On April 23, 2024, the Federal Trade Commission (“FTC” or “the Agency”) voted 3-2 along partisan lines in a special public meeting to adopt the “Non-Compete Clause Rule” (the “Final Rule”), which will prohibit most employee non-competes with retroactive effect, except existing non-compete provisions of “senior executives.”  The Final Rule will also ban future non-compete agreements, including for senior executives, with limited exceptions.  The rule will not become effective until 120 days after publication in the Federal Register, and covered employers will be required to comply with the Final Rule by that effective date, which could come as early as August this year.  By the FTC’s own estimate, this ban could affect up to one-in-five American workers.

The Final Rule, however, is already facing legal challenges one day after the FTC finalized the rule.  Earlier today, for example, in Texas federal court, business groups (including Business Roundtable, Texas Association of Business, and Longview Chamber of Commerce) led by the U.S. Chamber of Commerce sued the FTC to block its non-compete ban, arguing that the agency lacks the authority to issue rules that regulate “unfair methods of competition.”  In its complaint, the lobby group said that while the Federal Trade Commission Act granted the Agency the ability to challenge particular practices, it did not allow the Agency to promulgate “unfair methods of competition” rulemaking.  The suit requests that the court vacate and permanently enjoin the non-compete ban, among other forms of relief.  Such challenges could further delay—or bar altogether—enforcement of the rule.

Notably, the two dissenting Republican commissioners, Melissa Holyoak and Andrew N. Ferguson, vigorously questioned the FTC’s ability to promulgate such a rule at the public hearing this week.  Echoing arguments previously set out in January 2023 by former Commissioner Christine S. Wilson’s detailed dissent on the proposed rule, Holyoak expressed concerns that the Final Rule undermines the U.S. Constitution’s separation of powers, and that the FTC lacks legislative authority through Section 6(g) of the FTC Act to promulgate a rule designed to prevent “unfair methods of competition.”  In agreement with Holyoak, Ferguson added that the Final Rule is unlawful, arbitrary, and capricious, as it nullifies millions of preexisting contracts, preempts the laws of forty-six states, and usurps the role of Congress to regulate areas of “tremendous economic and political significance” by redistributing nearly half a trillion dollars by “regulatory fiat.” 

As these legal challenges play out, however, companies should stay the course and continue to hew very close to state and local laws on non-competes, where most of the action on non-competes is happening.  Companies should also continue to work closely with antitrust, labor, or trade secrets counsel to ensure they use all tools available to protect their investments and business strategies.  

Overview of the Final Rule

After review of over 26,000 comments submitted on the FTC’s publicly proposed rule, the Final Rule is similar in many respects.  (For more information on the proposed rule, see our January 2023 client alert.)  As with the proposed rule, the Final Rule deems virtually all non-compete agreements with workers to be “unfair methods of competition” in violation of Section 5 of the FTC Act.  Below are the key elements of the Final Rule:

  • The rule bans all new non-competes, including with senior executives, after becoming effective.
  • The rule contains a “grandfathering” exception for existing non-competes with “senior executives,” defined to include very high-level, “policy-making” officers meeting certain salary thresholds (as described below).
  • The only exemption to the Final Rule is non-competes that are entered into in connection with the sale of a business.
  • By the effective date of the rule, employers will be required to provide written notices to relevant employees informing them that their non-competes are unenforceable and will not be enforced.
  • The Final Rule preempts conflicting state laws, thus banning otherwise lawful employee noncompete clauses in the 46 states that permit them.

Key Definitions of the Final Rule

Below are key definitions in the Final Rule: 

  • “Non-Compete” provisions are broadly defined to include “[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.”  The Final Rule therefore does not extend to restraints on concurrent employment, but is limited to post-termination non-compete agreements. 

    Notably, the Final Rule departs from the FTC’s original proposal to prohibit contractual terms that may be considered de facto non-compete clauses in response to vagueness concerns raised in public comments, and confirms that other types of restrictive covenants, such as non-disclosure agreements, non-solicitation agreements, and training repayment agreement provisions (or TRAPs), do not by their terms alone prevent a worker for working for another employer.  However, the FTC confirmed its intention to bring any agreement deemed to “function” as a non-compete within the scope of the ban. The rule therefore retains the “functional test” to determine whether a specific term or condition that operates as a non-compete clause, even if the contractual term is not explicitly called a “non-compete clause,” such as an NDA. 
  • “Worker” is defined broadly to include any employee regardless of whether they are paid or unpaid, irrespective of title or status, including “independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer.”
  • “Senior executives” are treated differently than other workers under the Final Rule, as existing non-competes of “senior executives” are grandfathered in, but new non-competes would be banned after the Final Rule becomes effective.

    The Final Rule defines “senior executives” to include either: (1) a business entity’s president, Chief Executive Officer or the equivalent, or (2) an officer with “policy-making position, meaning any individual who earns more than $151,164 annually and has final authority to make controlling policy decisions on significant aspects of a business.
  • Covered employers include certain sectors and entities—such as banks, non-profits not organized to carry on business for their own profit or that of their members (e.g., 501(c)(3) organizations), insurance companies, transportation and communications carriers, air carriers, and employers subject to the Packers and Stockyards Act—that fall outside of the FTC’s jurisdictional reach under the FTC Act. Notwithstanding these exemptions, Commissioner Rebecca Slaughter, who supported the ban, acknowledged that certain non-profits are exempted from the FTC Act’s reach, but suggested the ban could apply to other non-profit organizations in cases where entities “claim nonprofit tax status but are organized to the profit of [their] members who are within [their] jurisdiction and covered by the rule, which nonprofits are not,” thus, creating a grey area regarding the ban’s application with respect to certain non-profits.

Effect of the Ban on Trade Secret Protections

Though non-compete agreements have been unenforceable in jurisdictions like California for many years, the FTC’s nationwide expansion of the ban on non-compete agreements nonetheless raises significant concerns around IP theft.  In particular, where non-compete agreements are enforceable, they have provided at least some deterrent to trade secret misappropriation, and without them, employers will be faced with increased risk that misappropriated trade secrets will make their way into the hands of competitors.  Companies should begin taking steps to mitigate the heightened risks that will result from a ban on non-compete agreements.  For example, companies should consider whether non-disclosure and non-solicitation agreements can be drafted to provide some protection against flagrant theft and disclosure of trade secrets.

In addition, companies can begin auditing and diligently practicing good hygiene around trade secret protection through employment policies and written agreements and acknowledgments regarding the confidentiality of company information and procedures governing access to trade secrets, among other best practices.  Companies should also routinely confirm their employees’ understanding of these policies and, where possible, obtain contractual agreements from departing employees that they will return all confidential and trade secret information to the company upon their exit.

Finally, companies seeking the return of misappropriated trade secrets through litigation should consider whether they can fill the gap left by the FTC’s ban on non-compete agreements through the “inevitable disclosure” doctrine.  In jurisdictions that recognize the doctrine, courts can enjoin an employee from taking on particular job responsibilities at the competitor’s company where it is “inevitable” that they will disclose trade secrets in performing those job duties.  However, there is a split in authority on whether the “inevitable disclosure” doctrine can support the issuance of an injunction.  The doctrine is currently only recognized in about half of the states, and a portion of those impose a high evidentiary burden before granting such relief.  And although the Defend Trade Secrets Act (DTSA) provides that an injunction may issue to prevent actual and “threatened” misappropriation, it does not expressly refer to “inevitable disclosure.”  Thus, although the FTC points to the DTSA as providing adequate protections against trade secret misappropriation, and the DTSA’s protections against “threatened” misappropriation may justify injunctions under the inevitable disclosure doctrine in some states, it remains to be seen whether and to what extent the doctrine will survive in the remaining jurisdictions should the FTC’s ban on non-competes take effect.

Key Takeaways

As described, the FTC’s Final Rule is already being tested in the courts by the U.S. Chamber of Commerce and certain business groups on various grounds, including on constitutional grounds, seeking to vacate and permanently enjoin the rule in its entirety, as well as other forms of relief.  In a statement following the FTC’s vote to finalize the ban, U.S. Chamber of Commerce President and CEO Suzanne P. Clark said that the FTC’s rule “to ban employer noncompete agreements across the economy is not only unlawful but also a blatant power grab that will undermine American businesses’ ability to remain competitive.”  Enforcement of the rule will therefore likely be delayed or thwarted completely. 

In the meantime, companies that rely heavily on non-compete agreements should review their policies and practices, focusing on determining which employees are senior or non-senior executives and what provisions in employment contracts may operate on as a non-compete agreement.   Companies should also continue to remain in compliance with the panoply of state and local laws regarding non-competes, and stay abreast of recent state law changes in this area as well, such as the California’s recent strengthening of the state’s ban on non-compete agreements and accompanying notice requirements.  (For more information on these developments, see our April 1 client alert.)

Companies that want to re-examine their existing non-compete agreements and audit their protections and controls over confidential and trade secret information can contact Crowell’s antitrust, labor, or trade secrets teams, including the contacts for this alert.

We would like to thank Corey Hitsch, Associate, for their contribution to this alert.

A perennial issue in trade secret litigation is: what factual allegations must be pled regarding what trade secrets are left when there are related patents from the same company on the same technology.  The recent decision Safe Haven Wildlife Removal and Property Management Experts, LLC v. Meridian Wildlife Services LLC provides insight on this issue at the motion to dismiss phase.

In this case, the court inferred differences between the alleged trade secrets and publicly-available patent based on the owner’s general allegations, stating there were differences and that the patent covered “non-proprietary” aspects of Meridian’s technology. Under the permissive Rule 12 standard for review of a complaint, this was enough to survive dismissal and enter discovery.

The case started more than two and a half years ago when Safe Haven sued Meridian for patent infringement. After a transfer of venue and a brief stay, in May 2023 Meridian filed counterclaims asserting infringement of its own two patents and trade secret misappropriation by Safe Haven and its founder Derek Tolley, a former employee of Meridian.

Meridian’s asserted U.S. Patent Nos. 9,943,073 and 10,154,663 are entitled “Indoor Live Bird Capture System” and are directed to a method and device for the safe live capture of a flying bird inside a building using bird netting with adjustable height support poles.

Meridian’s claimed trade secrets include (1) Meridian’s proprietary non-lethal practices, methods, and techniques for removing birds from commercial spaces and its unique application of bird behavior analysis and netting in that process; (2) Meridian’s bird behavior assessment methods, techniques, and processes; and (3) Meridian’s compiled, confidential customer and potential customer database including pricing, confidential contact information, customer buying preferences and history.

Safe Haven and Tolley, in their motion to dismiss, challenged Meridian’s claim of trade secret misappropriation on several grounds, including that Meridian’s trade secrets under categories (1) and (2) relating to the bird behavior assessment and capture techniques were not “secret” because Meridian filed and obtained patents on those assessment and capture techniques. In other words, because the information was subject to patent, it was known to the public and could not be secret.

The court rejected this argument, finding that Meridian explicitly described its patents as covering “non-proprietary” aspects of its bird capture systems. Taking all alleged facts as true and construing the counterclaim in a light most favorable to Meridian, the court inferred that Meridian’s allegations were that “the public filing of the patents did not contain the trade secrets implicated” which therefore does not impact their purported “secrecy.”

The court took a relatively permissive view on any potential overlap between publicly-known information disclosed in a Meridian’s asserted patent and that which it claimed as trade secrets. The court inferred differences based on Meridian’s general allegations that the patents cover “non-proprietary” aspects of its bird capture systems. In effect, the court took Meridian at its word that there is a distinction. As the proceedings unfold, Meridian may be required to more specifically identify the differences between its trade secrets and its patents, or it may be subject to continued challenges from Safe Haven and Tolley.

The Ninth Circuit’s decision in Perrin Bernard Supowitz, LLC v. Morales continues to highlight the high bar necessary for a motion for preliminary injunction, the evidence required to establish irreparable harm, and the limited “abuse of discretion” standard that may be applied during any appeal.  Case No. 23-55189, 2023 WL 1415572 (9th Cir. Feb. 5, 2024).

In Perrin, the Ninth Circuit found no abuse of discretion in the Central District of California’s decision to deny a preliminary injunction that Individual FoodService (“IFS”), a supplier of food service products, sought against two former employees who formed a competing business while still employed at IFS, for misappropriation of a trade secret – IFS’s customer list. 

Although the Court noted that “there was no dispute that IFS’s customer order history qualified as a trade secret,” the Court found that any trade secrets the former employees may have misappropriated from IFS were “old and stale,” and therefore IFS was at no risk of suffering irreparable harm by being “wronged again” by their continued use.  The Court explained that this finding of staleness sufficed to deny the preliminary injunction because such a remedy should only last as long as it is necessary to preserve the rights of the parties and eliminate the commercial advantage gained through misappropriation. 

The Court further reasoned that barring the two former employees from doing business with any customer they serviced while still employed at IFS was a punitive measure, “whereas the purpose of a preliminary injunction is to preserve the status quo.”  The Court explained that by refusing to enjoin activity that potentially extended beyond the two former employees’ trade secret misappropriations, the lower court properly balanced the competing public interests of protecting trade secrets and allowing open competition and employee mobility. 

This case highlights the need to critically assess the bases for a request for preliminary relief when claims of misappropriation of trade secrets are being asserted.  One should be particularly careful about the scope and strength of the trade secrets at issue and be able to articulate the various harms that may be encountered if those secrets are allowed to be misused on an ongoing basis. 

The legal battle between VANDA Pharmaceuticals, Inc. and the United States government provides guidance on the minimum requirements that the government must meet to protect trade secrets provided during the regulatory approval process for pharmaceuticals. The case, which involves alleged unlawful disclosure of trade secrets by government officials to generic drug competitors, presents several issues of first impression.

VANDA did not assert a trade secret misappropriation claim, but rather asserted a Fifth Amendment takings claim. (VANDA’s breach of implied-in-fact contract claim was dismissed). At the core of the case are two of Vanda’s brand-name drugs, Fanapt and Hetlioz. VANDA claimed that Food and Drug Administration (FDA) officials improperly shared the company’s trade secret and confidential manufacturing information with generic competitors by disclosure through the review process for generic drug manufacturers’ proposed competing products. VANDA alleges that the disclosure not only breached the FDA’s duty of confidentiality with VANDA, but also resulted in considerable economic harm to the company and violated the statute preventing the unauthorized disclosure of trade secrets by federal government officials who “obtain that information in the course of their official duties.” 18 USC § 1905.

On January 18, 2024, the court denied the government’s motion to dismiss regarding the Fifth Amendment takings claim. The court stated that the FDA’s review and approval of NDAs falls squarely within the scope of the federal agency’s statutorily authorized duties. Furthermore, unlawful acts are not per se unauthorized for purposes of engaging in a Fifth Amendment takings analysis, and can still be imputed to the government. In other words, even if the government employees’ acts eventually were found to be unlawful, the actions could still constitute unauthorized taking by the agency. The court declined to determine if this was a per se or regulatory taking at this stage.

The Court also left open the question of whether VANDA even had any trade secret or proprietary rights in the disclosed information. As the legal proceedings unfold, VANDA’s confrontation with the U.S. government will impact how trade secrets are handled within the pharmaceutical industry’s regulatory framework, and what remedies are available to future plaintiffs.

​

  1. The “Elf on a Shelf” has seen a lot from the outside.  Make sure the employment agreement prevents them from sharing within. 
  2. If elves are working remote, make sure they know not to download the gift-wrapping procedure from the Workshop shared drive to personal devices.
  3. Distribute the “Naughty or Nice” list on a need to know basis only.
  4. No photographs of the sleigh allowed. 
  5. Don’t forget about the NDAs with the reindeer handlers and flight navigators. 
  6. Revisit the Workshop’s plan to limit disclosure of confidential information if a human finds their way in. 
  7. Review the applicable law of the North Pole to ensure Confidentiality Agreements are enforceable and do not violate an elf’s right to work at a competitor. 
  8. Do not mark gift wrapped toys as “Confidential,” since those gifts do not contain trade secret or confidential information.
  9. Confirm that trade secret protection is best for the innovations developed—the Workshop likely wants to keep them secret for as long as possible and not the limited lifespan patent protection offers. 
  10. Remind Mrs. Claus not to share information at the New Year’s Magical Creature Gathering— “Loose lips can unwrap gifts!”

Earlier this year the Federal Judicial Conference released its Trade Secret Case Management Judicial Guide.  That paper is over 400 pages but contains comprehensive insights for courts and litigants in the various stages of a trade secret case.  It is required reading for those practicing in the field.

SSRN-id4360102.pdf

Key Takeaways

  • The new law has the potential to have a great impact on how domestic companies protect their IP, and how foreign companies assess theft of trade secrets.
  • Many crucial issues, however, are left open. The scope and impact of the law will depend heavily on how the executive branch decides to address these issues, if at all.

On January 5, 2023, President Biden signed into law the Protecting American Intellectual Property Act, a new bill aimed at imposing sanctions on foreign individuals and entities involved in the theft of trade secrets belonging to a U.S. individual or entity. The law provides a new mechanism for the U.S., and potentially U.S. companies, to combat theft of trade secrets committed by foreign entities or individuals.

Read more here.

The Sedona Conference’s Trade Secret Working Group recently published an article titled “7 Ways To Approach The Difficulties Of Trade Secret Litigation”. Crowell’s Mark Klapow is a member of the working.

Read more at: https://www.law360.com/articles/1559728/7-ways-to-approach-the-difficulties-of-trade-secret-litigation?copied=1

Med-Abstract-technology-background-security-concept-GettyImages-618950118

Crowell & Moring is a proud sponsor of this year’s American Intellectual Property Law Association (AIPLA) Trade Secrets Summit, taking place December 8-9 in Miami, FL.

Please join us for a panel discussion on “Best Practices for Trade Secret Identification in Litigation,” led by Crowell & Moring attorney Mark Klapow on Thursday, December 8 at 9:45 AM (ET).

For more information about the 2022 AIPLA Trade Secret Law Summit and to register, please click here.

A Central District of California court recently denied a defendant’s motion for summary judgment where the defendant argued that the plaintiff’s claims for trade secret misappropriation were barred by the applicable statute of limitations. The court determined that the statute of limitations did not bar the plaintiff’s claim because a reasonable jury could find that the plaintiff did not have reason to believe that all of the elements of its trade secret misappropriation claim were met prior to the bar date. In particular, the court concluded that a reasonable jury could find that the plaintiff did not have reason to believe that the defendant possessed the required knowledge of the trade secrets themselves, despite having knowledge that the product was manufactured using the trade secrets.

Continue Reading Pinkerton Tobacco v. Kretek Int’l: Defendant’s Statute of Limitations Argument Goes Up in Smoke