Trade Secret Protection Strategies in Lieu of Noncompetes

As an increasing number of states take up the issue of restricting noncompete agreements, and as group lift-outs (hiring a team of individuals from another company) are generating heightened legal concerns for the C-suite, relying on traditional restrictive covenants and strategies may present risks and no longer be enough to safeguard an organization’s valuable trade secrets.

With that as context, employers and their HR and total rewards (TR) professionals are seeking proactive, alternative ways to protect intellectual property beyond noncompetes.

This article provides some context, insights and guidance on this subject.

Some National Context

Brian Hartstein, a partner in the Chicago office of the Quarles & Brady law firm, explained that national efforts begun at the Federal Trade Commission (FTC) under the Biden administration to ban noncompetes for most employers are currently at a standstill.

“After an injunction prevented the nationwide ban from going into effect, the FTC appealed the decision,” he said. “In March of this year, the FTC asked the [Eleventh Circuit Court of Appeals] to stay the commission’s appeals for 120 days to reconsider the government’s position given the new administration.”

Hartstein noted that many observers anticipate the Trump FTC to withdraw the previous administration’s “far reach” rule, but interest in limiting restrictive covenants does not fall along strictly partisan lines. He said there also are some indications the Trump FTC will continue to look at limitations on the use of such covenants — albeit with a focus more on the benefits to employers as opposed to worker protection.

States Taking Up the Issue

Hartstein added that, at the state level, there have been an influx of restrictions in recent years, including the addition of income thresholds or other notice requirements to make noncompete agreements enforceable. So far, four states (California, Minnesota, North Dakota and Oklahoma) have banned the agreements for all workers, and others have set income levels that essentially bar them from a large portion of the working population.

Given the variances in these rules from state to state, Hartstein said employers should review their agreements any time they enter a new jurisdiction and not just rely on form documents, adding that the days of utilizing a single restrictive covenant agreement nationwide are over.

“Employers need to carefully analyze state-specific restrictions for compliance and/or develop new language and restrictions for the particular jurisdiction,” he said. “Employers should also strongly consider refining and narrowing the scope of nonsolicitation provisions and addressing sensitive information through confidentiality and intellectual property protections.”

When it comes to granting additional benefits in a binding quid pro quo relationship, he added, employers should consider whether tying benefit access to restrictive covenant agreements and other intellectual property, trade secret and confidential information protections might be appropriate.

Hartstein said that granting various types of benefits, equity, bonuses or other compensation plans may create opportunities to also protect the organization’s interests in these areas, or make changes to existing agreements to keep up with legal changes.

The Critical Role of Technology

Technology today can play a critical role in access to and tracking of confidential information and trade secrets, according to Hartstein, noting that employers should carefully consider who has access to what systems and data.

“This can include restricted access to certain networks, databases and even specific documents,” he said, adding that employers should consider a “need to know” approach where the default to sensitive information is limiting access rather than broad access.

Hartstein said businesses also can consider restricting employees’ ability to use thumb drives or external hard drives, or access cloud-based services such as Dropbox or Google Docs, from their browsers. Even restricting access to outside email on company-provided computers or smartphones can prevent efforts at misappropriation, he said.

John Maley, a partner with the Barnes & Thornburg LLP law firm, said emerging technologies such as artificial intelligence (AI) can be helpful for prompt action when misappropriation of confidential information or trade secrets occurs.

These experts state that employers should generally balance cost versus need when considering technical solutions.

“The best defense to employees joining competitors is to be a great employer. Culture and compensation are critical.”
— John Maley, partner, Barnes & Thornburg LLP

Additional Insights and Guidance

Maley, who has an extensive background in noncompetes and trade-secret protection, said there is generally no correlation between such agreements and total rewards offerings, although some states do require special consideration (e.g., additional money in exchange for signing a noncompete) for the covenant to be enforceable.

He explained that when it comes to other strategies employers can enact to enhance protections outside of noncompete agreements, HR and TR professionals should consider a few main issues.

“Of course, the best defense to employees joining competitors is to be a great employer,” Maley said. “Culture and compensation are critical. Noncompetes alone are not the key to employee retention, protection of intellectual property and customer goodwill.”

Next, he said other restrictive covenants — including confidentiality provisions, and employee nonrecruitment and customer nonsolicitation agreements — are often more important than a provision limiting employment with a competitor for a specified time period.

“And, these types of restrictions are more favored by the law and not under attack by legislatures and courts,” he added.

Finally, educating and training employees on the “why” of restrictive covenants can be very important. “Protecting the enterprise protects the team,” Maley said.

He stated that employee retention and intellectual property protection are most effective when tailored to the particular employer, its workforce and the other unique factors. For example, for some employers, retention bonuses or clawbacks can be more effective than restrictive covenant documents.

“Any departure of personnel with valuable company information or significant clients or customers should be considered a risk threat, and standard steps should be in place to detect data theft or other misconduct, again tailored to the individual employer,” Maley said.

Editor’s Note: Additional Content

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