How US employers can adapt to FTC ban on non-compete agreements

On 23 April 2024 the Federal Trade Commission (FTC) issued its final rule effectively banning workplace non-compete agreements. The rule applies retroactively and operates as a sweeping ban on workplace contract provisions that prevent a former employee from working for a competitor after leaving employment. This new rule is one of the centrepiece items of President Biden’s economic agenda. It becomes effective 120 days after its formal publication and has been subject to a legal challenge by several plaintiffs in the US Eastern District of Texas district court.   

As a result of this rule, US employers may need to pivot away from non-compete agreements and transition toward practices that focus on protecting intellectual property rather than restricting employee mobility. Because the rule bans non-compete agreements, trade secrets are now the key route for employers to restrict post-termination competition. 

Employers should implement the following guidance in order to make this necessary pivot towards protecting trade secrets.

Draft standalone agreements

Draft separate standalone agreements to address confidentiality, IP and trade secret provisions. In practice, the FTC’s rule elevates the importance of protecting trade secrets. While inclusion in an employment handbook is acceptable to show that the employer undertook efforts to protect these rights, employers should have a separate, stand-alone agreement for employees to review and sign. Courts are often reluctant to enforce handbook provisions as contracts.

Include an attorney fee provision

Employers should consider including a prevailing party provision to recover attorney fees and costs incurred to enforce such an agreement. Statutory fees are available under each state’s version of the Uniform Trade Secrets Act and the federal Defend Trade Secrets Act, but statutory requirements for a plaintiff employer to recover its fees is heightened under the statutory schemes. In contrast, prevailing on a breach-of-contract claim – that the employee took and used confidential information – avoids this heightened standard. More importantly, the leverage of recovering attorney fees operates as a strong deterrent against exploiting trade secret information.

Define ‘confidential information’

Certain files or records being taken or disclosed can significantly harm any company's competitive advantage. It is critical to identify the information that would injure the organisation if it were to fall into a competitor’s hands. Be as specific as possible and avoid generic terms and catch-all phrases. 

Further, as companies evolve, the information that they seek to protect changes. Employers should regularly update agreements every three to five years. In many states, trade secrets are protectable whether the information is electronic, in hard-copy records or learned or memorised by an employee. Thus, defining the protectable information with reasonable specificity is crucial.  

Take technical measures to protect trade secrets

It is imperative that employers take reasonable measures under the circumstances to protect confidential information. Technical security measures include:

• password-protected devices;
• the ability to remotely access or wipe devices;
• firewalls;
• passwords; and 
• configuring the network so that information is accessed on a need-to-know basis. 

When judges review an employer’s motion for an injunction, they typically review both the strength of the company’s confidentiality agreement and the electronic or technical measures that were in place when the information was allegedly taken. 

Understand shop rights

When the US Chamber of Commerce made its legal challenge to the FTC’s rule, it incorrectly claimed that an employer’s rights to its intellectual property would be altered. ‘Shop rights’ refer to an employer’s legal rights to use or benefit from intellectual property that has been created by staff during their employment or using the employer’s resources. In most states, the employer owns what an employee develops during their employment, particularly if its resources have been used. Several states, including California, have codified shop rights principles. As a result, the claim that employers will not own their intellectual property if the FTC’s rule is enacted is inaccurate. If anything, the FTC’s new rule should prompt state legislatures to clarify and codify the requirements for IP assignment provisions. 

Improve the exit process 

When employers learn that an employee is leaving, that employee’s work computer should be reviewed by a qualified forensic examiner, particularly if their departure could impact the company’s revenue or harm its competitive advantage. A company’s internal IT department will often conduct some form of informal assessment, which could irreparably damage or alter the evidence.

Utilise trade secret litigators

Trade secret litigation is highly specialised and fast moving. Trade secret disputes can be very hard fought, often involving emergency injunctive relief, extensive computer forensics and litigating under a protective order. A typical commercial or business litigator that handles leasing disputes, insurance coverage matters and contract matters may only have two or three trade secrets cases over the course of their entire career. The FTC has elevated the importance of trade secrets as the only way to restrict post-termination conduct, so US employers should ensure they have trade secrets lawyers in their arsenal.

Key takeaways 

Ultimately, a version of the FTC’s ruling will survive legal challenges. By deploying these methods, employers can pivot towards protecting trade secrets and away from restricting employee mobility. Adopting California’s battle-tested best practices should help ignite the innovation economy in the United States.