Revisiting Trade Secret Strategies Following the FTC’s Ban on Noncompete Agreements | McDermott Will & Emery
On April 23, 2024, in a move that will have significant ramifications for employment contracts and intellectual property (IP) rights, the Federal Trade Commission (FTC) issued a rule banning all future noncompete agreements nationwide with limited exceptions. The rule marks a pivotal moment for trade secret protection and enforcement strategies as it promises to reshape the relationship between employers and employees and impact safeguards for proprietary information.
Noncompete agreements have long been used to temporarily restrict employees from working for a competitor or starting a competing business after leaving an employer. These agreements are often used to protect a company’s IP by prohibiting employees from taking and/or disclosing proprietary information, such as customer lists, to competitors.
The FTC’s new ban on noncompete agreements requires employers to tailor their strategies for protecting valuable proprietary information.
IN DEPTH
TRADE SECRET PROTECTION STRATEGIES
The FTC’s new rule should motivate employers to seek alternative measures to protect proprietary company information, including through trade secret enforcement. For many employers, however, trade secrets are often the most overlooked form of IP. Many employers are unaware that trade secrets are a valuable part of their IP portfolio that provides a competitive advantage. Almost any type of proprietary information can be a trade secret, so long as the information is valuable because it is not generally known or readily ascertainable by others. Trade secrets can include technical information, manufacturing processes, chemical formulas, recipes, specialized know-how, test data, customer lists and data, price lists, supplier information, strategic business plans, financial and marketing information, and virtually any other commercially valuable secret information.
Noncompete agreements have commonly been used to protect an employer’s trade secrets from falling into the hands of a competitor. The FTC’s ban should encourage employers to analyze their current trade secret protection strategies and devise new and enhanced safeguards to sufficiently protect those trade secrets from improper disclosure by departing employees.
Unless an employer takes “reasonable efforts” to protect a trade secret from improper disclosure, the employer can lose its right to prevent others from using the trade secret. Whether a company’s efforts are reasonable depends on evolving industry norms and the nature of the trade secret. Some protective measures to consider implementing include access control measures, password protection, encryption techniques, monitoring systems, document labeling and confidentiality agreements with third-party suppliers and customers. The efficacy of these measures should be regularly assessed, and potential vulnerabilities should be promptly addressed. Employers should consider other options as well, such as periodically updating company policies, revising employee handbooks and training employees on how to safeguard the company’s trade secrets.
Employers should still use confidentiality and nondisclosure agreements (NDAs) to safeguard sensitive information as long as these agreements do not essentially function as de facto noncompete agreements. Such agreements should be carefully drafted to require that employees maintain the confidentiality of proprietary information both during and after their employment and prohibit all future use and disclosure of such information.
Ultimately, deciding which protective measures are appropriate is a complex process that requires balancing appropriate secrecy with the practical realties of efficient business operations. It’s crucial that trade secret owners appropriately tailor measures to protect their valuable proprietary information. These assessments are case specific, and trade secret owners should consult legal counsel to ensure proper protections are in place.
TRADE SECRET ENFORCEMENT
The FTC’s ban will almost certainly increase the volume of trade secret litigation. Because the ban may make it more common for employees to leave their employers to work for their employer’s competitors, employers will be forced to threaten or pursue legal action more frequently against departing employees suspected of trade secret misappropriation – and in some instances, against the new employer. Under current state and federal laws, remedies for trade secret misappropriation include monetary damages, injunctive relief and reimbursement of attorneys’ fees.
Conversely, hiring a new employee from a competitor also requires diligence to avoid being sued for trade secret misappropriation. To minimize misappropriation claims arising from hiring new employees, employers should maintain an explicit policy prohibiting the hiring of new employees from a competitor for the purposes of obtaining that competitor’s proprietary information. Employers should also seek to cultivate a work environment in which such hiring practices are clearly unacceptable. Additionally, employers should ensure that new hires understand and attest in writing that the use or disclosure of a prior employer’s proprietary information is strictly forbidden. Such efforts are particularly important when hiring multiple new employees from the same competitor. After new employees are hired, follow-up procedures should be implemented to ensure compliance with these policies and restrictions.
When an employer or its new employee is accused of trade secret misappropriation, the employer should promptly investigate the allegations and preserve relevant electronic and physical evidence. The employer should also ensure that relevant files, communications and metadata are not altered or deleted. The employer should further consider implementing mitigation efforts, such as restricting the new employee’s access to the alleged proprietary information or reassigning the new employee to tasks unrelated to the alleged proprietary information. Each situation is unique and will require consultation with capable legal counsel to alleviate any further damage and protect the company’s interests.
Once the investigation is complete, the company may seek to resolve the dispute through settlement discussions with the prior employer. If the attempt at informal resolution fails, however, the company should prepare strong defenses against the allegations. Common defenses against a trade secret misappropriation claim include proving (a) independent development, (b) that the alleged trade secret is not proprietary to the prior employer because it is reasonably ascertainable through other means, (c) that the prior employer failed to take reasonable measures to maintain secrecy of the alleged trade secret and (d) that the trade secret is not proprietary to the prior employer because it was lawfully acquired.
BOTTOM LINE
The FTC’s ban on noncompete agreements has the potential to significantly impact trade secret protection by encouraging the adoption of alternative safeguards. While the full ramifications of the new rule remain to be seen, including whether it survives pending legal challenges, the rule represents a significant step toward changing the relationship between employers and employees and requires employers to reassess the efficacy of their current efforts to protect their trade secrets.
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