Corporate & Securities Blog

FTC’s Noncompete Ban and the Impact on Trade Secret Protection

By Kevin R. Casey and Samantha Krasker

The recent rulemaking by the Federal Trade Commission (FTC) on worker noncompetes has garnered an avalanche of publicity, mostly for its impact on employment agreements and employees’ ability to work for competitors. However, the rule’s effect on previously protected trade secrets is equally important. Read on as we highlight the rule’s restrictions and provide practical solutions for businesses looking to continue to protect valuable intellectual property.

First, it should be noted that the ban does not take effect for 120 days after its May publication in the Federal Register. Second, leaving the 120-day period aside, the rule already has been the subject of litigation, which may ultimately modify or overturn it. The U.S. Chamber of Commerce filed one of the first actions in the U.S. District Court for the Eastern District of Texas seeking injunctive relief, declaring that the ban is invalid and preventing the ban from taking effect. The Chamber’s lawsuit asserts, among other things, that the FTC’s ban is overbroad and violates the basic legal principle against the FTC’s lawful authority. Other similar litigation has also been filed against the FTC.

The new ban on noncompetes seeks to prohibit employers from requiring workers — including employees, independent contractors and unpaid workers — to execute noncompete clauses. The FTC’s ban also requires employers to notify most workers by the effective date that any current noncompete agreements will not, and cannot, be enforced against them. The FTC identifies only two exceptions to the ban: noncompete clauses executed by senior executives (employees who make more than $151,164 and are in policymaking positions) and certain types of noncompete clauses executed pursuant to the sale of a business.

To date, noncompetes effectively protected trade secrets, which can be a critical component of a company’s intellectual property portfolio. Trade secrets can be defined as information used in a business (trade) that gives the owner a competitive advantage over others who do not know the information (secret), and the owner takes reasonable measures to protect the information from disclosure. Common examples of trade secrets include technical know-how, customer lists, product development plans, recipes or formulas, processes, data, software code, customer lists and business plans. Internally, companies limit access to trade secrets to those who “need to know” and provide strict guidelines for employees and contractors on how they can use and protect the trade secrets. Externally, businesses protect their intellectual property through confidentiality agreements, nondisclosure agreements and licenses.

Both federal and state laws protect trade secrets. On the federal level, sources include the Economic Espionage Act of 1996 and the Defend Trade Secrets Act of 2016 (DTSA). For state law, sources include the Uniform Trade Secrets Act, the Restatement of Unfair Competition and the Restatement of Torts Section 757. However, these laws are not uniform. While most states allow confidentiality and nondisclosure agreements, some states strongly disfavor noncompete agreements. The FTC’s new rule sides with those states, noting, “Trade secret laws and nondisclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information” independent of noncompete clauses.

With the current uncertainty surrounding noncompete agreements, many companies are exploring different ways to protect their valuable trade secrets. Among the alternatives to noncompete agreements that can be used to protect trade secrets are:

  • NDAs: Require employees or contractors to keep specific information confidential and not disclose that information to others. When NDAs are carefully tailored and seek to protect proprietary information rather than prevent competition, they are more likely to be found enforceable.
  • Limited use agreements: Allow employees or contractors to use trade secrets for a specific purpose but prohibit them from either using the trade secrets for any other purpose or disclosing the trade secrets to others.
  • Use of existing trade secret laws: The aforementioned federal and state laws allow owners of trade secret information to sue in court and seek remedies for misappropriation of their trade secrets. The DTSA specifically allows for the recovery of attorney fees if the misappropriation has been in “bad faith.” Efforts to protect trade secret information will also help demonstrate that the owner has taken reasonable measures to maintain confidentiality.
  • Encryption and security measures: Companies can implement secure methods for storing and transmitting trade secret information, which can help prevent unauthorized access or theft by third parties.
  • Timely response to disclosures: If a trade secret is disclosed, companies should move swiftly to investigate the disclosure and, if necessary, take legal action.

It is important for companies to have a comprehensive strategy in place to protect their trade secrets, including both legal and practical measures. This strategy can help prevent the loss of valuable assets and maintain a competitive advantage in the marketplace. With respect to the FTC’s ban on worker noncompetes, Stradley Ronon will continue to monitor these developments. We are available to assist clients with their obligations in navigating these new requirements while maintaining trade secret protections.

 

Meet the Authors

Kevin R. Casey

Kevin Casey is chair of the intellectual property litigation group at Stradley Ronon and an active member of the alternative dispute resolution group. Kevin considers ADR to be an integral part of his practice, participating in various ADR procedures as a party representative and as a neutral. In addition to being consistently listed by The Best Lawyers in America in several substantive intellectual property fields, Best Lawyers has named Kevin multiple times as its “Lawyer of the Year” in Philadelphia for intellectual property, patent and trademark law. Chambers USA: America’s Leading Lawyers for Business has identified Kevin as a leader in intellectual property in Pennsylvania.

kcasey@stradley.com | 610.640.5813

Samantha Krasker

Samantha Krasker represents clients in a variety of general commercial litigation matters. Her work includes researching and drafting legal memoranda and motions and assisting with case management.

skrasker@stradley.com | 215.564.8797

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