On April 23, 2024, the Federal Trade Commission narrowly approved a rule banning most non-competition agreements. The rule, set to go into effect on September 4, 2024, prohibits employers from including non-compete provisions in new employment contracts. It also renders all existing non-competes unenforceable against employees except for those applying to “senior executives,” defined in the rule as workers who are in a “policy-making position” and earning more than $151,164 per year.

As many expected, though, the rule promptly faced legal challenges. On July 3, 2024, Judge Ada Brown of the United States District Court for the Northern District of Texas preliminarily enjoined the rule from going into effect in the pending case of Ryan LLC v. Federal Trade Commission.

However, as of now, the injunction only applies to the plaintiffs in that case. This means, barring further developments, the rule is still set to take effect for all other businesses, posing a significant risk that intellectual property theft will increase. Furthermore, aside from the FTC’s rule, non-competes face other threats to their legitimacy. For example, the National Labor Relations Board takes the position that non-competes are violative of the National Labor Relations Act for non-managerial employees. Certain states have also taken actions to curtail non-competes.

Intellectual property owners should act now to minimize the risk that their IP will be misappropriated once the FTC’s rule, or another restriction, goes into effect. Employers can do so by capitalizing on protections offered by trade secret, patent and copyright laws.

Trade Secrets

The FTC’s primary recommendation to combat the risk of intellectual property theft is for employers to take advantage of trade secret laws in combination with confidentiality agreements. Most states have adopted the Uniform Trade Secrets Act (UTSA), and claims can also be made at the federal level under the Defend Trade Secrets Act (DTSA) enacted by Congress in 2016.

To prove a case against a competitor under either Act, an employer must (1) clearly identify the company’s trade secret or confidential information and show it is and was secret; (2) demonstrate that an ex-employee now working for the competitor had access to that information; and (3) show that the competitor is both using that technology and did not develop it on their own.

Though proving each of these elements poses a challenge, employers can set up internal systems that may make these claims easier to pursue. For example, employers can have employees sign more detailed confidentiality agreements to protect economically vital trade secrets. Combining this with a review of an ex-employee’s search activity and interviews with the ex-employee’s coworkers, employers can more thoroughly demonstrate that the ex-employee had concrete knowledge of specific key secrets, as opposed to more broad and ill-defined information.

Additionally, if possible, employers might well benefit from further limiting employee access to trade secrets to only those who truly need to know them. This can be reinforced by restricting physical access to sensitive areas and requiring employees to sign non-disclosure agreements before entering. By having such detailed records of which employees know what, employers can better protect their critical internal information and enforce claims against competitors if ex-employees misappropriate that information.

Beyond this primary recommendation from the Commission, employers have additional options to protect themselves from intellectual property theft, including patents and copyrights.

Patents

Patents accord stronger protection than trade secret law, providing both an effective avenue for shielding important intellectual property from misappropriation by competitors as well as a remedy for infringement. Proving patent infringement is much easier than trying to show a theft of trade secrets: employers do not need to describe its technology, nor do they need to show that the ex-employee either knew of the patent or had an intent to infringe.

Although not all intellectual property is eligible for patent protections, employers can put procedures in place to identify and gather new potentially patentable inventions. Employers can start by ensuring that employees assign all IP rights arising from their work. This can be done by having all employees execute an invention assignment agreement (which may be bundled with a confidentiality agreement). Additionally, employers may affirm or create new processes encouraging employees to err on the side of disclosing their inventions to their employers. Doing so makes it much more likely that these inventions can be protected if patentable. Furthermore, even if the IP cannot be patented, it might still be considered a trade secret or confidential information.

Patents also have the added benefit, akin to that found in noncompete agreements, of encouraging employee retention. If an inventor puts an idea into motion and has already assigned their IP rights to their employer, they have a more distinctly vested interest in sticking around to be a part of the development process.

When employees leave for a new company, companies should notify the new employers of all patents—active or pending—that related to the ex-employees’ work.

Copyright

Particularly in the technology space, employers should ensure that they register copyrights for any artistic work or software with the U.S. Copyright Office. While copyright rights arise at the moment of creation, the copyright must be registered before the owner can bring an action for copyright infringement in the United States. Therefore, companies should have a system in place to routinely register their copyrights. Software code and AI processes can often be copyrightable, and cementing their protection through registration can help companies rest assured that their valued IP is safe. This is especially true as the tech industry continues to accelerate development year after year.

Similar to the process for patents, companies should have their employees assign their rights to copyrightable information as a condition of employment.

Other Considerations

Companies should also review the laws in their states for idiosyncrasies that complicate any of these aforementioned steps, namely with respect to non-disclosure agreements. For example, in some states, non-disclosure agreements may be considered de facto non-competes and be held unenforceable if they sweep too broadly. Some states also have different standards for how long a non-compete agreement can last before it is considered unreasonable.

Additionally, state laws differ toward how courts may resolve enforceability issues with non-disclosure or noncompete agreements. Courts in some states will hold the entire agreement to be unenforceable while others will “blue pencil” the agreement to strike out only the unenforceable provisions.

Next Steps for Employers

Trade secret, patent and copyright are unlikely to provide the same protection as non-competes on their own. However, when used in combination, they can help employers significantly in their efforts to protect their intellectual property investments while also not being afraid to invest in the development of their workforce.

Companies should review all of the options mentioned above and deploy internal practices that will allow them the best safeguards against misappropriation of their most critical intellectual property. They should also keep an eye out for further legal developments on the current challenge to the FTC’s rule, as well as other developments that may arise in the weeks and months to come.