Considerations for Companies to Protect Trade Secrets

In January 2023, the Federal Trade Commission (FTC) proposed a ban on non-compete clauses that prohibits employees from joining or starting a competitive company after leaving the company. announced. According to the FTC, non-compete clauses unfairly and needlessly stifle an employee’s ability to pursue better employment opportunities. While this criticism may be true in the case of low-wage workers such as restaurant and warehouse workers, even the most ardent critics of non-compete clauses usually find it hard to believe that they have a legitimate role to play. Admit that you can. trade secret. This is why the FTC’s proposed rulemaking is taking the intellectual property community by surprise.

President Biden has made worker rights a major part of his presidential campaign, so it’s no surprise that his administration is now proposing rulemaking aimed at non-compete clauses. But many commentators hoped that any restrictions on non-compete clauses would only make them less enforceable on low-wage workers. We weaken these hopes because we emphatically prohibit virtually all non-compete clauses, with the limited exception of non-compete clauses between

Alternatives to non-compete obligations can be problematic

In supplemental information to the proposed rule, the FTC recognizes trade secret protection as a commonly cited justification for non-compete clauses. For many companies, trade secrets are one of their most valuable assets. This is especially true where certain types of information are incompatible with other forms of intellectual property protection, such as research and development activities, customer and supplier lists, business and marketing plans, procedures and processes (for examplepatent, copyright, or trademark protection), and therefore provide a competitive advantage to your business only if you keep it confidential.

The FTC downplays the trade secret justification of the non-compete clause by arguing that employers have alternatives available under trade secret law to protect their valuable investments. increase. For example, the FTC confirms that nearly all states have passed the Uniform Trade Secrets Act (UTSA) and Congress has enacted the Protected Trade Secrets Act of 2016 (DTSA), both of which are measures against trade secret misappropriation. It offers a civil cause of action. The FTC further states that the proposed rule would prevent employers from using non-disclosure agreements to protect and enforce trade secrets unless the non-disclosure agreement is written broadly enough to act as a non-disclosure agreement. Emphasize that you still allow it. in fact Non-Competition Clause.

Trade secret laws and nondisclosure agreements provide several avenues for ex-employees to disseminate trade secrets of their former employers to new employers, but the protections offered are not without limitations. not. While non-compete clauses can eliminate opportunities for former employees to disseminate confidential or proprietary information, trade secret enforcement in civil lawsuits often only yields results after damage is done. . Of course, the value of trade secrets lies in their secrets, which, once lost, cannot be recovered.

Some state courts may future prohibit you from doing similar work for a competitor under the “necessary disclosure doctrine.” However, this principle is not universally accepted, and even where this principle is recognized, such injunctions are considered special remedies. Additionally, whether the “must-disclose doctrine” survives the FTC’s explicit inclusion of non-disclosure agreements works as follows. in fact The non-compete clause in the proposed rules is unclear.

Detecting misuse of trade secrets is very difficult, even after the fact. Former employers usually have limited information about the former employee’s activities at the new job. Additionally, the use of trade secrets may not be apparent outside the new employer.

Further difficulties arise when defining trade secrets. at first glance Factors that prove misuse of trade secrets. Some trade secrets are easily identifiable (e.g. customer lists, formulas, source code), while others are less identifiable (e.g. know-how, strategic plans), but can be just as valuable. I have. For example, if a previous employer’s investigation was found to be unsuccessful, it could give the new employer an unfair advantage by influencing the direction of that investigation. Similarly, executives exposed to their previous employer’s strategic plans will undoubtedly be influenced by this knowledge when helping new employers develop strategic plans to compete.

Incomplete deal

Notably, the FTC’s proposed rule is provisional and currently under a 60-day comment period. Therefore, there is no guarantee that the FTC’s proposed rule will be enacted, much less enacted in its current form. The FTC will decide whether the proposed rule should apply uniformly to all workers, as currently proposed, or whether there should be exemptions or different standards for different categories of workers. I am specifically looking for comments. Under this alternative, different standards may apply to different workers based on their job function, occupation, or income. For example, the final rule could include an exemption to allow non-compete clauses for senior management.

Even if the FTC does not enact a proposed rule, it is important for companies interested in protecting trade secrets to recognize that the enforceability of non-compete clauses varies greatly from state to state. California, North Dakota, and Oklahoma long ago adopted laws that void non-compete clauses in most circumstances (Cal. Bus. & Prof. Code sec. 16600; ND Cent. Code sec. 9-08-06; Okla. Stat. Ann. Title 15, sec. 219A). Several other states have recently passed non-compete clause restrictions based on a worker’s income or exemption status under the Fair Labor Standards Act. Even where non-compete clauses are permitted, they are generally considered “unfavorable” and are usually subject to reasonableness scrutiny.

Additional steps to protect secrets

Even before the FTC’s proposed rule, there was a clear trend toward reducing the enforceability of non-compete clauses. With this in mind, employers should analyze their current non-compete clauses to ensure they comply with state laws. States with non-compete clauses that aren’t completely void are more likely to stand up to scrutiny if they’re tightly tailored to the needs of businesses. This includes implementing non-compete clauses only for employees who are lawfully exposed to an employer’s confidential or proprietary information, specifying specific competitors where possible, and limiting the duration and geography of restrictions. This includes ensuring that the scope is legitimate.

Additionally, employers should consider additional strategies beyond non-compete clauses to adequately protect trade secrets and confidential information. This includes the use of confidentiality and non-solicitation agreements with employees. As noted above, non-disclosure agreements can be difficult to enforce. Therefore, non-compete clauses and non-disclosure agreements can be combined with additional practices such as improved handling of trade secrets (for examplepassword protection and restricted distribution of sensitive documents), and employee retention incentives for key employees.

In summary, the FTC’s proposed non-compete prohibition would certainly undermine an employer’s ability to protect trade secrets when an employee seeks a job. However, the FTC’s proposed rulemaking is far from certain. Still, it tends to shy away from the enforceability of non-compete clauses. As such, employers should fine-tune their use of non-compete clauses, adopt the use of non-disclosure and non-solicitation agreements, limit access to trade secrets, and add additional policies to retain high-performing employees. should be considered for inclusion. you can access them.

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