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FTC’s Noncompete Ban Leaves Room to Prevent Trade Secret Theft

Jan. 24, 2023, 9:00 AM

Since the Federal Trade Commission recently announced a proposal to ban all noncompete agreements, clients have been asking, “What about our trade secrets?”

It’s a logical question, considering that noncompetes are one of the primary ways businesses protect these secrets.

Employers don’t want their valuable information walking out the door with a departing employee. To protect against this risk, most noncompete agreements contain restrictive covenants. These provisions prohibit an employee from soliciting certain clients of the employer or from divulging and using the employer’s confidential information and trade secrets at their new job.

In addition to these contractual protections, employers rely on federal and state laws that prohibit theft of trade secrets. States are increasingly viewing noncompetes with skepticism, with a few—like California, Oklahoma, and North Dakota—prohibiting their enforcement.

Therefore, businesses should imagine their trade secret protection practices in a world without noncompetes. Fortunately, there are practical and effective steps businesses can take to protect their trade secrets without using such agreements.

So what can business leaders do if noncompetes are off the table?

With the uproar over the proposed rule, along with questions about the Federal Trade Commission’s legal authority to enforce it, it’s far from certain the ban will take effect. But even if the FTC’s proposed rule is scrapped, companies must start examining all available defenses.

Protecting Trade Secrets Without Noncompetes

While the FTC takes a hard line arguing in favor of employee mobility, the proposed rule acknowledges that businesses should be able to—and in fact can—protect trade secrets through mechanisms other than noncompete agreements.

Here are some of the most effective ways for doing so.

If the ban moves forward, employers can rely on more narrowly tailored confidentiality, nondisclosure, and nonsolicitation agreements to protect important company information and relationships.

In crafting such agreements, which seek to protect information and relationships rather than prevent competition, it will be important to identify confidential information and trade secrets with specificity. If agreements are overly broad—for example covering all manner of information an employee may encounter—then they may be found to be an unenforceable noncompete agreement in disguise.

Businesses can also reinforce any restrictions in practice through employee policies and training. Protective data hygiene, is also useful, such as limiting access to need-to-know employees, applying safeguards on employees’ ability to export sensitive information—such as restrictions on external devices or on personal email and cloud access on company devices—and using file-tracking software.

Leverage Other Laws, Tighten Up Protections

The federal Defend Trade Secrets Act allows an owner of a trade secret to sue in federal court for trade secret misappropriation. Nearly all states have adopted similar statutory protections for a business’s trade secrets, and some states have case law that establishes an employee duty of loyalty or good-faith and fair dealing.

These laws could be implicated when an employee uses trade secrets to launch a competing business.

To benefit from DTSA and many state law remedies, a business should first ensure that the purported trade secrets are actually kept secret. A claim for misappropriation will fail if a business’s assertion of a protected trade secret is merely an after-the-fact assertion.

Engaging in information protection practices will help demonstrate a business’s efforts to keep their trade secret and maybe avoid misappropriation in the first place.

Implement Effective Hiring, Exit Practices

Having employees sign confidentiality and nondisclosure agreements, implementing proper training and resources detailing trade secret policies, and other practices should be part of a business’s onboarding process. These practices bolster legal rights in the event of a dispute, and also create a culture where confidential information is respected and protected.

These onboarding processes should also emphasize the importance of not divulging a former employer’s trade secrets.

The new employer is likely to get dragged into any lawsuit alleging misappropriation of trade secrets by a former employee, so policies aimed at preventing a new employee from spilling its former employer’s trade secrets can help mitigate that risk.

These issues should also be revisited during an exit interview process when departing employees can be reminded of pertinent policies, potential risks, and their related duties. This may help an employee who has no intention of misappropriating a trade secret be more diligent about not taking or divulging information. It will also make an employee think twice about misappropriating.

Finally, a diligent company device tracking and collection process can help avoid information leakage.

Whether the FTC’s ban on noncompete agreements moves forward, businesses have tools available to protect their trade secrets. Each tool requires proactive steps to ensure they are effective.

As we wait for the FTC’s next move on noncompetes, companies can take this opportunity to protect their most valuable information.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

Steve Carey is a partner at Parker Poe. His practice focuses on complex litigation and appeals.

Sarah Hutchins is a partner at Parker Poe and leads the firm’s cybersecurity and data privacy team.

Tory Summey is a partner at Parker Poe who focuses on employment counseling and litigation.

Parker Poe associate Zack S. Anstett contributed to this article.