Don't Fret (Yet): Trade Secrets, NDAs and Non-Solicits After the FTC Non-Compete Rule

With the issuance of the Federal Trade Commission's (FTC or Commission) much-anticipated final rule on its "non-compete ban" (see Holland & Knight's previous alert, "New FTC Rule Bans Non-Compete Agreements in All Employment Contracts," April 23, 2024) and litigation already filed to stop what many view as FTC overreach,¹ companies and employers are expected to even more vigilantly protect against departing workers or employee groups taking their trade secrets and proprietary information. In addition to statutory claims for trade secret misappropriation and common law claims arising from duties of loyalty, non-disclosure agreements (NDAs) and non-solicitation of customer agreements (Non-Solicits) are, and will remain, an effective way to protect a company's confidential and competitively sensitive information when workers leave. The FTC's 570-page final rule contains several comments regarding such restrictive agreements and trade secret protection, some of which are noted below.

Simply put, in addition to trade secret statutory relief, NDAs and Non-Solicits are alive and well under the new FTC rule, even if the rule ultimately takes effect in its current form, provided they don't functionally operate as a non-compete to sideline a worker from taking another job. This relevant phrase (which assuredly will be litigated in the future) is highlighted below from the FTC's final rule:

Section 910.1 defines a "non-compete clause" as a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (A) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (B) operating a business in the United States after the conclusion of the employment that includes the term or condition.² (Emphasis added.)

In its comments, the FTC explained that "the term 'functions to prevent' clarifies that, if an employer adopts a term or condition that is so broad or onerous that it has the same functional effect as a term or condition prohibiting or penalizing a worker from seeking or accepting other work or starting a business after their employment ends, such a term is a non-compete clause under the final rule."³

Although the FTC noted commentators' concerns that this kind of "functional test may frustrate employers' ability to use NDAs to protect legitimate trade secrets or to enjoin a former worker employed with a competitor" under the federal trade secrets statute (DTSA),⁴ the FTC actually characterized trade secret protection and NDAs as "less restrictive alternatives" to non-compete agreements.⁵ To highlight the point, the Commission noted "the economic success" in three states that have long banned traditional non-competes (California, North Dakota and Oklahoma), noting that industries in those states "are highly dependent on trade secrets and other confidential information illustrat[ing] that companies have viable alternatives to non-competes for protecting valuable investments."⁶

Further distinguishing NDAs, the FTC noted that "non-competes are generally less enforceable than NDAs"⁷ and that "the final rule will not prevent employers from adopting garden-variety NDAs."⁸ What is a "garden-variety" NDA without crossing into a "functional" non-compete in the FTC's eyes? In short: "Appropriately tailored NDAs burden competition to a lesser degree than non-competes. Such NDAs may prevent workers from disclosing or using certain information, but they generally do not prevent workers from seeking or accepting other work, or starting their own business, after their employment ends."⁹

Still, because trade secret misappropriation and NDA breach litigation is, by its very nature, usually reactive as to what the employee already has done versus the more preventative non-compete agreement, the FTC's rule may invite more "inevitable disclosure" trade secret claims in those jurisdictions where permitted or test the doctrine in those states where it is not.¹⁰ On that front, it's fair to expect more threshold disputes over what an employee claims to be "general trade knowledge and skills" – particularly given the FTC's stance that "restrictive employment agreements and trade secret law as well … cannot be used to prevent workers from using" such knowledge and skills in another job¹¹ – versus information rising to the level of trade secret and protected proprietary material that the worker obtained from their former employer.

With respect to Non-Solicits (as with NDAs), the FTC also provided at least some comfort in noting that its "functions to prevent" non-compete definition "does not categorically prohibit other types of restrictive employment agreements, for example, … non-solicitation agreements."¹² According to the Commission, Non-Solicits "do not by their terms prohibit a worker from or penalize a worker for seeking or accepting other work or starting a business after they leave their job, and in many instances may not have that functional effect."¹³ The FTC further observed that Non-Solicits "are generally not non-compete clauses under the final rule because, while they restrict who a worker may contact after they leave their job, they do not by their terms or necessarily in their effect prevent a worker from seeking or accepting other work or starting a business."¹⁴ However, whether a Non-Solicit is "so broad or onerous that it has the same functional effect" as a non-compete will be a "fact-specific inquiry" according to the Commission.¹⁵ For example, if a narrowly tailored Non-Solicit applies only during the restricted period to the customers an employee actually serviced or sold to, how might the FTC view such agreement where the employee serviced all the customers in a small industry and wants to continue working in that industry? This remains an open question.

These and other fact-specific disputes in the Non-Solicit, NDA and trade secret world likely will be tested if the FTC rule goes into effect. The FTC acknowledged that such disputes, in the absence of non-competes, will result in increased costs for parties. The Commission explained: "While the Commission recognizes that trade secrets litigation and NDA and non-solicitation enforcement may be more costly than non-compete enforcement in some instances, the Commission is not persuaded that higher costs associated with alternative tools make those tools inadequate."¹⁶

In this evolving non-compete landscape, it is advisable to wait for a short while to see how litigation over the FTC's rule plays out and not immediately revise restrictive covenants or tell employees that their restrictive covenants are unenforceable. But, even if the FTC's rule takes effect in its current form notwithstanding the litigation to stop it, the Commission fortunately recognized distinctions in its rule for appropriately tailored NDAs, Non-Solicits and trade secret protection that do not broadly function as a traditional non-compete.

Notes

¹ See Ryan, LLC v. Federal Trade Commission, No. 3:24-cv-986 (N.D. Tx.); U.S. Chamber of Commerce, et al. v. Federal Trade Commission, et al., No. 6:24-cv-00148 (E.D. Tx.).

² Federal Trade Commission, 16 CFR Part 910, Non-Compete Clause Rule (April 23, 2024) (hereinafter "Non-Compete Rule"), at 65.

³ Id. at 77-78.

⁴ Id. at 70.

⁵ See id. at 124, 289, 291

⁶ Id. at 289.

⁷ Id. at 215.

⁸ Id. at 294.

⁹ Id.

¹⁰ See Holland & Knight's previous alerts, "How 'Threatened Misappropriation' Squares with Virginia's Nonrecognition of 'Inevitable Disclosure'," Aug. 1, 2018; "Inevitable Disclosure: Recognition (or Lack Thereof) Under the Defend Trade Secrets Act," Aug. 13, 2018.

¹¹ Non-Compete Rule at 312.

¹² Id. at 77.

¹³ Id.

¹⁴ Id. at 81.

¹⁵ Id. at 77, 81.

¹⁶ Id. at 302.

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