Trade Secret Protection as a “Trade-Off” for Non-Competes | Dinsmore & Shohl LLP
Non-compete agreements can be an effective method for protecting confidential and proprietary business information. However, over the past several years, it seems that non-compete agreements have been falling out of favor. After the Federal Trade Commission (FTC) recently came too close for comfort with its attempt to ban non-compete agreements, and with the National Labor Relations Board (NLRB) doubling down on its own anti-non-compete positions on October 7, 2024, employers would be wise to consider how else they can protect their confidential and proprietary business information. One way is to take the necessary action to have that information deemed “trade secrets.” Trade secrets are very clearly still subject to statutory and common law protections under both federal and state law.
Background
Two recent events at the federal level are very real examples of why employers should be looking to take advantage of protections in addition to non-competes and other restrictive covenants. As mentioned, the FTC has been attempting to ban almost all non-compete agreements, and those efforts have been widely reported.
A less-reported event, however, was the General Counsel of the NLRB–another administrative agency–formally stating in May of 2023 that, in the NLRB’s view, non-competes likely violate another federal law, the National Labor Relations Act (NLRA). Just recently, on October 7, the General Counsel issued another statement confirming this position and suggesting how the NLRB would intend to pursue remedies–including “make-whole” monetary relief–against employers using unlawful non-competes.
While neither of these events make it mandatory for employers to immediately stop using all non-competes, the events do serve as warnings that employers should consider seeking out potentially more reliable protections.
The FTC’s Attempt to Ban Non-Competes
In January of 2023, the FTC proposed a new rule that would ban most non-compete agreements. During the comment period for the proposed rule, the FTC reportedly received nearly 27,000 comments, demonstrating significant public interest in the issue. In April of 2024, the FTC announced that the rule would go into effect on September 4, 2024.
Under the rule, a non-compete agreement was defined broadly as any term or condition of employment that could prevent workers from, or punish them for, seeking work or starting their own businesses in the same field after their current employment ended. The rule would have been applied retroactively to all existing non-compete agreements, except for those between a company and its “senior executives.” There were very few exceptions under the FTC rule.
In August of 2024, however, the rule was blocked by a federal court in Texas. The federal judge held that the rule (1) exceeded the FTC’s statutory authority and (2) was an unreasonably overbroad rule for which the FTC did not provide a reasonable explanation. That may not be the end of the FTC rule, however. At least one other federal court came to the opposite conclusion, holding that the rule was likely well within the authority of the FTC. This split means that the validity of a non-compete ban may end up before the U.S. Supreme Court. Ultimately, although the FTC rule did not go into effect in September, it is not yet truly dead.
NLRB – Statements of General Counsel
Even before the FTC’s attempt to ban non-competes, the NLRB weighed in against them as well. Many employers may not appreciate that the NLRB has authority over both union and non-union employers, which makes the NLRB’s actions important for all to monitor.
On May 30, 2023, General Counsel Jennifer Abruzzo released a memo asserting that non-compete agreements generally violate the NLRA. The NLRA protects certain collective activities of employees used to achieve better terms and conditions of employment (hours, wages, etc.). According to Abruzzo, non-compete agreements may be reasonably construed by employees to impede their ability to change jobs, which could chill their exercise of protected activities seeking better terms and conditions from their current employer.
The new standard proposed by Abruzzo would provide that non-compete agreements violate the NLRA unless they are “narrowly tailored to address special circumstances” that would outweigh the interference with employee rights. This seems to mean that in her eyes, a valid non-compete agreement can be no broader than absolutely necessary to protect the employer’s business interests.
In turn, this means that under the NLRB’s guidance, even non-union employers could be penalized by the NLRB for using unlawful non-compete agreements. While the memo was merely guidance, and not a rule like the FTC’s proposed non-compete ban, it was further evidence of what seems to be a changing tide when it comes to non-competes.
On October 7, 2024, Abruzzo issued a follow-up memo further addressing non-competes and how the NLRB should enforce these positions. The memo comes closely on the heels of the court’s rejection of the FTC rule, suggesting that another administrative agency may be trying to take up the mantle and do at least some of what the FTC has been prohibited from doing.
Perhaps the biggest takeaway is the new memo’s focus on “make-whole” remedies that the NLRB would intend to seek against employers, including “monetary relief.” According to Abruzzo, simply voiding unlawful non-competes would not be enough. Awarding monetary relief may be necessary to address all the perceived harms to employees associated with unlawful non-competes. Such harm could include money to compensate an employee for a lost, better job opportunity (not just pay but also benefits); for being out of work longer than they would have been without the non-compete; for having to accept a lower-paying job in a different industry; and/or for having to move outside of the geographic region to continue working in the same industry.
Additionally, the new memo suggests that the NLRB should even amend its standard notice posting to “solicit relevant information from employees” about employer enforcement of unlawful non-competes. Thus, not only would the NLRB enforce the positions outlined above, it would require that employees be informed of them and encouraged to pursue violations with the NLRB’s help. In some ways, these positions are even more aggressive than the more-widely-reported FTC rule.
Recommendations
The recent federal actions against non-compete agreements are not the only efforts going on. Bills seeking to reform non-compete use have been introduced and/or voted on in state legislatures throughout the U.S. Many supporters of non-compete reform claim that such restrictions on employees lead to reduced wages and hurt the economy.
On the other hand, employers need to be able to protect their most critical and confidential information. As negative opinions about non-competes continue to spread, employers should be anticipating a future in which non-compete enforcement may not be as reliable as in the past, and possibly in which non-compete enforcement is not available at all. The idea of an FTC rule that bans future and past non-competes is nothing short of shocking, from an employment law perspective. But it also might become reality.
Therefore, employers need to be prepared with other strategies to keep their business information safe, and to prevent former employees from taking that information with them to new employers–especially competitors. As discussed below, trade secret protection under the law is different but can be similarly effective when compared against non-competes and other restrictive covenants.
In fact, according to the FTC itself, trade secret law provides employers with a viable means of protecting their investments in their critical information. Pointing to federal and state protections for trade secrets, as well as the thousands of trade secret lawsuits filed every year, the FTC proposed trade secret law as a suitable alternative for concerned employers in the absence of non-compete agreements. Similarly, in the NLRB memorandum, General Counsel Abruzzo noted that employers’ legitimate business interest in protecting proprietary or trade secret information can be addressed by narrowly tailored workplace agreements that protect those interests.
Trade Secrets Defined
Trade secrets are typically business or scientific information that has value because (1) it is not known or accessible to the public and (2) the owner has taken reasonable steps to keep it a secret. But whether specific information is deserving of full trade secret protection depends on a more detailed analysis, much of which depends upon what specific efforts an employer has taken to protect the information.
In Ohio, for example, there is a six-factor test to assess whether the information at issue is a trade secret. Although no one factor weighs more heavily than another, factors to be considered include:
(1) The extent to which the information is known outside the business;
(2) The extent to which it is known to those inside the business;
(3) The precautions taken by the holder of the trade secret to guard the secrecy of the information;
(4) The savings effected and the value to the holder in having the information as against competitors;
(5) The amount of effort or money expended in obtaining and developing the information; and
(6) The amount of time and expense it would take for others to acquire and duplicate the information.
Other jurisdictions will also typically consider these or similar factors when determining whether specific information is entitled to trade secret protection.
Actions Aimed at Obtaining Trade Secret Protection
Because taking reasonable steps to protect confidential information is a basic element of whether the information is considered a trade secret, there are a number of actions businesses should take. The first step is establishing clear written policies and agreements with employees. Note, however, that generic confidentiality policies can be problematic, because they may not address the most important information specifically enough and may infringe on types of activity by employees that are protected under the law. Therefore, employers will want to have specific policies aimed at confidential and proprietary information that they want to protect because of its economic value to the employer and to any competitor into whose hands such information might fall.
Such specific policies should include strategies to enhance security, both digital and physical. On the digital side, businesses should always know who has access to what electronic information and consider providing access to highly confidential information on a need-to-know basis. Important files should be marked as confidential, and regular information audits are strongly recommended. Businesses may also implement computer events logs, which track how often certain information is accessed, or restrict whether an employee can download, print or send confidential information out of network. Further, it is important that confidential information is secured by a strong, regularly-updated password, and the option of multi-factor authentication can be used as well.
Physical security is just as important. To protect trade secrets, businesses should keep important files physically locked and invest in security systems. Public access to office spaces should be limited, with specific protocol for visitors and third-party vendors. In addition, employers should ensure that confidential information is disposed of in a secure manner.
Additionally, establishing a comprehensive employee training program enables businesses to communicate their expectations clearly. Employees should be trained on the security measures discussed above and be able to respond when confidential information is threatened. Ideally, businesses also should establish procedures for the following: (1) reporting suspicious behavior; (2) handling the termination or departure of an employee; and (3) responding to trade secret theft. Having a plan in place for incidents like these allows businesses to take immediate action to protect their confidential information.
Remedies for Trade Secret Theft
The end goal is that in the event an employee “steals” a trade secret, including for a new employer, the former employer can pursue legal claims for misappropriation. Misappropriation of a trade secret occurs when a person (1) acquires, (2) discloses or (3) uses a trade secret without consent and with knowledge that the trade secret was acquired through improper means. “Improper means” can include theft, bribery, misrepresentation, breach of duty to maintain secrecy and espionage.
At the federal level, employers can bring civil suits under the Defend Trade Secrets Act (DTSA) if the trade secret has a connection to interstate or foreign commerce. A federal court may also order a civil seizure. Remedies can include an injunction–which is often the first remedy sought in a non-compete case–and damages. Additionally, if a trade secret is misappropriated with the intent of benefitting a foreign entity, federal criminal charges are also possible. While not the same as a non-compete agreement, these remedies can be significant deterrents, to be sure.
Ohio has codified the Uniform Trade Secrets Act. Under Ohio law, employers also can get an injunction against actual or threated misappropriation, and may be entitled to damages as well. In the more egregious of cases, employers can collect punitive damages where there is proof of “willful and malicious” misappropriation.
Trade secret protections do not end with federal and state statutes, however. Ohio courts also allow trade secrets to be protected through use of the common law doctrine of inevitable disclosure. An employer can pursue injunctive relief against inevitable disclosure where an employee with detailed and comprehensive knowledge of an employer’s trade secrets and confidential information has taken a substantially similar job with a competitor, because when an employee knows a significant number of his former employer’s trade secrets and goes on to work in a nearly identical job, it is “inevitable” that the trade secrets will be revealed to the new employer. There are other common law claims under Ohio law that can be asserted, such as conversion, replevin, civil theft and more.
Conclusion
As the tide seems to be turning against reliable enforcement of non-compete agreements, employers should look to rely even more on trade secret protection and remedies that are available under the law. Non-compete agreements and other restrictive covenants remain important still, but it is always good to have as much protection as possible against unfair competition.
*Emily Snively is a law clerk and not yet licensed to practice law.
