In January 2023, the Federal Trade Commission proposed a new rule that would ban non-compete provisions. The FTC’s proposal would invalidate any non-compete clause, which is defined as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” The proposed rule also contains a “functional test” for any contractual term that acts as a “de facto” non-compete clause—i.e., one that has the effect of prohibiting a worker from seeking or accepting employment with another employer.
After receiving over 17,000 comments on its proposed rule, the FTC unanimously voted to extend the public comment period until April 19, 2023, after which it will review comments and potentially make changes to a final rule. If implemented, the FTC’s proposed rule may impact how employers rely on trade secret statutes to protect their confidential information upon the departure of their employees. Indeed, the FTC acknowledges that its proposed non-compete ban will jeopardize protection for employers seeking to protect their confidential information, but emphasizes that “trade secret law provides employers with an alternative means of protecting their investments in trade secrets” and “confidential business information.”
In its proposal, the FTC points to the Defend Trade Secrets Act (“DTSA”) as one method of “redressing trade secret theft” and protecting confidential information. The DTSA, which was enacted in 2016, allows an owner of a trade secret to sue in federal court when its trade secrets have been misappropriated. Nearly all states have adopted similar statutes designed to protect trade secrets. As the FTC mentions in its proposal, the number of trade secret cases filed has steadily increased since enactment of the DTSA, which “suggests employers view trade secret law as a viable means of obtaining redress for trade secret theft.”
Although the FTC emphasizes that “[t]here is virtually no category of information that cannot, as long as the information is protected from disclosure to the public, constitute a trade secret,” employers will still need to consider the factors that are applied to determine what specific information can qualify as a trade secret. In general, to constitute a trade secret under DTSA, information must (1) have economic value; (2) not be generally known; and (3) the owner must have taken reasonable measures to keep the information a secret.
Notably, the potential ban on non-compete provisions may render a principle known as the “inevitable disclosure” doctrine more relevant in future cases. Certain jurisdictions have approved of the application of this doctrine under their respective state laws, which permits a plaintiff to allege misappropriation by demonstrating that a defendant’s new employment may inevitably lead him or her to rely on the plaintiff company’s trade secrets. Phoseon Tech., Inc. v. Heathcote, 2019 WL 72497, at *11 (D. Or. Dec. 27, 2019) (“Seventeen states appear to have adopted the inevitable disclosure doctrine in one form or another.”). Other jurisdictions have rejected the doctrine’s application under DTSA or generally. Id. (“Five states appear to have rejected the doctrine.”); see also, e.g., Whyte v Schlage Lock Co., 125 Cal. Rptr. 2d 277, 293 (Ct. App. 2002) (“[O]ur rejection of the inevitable disclosure doctrine is complete.”); Kinship Partners, Inc. v. Embark Veterinary, Inc., 2022 WL 72123 (D. Or. Jan. 3, 2022) (“[T]he DTSA specifically forecloses courts from granting relief based on the inevitable disclosure doctrine because such relief restrains employment.”); Human Longevity, Inc. v. J. Craig Venter Inst., Inc., No. 18CV1656-WQH-LL, 2018 WL 6617633 (S.D. Cal. Dec. 18, 2018). Although the DTSA is silent on the issue, it provides that a court may enter an injunction to prevent either the actual or “threatened” misappropriation of a trade secret. 18 U.S.C. § 1836(b)(3)(A)(i). Because the DTSA protects against “threatened” misappropriation, some employers have attempted to bring claims under the DTSA relying on the inevitable disclosure doctrine. Yet whereas the DTSA has been in place since 2016, case law interpreting this doctrine under the DTSA is still relatively undeveloped, and there is no judicial consensus on whether the DTSA permits application of the inevitable disclosure doctrine.
In jurisdictions that have adopted the inevitable disclosure doctrine, courts generally consider three factors in determining whether to grant injunctive relief based on threatened misappropriation: 1) whether the employers in question are direct competitors providing the same or very similar services; 2) whether the employee’s new position is nearly identical to his old one, such that he or she could not reasonably be expected to fulfill his or her new job responsibilities without utilizing the trade secrets of his or her former employer; and 3) whether the trade secrets at issue are highly valuable to both employers. See Sunbelt Rentals, Inc. v. McAndrews, 552 F. Supp. 3d 319, 331 (D. Conn. 2021). Some courts have recently held that it is not enough to show merely that a former employee acquired confidential information during his or her employment and later assumed a similar position at a competitor. For example, a court in the Northern District of Illinois recently found as much, dismissing a DTSA claim filed by PetroChoice against a former employee because PetroChoice alleged only that the former employee acquired its information while employed by PetroChoice, and that the employee would “inevitably disclose” the information. Petrochoice LLC v. Amherdt, No. 22-CV-02347, 2023 WL 2139207, at *5 (N.D. Ill. Feb. 21, 2023). The court held that “[t]he mere fact that a person assumed a similar position at a competitor does not, without more, make it inevitable that he will use or disclose trade secret information[.]” Id. Similarly, a federal court in Georgia dismissed a trade secret lawsuit that relied on the inevitable disclosure doctrine because the employer failed to allege that the former employees ever threatened to use or disclose the trade secrets, noting that “[i]t is not enough for to simply allege that [defendant] hired two individuals who happen to possess knowledge of [plaintiff’s] trade secrets.” AWP, Inc. v. Henry, 1:20-cv-01625-SDG, 2020 WL 6876299, at *1 (N.D. Ga. Oct. 28, 2020). Although instructive in determining potential limitations of the doctrine, the case law is not clear as to when the inevitable disclosure doctrine may be invoked under the DTSA, even though some courts have allowed its application in certain circumstances. Phoseon, 2019 WL 72497, at *11.
Overall, the statutory language of DTSA provides that it protects against “threatened misappropriation,” which may provide a way to protect confidential and trade secret information in lieu of non-compete agreements. However, the scope and extent to which both employers and employees alike may interpret the statute (including the “inevitable disclosure” doctrine) remains to be seen, and may become a topic of increased interest should the FTC’s proposed rule go into effect.