“FTC rules do more than just copy California. They seem to go out of their way to introduce more uncertainty, burden and risk to the industry.”
“He is guided by an unseen hand, promoting ends that are not part of his intentions.”
— Adam Smith
When Adam Smith spoke of the “invisible hand,” he was talking about good things. It is how the free market harnesses the laws of competition, supply and demand, and selfishness to improve the economy. But he may have had other laws in mind. Law of Unintended Consequences: The law that the actions of people, especially governments, always have unintended consequences. These effects can be perverse, reflecting a serious failure of “secondary thinking” (i.e., thinking “why can this go wrong?”).
On January 5th, 2023 (the day IPs may lose their notoriety), we saw two bold moves. First, the “American Intellectual Property Protection Act” became law. Second, the Federal Trade Commission (FTC) has proposed new rules that void the national non-compete agreement. But wait, you might say it actually sounds great! is the problem? Well, don’t be too hasty. Please stay with me on this. Then you will see how short-sighted our government is.
First, let’s look at the law. Commonly known as S.1294, it requires the President to impose sanctions on foreign organizations or persons involved in the “serious” theft of trade secrets owned by the United States, and on others who assist them. increase. The new law requires the president to report to Congress in his July (and every year thereafter). . . the report must also list the names of foreign nationals who provide “significant” financial or technical assistance to or act on the direct offender’s behalf. This includes company CEOs. and board members. No definition is given as to what the frequently repeated word “significant” means, but the possibilities range from “significant” to “substantial” to “large”.
Choose 5 from our list
After identifying all these foreign associates and supporters, the President may (1) block property transactions, (2) go to the “entity list,” unless he submits a written waiver justified by national interest. (3) denial of financial assistance or access; (4) disqualification from selling goods or services to the United States; and (5) prohibition of US investment sources. Individuals may be denied a visa or have their existing visa revoked. In particular, there is no way to go to court for relief from the President’s decision.
If this law sounds vaguely familiar, congratulations. paying attention. In June 2021, we published an article about the move to “disconnect” the US from China. It included several examples of pending bills at the federal and state levels, which I derided for their apparent inefficiencies. One of them was an earlier version of S.1294. At the time, I thought it was silly to think that a law requiring the president to choose “five or more” sanctions, such as choosing a dish from a menu, could actually become law. How naive it was!
However, one thing has not changed. Clearly, this law does not really deter trade secret theft. We have already enacted the Economic Espionage Act, which provides for up to 15 years in federal prison and her $10 million fine (and restitution). Trade sanctions aren’t that big if you’re prepared to risk going to jail.
cobra effect
If S.1292 doesn’t work, at least it doesn’t hurt, right? This is where the law of unintended consequences comes into play. Let me pause here for a little digression as to how this law came to be known as the “Cobra Effect”. During colonial times, the British Governor of Delhi was concerned about cobra infestations. So he offered a generous bounty for cobra skins, assuming their numbers would decline. Instead, people saw an opportunity in the business and started making money by breeding and killing thousands of snakes. Horrifyingly, the governor canceled the bounty. All those breeding farms released their livestock, which crept into the city.
Here, the law does not actually make an exception for “foreign” entities that are subsidiaries of U.S. companies, so sanctions may ultimately apply to U.S. assets. The bigger concern, however, is that the law will not bring additional benefits and will serve as an inspiration for copycat legislation in other countries. We are mostly in a position to complain about China arresting US executives (or seizing data belonging to their companies) based solely on government “investigations” conducted without due process. not in
Okay, let’s hope it remains just a terrifying risk that never materializes. This is a new FTC rule that prohibits non-compete agreements. It has also previously investigated non-compete obligations when the White House asked his FTC to investigate following public outrage over contracts forced on summer camp counselors and sandwich makers.
FTC Voids State Noncompetitive Resolutions
Here’s some background: California doesn’t (almost) allow non-compete agreements, but almost all other states allow them under strict “reasonable” filters that limit time, subject matter, and geographic scope. Companies like them because it’s hard to know when a secret is being used by a retired employee, and because trade secret litigation is costly and unpredictable for both parties.To address the worst abuses In addition, individual states are considering specific amendments. According to Russell Beck’s scorecard, 11 states have enacted laws banning low-wage employees from non-competing, and many others are currently considering similar laws.
FTC rules immediately wipe out all state-level activity based on the conclusion that all non-competitive practices are “unfair” and that outlawing them will result in higher wages, according to economists. Become. The FTC justifies much of its logic and faith in the California experience.But no causal relationship has been proven between that state’s non-competitive restrictions and Silicon Valley’s success. trade secret litigationThis is not surprising as the company’s business has no other tools to protect sensitive information. It is reasonable to question whether the surge in lawsuits in other parts of the country is acceptable or whether its consequences were considered by his FTC.
But the FTC’s rules don’t just copy California. Introducing more uncertainty, burden, and risk into the industry seems to be way out of the way. Consider, for example, that California grants a non-compete obligation to anyone selling an interest in a business. This makes sense. Because no one buys a business if they can’t be sure the seller won’t open a store down the street. However, the FTC only allows this “goodwill” exception to “substantial” owners. twenty five% Company’s. think about it. A business with an equal number of shareholders exceeding her four cannot guarantee buyer protection against goodwill, even if they all agree that it is necessary. What about potential liquidity for businesses, not only on Wall Street, but also on Main Street? Has anyone tried to add up the prices?
Getting worse
And there are more. The term “non-compete clause” is defined by the FTC. non-disclosure “It is so widely written that it effectively prevents workers from working in the same field.” Employee confidentiality agreements allow confidence that confidential information will be shared and will not remain on the minds of departing staff. Therefore, it is widely used in most industries. Also, no one knows exactly what the information being shared will look like from the start, so agreements need to be made broadly. How many of those can be challenged as “de facto” non-compete agreements? , it will be a “pretty much” one.
Well, at least there is a transition, right? error! In fact, the FTC’s rules are not only effective from day one, track back, requires employers to provide “separately” written notice that a contract clause is “cancelled”. And the notice must be directed to all past workers at the last address, not just current “workers” (a term that includes independent contractors).
To remain competitive in global markets, the United States must enable and foster innovation. Today’s businesses rely heavily on information assets, but commercializing those assets requires hundreds or thousands of employees while ensuring a stringent set of laws to protect trade secrets. Confidential access must be provided. For decades, the United States has spread that framework around the world. Now the federal government doesn’t seem to know the end result of what seems like a great idea to some people.
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Author: Kirk Dark
