With a Proposed Ban on Non-Competes, Will NDAs Be Next on the Chopping Block?

Non-compete agreements are under assault, courtesy of the Federal Trade Commission (FTC), which rolled out a proposed ban last month. Will non-disclosure agreements, or NDAs, be the next business tool to draw regulators’ ire? That’s a real possibility, according to some employment attorneys and regulatory experts, with the push potentially coming from state attorneys general rather than the federal government.

“From a regulatory perspective it’s a logical extension of the restrictions … that the federal government is enacting,” says Stephen Piepgrass, a partner at Troutman Pepper Hamilton Sanders. “State attorneys general are the ones who tend to push the regulatory envelope and look for new legal theories to bring consumer protection claims. This is very much in line with that.”

Non-disclosure agreements already are under attack in narrow circumstances. Just last month, for instance, President Joseph Biden signed the Speak Out Act, which prevents the enforcement of NDAs in instances of sexual assault and harassment. Introduced in July by Senator Kirsten Gillibrand, D-New York, the measure follows similar legislation passed in states such as California, Washington, and New Jersey.

Piepgrass said that as such laws pass at the state and national level, regulators will naturally wonder whether they should restrict NDAs in other cases.

Among the attorneys general pushing back on NDAs is Washington State Attorney General Bob Ferguson, who late last year filed a federal lawsuit against plastic surgery provider Allure Esthetic, in part over its use of NDAs to silence negative reviews online.

In the suit, Ferguson alleged that Allure and owner Javad Sajan required more than 10,000 patients to sign unlawful NDAs restricting them from posting negative reviews online. Allure did not respond to a request for comment, and the company and Sajan have not filed a response in court or identified who will represent them.

Ferguson’s suit alleges that Allure Esthetic’s ”illegal NDAs restricted their patients from sharing truthful information about defendants’ services with the public and prevented other Washington consumers from having access to accurate, complete information when shopping for healthcare services.”

Piepgrass said he sees that case as an example of the enthusiasm he’s seeing among attorneys general to be on the forefront of bringing novel consumer protection claims.

Not all attorneys agree. Some say they don’t see NDAs under threat, especially at the federal level.

Sara Jodka, who specializes in employment agreements at Dickinson Wright, doesn’t even think the FTC would have proposed a non-compete ban had it not been a priority of President Joe Biden, who appointed FTC Chair Lina Khan.

“[Non-competes] were put on the FTC’s to-do list because President Biden gave them an executive order,” Jodka said. “As soon as we’re outside the Democratic administration, you’re not going to see anything like this.”

Linda Jackson—who is co-leader of the Arent Fox Schiff trade secrets, non-competes, and employee mobility group—agreed. Although Jackson said it’s worth asking whether NDAs are next on the chopping block, she said she hasn’t seen any jurisdiction make moves to significantly restrict them. Although there’s certainly overlap between non-competes and NDAs, Jackson said, it makes little sense for federal regulators to intervene in the latter.

Jessica Rich, a former director of the FTC’s Bureau of Consumer Protection, said she thinks non-disclosure agreements are more likely to be challenged in narrow circumstances, such as the online reviews cited in Ferguson’s lawsuit in Washington state.

Rich, who is of counsel at Kelley Drye & Warren, said the FTC has longstanding guidance on reviews and endorsements but soon could step in to make a formal rule. Such a rule would almost certainly be informed by lawsuits such as the one filed by Ferguson against Allure Esthetic.

“Given that this issue has been raised in enforcement and that the point of the rule would be to broadly address problems like those Ferguson raised … something regarding NDAs could be addressed in the rule, if it ever gets there,” Rich said.

While Jodka is skeptical the FTC would ban non-competes, she said the terrain is less clear in individual states. Out of an abundance of caution, she suggests that employers in states where attorneys general have signaled discomfort with NDAs should go ahead and review their policies.

Paul Singer, a former deputy associate attorney general in Texas, encourages companies to take a more thoughtful approach to NDAs. He said companies should consider not only what they’re asking for in an NDA, but why they are asking for it. This approach is advantageous, as it’s likely to be the same one regulators will take if they start cracking down on NDAs, said Singer, who’s now a partner at Kelley Drye.

“Is there a real, genuine competitive issue that they’re protecting? Is there sensitive information that that needs to be protected? Or is it potentially going to be used in a way that could arguably harm the public?” Singer asks.

Even if the pressure comes only from states, rather than the federal government, companies will need to take it seriously, Piepgrass said. “Often, state agencies will be the ones to bring aggressive action, even more so than the FTC. Sometimes they’ll take novel legal theories and run with them in their investigations.”

From: BenefitsPRO