Ryan LLC v. Chamber of Commerce of the United States of America, and ATS Tree Services v. FTC et al. leave the FTC’s Nationwide Ban on non-competes up in the air - DTSALaw®

30 million is a BIG number! That is the estimated number of employment contracts that could be impacted by the Federal Trade Commission’s new rule banning non-competes, if it goes into effect on September 4, 2024, as scheduled. On April 23, 2024, the Federal Trade Commission (FTC) dropped a rule, at 16 CFR Part 910 that promises to upend the world of employment contracts and intellectual property (IP) rights. The new rule bans noncompete agreements across the board, with only a few exceptions. This is a game-changer for how companies protect their trade secrets under the DTSA and State Laws and will reshape the employer-employee relationship in a big way.

In early July, the Northern District of Texas entered an injunction prohibiting the FTC from enforcing its non-compete ban, in Ryan LLC v. Chamber of Commerce of the United States of America. Ryan LLC v. Fed. Trade Comm'n, Civil Action 3:24-CV-00986-E, (N.D. Tex. Jul. 3, 2024). But, the wrinkle to the ruling is that the court declined to enter a nationwide injunction to halt the non-compete ban. As it currently stands, enforcement of the rule is blocked only as to the plaintiff and the intervenors in the Northern District of Texas case, including the US Chamber of Commerce. But, the injunction could be expanded upon review by the Fifth Circuit or when the court enters its final merits ruling on or before August 30th.

ATS Tree Services v. Federal Trade Commission et al. at Odds with Ryan Case

Weeks ago, in ATS Tree Services v. Federal Trade Commission et al.,the Eastern District of Pennsylvania denied Plaintiff ATS Tree’s motion for a preliminary injunction and stay of the FTC’s rule, siding with the Commission, primarily leaning on the plaintiff’s failure to prove facts showing that it would suffer irreparable harm from the rule going into effect. ATS Tree Services v. Fed. Trade Comm’n, Civil Action 2:2024cv01743 (E.D. Pa Jul. 23, 2024).

Now, eyes turn to the final merits ruling from the Northern District of Texas which is expected to land August 30, days before the rule goes into effect. The FTC’s ban turns the tables, compelling employers to rethink their strategies for shielding valuable IP. As noncompete agreements may fall by the wayside, trade secret protection and enforcement will take center stage.

Noncompete agreements have been a staple of employment contracts for ages. These agreements keep employees from jumping ship to a competitor or starting their own rival business after leaving a job. The idea is to lock down a company’s IP by preventing employees from swiping things like customer lists or other trade secrets and taking them to a competitor.

But now, the FTC is forcing employers to rethink their game plan for keeping their proprietary information safe. It’s time to get creative with trade secret protection.

Trade Secret Protection: A Little Misunderstood

Trade secrets are often the most underappreciated yet powerful tool in a company’s IP arsenal. Any proprietary information that provides a competitive edge (has independent economic value) and remains secret (through the efforts of the trade secret owner) can qualify as a trade secret – from technical blueprints and business strategies to customer databases and financial models. Trade secret owners must take reasonable measures to protect the secrecy of their trade secrets. These are affirmative burdens that must be undertaken and pled affirmatively in any lawsuit to bring claims of trade secret misappropriation.

In any post-noncompete era, employers must prioritize robust trade secret safeguards to prevent misuse by departing employees. Merely having trade secrets is not enough; companies must demonstrate “reasonable efforts” to maintain their confidentiality. This might include access controls, encryption, confidentiality agreements, and regular security audits.

Employers should update policies, revise handbooks, and educate employees on their role in protecting trade secrets. While confidentiality agreements remain essential, they must be carefully crafted to avoid resembling noncompete agreements in disguise.

Figuring out the right protections is a puzzle that demands a critical look at the reasonable measures test for protecting secrecy and into the specifics of each business. The reasonable measures test is calibrated to fit the particular industry in which the business resides, or the service that the business provides. It is mission critical to get tailored advice from legal counsel to make sure things are buttoned up.

Litigation Nation: The Coming Boom in Trade Secret Lawsuits

The noncompete ban, if upheld by the courts, will undoubtedly spur a surge in trade secret lawsuits. As employee mobility increases, companies will face growing pressure to pursue legal action against ex-employees and their new employers suspected of misappropriating trade secrets.

Hiring companies also face risks, and must take proactive steps to avoid accusations of trade secret theft. This includes implementing strict no-misappropriation policies, obtaining written attestations from new hires, and monitoring compliance.

When allegations arise, swift investigation and evidence preservation are critical. Companies may need to restrict access to potentially stolen information and consult with legal experts to mitigate damage. If a company gets accused of misappropriation, they need to spring into action. That means launching an investigation, preserving evidence and locking down files and communications. They may need to wall off the accused employee from the information in question or ship them to a different project. Each situation is unique and demands swift legal review and a custom game plan.

The Bottom Line

The FTC’s ban on noncompete agreements marks a potential seismic shift in the employer-employee dynamic, with far-reaching implications for IP protection. While the full impact remains to be seen, one thing is clear: companies must adapt quickly by fortifying their trade secret safeguards and preparing for the coming wave of litigation.

In this new landscape, proactive employers will thrive by prioritizing trade secret protection, educating their workforce, and staying ahead of the legal curve. Those who adapt slowly risk seeing their competitive advantage walk out the door with departing employees.