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FTC Ban on Non-competes Will Expand Trade Secrets Litigation

May 2, 2024

The final rule is the anticipated result of years of workshops on the topic, and follows the FTC’s January 19, 2023 proposed rule and 90-day public comment period. Enactment of a federal ban is not surprising, given that many states have long prohibited non-compete agreements unless they are reasonable as to time, subject matter, and geography, and a number of states have recently further curtailed the enforcement of non-compete agreements against low-wage or non-technical employees.

The rule will become effective Wednesday, September 4, 2024 (120 days following its intended publication in the Federal Register on May 7, 2024). After the rule’s effective date, non-compete agreements involving a majority of employees will be deemed immediately unenforceable. And employers must affirmatively notify their workers with existing non-competes that they are no longer enforceable.

An interim exception to the ban is senior executives, whose non-compete agreements existing as of the rule’s effective date (that otherwise comply with applicable state law) will remain in force. Employers are banned, however, from entering into any new non-competes, regardless of whether they involve senior executives. The rule also does not apply to non-competes entered into pursuant to a bona fide sale of a business, or where a cause of action related to a non-compete accrued prior to the rule’s effective date.

The rule is already the subject of multiple legal challenges, which may or may not affect its enaction, in whole or in part. But in the meantime, for businesses seeking to protect their legitimate competitive interests when employees migrate, the rule shifts the focus even further toward other available protections and remedies. Trade secret rights and contractual nondisclosure agreements are now more important than ever. In addition to enforcement of other contract provisions barring departing employees from taking or disclosing sensitive information, trade secret causes of action under both state and federal law (e.g., 18 U.S.C. § 1836 et seq., the Defend Trade Secrets Act of 2016) will remain useful tools in protecting a company’s sensitive interests.

The challenge for businesses is that protecting trade secrets and enforcing trade secret rights is appreciably more burdensome than maintaining a “high level” shield based on non-compete agreements alone. Trade secret protection and enforcement requires careful attention to information control, workforce access and training, and vigilant and timely review of data upon employee departures.

First, the information sought to be protected must actually be a trade secret—information strictly held in confidence and not generally known in the industry that, if disclosed, would harm the legitimate interests of the business. Reasonable protections include but are not limited to internal security of documents and information including limited access and password protections, strict accountability of digital assets issued to employees (laptops, tablets, phones, etc.), limited and carefully-tracked distribution and use of protected information, disclosure to others only for necessary business purposes and under contractual non-disclosure obligations, and the like. Implementation of such protections requires close coordination between company leadership, IT professionals, and the workforce—all supported by well-documented policies that are not only issued on paper but uniformly enforced.

Second, vigilant enforcement of trade secret rights is imperative, and time is of the essence. Upon employee departures, while complying with applicable privacy laws company leadership should immediately account for, lock down, and forensically examine the digital assets of the departing employee to ensure that no unauthorized copies or transmissions of protected information have been made.

Departing employees should be equally interested in separating from employment with a “clean slate,” to avoid disputes down the road regarding suspicions of misappropriation. It is usually better for a departing employee to immediately identify and return any sensitive information they may possess rather than have it become the subject of later litigation. In this age it is remarkably easy, and a not-infrequent occurrence, for employees to inadvertently leave employment with at least one thumb drive containing protected information.

Ironically, while the FTC rule seeks to protect the interests of the workforce by freeing them from what the Commission perceives as unfair restraints on competition, it remains to be seen whether the necessary shift to more strict and vigorous enforcement of trade secret rights and nondisclosure obligations will actually increase the burdens on departing employees over time. It is one thing to wait out a reasonable non-compete period before starting or joining a competing venture down the street; it is quite another to become embroiled in complex and expensive trade secret misappropriation litigation extending far beyond the initial non-compete period. Employers and employees alike need to carefully evaluate this unintended consequence of the new rule.