In the second installment of the 2023 Trade Secrets Webinar Series, Seyfarth attorneys reviewed noteworthy legislation, cases, and legal developments from across the nation over the last year in the areas of trade secrets and data theft, non-competes and other restrictive covenants, and computer fraud. Plus, they provided predictions for what to expect in 2023.
As a conclusion to this webinar, we compiled a summary of takeaways:
- The FTC’s attempted regulation of employment non-competes as part of its rulemaking powers is unprecedent in the 109 years since its creation in 1914. The FTC bases its rulemaking authority on Section 5 of the Federal Trade Commission Act, which provides: “The Commission is hereby empowered and directed to prevent persons, partnerships, or corporations … from using unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.” 15 USC § 45(2).
- The proposed rule impacts not just typical employee non-compete agreements but also non-compete agreements that are made in connection with the sale of business entities. While there is an exception for a substantial owner of, or substantial member or substantial partner in, the business entity at the time the person enters into the non-compete clause defined as an owner, member, or partner holding at least a 25 percent ownership interest in a business entity, the 25% interest threshold is arbitrary and ignores the business realities, complexity and individuality of such transactions. Moreover, it applies retroactively to such transactions so parties to the transaction may not get the benefit of their bargain.
- The proposed rule is only a proposal at this point, as the FTC has solicited public comment on the proposed rule before it issues a final rule. The deadline to submit comments is March 20, 2023, and we encourage all affected employers to submit comments.
- It’s unclear whether the final rule will be as sweeping as the current proposal. Regardless of the final form of the rule, we expect legal challenges to the FTC’s rulemaking, including significant constitutional challenges to whether the FTC has power to issue rules at all on worker non-competes.
- In the interim, employers should take a close look at their restrictive covenant agreements to ensure that they are reasonable and compliant with ever-evolving state law.
- There were several significant trade secret jury awards in 2022 in Virginia ($2 billion), Ohio ($65 million), and Michigan ($105 million). We expect to see even more large jury results in 2023. Courts continue to recognize combination trade secrets where a plaintiff can demonstrate a unique combination of processes and information that aid company processes, including research and development. Courts also continue to allow creative damage theories based upon avoided development costs or unjust enrichment even where there may only be disclosure rather than use or no competing market product embodying the misappropriated secrets.
- The Protecting American Intellectual Property Act signed on January 5, 2023, is designed to help American businesses from trade secret theft by foreign actors. The President is required to report annually to Congress foreign entities and individuals who engaged in trade secret theft that possess a threat to the country and sanction such entities and individuals.
- We saw some notable non-compete court decisions coming from Hawaii (must have legitimate business interest for employee non-compete, including protection of trade secrets), Wyoming (blue penciling overly broad employee non-competes not permitted), California (upholding customer non-solicit covenant in employment agreement that was part of business transaction accomplished to further joint venture), Delaware (Chancery court refuses to blue pencil overly broad non-compete in business transaction), and Louisiana (court refuses to enforce non-compete where individual executes non-compete merely as an applicant rather than employee).
- We saw Colorado, District of Columbia, Illinois, and Oregon enact new state laws governing restrictive covenants, and New Jersey, Connecticut, and New York introduced their own respective bills on employee mobility.
- California and Washington have new laws prohibiting employers from using employee agreements that prohibit the disclosure of certain conduct the employee believes is unlawful, such as illegal harassment or discrimination.
- The DOJ has revised its policy for charging CFAA cases after the Supreme Court Van Buren’s ruling that adopted a narrowed interpretation of the statute’s “exceeding authorized access” in Van Buren. And we expect combating ransomware to remain a top priority for the DOJ in 2023.
You can view a recording of the webinar and all other webinars in our Trade Secrets & Non-Competes Webinar Series here.