The Federal Trade Commission (FTC) has recently voted to implement a Non-Compete Clause Rule banning non-compete clauses in contracts with workers across all industries. While these clauses are designed to safeguard a business’s proprietary information and competitive edge, the FTC rule addresses concerns raised about their widespread use and impact on job mobility and economic competition. Specifically, the FTC determined that non-competes are an unfair method of competition in violation of Section 5 of the FTC Act. The rule will take effect on September 4, 2024, and have a significant impact on employment and trade secret practices nationwide.
In light of this, companies and legal counsel are encouraged to engage in broader discussions on trade secret protections moving forward. Trade secrets are especially vulnerable in the software sector where businesses are rapidly innovating, fiercely competitive, and employees may not know what constitutes a trade secret, often resulting in confusion and conflict.
The Impact on Workers
The new rule applies to workers and senior executives, although there is a distinction between the two. The term “worker” is defined broadly to include employees, independent contractors, externs, interns, and volunteers. The term “senior executive,” on the other hand, is defined more narrowly as a worker who is in a policy making position, such as a CEO, and receives a minimum total compensation of $151,164 per year.
The new rule bans all non-competes for workers, finding that it is unfair for a person to enter into, enforce, or represent that a worker is subject to a non-compete clause. This ban is anticipated to cover over 100 million workers nationwide. Additionally, there is a requirement for employers to notify workers that non-competes will no longer be enforceable. This notification can be hand delivered, mailed, sent by email or SMS text message and there is model language included in the rule to satisfy notice requirements.
For senior executives, the rule bans prospective non-competes. After the effective date, it will be unfair for a person to enter into, enforce, or represent that a senior executive is subject to a non-compete. According to the Commission, fewer than 1% of all workers would qualify as a senior executive under this definition.
There are limited exceptions including bona fide sales of business, existing causes of action, and good faith.
The Impact on Trade Secret Best Practices
A trade secret is any commercial or technical information that has economic value from not being generally known or reasonably discovered by others. Trade secret owners must use reasonable measures to protect the secrecy of the information. Reasonable measures might include corporate policies, need-to-know restrictions, restricted access to facilities and systems, and non-disclosure agreements for vendors or suppliers.
With this new ban on non-competes, companies and legal advisors will need to consider alternate routes to protect proprietary business information. For example, a confidentiality agreement, also known as a non-disclosure agreement (NDA), can protect sensitive information, such as trade secrets, and set forth obligations to prevent unauthorized disclosure or use of the confidential information. Another option to be considered is patent protection. A patent gives an owner exclusive rights to make, use, and sell their invention and protects against others making, using, or selling the patent invention without the owner’s permission.
Our understanding is based in part on information presented during the Sterne Kessler IP webinar, Navigating Trade Secrets Under the FTC’s Non-Compete Ban Webinar, on June 12, 2024.
Quandary Peak Experts Protect Trade Secrets
At Quandary Peak, our team of software experts specializes in safeguarding trade secrets. From identification to litigation, including pursuing preliminary injunctive relief, we provide comprehensive support throughout the process. Contact us today to engage an expert experienced in trade secret litigation.
