How Employers Can Safeguard Trade Secrets In The Absence Of Non-Compete Agreements

Revising employment contracts to include alternative protective measures

Three federal district courts weighed in on the enforceability of the Federal Trade Commission’s (“FTC”) ban on non-compete agreements that was set to go into effect on September 4, 2024. One court refused to enjoin the FTC’s non-compete ban (Eastern District of Pennsylvania, ATS Tree Services, LLC v. FTC), one court granted a limited injunction only applicable to the plaintiff’s employer (Middle District of Florida, Properties of the Villages, Inc. v. FTC), and, of widest impact, a nationwide injunction against the FTC’s non-compete ban was ordered (Northern District of Texas, Ryan LLC v. FTC).  As a result, at least as of now, the FTC’s non-compete ban is not in effect. 

Employers have some relief from a national ban on non-competes in employment, however, they should be aware that state and federal efforts continue afoot to ban and/or limit the use of non-competes in employment relationships.

 

1. Check Applicable State Laws Before Using a Non-compete

Many state laws ban non-competes or impose significant restrictions on restraints on employee mobility. 

Recent California law expressly prohibits employers from entering into non-compete agreements with employees. A non-compete agreement is considered to be unlawful competition in California that exposes the employer to liability for damages and attorneys’ fees. California required employers to have notified employees who had signed a non-compete that it was not enforceable. North Dakota, Minnesota and Oklahoma have similarly banned non-compete agreements. Notably, while the language of many statutes refers to “non-compete” agreements explicitly, employers should conservatively extend such laws to non-solicitation agreements.  

Other states permit non-compete agreements, but require a “reasonable” limit in time, scope of competition and geographical scope. For instance, Texas and Florida require restrictions to reasonably protect a legitimate business interest. Reasonableness is determined on a case-by-case basis rendering compliance difficult for employers, especially multi-state employers who face different standards and tests in different states.

Depending on the industry or income level of the employee, additional limitations on non-compete agreements may apply. For example, some states limit the scope of enforceable non-compete agreements in the healthcare industry to promote the availability of health care services to the public. 

These state-specific regulations apply to employees working in those states even though the FTC’s non-compete ban has been enjoined. 

2. Anticipate Increased Scrutiny on Non-compete and Non-solicitation Terms

In the wake of Ryan’s injunction against the FTC’s ban on non-compete agreements, the FTC has made it clear that it will fight non-compete agreements through individual cases. It is clear that the FTC will not give up its efforts to eradicate non-compete agreements and it will be expensive to get into the FTC’s sights.  

The FTC likely will appeal the decision in Ryan, especially given the split in authority on the enforceability of the FTC’s ban. An appeal could lead to a United States Supreme Court decision on the propriety of the FTC’s ban. 

3. Expect Challenges to Regulations Governing Employment Agreements Issued By Federal Agencies Like the FTC

On June 28, 2024, the United States Supreme Court overturned a forty-year old precedent giving agency deference to interpret statutes in Loper Bright Enterprises v. Raimondo, 144 S.Ct. 2244 (2024). The Loper court shifted authority from agencies to the courts to review and interpret federal agency rules and regulations.

The Loper decision provides employers greater opportunity to challenge federal agency rulemaking, such as the FTC’s rules, in court. This also opens the door to potentially successful challenges to other regulations regarding employee mobility or other constraints on employer-employee agreements that may be issued by federal agencies like the Equal Employment Opportunity Commission and the National Labor Relations Board.

Staying up to date on litigation and state law developments related to non-compete agreements is critical.  

4. Strengthen Confidential and Trade Secret Protection 

While non-compete agreements are one tool to protect an employer’s confidential information and trade secrets, employers should also invest in strong Confidentiality Agreements. Confidentiality, trade-secret and proprietary information agreements are important tools to protect information, regardless of whether an employer may also use a non-compete agreement.  

Confidentiality agreements should have the employees acknowledge that they are provided access to confidential information on a need-to-know basis to carry out their employment responsibilities and that such information is not available publicly. Such agreements should be tailored narrowly to the confidential information that an employer seeks to protect and employees should be trained to recognize the information that is to be maintained in confidence. Likewise, an employer must undertake internal measures to ensure limited and controlled access to information intended to be secret.  

Confidential and trade secret financial information should not be left out visible to passers-by. Computer networks and systems should be only accessed with approved passwords and should be monitored for potential misuse. Computer systems may be programmed to raise alerts to notify employers of improper or suspicious activity. Employers should also train management personnel to ensure that their managers are sufficiently overseeing company processes and employees to avoid claims that confidential information is not properly safeguarded.

Such agreements should ensure that they remain in force after termination and provide for the return of all company materials, documents (electronic or otherwise) at the end of employment. Employees should expressly agree not to wipe the electronic devices that they used during their employment.

In addition, such agreements may provide for expedited remedies in the event of a breach. Moreover, all warnings required by the Federal Defend Trade Secrets Act should be included to ensure the full scope of remedies under Federal law are available in the event of a breach.

5. Solidify Onboarding and Offboarding Practices

Even before hiring a new employee, employers should not encourage prospective employees to take their former employer’s confidential information with them. All prospective employees and new employees should verify, in writing, that they are not bringing a prior employer’s confidential information to the new employer.  

These affirmations may be documented in employment applications, offer letters or other onboarding materials. During onboarding and training, new employees should be reminded of the steps the company takes to ensure the confidentiality of its proprietary information.  

At termination, the employer should require the exiting employee to certify that the employer’s confidential information and property has been returned pursuant to company policy and that should the employee locate confidential company information in the future that they will alert the employer and cooperate with the return of the information. 

Such policies and practices are useful to protect the employer in the event an issue arises. Moreover, after an employee with access to sensitive information is known to be departing, employers should consider evaluating the departing employees access to documents, emails to personal email accounts, saving materials to mobile devices and/or printing of documents to evaluate whether any suspicious activities occurred.

Dan M. Forman is a Partner and Chair of CDF Labor Law LLP's Trade Secret Practice Group and CDF's Privacy Practice Group. Dan's knowledge expands beyond employment law to the prosecution and defense of complex matters arising from the protection of trade secrets, and determinations of whether contracts are enforceable or unenforceable covenants not to compete.

Ashley Halberda is a Partner at CDF Labor Law LLP. Ashley advises and represents clients in matters involving California labor and employment law.  During her years of practice, Halberda has gained extensive experience in representing employers before state, federal and appellate courts in various employment disputes involving claims of wrongful termination, discrimination, harassment, and wage and hour violations for clients in the banking, retail, insurance, food and beverage, hospitality and manufacturing industries.