As a result of the FTC’s ban of non-compete
agreements, businesses should assess alternative ways to protect
their confidential information, and may consider the use of trade
secret and confidential information protection efforts directed to
the information itself, and not the individuals that use the
information.
Non-compete agreements have been among the tools businesses
often rely upon to prevent the unauthorized dissemination of
confidential and trade secret information to competitors. On
Tuesday, April 23, 2024, however, the Federal Trade Commission
publicly announced a long-anticipated rule banning non-compete
agreements, claiming that such agreements restrict worker freedoms,
suppress worker wages, and harm competition. The rule will ban all
future non-compete agreements as an unfair method of competition.
Existing non-competes would be deemed not enforceable, except for
those impacting “senior executives,” defined as workers
earning more than $151,164 who are in a “policy-making
position.”
The rule is scheduled to take effect as early as late August.
Extensive litigation is expected around this rule, and at least one
challenge was filed in federal court the same day that the rule was
announced. Although it is possible the FTC’s rule will be
struck down someday, businesses currently relying on non-compete
agreements to protect their trade secret and confidential
information face the risk that this rule will take effect. Barring
court action striking down the rule, the FTC’s recent action
will require many businesses to reassess their protection
strategies for company trade secret and confidential
information.
The FTC’s comments regarding its new rule acknowledge
concerns that the elimination of non compete agreements could
impact the protection of confidential information. In some (but not
all) states, a business could rely on a non-compete agreement with
an employee to act as a blanket protection from the unauthorized
use of trade secret or confidential information if the employee
would leave the company. The reasoning is that such information is
effectively protected because the employee cannot move to other
employment in which the information may be used to the detriment of
the past employer.
The articulated concern underlying the FTC’s rule is that
non-competition agreements unnecessarily restrict more activity
than necessary to achieve the protection of confidential or trade
secret information. The FTC has also estimated that banning
non-competes will have substantial positive effects for
“workers, businesses, and the economy,” including an
estimated 17,000-29,000 more patents each year, increased
start-ups, reduced healthcare costs, and higher wages for certain
employees. In justifying the proposed rule, the FTC has asserted
that employers have alternative strategies to protect confidential
or trade secret information, namely trade secret and contract law
involving non-disclosure agreements. In view of this expectation
underpinning the FTC rule, employers should consider reassessing
their protection efforts and focus to prevent unauthorized movement
of information rather than the movement of employees who may have
access to such information.
Alternative Strategies to Protect Confidential Information:
Trade Secret Protection Assessment and Planning
Legal strategies employing trade secret law (via the federal
Defend Trade Secrets Act or state implementations of the Uniform
Trade Secrets Act) to protect proprietary information are largely
unaffected by the FTC rule. In view of the FTC’s attempt to ban
non-compete agreements, companies should assess whether their
remaining efforts to protect information are sufficient to meet or
exceed the “reasonable measures under the circumstances”
that those statutes require. Failing to do so could result in a
finding, when asserting the alleged trade secrets, that the
unimplemented measures demonstrate the company did not take
“reasonable measures” to protect its trade secrets. Such
a finding could result in a misappropriating employee—and
their new employer—escaping with no liability at all.
Successfully assessing and systematizing trade secret protection
is more easily achievable with a plan. While not required as part
of reasonable measures to protect a trade secret, planning may be
useful to inform present employees of the protected confidential
information and steps taken to protect that information, as well as
to provide future employees historical context of the
information’s protection. Additional steps for protecting
confidential information may be tailored to the specific nature of
a company’s trade secrets and to the geographic areas in which
the company does business. Planning could address information
categorically or with greater specificity. The measures to be taken
may address the industry and business risks specific to the
business, while avoiding implementation based on overly-generalized
assumptions of business risk.
For many businesses, a protection plan may consider (1)
restricting access of sensitive information to only those with a
need relating to their employment roles; (2) employing physical,
digital, and geographic limitations on access; (3) complementing
physical protections with contractual limitations on information
use; and (4) implementing an employee education cycle from hiring
to termination that reinforces the value and company protection of
trade secret and confidential information. Generally, action is
better than no action, particularly if after assessment a company
determines that additional protective measures should be
implemented, and a lack of action or planning may be used by an
employee as an indication that information used during work is not
company confidential or trade secret information. Small steps taken
now may translate to potentially eliminating a larger loss later,
when loss recovery is much more costly and less certain.
Alternative Strategies to Protect Confidential Information:
Non-Disclosure Agreements
The FTC rule will not reach regulation of non-disclosure
agreements (NDAs) per se. In general, an NDA creates an enforceable
contractual obligation on the part of an employee to protect and
prevent the disclosure or misuse of company confidential
information inconsistent with the employee’s role. Companies
should beware, however, that certain NDA provisions may be found
unenforceable under the FTC’s proposed rule.
First, an agreement may bundle several rights and obligations
together, such as a non-disclosure provision, a non-solicitation
provision, and a non-compete provision. Absent a severability
clause in the agreement, a bundled agreement may be found wholly
unenforceable if the non-compete provision is eliminated. Second,
the FTC has commented that “NDAs that are unusually broad in
scope may function as de facto non-compete clauses, hence falling
within the scope of the proposed rule.” The FTC has compared
such NDAs to more favorable NDAs that “may prevent workers
from disclosing or using certain information, but they generally do
not prevent workers from working for a competitor or starting their
own business altogether.” Thus, an NDA’s overly broad
protectionary language may result in a finding that the
non-disclosure provision really falls into the non-compete
category, making it unenforceable.
In view of the FTC’s recently issued rule, companies should
consider a review of existing agreements to eliminate potentially
unenforceable provisions. Problematic existing contractual
provisions may be mitigated by entering into new agreements with
key company employees.
Conclusion
The FTC’s ban on non-compete agreements may affect some
companies’ efforts to protect confidential or trade secret
information. Anticipating implementation of the FTC’s announced
rule, companies may consider focusing on trade secret and
confidential information protection efforts directed to the
information itself and not on the individuals that use the
information. Such an approach may mitigate future risk if existing
information protection measures focused on the restriction of
employee movement are found to be unenforceable.
This article is an update from its
original version, published February 22, 2023 in The National
Law Journal© 202X ALM Global Properties, LLC.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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