On April 23, the Federal Trade Commission issued its final rule banning non-compete agreements nationwide, with the aim of “protecting the fundamental freedom of workers to change jobs, increasing innovation, and fostering new business formation.”
The fall of non-competes removes one of the more effective tools businesses have to protect their trade secrets by stopping employees from taking confidential information straight to a competitor. How, then, should companies with intellectual property to protect respond?
First, Sit Tight
This legislation has yet to be tested in the courts. Less than 24 hours after the FTC established the rule, lawsuits have been filed to challenge it.
However, the end of the non-compete is not just a federal matter. Many states are considering their own bans, with California, Colorado, Minnesota, North Dakota and Oklahoma having already signed them into law.
Whether or not the federal rule stands, businesses have other tools available – that could avoid overreliance on any one of them to the exclusion of others – to protect their trade secrets.
Limit Access
If one cannot prevent an employee from going to a competitor, the next best protection for trade secrets is to limit who has access to them. The fewer employees to know the trade secrets, the less likely a competitor can misappropriate them by hiring away an employee. Generally, few employees are on a need-to-know basis with the most sensitive commercial information, though that obviously depends on what that information is. The accounting or finance team will always have access to financial information, along with management. Businesses that rely on scientific or engineering knowhow may be able to limit access to only the scientists and engineers. Customer lists may be limited to the sales people who service those specific customers. Regardless of the information, it can be kept electronically secure rather than open to the whole enterprise. Essentially, compartmentalization can limit the exposure, but cannot eliminate it.
Actively Protect Information
Outside of limiting access, it is essential to arrange one’s affairs so that a court will ultimately uphold the business’s claim to trade secret protection. The hope is to never have to sue a former employee or competitor for misappropriating trade secrets, but if the need arises, it is important to account for what courts consider in determining whether particular information is even entitled to protection. While different courts may use slightly different tests or language in their analysis, there are common factors. Limiting access, as discussed in the prior paragraph, is almost always step one. A court is far more likely to protect trade secrets if the business can show that it is actively trying to protect the information. The non-compete may have prevented employees from going over to competitors, but the confidentiality provisions in those agreements were doing a lot of the heavy lifting. The prohibition on non-competes is not a prohibition on confidentiality agreements, which should remain a key part of any trade secret protection program.
Employ Every Tool
Aside from confidentiality agreements with employees, vendors, and customers, other methods of keeping information confidential from those outside and within the organization are essential. Written information policies put employees on notice of the ways in which they are required to assist in maintaining confidentiality. Electronic sequestration of sensitive information within the organization keeps information on a need-to-know basis. Strong network protection against those outside the organization prevent exposure to hacks. And regularly reviewing or auditing these measures to ensure compliance and effectiveness will help a court recognize that the organization has identified and values the information it claims to be trade secrets and convince the court to hold former employees and their new employers accountable for misappropriation.
Prior to the FTC’s actions, non-competes should have only been one piece of a larger program of trade secret protection. After the non-compete ban, businesses must invest in a more multilayered approach.