FTC’s Banning Noncompetes Means Considering Alternatives

 

With theFederal Trade Commission’s announcement of a ban on non-compete agreements (including agreements with independent contractors), companies are looking for ways to protect their confidential information and trade secrets. From JDSupra Suet Lee and Joseph Marinelli discuss a recent case in which a non-compete agreement was unenforceable but claims under the Defense of Trade Secrets Act (“DTSA”) and other laws were upheld. Suet and Joseph write:

KPM Analytics N. Am. Corp. v. Blue Sun Sci., LLC, No. CV 21-10572-MRG, 2024 WL 1558167 (D. Mass. Apr. 10, 2024)

For employers, safeguarding trade secrets and requiring that employees sign non-disclosure agreements are now more crucial than ever. On April 23, the Federal Trade Commission issued a final rule that, if it survives challenges that have already been filed in the courts, will ban the noncompete restrictions many employers used to prevent departing employees from taking trade secrets to a competitor. While the final rule is being litigated, there are still alternative claims employers can bring against former employees who take trade secrets to a competitor. KPM Analytics N. Am. Corp. v. Blue Sun Sci., LLC, illustrates how state and federal trade secrets and unfair competition claims remain potent alternatives to protecting trade secrets and even allow employers to recover punitive damages.

To start, Defendant Irvin Lucas, while working for Plaintiff KPM, approached KPM’s competitor, Defendant Innovative Technologies Group (“ITG”), to form Blue Sun Scientific. Lucas and other employees stayed at KPM as they misappropriated KPM’s trade secrets for Blue Sun’s benefit. For example, Lucas and others used phony email addresses to hide their identities, misrepresented KPM’s business, diverted KPM customers to Blue Sun, and used KPM’s customer data to undercut KPM. The employees did this in violation of their KPM NDAs and noncompetes.

The Court found the noncompetes to be unenforceable, but KPM pursued claims under the Defend Trade Secrets Act (“DTSA”) and Massachusetts Uniform Trade Secrets Act (“MUTSA”) for trade secret misappropriation, the Massachusetts Consumer Protection Act (“MCPA”) for unfair or deceptive trade practices, and breach of the NDAs. A jury found that Blue Sun, Lucas, and the other employees misappropriated trade secrets under the DTSA and MUTSA, and that Lucas and the other employees breached their NDAs. The jury also found Blue Sun and ITG liable for unfair or deceptive trade practices under the MCPA. The jury awarded KPM actual damages of $1.8M from ITG, $1.5M from Blue Sun, $20K from Lucas, and a total of $27.5K from other individual employees. The Court assessed punitive damages of $1.8M against ITG, $1.5M against Blue Sun, $10K against Lucas, and $7.5K against another employee.

This case demonstrates the types of claims employers can bring against employees who misappropriate trade secrets. By bringing actions under state consumer protection laws alongside actions for federal and state trade secret laws, an employer may be able to recover compensatory and punitive damages. Issues of preemption must be considered, however. For example, claims under some state trade secret statutes may preempt claims under state unfair competition statutes where the unfair competition or deceptive act involved trade secret misappropriation. That said, to maintain these causes of action, employers should take appropriate measures to protect their valuable business information as trade secrets, such as requiring that employees sign NDAs, controlling and limiting access to trade secrets, and developing ways to monitor threats to their secrecy.

Source: FTC’s Banning Noncompetes Means Considering Alternatives  | Irwin IP LLP – JDSupra

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