-to-the-states-not-the-ftc [https://perma.cc/345B-NVGB].
[ix] Id.
[x] See id.
[xi] Id.
[xii] See Hon. Elizabeth D. Laporte, Trade Secret Litigation on the Rise in California: How ADR Can Help, JD Supra (May 4, 2020), https://www.jdsupra.com/legalnews/trade-secret-litigation-on-the-rise-in-86819/ [https://perma.cc/RLQ9-85YW].
[xiii] Id.
[xiv] Id.
[xv] FTC, supra note i.
[xvi] Mertineit, supra note viii.
[xvii] See FTC, supra note i.
[xviii] Nicole Stangl, Protecting the Farm: Employment Considerations, JD Supra (Feb. 23, 2022), https://www.jdsupra.com/legalnews/protecting-the-farm-employment-4211895/ [https://perma.cc/4JA5-LZKR].
[xix] E.g., Christine Streatfeild et al., Nine Steps Cannabis Companies Can Take to Protect Trade Secrets, Bloomberg L. (Dec. 15, 2020, 4:00 AM), https://news.bloomberglaw.com/business-and-practice/nine-steps-cannabis-companies-can-take-to-protect-trade-secrets [https://perma.cc/RZB5-QYTK].
[xx] Stangl, supra note xviii.
[xxi] Kaylyn McKenna, What Is a Noncompete Agreement?, Bus. News Daily (Feb. 21, 2023), https://www.businessnewsdaily.com/4803-non-compete-agreement.html [https://perma.cc/74N2-CNTT].
[xxii] Bryan Thompson, Piracy In The Fields: Agricultural Trade Secrets A Tempting Target, KCUR (June 6, 2017, 5:00 AM), https://www.kcur.org/agriculture/2017-06-06/piracy-in-the-fields-agricultural-trade-secrets-a-tempting-target [https://perma.cc/67W7-KFUD].
[xxiii] Id.
[xxiv] Id.
[xxv] Precious Adebanjo, Intellectual Property Rights in the Agricultural Value Chain, Flora IP (Sept. 13, 2020), https://www.floraip.com/2020/09/13/intellectual-property-rights-in-the-agricultural-value-chain/ [https://perma.cc/N28N-G4RS].
[xxvi] See id.
[xxvii] Id.
[xxviii] Id.
[xxix] Intellectual Property in the Agriculture Sector and the Issue of Food Security, Kashish Intell. Prop. Grp., https://www.kashishworld.com/blog/intellectual-property-in-the-agriculture-sector-and-the-issue-of-food-security/ (last visited Apr. 10, 2023) [https://perma.cc/X62C-6GZD].
[xxx] Id.