The FTC recently found that non-compete agreements are an unfair method of competition, and issued a final ruling that bans non-compete agreements. The commission predicts the nationwide ban will encourage innovation, increase the number of business startups, and lead to higher earnings for employees. If you’re not familiar with the new rule, Schwabe recently published an article on the FTC non-compete ban here.

Non-compete agreements can be essential tools to protect a company’s intellectual property and may be especially useful to protect trade secrets and confidential information: assets that might not be eligible for protection through registration like other forms of intellectual property. Such agreements can prevent workers from taking company secrets to competing firms. A ban on non-compete agreements could have a negative impact on companies that have lots of valuable trade secrets or other confidential information because it could make it harder to prevent employees with access to such information from taking it to a competitor.

During the rulemaking process, The Intellectual Property Owners Association commented: “U.S. businesses lose an estimated $180 billion to $450 billion to trade secret misappropriation each year. Non-compete clauses help address some of the many limitations that make trade secret enforcement difficult.” The association emphasized how useful non-compete agreements are in protecting against trade-secret misappropriation and the disclosure of confidential information before such transgressions occur. Nonetheless, the FTC recommends alternatives to non-compete agreements to protect intellectual property. According to the commission, “[t]rade secret laws and non-disclosure agreements (NDAs) both provide employers with well-established means to protect proprietary and other sensitive information.” Although non-compete agreements may be on their way out, you can resort to other tools to protect your company’s investments.

If you’re concerned about the intellectual property implications of the non-compete agreement ban, here are actions you can take:

• Invest in an IP Audit. This is a review of a company’s intellectual property assets, policies, and procedures which identifies the properties the company owns, determines whether they are suitably protected, and recommends how to protect them further and/or leverage them to support the company’s business goals. If you want to learn more about IP audits and why they’re worthwhile, you can read more here.
• Update your employment agreements. Agreements may contain Confidentiality, Non-Disclosure, and Non-Solicitation provisions that protect your confidential information. For rank-and-file employees who do not have employment agreements, you may consider obtaining restrictive covenant agreements (confidentiality, non-disclosure, and non-solicitation provisions) to protect your assets.
• Assess and update your non-disclosure agreements (NDAs) to ensure they address your needs. If you haven’t updated your NDAs recently, now may be the time. Consider whether the NDAs are comprehensive and cover the information that needs protection. In the FTC’s final rule on non-competes, for example, the commission specifically noted that “NDAs provide employers with another well-established, viable means for protecting valuable investments.” Bear in mind, however, that the FTC also stated the final rule would prohibit “NDAs that are so overbroad as to function to prevent a worker from seeking or accepting employment or operating a business.”
• Discuss the importance of NDAs during exit interviews. Employees may not fully understand the NDA they signed or its importance. Consider explaining the terms and emphasizing their importance during exit interviews, including the information your NDA protects.
• Identify applicable trade-secret law in your jurisdiction. Although the FTC seeks to ban non-compete agreements, restrictions on the disclosure or use of intellectual property that arise out of trade secrets and patent laws remain valid and applicable. Indeed, the FTC specifically cited those laws, and their restrictions on post-employment disclosure and use of intellectual property, among the reasons expansive non-competes are not necessary to protect an employer’s confidential business information. Determining the extent to which a state’s trade secret laws, or federal patent law, will protect intellectual property may provide some assurance.
• Review your processes for accessing confidential information. You may also consider confirming that your company procedures restrict access to proprietary or sensitive information to protect trade secret and confidential information from disclosure. Please note that if you have an IP audit performed, this may be part of your review.

To learn more about the new rule, visit https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes or contact an attorney.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for ‎your situation, you should contact an attorney.