Hopefully A Middle Ground

Late last week President Biden signed a sweeping collection of Executive Orders dealing with various aspect of how America does business. Today I’d like to comment on two individual items: non-disclosure agreements (NDA) and non-compete provisions, that I’ve long had strong feeling on.

An executive action has two inherent shortcomings, one of which may be a blessing here. Any executive action can be completely undone by the stoke of a pen and that very often happens with a change of political affiliations in the Oval Office. I feel that is bad because if markets hate anything it is uncertainty.

The other is that the enforcement, or lack thereof, is often the call of the agencies charged with making the change. In the two cases I want to discuss today I think that is a good thing. While I lean heavily against both NDAs and non-compete provisions, I do see instances where they are in the best interest of society. “Discretionary enforcement” may well help us achieve the middle ground that will best serve the interests of society at large.

The NDA has been abused and largely by people trying to hide their misdeeds. In most cases some things should remain relatively private. A typical example would be an extra-marital affair. The exception would be if someone is holding themselves out as holier than thou as a main part of their marketing image (i.e. a clergyperson/role model). If you are privy to the CEO of a manufacturing concerns mistress’ existence perhaps all of America doesn’t need to know about that. However, if you are privy to the tax cheating of the CEO of a boutique real estate firm that certainly is in the public interest (in fact it is white collar crime with millions of victims) and it needs to be public knowledge.

The natural bridge in this discussion is trade secrets. That can be covered by both the NDA and a non-compete clause in an employment contract. The classic example is that if you know Coca-Cola’s secret formula the company has every right to protect itself from you disclosing it to Pepsi.

I think there is a place for non-compete clauses based on position and compensation. If you are that key of an employee you should be titled and compensated as such. A pizza delivery person should not be prohibited from jumping from Jimmy John’s to Papa John’s. (For the record, I’m not certain if either or both have non-competes but many firms like them do have them for people at that level.)

Most often the first time a non-senior ranking employee becomes aware of a non-compete agreement is in Human Resources the first day on the job as they sign what seems like a million forms. (As an aside that often includes an arbitration agreement which I also condemn but that is another matter for another day.) The reality is that these agreements are last minute surprises when the employee is in a vulnerable position. Most people are happy to have been hired and are in no position to simply walk away.

On a lower level than company secrets I can still see where some, particularly smaller businesses, make huge investments in an employee and need to protect their interests. The example I will use is a small company that sells a commodity and hires a salesperson. The salesperson works for you for a time during which they get to know all or a substantial portion of your key customers then they go out on their own or worse yet to a competitor selling that same commodity to the customers they developed relationships with and knowledge of on “your dime”. Perhaps in those cases the originals company needs to protect itself with a limited in time and possibly geography non-compete provision.

That all has to be balanced with the former employee’s right to earn a living. They were an employee not a slave. They were employed not owned.

I hope the agencies do a diligent job of enforcing these new executive orders especially pertaining to NDAs and non-compete clauses. It will be interesting when the inevitable cases end up reaching the Supreme Court. They will be tailor made for narrow rulings.

America is not good at reaching and maintaining a middle ground. I hope this will be an exception.

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