*As of August 20, 2024, the United States District Court for the Northern District of Texas has blocked the FTC's impending ban on non-compete agreements. Please see the update at the end of this alert.
Trade secrets exist, by definition, only if the owner takes reasonable measures to maintain their secrecy. This is true under the Federal, State and Uniform Trade Secret Acts.
Companies have traditionally used non-compete clauses and other provisions in employment agreements and/or policies to protect the secrecy of their trade secrets and to prevent the use of their proprietary information by their competitors. A new Federal Trade Commission (FTC) Rule, which becomes effective on September 4, 2024, purports to prevent the enforcement of non-competes and other employment agreements that the FTC says limits employees’ ability to use their knowledge and experience to find work in their chosen field. The result of the new FTC Rule is to potentially eliminate one of the important tools that companies use to maintain the secrecy of their trade secrets and other confidential information.
Litigation challenging the new FTC Rule and seeking to enjoin its enforcement was filed immediately after the new Rule was announced, and no doubt, the Supreme Court's recent decision in Loper Bright Enterprises v. Raimondo, overturning the Chevron doctrine of agency deference will invite additional litigation assailing the new FTC Rule. While the twists and turns of these cases will be intellectually stimulating and fodder for future legal cases (and legal fees), we know you have a business to run, and valuable trade secrets to protect right now. You cannot afford to wait on the results of the long legal process attendant to the new Rule challenges and appeals. As the new Rule’s effective date nears, here is what you should do to ensure protection of your trade secrets:
- Identify your agreements that have non-compete clauses, non-solicit, non-disclosure, or similar provisions or anything that may "function to prevent" a worker from seeking or accepting different employment. If you are a franchisor, this includes non-compete agreements with employees of your franchisees.
Why? Because the new FTC Rule has a Notice Requirement. Our Employment & Labor Practice can assist you in determining who gets notice, and how notice can be given.
- Understand the exceptions to the new FTC Rule. If your non-compete agreements are with franchisees and their owners or qualifying “senior executives,” they may not be impacted by the new Rule. The same goes for causes of action relating to non-compete agreements that accrued before September 4, 2024. Our Franchise and Business Transactions practices can assist you in sorting through the potential exemptions.
Why? Because in such instances, this new Rule will be inapplicable to those you have entrusted with trade secrets and confidential information, or you may choose to change your policies regarding access to that information.
- Conduct an audit of your existing trade secrets. The audit will help you identify the information that will be most vulnerable should agreements with certain employees be eliminated by the new FTC Rule. Knowing what you are protecting is necessary to determine how best to protect it once the new FTC Rule is effective. Our Intellectual Property and Employment & Labor teams regularly assist clients with these important audits.
- Bolster your arsenal of protective measures. You need to be prepared to implement other protective measures before the new FTC Rule goes into effect. A complete arsenal of measures available to protect the confidentiality of trade secret information includes alternative forms of intellectual property protection, access restrictions, training, physical security, electronic security, as well as properly tailored agreements that avoid the restrictions of the new FTC Rule. We are available to conduct training and educational programs to help you identify and properly protect your trade secrets and other intellectual property.
- Enforcement and litigation remain strong avenues to protect trade secrets. The new FTC Rule does not change this. The new FTC Rule is inapplicable to causes of actions that have accrued before September 3, 2024. The Rule itself is under scrutiny, and its inapplicability and/or enforceability remains a viable defense. We are monitoring the cases developing under this new FTC Rule and know how to enforce or defend claims in view of this new Rule. In the meantime, courts interpreting and applying the various Federal, State and Uniform Trade Secret Acts will still analyze your efforts to protect your confidential information under a reasonableness standard considering the circumstances of your particular company. So do not assume that the Rule will prevent you from protecting your company’s valuable IP assets.
For more information regarding the FTC’s reasoning for the new rule, the FTC’s announcement can be accessed through this link.
*On August, 20, 2024, the Northern District of Texas handed down a much anticipated decision regarding the FTC’s impending ban on most non-compete agreements that was scheduled to become effective on September 4, 2024. Judge Ada Brown ruled that the FTC lacked the statutory authority to adopt such a rule. Additionally, Judge Brown concluded that even if the FTC had such authority, the FTC’s failure to provide the court with sufficient evidence or a reasoned basis for such a broad prohibition rather than a focused approach toward certain types of non-compete agreements rendered the rule arbitrary and capricious. Accordingly, Judge Brown blocked implementation of the rule. Judge Brown’s ruling is not limited to the specific parties—the FTC’s rule is completely blocked from taking effect as scheduled.
The court’s decision is subject to an appeal, and the FTC is likely considering its options. For now, businesses that use non-competes can continue to act consistent with applicable state law. However, the FTC’s attempted prohibition may signal a warning to reconsider whether existing non-compete agreements may require some reworking before an appeal or another attempt proceeds.
