On April 23, 2024, the Federal Trade Commission (FTC) issued its Final Rule prohibiting non-compete clauses in employment contracts. This prohibition on non-compete clauses, which only applies to for-profit businesses, will have a long-lasting effect on how employers approach trade secret protection.
Since the Final Rule was published earlier this year, employers have been filing lawsuits challenging the rule’s legality in an effort to derail the FTC’s agenda in their nationwide ban of non-competes. In response to a recent challenge from a company hoping to block the Final Rule’s ban, a U.S. District Court judge in Pennsylvania rejected the company’s argument and expressed the FTC does indeed have the power to ban non-competes. In contrast, a federal court in Texas recently granted plaintiffs’ motion for a preliminary injunction but declined to issue a nationwide stay. If the Final Rule survives these legal challenges, employers must comply by September 4, 2024. In accordance with this deadline, employers should consider how the Final Rule will impact their non-compete agreements and trade secret protections with current and former workers.
Breakdown of the Non-Compete Ban
The FTC’s goal behind the Final Rule is to increase healthy competition in the workplace, promote employee mobility between employers, and boost the economy overall. According to the FTC, this ban will help businesses grow, expand, and more rapidly reach their potential through widening the hiring pool and allowing employees to more easily transition from one employer to another.
The FTC’s ban would prohibit employers from entering into new non-compete clauses in any employment contract for U.S. workers, including senior executives. The rule differs for employees who are current versus former employees, and for those who are senior executives, who entered into a non-compete agreement prior to September 4, 2024. Any non-compete entered into with a current or former employee prior to September 4, 2024, is no longer enforceable. Whereas a non-compete entered into with a senior executive prior to September 4, 2024, remains enforceable. A “senior executive,” for purposes of the rule, is an employee who (1) was/is in a policy-making position; and (2) received total annual compensation of at least $151,164.
Prior to the Final Rule’s effective date, employers are required to notify all current and former employees who have an existing non-compete agreement, that the non-competes they entered into are no longer valid effective September 4, 2024. This required notice must “(i) identify the person who entered into the non-compete clause with the worker; (ii) be . . . delivered by hand to the worker,” or by mail, email, or text message. The Final Rule provides model language that complies with its notice requirement.
How the Ban Impacts Trade Secret Protection
Employers who seek trade secret protection through their non-compete agreements should prepare to take an alternative approach to ensure trade secret protection before the ban becomes effective. Trade secret protections are commonly incorporated into non-compete agreements because they prevent employees from working for competing employers, thus reducing the risk of valuable trade secrets being shared with competitors. However, with the pending ban on non-competes, employers must explore other options for protecting trade secrets. For example, implementing a nondisclosure agreement (NDA) into an employment contract is an excellent tool for employers to protect trade secrets. NDAs permanently prohibit workers from revealing certain confidential and proprietary information to others. Another option is to include a non-solicitation provision in the agreement, which continues to be enforceable in most states (if not overbroad). When crafting NDAs and non-solicits, employers should draft carefully, ensuring the provisions do not have a functional effect similar to a non-compete. Because drafting these provisions can be a complex task, consulting with trusted legal counsel is recommended.
Key Takeaways for Employers
Moving forward, employers should review their non-compete arrangements and ensure compliance with the FTC’s Final Rule before September 4, 2024. Specifically, employers expecting trade secret protection through non-compete agreements should consider alternative methods for protection. Even for employers already utilizing other contractual methods, reevaluating the impacts of the FTC’s non-compete ban to confirm protection is recommended. Employers should review employee manuals, materials, and contracts to verify that all trade secrets are expansively protected and that employee expectations of confidentiality are clear. Employers should also consider when to issue notices to any current and former employees who have existing non-compete agreements, prior to the Final Rule’s effective date on September 4, 2024.
For more information about best practices for protecting trade secrets following the FTC’s non-compete ban, register for Barran Liebman’s 2024 Annual Employment, Labor, Benefits & Higher Education Law Seminar at barran.com or contact any of our employment, labor, and benefit attorneys.
Becky Zuschlag is an attorney Barran Liebman LLP. She advises and represents employers on a wide range of workplace issues. For questions, contact Becky at 503-276-2151 or bzuschlag@barran.com.
Iesha Comia is a law clerk with Barran Liebman LLP. She partners with attorneys in client trainings, legal research, and the drafting of employment policies and handbooks.
