An administrative law judge (“ALJ”) of the National Labor Relations Board (“NLRB”) in J.O. Mory, Inc. recently required an employer to rescind certain restrictive covenants in its employment agreements. The decision is yet another attack on non-competes in line with the NLRB General Counsel’s May 30, 2023 memo (“Abruzzo Memo”) (see our prior article here), and apparent coordination with the Federal Trade Commission’s Final Non-Compete Clause Rule announced on April 23, 2024 (see our prior article here). However, the J.O. Mory decision also provides insight on strategies to avoid the NLRB’s recent attempts to expand its review to non-competes and other restrictive covenants.

In J.O. Mory, the employer terminated an employee acting as a “salt”–a union-organizer who obtains non-union employment with the goal of organizing the workforce. In addition to finding the employer improperly terminated the employee for his salting activities (not analyzed here), the ALJ also found three provisions of the employment agreement unlawful: (i) a non-solicit provision; (ii) a non-competition provision; and (iii) a reporting obligation provision, requiring current employees to report any job offers received (the “Provisions”).

Taking cues from the Abruzzo Memo, the ALJ premised the NLRB’s authority to adjudicate the legality of the Provisions under Section 8(a)(1) of the National Labor Relations Act (the “Act”)–“Under Section 8(a)(1) of the Act, it is unlawful to interfere with, restrain, or coerce employees in the exercise of rights guaranteed by Section 7 of the Act.” Section 7 protects, generally, an employee’s right to unionize and efforts in further of unionizing. 

In line with its claimed authority, the ALJ provided specific examples of how the Provisions might interfere with an employee’s protected Section 7 activities. For example, the ALJ found the non-solicit provision may dissuade an employee from “telling their coworkers about the wages and benefits offered by the Union.” Similarly, the NLRB found the reporting obligation had no “limitation for union or other protected activities” and thus may “require employees to report their own protected activities.” The ALJ did not provide a specific example regarding the non-compete provision, but instead, echoing the Abruzzo memo, conclusively determined that it would “deter a reasonable employee from engaging in protected activity.” In line with the Abruzzo Memo, the ALJ reasoned that non-compete provision would “cause a reasonable employee to refrain from engaging in protected activities that come with a risk of retaliation” because the employee would fear that they would be “unable to find any work in their geographic area if they are fired or forced to leave their job.” 

The ALJ applied the Stericycle framework advanced by the Abruzzo Memo by examining whether a rule “has a reasonable tendency to chill employees from exercising their Section 7 rights, viewed from the perspective of an employee who is economically dependent upon the employer and who also contemplates engaging in protected concerted activity.” The ALJ found that the Provisions met this first step of the Stericyle framework and are thus presumed to be unlawful. The ALJ also found that the employer failed to rebut this presumption by failing to show that the Provisions advance “a legitimate and substantial business interest that it is unable to advance with a more narrowly tailored rule”. The ALJ determined that the stated justifications for the Provisions (e.g., to prevent ‘pirating” of employees, protect employer’s rights under the employment agreement, and to protect confidential or trade-secret information) were more appropriately addressed by other provisions in the employment agreement “requiring employees to turn over confidential and proprietary information and prohibiting them from trying to divert [employer’s] customers.”

The ALJ ultimately ordered the employer to, among other things, pay damages to the employee, to rescind the Provisions and

any other policies or work rules prohibiting employees from (1) being engaged in, interested in, or employed by any business similar or competitive with Respondent’s business, (2) inducing other employees to leave Respondent’s employ, and (3) requiring employees to inform Respondent of any offers or solicitations of employment they receive from third parties, and send each of its current and former employees who have been subject to the same or similar agreement that those provisions have been rescinded and they are released from any obligations pursuant to them.

Interestingly, the ALJ’s order to address the overbroad Provisions, appears itself to be overbroad in its requirement to rescind all similar provisions without determining whether such provisions are appropriately narrow to protect legitimate business interests and avoid interfering with employees’ rights under Section 7. The employer still has an opportunity to file exceptions with the NLRB.

Key Takeaways and Practice Tips 

The NLRB’s General Counsel’s office is moving forward with the Abruzzo Memo in pursuing complaints related to restrictive covenants. This enforcement is not limited to non-competes and includes, at least, non-solicits as well. This new area of enforcement for the NLRB is premised on the NLRB’s asserted authority under Section 7 and 8(a)(1) of the Act. Broad restrictive covenants, like those in the employer’s employment agreement, are apparently now potentially ripe for challenge before the NLRB. 

It is paramount in attempting to avoid the NLRB’s claimed authority to include in agreements expressed exceptions that covenants are not meant to interfere with protected activities, reporting wrongdoing and other statutory, rule, and court recognized exceptions such as the Defend Trade Secrets Act, for example. Further, it is worth speaking to appropriate counsel to make sure covenants are surgically tailored, but also explain why the covenant is warranted; such as to protect legitimate business interests, long term customers, training, and a stable work force.

One should also consider the use of examples in agreements and policies to illustrate how a covenant may be applied. Well drafted restrictive covenants should avoid adverse determination by the NLRB (see for example here). Employers should review not only their restrictive covenants, but also any employee handbooks, workplace rules, etc.  Because the NLRB is relying on its authority to analyze restrictive covenants under Sections 7 and 8(a)(1), employers should consider drafting such provisions narrowly to avoid, and even expressly carve out, protected activities under Section 7. This task is more difficult if ALJs begin to adopt the reasoning that any non-compete tends to chill employees Section 7 protected activities set forth in the Abruzzo Memo.

FTC

In a rapid-fire response, the Ryan Court in the Northern District of Texas this morning denied Plaintiff and Plaintiff-Intervenors’ Expedited Motion for Limited Reconsideration of the Scope of Preliminary Relief, and Plaintiff and Plaintiff-Intervenors’ Motion for Expedited Consideration of their Motion for Limited Reconsideration of the Scope of Preliminary Relief (for more on these motions, see here). In a three-sentence Order, the Court provided no explanation except that Plaintiff and Plaintiff-Intervenors “have not shown themselves entitled to the respective relief requested” and denied the motions in their entirety.

With the Court’s swift denial of the motion to expedite and reconsider, employers face increased uncertainty and are left to once again wonder how to handle their restrictive covenant programs. This leaves all watching impacted employers in the unenviable position of deciding whether to (1) wait and see until August 30, 2024 whether the Court will strike down and enjoin nationwide or vacate the FTC ban, (2) intervene in the current lawsuit and seek the interim relief of the current preliminary injunction staying the FTC’s noncompete ban, or (3) file their own suit and risk conflicting rulings and an unfavorable jurisdiction. The best course may be to wait until a substantive ruling, intervene, or rely on the FTC good faith exception as this important issue winds its ways through the courts. 

Having achieved a milestone in obtaining a limited preliminary injunction halting the application of the FTC ban on non-competes effective September 4, 2024 as to the named plaintiffs and plaintiff-intervenors in its Texas lawsuit, the U.S. Chamber of Commerce et al. and Ryan, LLC moved today, July 10, to expand the injunction to apply more broadly.  Specifically, plaintiffs moved Chief Judge Ada Brown to reconsider her limited prior injunction ruling, arguing that enjoining the FTC’s unlawful regulation or staying its effective date under the Administrative Procedure Act need not be “party restricted” and that the Fifth Circuit and U.S. Supreme Court have repeatedly stayed agency rules without party limitation. Alternatively, plaintiffs argue that at minimum the Court should expand the injunction to apply to plaintiff-intervenors’ association members, citing Warth v. Seldin, 422 U.S. 490 (1975) for the proposition that any remedy should inure to the benefit of the association members actually injured.

As if to warn the Court of an impending storm and to give the Court an opportunity to stave off an avalanche of additional intervenors hoping to benefit from the injunction already issued, the motion notes that association members (and others) will have uncertainty and incur substantial compliance costs if the current injunction is not expanded even though the Court will rule on the merits by August 30, 2024, just a few short days before the FTC ban’s September 4 effective date.   The motion notes that district courts are authorized to set aside agency action and postpone effective dates such that an agency rule may not be applied to anyone, despite the FTC’s opposition in the initial pleadings that relief should be granted only to named plaintiffs (which Chief Judge Brown apparently agreed with, given her ruling last week limiting the injunction to the named plaintiffs).  

In a bevy of citations, the plaintiffs note that the Fifth Circuit, and other courts, typically set aside unlawful agency action on a nationwide basis rather than assessing individual equities on a party by party basis. Of course, that appears to be a practical approach in that Chief Judge Brown already ruled that the FTC violated the APA in promulgating the non-compete ban in the first place, and requiring each business wishing to benefit from the issued injunction to file its own action is neither cost-effective nor practical. Rule 24(b) of the Federal Rules of Civil Procedure provides that “[o]n timely motion, the court may permit anyone to intervene who . . . has a claim or defense that shares with the main action a common question of law or fact.”  Intervention under Rule 24 would allow intervenors the ability to benefit from the Court’s prior injunction because “one who intervenes in a suit in equity thereby becomes a party to the suit, and is bound by all prior orders and adjudications of fact and law as though he had been a party from the commencement of the suit.”  Galbreath v. Metropolitan Trust Co., 134 F.2d 569, 570 (10th Cir. 1943). There could literally be thousands of intervenors wishing for some certainty in the short term as this national issue winds its way through the judicial process potentially for years—particularly as the FTC ban requires businesses to proactively inform the vast majority of their employees that their non-competes are void and unenforceable by September 4. In other words, absent prompt clarity as to the FTC’s ability to enforce the ban against the thousands of businesses who are currently not impacted by the injunction, many businesses will likely be unwilling to take a “wait and see” approach and will be forced to disavow and abandon otherwise compliant non-competes, despite the very real possibility that the FTC’s ban will be deemed invalid by a higher court. 

Leaving nothing to chance, the plaintiff-intervenors also ask the Court at minimum to expand the current injunction to association members in light of a long history of courts extending preliminary relief and other remedies to association members through associational standing. The plaintiffs argue that they are committed to protecting their members and that it is their members who are the actual parties who will suffer concrete financial and other harms as a result of the FTC ban.  The plaintiffs further note that they did not previously argue associational standing because no one challenged it, but that they had “alleged associational standing in their complaint and supported it with evidence necessary to obtain preliminary relief.”

The FTC will likely be hard pressed to oppose this natural, necessary and commonplace expansion of the current injunction. Because the Court already ruled that the FTC exceeded its authority, one cannot imagine that the FTC would take the untenable position that it should be allowed to enforce its ban against any business that has not filed a lawsuit or that the Court’s ruling should not be equally applied to all businesses affected by the ban when the rulemaking authority of the FTC has already been found to be improper.  Would the FTC actually encourage a record number of intervenors to benefit from the Texas Court’s preliminary ruling? One would hope not, but we will know for sure when the FTC files its opposition to plaintiffs’ motion.

In the interim, employers who seek to enforce non-compete covenants with their employees should give serious consideration as to how they can benefit from the current injunction, how they would react if this motion to expand is not granted, how long it would take to comply with the ban by the September 4, 2024 effective date, whether they can rely on the good faith exception to the rule to avoid informing employees that their non-competes are void, and whether they can rely on other options to protect their critical business assets. Later today, the plaintiffs also filed a motion to expedite consideration of its motion to reconsider/expand the injunction, proposing that the FTC files its opposition by July 12, the plaintiffs file a reply by July 15, and the Court issue a ruling by July 17, 2024.   While it is not clear when the Court will rule on either motion, the Court’s practice thus far in this case suggests that the Court will likely move quickly on the plaintiffs’ motions.

Commentary: 

The Court ruled on Wednesday, July 3, what most of the legal community already believed: that the FTC lacked the substantive rulemaking authority to issue a nationwide ban on non-competes between employers and workers. Nevertheless, the  ruling itself is not likely one that anyone expected.   

On the one hand, the Court enjoined the FTC Rule, holding that “the text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g).”  However, the Court then turned around and only applied that injunction to the FTC Rule as it applied to the named plaintiffs, arguing that the plaintiffs failed to sufficiently brief a nationwide injunction or associational standing. Accordingly, the Court left the FTC Rule in place for every other otherwise affected employer in America. 

Ultimately, the Court has managed to thread the needle in such a way as to likely make everyone who reads the ruling unhappy. All of the necessary analysis is present to strike down the FTC Rule. Nevertheless, the Order leaves the whole world uncertain as to whether further briefing and a ruling on the merits will ultimately lead to a nationwide injunction or narrow relief just for the named parties. The Court also left open whether the Rule is unconstitutional under the Major Questions Doctrine and Non-Delegation Doctrine, issues that both sides heavily briefed.

The Court intends to rule on the ultimate merits of this action on or before August 30, 2024, only five days before the effective date of the Rule for everyone other than the named plaintiffs. This likely means many of the issues raised above may not be resolved until then. 

Ruling: 

  • The Federal Trade Commission (FTC) and its respective agents, servants, employees, and attorneys, and all persons acting in concert with the FTC are wholly enjoined from implementation of or enforcement of the Non-Compete Rule—16 C.F.R. § 910.1-.6—against Plaintiff Ryan, LLC, from the date of this order to the Court’s final adjudication on the merits. The Court hereby stays the effective date of the Rule as to Plaintiff Ryan, LLC.
  • The Federal Trade Commission (FTC) and its respective agents, servants, employees, and attorneys, and all persons acting in concert with the FTC are wholly enjoined from implementation of or enforcement of the Non- Compete Rule—16 C.F.R. § 910.1-.6—against Plaintiff Intervenors: Chamber of Commerce of the United States of America; Business Roundtable; Texas Association of Business; and Longview Chamber of Commerce, from the date of this order to the Court’s final adjudication on the merits. The Court hereby stays the effective date of the Rule as to these Plaintiff-Intervenors.

While this order is preliminary, the Court intends to rule on the ultimate merits of this action on or before August 30, 2024.

Analysis:

The Court granted a preliminary injunction because:

  • There was a likelihood of success on the merits:
    • “[T]he text, structure, and history of the FTC Act reveal that the FTC lacks substantive rulemaking authority with respect to unfair methods of competition under Section 6(g).”  Order 1.
      • Plainly read, the Court concludes the FTC has some authority to promulgate rules to preclude unfair methods of competition. Indeed, the Act says as much by alluding to this power in 15 U.S.C. § 57a. See 15 U.S.C. § 57a.
      • However, after reviewing the text, structure, and history of the Act, the Court concludes the FTC lacks the authority to create substantive rules through this method. Section 6(g) is “indeed a ‘housekeeping statute,’ authorizing what the APA terms ‘rules of agency organization procedure or practice’ as opposed to ‘substantive rules.’” Chrysler Corp. v. Brown, 441 U.S. 281, 310, 99 S. Ct. 1705, 1722, 60 L. Ed. 2d 208 (1979).
    • The Rule is “arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation. It imposes a one-size-fits-all approach with no end date, which fails to establish a ‘rational connection between the facts found and the choice made.’”  Order 21 (quoting Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S. Ct. 2856, 2867 (1983) (quoting Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 168, 83 S. Ct. 239, 246, 9 L. Ed. 2d 207 (1962)).
    • The Court did not address arguments about whether the Ban is invalid because it represents a “Major Question” Doctrine or runs afoul of the “Non-Delegation Doctrine,” two constitutional rules of interpretation that the opponents of the Ban raised in their briefing.
  • Irreparable harm: “Given Plaintiffs’ nonrecoverable costs of complying with the Rule, bolstered by the FTC’s failure to make a developed responsive argument, the Court concludes Plaintiffs have met their burden of showing irreparable harm in the absence of injunctive relief.”  Order 27.
  • Balance of Equities and Public Interest:
    • “On this record, it is evident that if the requested injunctive relief is not granted, the injury to both Plaintiffs and the public interest would be great.” Order 28.
    • “Granting the preliminary injunction serves the public interest by maintaining the status quo and preventing the substantial economic impact of the Rule, while simultaneously inflicting no harm on the FTC.” Id.
    • “Further, the Rule makes unenforceable long-standing contractual agreements that have been judicially recognized as lawful and beneficial to the public interest.” Id.

The Court declined to grant further relief, leaving the door open for a nationwide injunction and associational standing with further briefing.

  • No nationwide injunction:  Despite Ryan asking for a nationwide injunction, the Court declined to extend the relief beyond the named plaintiffs.
    • The court recognized that a court has the power “in appropriate circumstances, to issue a nationwide injunction.”  Id. at 30. 
    • Nevertheless, because of the limited guidance provided by the Fifth Circuit as to what are such “appropriate circumstances”, the Court declined “to view the circumstances of this proceeding as an “appropriate circumstance that would merit nationwide relief.” 
    • The Court noted Plaintiffs failed to brief “how or why nationwide injunctive relief is necessary to provide complete relief to Plaintiffs, at this preliminary stage.”
  • No associational standing:   Despite Intervenor-Plaintiffs seeking associational standing, the Court declined to grant such relief for failure to sufficiently brief it:
    • “Plaintiff-Intervenors have directed the Court to neither sufficient evidence of their respective associational member(s) for which they seek standing, nor any of the three elements that must be met regarding associational standing.”  Order 31.
    • “Without such developed briefing, the Court declines to extend injunctive relief to members of Plaintiff-Intervenors.”  Id.

About the Program

In today’s fast-paced business environment, intellectual property (IP) reigns supreme. Among the various forms of IP, trade secrets hold a distinct advantage, offering a competitive edge that’s both elusive and invaluable. Yet, in an era marked by technological advancements and increased connectivity, safeguarding these trade secrets poses a significant challenge.

As innovators and custodians of proprietary information, organizations continually face the challenge of mitigating the risks associated with trade secret misappropriation. The repercussions of such breaches can be severe, ranging from financial losses to legal entanglements and reputational damage. In this context, the ability to detect and respond to trade secret violations effectively (including via litigation) is paramount.

Join Seyfarth partners, alongside guest speaker Dan Fuller, Managing Director of StoneTurn, as we explore the intricacies of forensic examinations and their crucial role in protecting trade secrets and pursuing claims against wrongdoers when they are misappropriated. Through real-world case studies and practical examples, our Trade Secrets, Computer Fraud, and Non-Competes and eDiscovery and Information Governance team will equip you with the knowledge and strategies needed to bolster your IP protection efforts.

Key Discussion Points:

  • The pivotal role of forensic examinations in trade secret protection
  • Best practices for identifying and addressing trade secret breaches
  • Real-world case studies showcasing the efficacy of forensic examinations
  • Strategies for enhancing IP protection in an ever-evolving threat landscape
  • Use of forensic examinations in litigation (whether on behalf of the plaintiff or the defendant)

Speakers

Dawn Mertineit, Partner, Seyfarth Shaw LLP
Matthew Christoff, Partner, Seyfarth Shaw LLP
Dan Fuller, Managing Director, StoneTurn

If you have any questions, please contact Joan Gwak at jgwak@seyfarth.com and reference this event.

Learn more about our Trade Secrets, Computer Fraud & Non-Competes practice.

For more information and to register, click here.

Against the backdrop of the FTC’s rule banning non-compete agreements nationwide and the lawsuits challenging that rule, many states have considered legislation narrowing or outright banning non-competes. Minnesota recently followed California, Oklahoma and North Dakota in adopting legislation banning all employment-based non-compete agreements. Washington state adopted additional requirements for using non-competes with its residents. And, Colorado recently limited the use of employee training repayment agreements. Meanwhile, the governors of New York and Maine recently vetoed legislation that would have banned most employee non-compete agreements.

On June 20, 2024, the Rhode Island legislature sent bill H8059/S2436 to Governor Dan McKee. The proposed Rhode Island bill not only would have prohibited new non-competes, but also would have prohibited the enforcement of existing non-competes with senior executives. Governor McKee vetoed the bill. In his veto message to the legislature, Governor McKee explained that the proposed bill goes beyond the proposed FTC rule, which does not prohibit enforcement of existing non-competes with senior executives and would put Rhode Island businesses at a national disadvantage, particularly if the FTC were to amend or repeal its non-compete ban while Rhode Island’s more onerous ban remained in place. He further explained that while his “Administration is supportive of setting reasonable limits on the use of non-competes, [the proposed bill] did not address the valid concerns raised by the local business community… and makes Rhode Island an outlier as compared to other states.” 

Even in the absence of a bill broadly prohibiting non-competes, Rhode Island continues to have on its books statutes that limit the use of some non-competes. For example, in 2019, Rhode Island passed legislation restricting the use of non-compete agreements with non-exempt employees under the FLSA, students participating in an internship or short-term employment; employees aged 18 or younger; and low-wage workers (defined as earning 250% or less of the federal poverty level). And, on June 17, 2024, just a few days before the legislature sent him bill H8059/S2436, Governor McKee signed legislation that bans the use of non-competes with advanced practice registered nurses except for agreements in connection with the sale of business.

On July 3, 2024, we expect to receive a ruling in the Ryan lawsuit on plaintiffs’ motion to enjoin the FTC’s non-compete ban pending disposition of the litigation on the merits. It remains to be seen whether the Rhode Island legislature will try again, with proposed limits on the enforceability of non-competes that are scaled down or more in line with the FTC rule.

We invite you to watch our webinar, “Protection and Cybersecurity: Safeguarding Trade Secrets in the Digital Age.” In today’s ever-evolving and interconnected world, trade secret protection demands proactive measures against both technological vulnerabilities and human threats. Watch our fourth installment of our 2024 Trade Secrets Webinar Series, where our panel of seasoned trade secrets and cybersecurity attorneys spoke about practical strategies to bolster your defenses.

Here are the key takeaways from the webinar:

  • Employers should employee a three-pronged approach to ensuring confidential, proprietary, and trade-secret information is adequately protected, addressing: (1) employee training and agreements; (2) adequacy of physical and cyber-protections; and (3) third-party due diligence and agreements.
  • Courts will address the reasonableness and adequacy of a company’s efforts to protect its confidential information on a case-by-case basis, looking at a number of factors, including without limitation: (1) the size and sophistication of the company, (2) the value of the information; (3) the extent of the measures taken; (4) the company’s location; and (5) cost of efforts.
  • Proactive measures in detecting misappropriation, whether from third-party software or dedicated employee teams, is a cost but is often more efficient than trying to secure trade secrets in litigation.
  • The days of simply pointing to the use of passwords for employees accessing confidential information as “reasonable measures” are likely over, as courts are increasingly looking to what other steps employers are taking to secure trade secret material.
  • Courts are increasingly looking toward what a trade secrets plaintiff’s actual practice is rather than policy. If employees are routinely violating company policies regarding the use of personal devices or accounts to access or transmit company data, then a court is unlikely to look to the policy as evidence of steps taken to protect trade secrets.
  • The threat of cyberattacks is increasing both in volume and in the number of ways clients are threatened. AI and machine learning, the rise of cloud computing, and the proliferation of the Internet of Things are all exciting developments, but also represent new concerns for the protection of confidential information.
  • As the vectors for potential misappropriation continue to expand, clients will need to adjust and likely improve their mechanisms for trade secret protection to counter these emerging threats.

To view the webinar recording, click here.

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Both the federal Defend Trade Secrets Act of 2016 (“DTSA”) and Pennsylvania Uniform Trade Secrets Act (“PUTSA”) provide that a defendant may recover its attorneys’ fees if it demonstrates that a claim for misappropriation of trade secrets is brought in “bad faith.” See 18 U.S.C. § 1836(b)(3)(D); 12 Pa. Cons. Stat. § 5305(1). But who decides “bad faith” – a judge or a jury?

In Elmagin Capital, LLC v. Chen, et al., Case No. 22-2739 (June 5, 2024), the United States Court of Appeals for the Third Circuit, albeit in a non-precedential opinion, held that statutory fee-shifting is an equitable remedy, not a legal one, and that it is therefore for the judge to determine “bad faith” as a predicate to a fee award.

Plaintiff Elmagin Capital, LLC brought claims against its former employee and co-founder, Chao Chen, for misappropriating its trade secrets – namely, trading strategies in the wholesale electricity trading market – to start a competing business.  Following a May 2022 trial, the jury found that Elmagin’s trading strategies were trade secrets, but that Chen did not use them to develop the trading strategies used by Entegrid. The jury therefore decided in Chen’s favor.  In conjunction with his defense, Chen accused Elmagin of bringing the lawsuit in bad faith and sought attorneys’ fees under the DTSA and PUTSA. The trial court put the question of bad faith to the jury, which found that Elmagin acted in bad faith. However, the court considered the jury’s determination as “advisory” and declined to award Chen fees because it determined that Elmagin had at least “some evidence” in support of its claims.

On appeal, the Third Circuit affirmed the trial court’s refusal to accept the jury’s bad faith verdict and its ensuing denial of fees. In doing so, the Third Circuit held that Chen lacked a right to a jury in determining whether attorneys’ fees should be awarded because statutory fee awards have been regarded  as equitable remedies going back at least to the English courts of the 1700s, even if substantive trade secrets statutes were not enacted until many centuries later. The Third Circuit also held that even if it is for a jury to determine bad faith under the statutes, there was sufficient evidence for the trial judge to hold as a matter of law under Fed. R. Civ. P. 50(a)(1) that Chen failed to carry his burden of proving bad faith.

Although it is non-precedential, the Elmagin decision contains a thorough legal and historical analysis that supports the conclusion that statutory fee-shifting claims under the DTSA and PUTSA are equitable and do not carry with them the right to a jury.

We are proud to announce that Seyfarth Shaw’s Trade Secrets group has been recognized as one of the best in the country by the Legal 500 United States 2024 edition. This recognition underscores our commitment to excellence in trade secrets law. Feedback from corporate counsel was crucial in determining this ranking, with Seyfarth partners Michael Wexler, Kate Perrelli, Robert Milligan, Dawn Mertineit, and Gary Friedman being named in the editorial’s “Leading Lawyers” category. Additionally, Joshua Salinas was recognized as a “Rising Star.” We are also pleased to see Jesse Coleman, Daniel Hart, James Yu, Jesse Miller, Jennifer Fearnow, Kevin Mahoney, and Daniel Hart mentioned in the guide for their exceptional client service.

The Legal 500 United States guide highlights that complex IP litigation, alleged misappropriations, and breaches of contract are key areas of our trade secrets practice. Our team is well-equipped to assist our diverse client portfolio, which includes significant names from the pharma, medical devices, tech, and healthcare sectors.

Renowned for its comprehensive coverage of legal services, The Legal 500 United States is widely regarded for its authoritative assessment of law firm capabilities. It acknowledges and rewards exceptional in-house and private practice teams and individuals based on extensive research conducted over the past 12 months. These awards recognize elite legal practitioners for their outstanding contributions to the dynamic and evolving US legal market.

Our inclusion in the Legal 500 rankings reinforces Seyfarth Shaw’s position as a trusted authority in trade secrets law. We are honored to be part of a larger group of outstanding professionals at Seyfarth Shaw, all dedicated to providing exceptional legal counsel, clear communication, and efficient service. Together, we continue to be a valuable partner for companies seeking comprehensive trade secrets protection and strategic guidance in today’s highly competitive business environment.

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The FTC’s recently issued Final Rule banning non-competes for most workers prohibits an employer from (1) threatening to enforce a non-compete against a worker, (2) advising the worker that, due to a non-compete, they should not pursue a particular job opportunity, or (3) telling the worker that the worker is subject to a non-compete.[1] The FTC asserts that these type of representations can have an in terrorem effect on workers who are unaware and unable to vindicate their legal rights against exploitative employers, thereby causing an adverse effect on competition. The Final Rule contains an exception, however, for enforcement or attempted enforcement of non-competes where an employer has a “good-faith” belief that the provisions of the Final Rule do not apply.[2] Where this exception applies, however, remains an open question.

The Final Rule’s good-faith exception states that “it is not an unfair method of competition to enforce or attempt to enforce a non-compete clause or to make representations about a non-compete clause where a person has a good-faith basis to believe that this [Non-Compete Clause Rule] is inapplicable.”[3]

According to the FTC, the good faith exception of § 910.3(c) was added out of an abundance of caution “to ensure that the final rule does not infringe on activity that is protected by the First Amendment and to improve clarity in § 910.2(a).”[4]

 The FTC included a similar version of the good faith exception in the proposed rule issued last January, and represents the agency’s attempt to balance its regulation of anti-competitive activity with an employer’s protected speech and right to petition under the First Amendment.

The foundation for the good faith exception is the United States Supreme Court’s Noerr-Pennington doctrine, which grants antitrust immunity under the First Amendment to parties petitioning the government for relief, even if the relief may tend to restrict competition.[5] Protected speech under the Noerr-Pennington doctrine extends to litigation activities and pre-litigation communications.

The good faith exception, the FTC contends, is intended to ensure that the Final Rule does not infringe upon an employer’s actions towards its employees that may be protected under the First Amendment. By adding the good faith exception, the FTC recognizes that an employer has First Amendment rights to make subjectively truthful statements concerning the employer-employee relationship, and to petition the courts to enforce the employee’s contractual obligations, even if the employer’s belief is found to be incorrect or the lawsuit is unsuccessful. The Final Rule makes clear, however, that the good faith exception does not protect willful misrepresentations about whether a non-compete covered by the rule is enforceable.[6]

So, what does that mean for employers?

The FTC has not suggested an instance in which an employer may have a good faith basis to believe that the Final Rule may be inapplicable.  Presumably, such a good-faith basis may exist where the FTC rules that a restrictive covenant other than an express non-compete (such as a non-solicit or non-disclosure clause) is ultimately deemed a functional non-compete under the new rule, but the employer can demonstrate that it had reason to believe otherwise.[7] The exception may also come into play in those instances where the rule is not clear on the scope of a definition or exception. For example, it is unclear whether partners or members with an ownership stake in a business are considered “workers” covered by the final rule. The rule does not specifically address that issue other than to state that “sole proprietors” can be considered “workers”. The FTC’s comments indicate that such partners, members, or other holders of ownership stakes “may” be covered by the sale-of-business exception, assuming their noncompete agreements are tied to the sale of their ownership stake in the business.  Whether or not a partner or business owner who retains an ownership interest in the business can be held to a noncompete after they stop working for the business is unclear. Given that the FTC has not provided any guidance on the good faith exception,  employers must proceed with caution.

One area exists, however, where the FTC has stated no good-faith basis exists:  the FTC expressly stated that pending legal challenges to the rule’s validity are insufficient to provide cover to employers.

The FTC’s proposed version of the non-compete rule cautioned that the good-faith exception would not apply “where the validity of the rule . . . has been adjudicated and upheld.” However, the prior version of the text appeared to provide a temporary safe harbor to employers during pending litigation, but the agency ultimately declined to adopt that language into the Final Rule, believing that it would create confusion while challenges to the non-compete ban were ongoing.[8]

The FTC clarified its stance in the Final Rule by stating that “the absence of a judicial ruling on the validity of the final rule does not create a good-faith basis for non-compliance.”[9] Therefore, unless the rule is stayed or invalidated by the courts, the FTC’s stance is that there is no good-faith for non-compliance with the Final Rule simply because litigation is pending.

[1] 16 C.F.R. § 910.2(a), 89 Fed. Reg. 38404 (May 7, 2024).

[2] 16 C.F.R. § 910.3(c).

[3] 16 C.F.R. § 910.3(c).

[4] 89 Fed. Reg. 38441 (May 7, 2024).

[5] See E.R.R. Presidents’ Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961); United Mine Workers of Am. v. Pennington, 381 U.S. 657 (1965).

[6] 89 Fed. Reg. 38441 (May 7, 2024).

[7] See 16 C.F.R. § 910.1.

[8] 89 Fed. Reg. 38441 (May 7, 2024).

[9] 89 Fed. Reg. 38341 (May 7, 2024).