FTC’s National Ban of Non-Compete Agreements May Take Effect Soon

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Does your business have non-compete agreements with its employees? The Federal Trade Commission (FTC) may make it more difficult to protect your business from employees leaving for competitors and actively contesting your business.

The FTC approved a trade regulation rule banning employers from using non-compete contracts to prevent most workers from joining a competitor. Unless enjoined by one of at least three lawsuits pending against it, the new FTC rule will become effective on September 4, 2024. Many states, including California and other western states, have long-standing public policies against enforcing non-compete agreements that will continue in effect if they are stronger than the FTC’s rule.  But this is the first time in over 50 years that FTC officials have sought to regulate the issue on a national basis.

The new rule prohibits companies from enforcing existing non-compete agreements on anyone other than senior executives, classifying non-competes as “unfair methods of competition.” It also bans employers from imposing new non-compete agreements on any employees, including senior executives, going forward. (Banks, credit unions, and nonprofit healthcare employers are exempt from this ban.) Non-compete clauses are not affected by this Rule if entered into in connection with the bona fide sale of a business.

The practice of including non-compete clauses in employment agreements has grown significantly in recent years. (The FTC found that approximately one in five workers are subject to non-compete agreements.) They have been utilized to protect a business’s valuable intellectual property and trade secrets from disclosure to a competitor through its former employees who might be hired by the competitor. However, many states and labor organizations have accused employers of overuse and sought to outlaw the non-competes as unfair business methods that curtail competition or as an unreasonable restraint of trade.

One of the most prominent lawsuits attacking the new rule was filed in April 2024 by the U.S. Chamber of Commerce in the U.S. District Court for the Northern District of Texas. The Chamber alleges in its complaint that the FTC does not have the authority to regulate non-compete clauses, stating, “The sheer economic and political significance of a nationwide non-compete ban demonstrates that this is a question for Congress to decide, rather than an agency.”

Conkle, Kremer & Engel attorneys believe that appropriately drafted and enforceable non-compete provision may protect businesses and their property interests. If your business is considering including a non-compete clause in its employment or termination agreements, you will need to consider the potential impact of this Trade Regulation Rule on your plans. Conkle firm attorneys are familiar with this area of the law can help your business maximize the protection of its information and intellectual property, respond to cease and desist letters from competitors or, if necessary, engage in litigation of issues of misappropriation of trade secrets.



Making a Federal Case of Trade Secret Misappropriation

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On April 27, 2016, the Defend Trade Secrets Act (DTSA) passed the House of Representatives and went to President Obama’s desk, where it is expected to be signed.  With that, trade secret misappropriation claims will exist under federal law and can be pursued in federal courts.

The DTSA will provide businesses with more effective new tools to protect their sensitive information from misappropriation.  In the context of trade secrets, misappropriation is generally considered the acquisition of hidden information through some improper means .  The broadly structured language of the DTSA extends its protection to “all forms and types of financial, business, scientific, technical, economic, or engineering information” so long as (1) the owner has taken reasonable steps to keep the information secret and (2) the information derives its value from that secrecy.  The DTSA largely tracks the concepts of trade secrets that have long existed in most states.  But under the DTSA, plaintiffs will be able to bring claims for misappropriation of trade secrets in federal court.

Previously, trade secrets have been an outlier in the world of intellectual property.  Unlike copyright, patent and trademark claims, which receive the wider benefit and protection of federal court jurisdiction, trade secret claims have mostly been litigated in state court.  The problem with this has been that, given the diffuse and global nature of business and commerce, state courts are often not the best venue for intellectual property claims.   If a misappropriation occurs across state or national borders, a federal court is better suited to address such jurisdictional conflicts.

To gain access to the DTSA, and federal court jurisdiction, all that is required is that the “trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.”  This is generally a very low threshold, as most products and services these days are used or intended for use in at least interstate commerce – only the most localized of businesses would not be able to meet this minimal requirement.

The DTSA will confer on trade secret holders a greater ability to pursue misappropriation beyond the borders of the United States, and can even pursue remedies before the International Trade Commission.  In addition, a secondary benefit gained from access to the federal court system is a potential for more uniform decisions and precedent than the more disparate and varied state courts decisions.

Another interesting development that the DTSA will usher in relates to injunction and damages.  Injunctions are often sought in trade secret cases to prevent the information at issue from being disclosed.  Previously,  under the Uniform Trade Secrets Act (UTSA), which almost all states have adopted in some form or another, the injunction would end when the trade secret ceased to exist or after an amount of time necessary to stop any potential commercial advantage being gained from a misappropriation.  The DTSA however contains no such limitation, which presumably will give courts more discretion in applying an extended injunction.  Also, where the UTSA allows for double damages in cases of “willful and malicious misappropriation”, the language of the DTSA has upped this to treble damages.

Perhaps the biggest tool in the DTSA tool belt is the ability to seek ex parte civil seizures.  What this means is that a plaintiff can, without giving a defendant notice, seek the seizure of property if the plaintiff can demonstrate that the defendant, or someone working in concert with the defendant, is likely to “destroy, move, hide, or otherwise make such matter inaccessible to the court”.  This type of ex parte seizure is a powerful new tool that will likely allow trade secret holders to better combat harm associated with a misappropriation.  And being a powerful tool, it may be subject to misuse among competitors.

Conkle, Kremer & Engel attorneys stay current on developments that may be important to their clients concerned about commercial and intellectual property issues.  If you have questions about the DTSA or other aspects of trade secret or intellectual property protection, we would be glad to hear from you.