By Lauren Berry, a 2L student at Sandra Day O’Connor College of Law at Arizona State University. Lauren is the recent winner of the McCarthy Institute and Franklyn IP Essay Contest. Her work demonstrated exceptional originality, writing skill, legal thought, and citation proficiency, impressing our panel of Senior Fellows and David Franklyn. We extend our heartfelt congratulations to Lauren and look forward to her continued success in the legal field. Read her submission below:
Introduction
Non-compete clauses, particularly prevalent in innovation-driven industries, are contractual agreements that restrict an employee from working for competitors after leaving a job.[1] Nearly 36% of engineers and architects and 35% of workers in computer and math fields are bound by non-compete clauses.[2] While non-compete clauses aim to protect trade secrets and other proprietary information, they also limit an employee’s ability to move freely within their field, often hindering career growth and innovation.[3] This tension between protecting intellectual property and promoting fair competition has led to increased scrutiny as courts and lawmakers work to balance these interests.[4] In April 2024, the Federal Trade Commission (FTC) issued a final rule banning non-compete agreements nationwide, aiming to enhance worker mobility and foster innovation.[5] However, in August 2024, a federal district court in Texas issued an order stopping the FTC from enforcing the rule, and the FTC has since appealed that decision.[6] This back-and-forth underscores the complexities involved in balancing trade secret protection with employee mobility. This essay will explore the legal framework surrounding trade secrets and non-competes, analyze two key cases, examine the FTC’s rule, and future considerations for balancing employer and employee interests.
Background and Legal Framework
Trade secrets are defined under the Uniform Trade Secrets Act (UTSA) as information that derives independent economic value from not being generally known to the public or competitors and is subject to reasonable efforts to maintain its secrecy.[7] Formulas, recipes, business practices, processes, and techniques can all be considered trade secrets.[8] Most states, except for New York and North Carolina, have adopted the UTSA, allowing trade secret owners to sue and obtain relief for trade secret misappropriation.[9] However, while the UTSA serves as a state-level framework, the increasing importance of trade secret protection at the national level led to the enactment of the Defend Trade Secrets Act (DTSA) in 2016, which established a new federal civil cause of action for trade secret misappropriation.[10]
Non-compete clauses, on the other hand, are contractual provisions that prevent employees from working for competitors or starting similar businesses within a specified time period and geographical region after leaving a job.[11] Among other things, these clauses were designed to protect an employers’ business, including its trade secrets.[12] Non-competes have long been viewed as necessary to prevent employees from using insider knowledge to gain an unfair competitive advantage.[13] Non-competes aim to prevent former employees from using confidential information to gain a competitive edge by joining a competitor or starting a similar business.[14] While employers view them as vital for protecting intellectual property, employees often see them as restrictive and limiting career opportunities.[15]
Vigorous competition drives the American economy, ensuring better pricing, choice, and quality, but increased job mobility has heightened employers’ concerns about losing trade secrets.[16] In response, employers use non-compete agreements to protect proprietary information, while employees see them as restricting professional freedom, leading to the rise of trade secret law as a means to address these issues without stifling employee mobility.[17] Next, I turn to a case analysis of two key rulings where courts differed in their approach to determining the enforceability of non-competes.
Case Analysis
AMN Healthcare, Inc. v Aya Healthcare Servs. is an example of a case in which a non-compete agreement was found void and unenforceable.[18] In AMN Healthcare, employer recruiter of temporary nursing workers, brought suit against former employees and its competitor, alleging breach of contract and trade secret misappropriation.[19] As a condition of employment with AMN, employees were required to sign non-compete agreements with the company and were required to agree to withhold confidential information they learned during their employment.[20] Defendant employees resigned from AMN and began working for Aya Healthcare.[21] After learning of this, AMN filed suit against all defendants, arguing, inter alia, breach of the non-compete agreement and trade secret misappropriation.[22] The employee provision was held unlawful and void, in direct violation of California state law preventing “individual defendants from engaging in their lawful trade or profession.”[23]
California is not the only state that has banned non-compete agreements.[24] Other states with complete bans on non-compete provisions include North Dakota, Minnesota, and Oklahoma.[25] Yet, plenty of states, including Connecticut, Ohio, and Michigan have no such restrictions.[26]
An Ohio court upheld the legality of a non-compete agreement in Total Quality Logistics, LLC v. BBI Logistics LLC.[27] In a similar fact pattern, plaintiff business sued a former employee for working for a competing business after leaving plaintiff’s company, allegedly violating a non-compete agreement the employee had signed.[28] The court upheld the non-compete agreement, finding that, despite the former employee’s vast experience and value as a worker in the logistics industry, it was outweighed by the public’s interest in promoting robust competition and the plaintiff’s business interest in protecting trade secrets.[29]
As courts continue to interpret and enforce non-compete clauses in light of trade secret protections, they must carefully balance the need to safeguard proprietary information with the broader public interest in promoting employee mobility. This delicate balancing act is further complicated by recent regulatory changes, including the FTC’s rule on non-compete clauses, which I will explore in the next section.
The FTC’s Rule on Non-Compete Clauses
In April 2024, the FTC issued a rule that would ban non-competes nationwide.[30] FTC Chair Lina M. Khan explained that the reason for the ban is that non-competes keep wages low and restrict the freedom for Americans to pursue new jobs or start new businesses.[31] The FTC’s new rule would render most existing non-compete agreements unenforceable for the majority of workers once the rule takes effect.[32] The Commission determined that non-compete agreements harm competitive conditions in labor, product, and service markets by hindering efficient worker-employer matching, suppressing new business formation and innovation, increasing market concentration, and driving up consumer prices.[33]
In August 2024, a federal district court in Texas issued an order blocking the FTC’s rule banning non-competes nationwide.[34] The court decided that the FTC lacked substantive and statutory rulemaking authority to ban unfair methods of competition arising from non-competes.[35] As of January 2025, the FTC has appealed to the United States Court of Appeals for the Fifth Circuit, with briefing expected to be completed in February.[36]
As of today, non-compete clauses are still enforceable unless prohibited under state law. This ongoing legal battle highlights the tension between protecting workers’ mobility and addressing businesses’ concerns over safeguarding their proprietary interests, setting the stage for a broader discussion on balancing employee and employer rights in the evolving landscape of non-compete agreements.
Balancing Competing Interests
The tension between protecting trade secrets and promoting employee mobility is particularly pronounced in industries like technology, healthcare, and finance, where proprietary knowledge and innovation drive competitive advantage.[37] Employers argue that without non-compete clauses, they risk losing sensitive information and key personnel to competitors, potentially causing financial harm and undermining their market position.[38] These concerns highlight the necessity of safeguarding intellectual property to maintain business viability and encourage investment in research and development.[39]
On the other hand, employees emphasize the importance of mobility in fostering career growth and innovation.[40] Restrictive non-compete clauses can stifle creativity and limit opportunities, especially for lower-income or less-mobile workers who may lack the resources to challenge these agreements.[41] This creates a power imbalance that disproportionately impacts vulnerable employees while favoring employers with greater legal and financial resources.[42]
Courts face significant challenges in determining what constitutes “reasonable” restrictions on employee movement.[43] Balancing the protection of trade secrets with public policy goals, such as fair competition and economic mobility, requires nuanced analysis.[44] Courts must weigh the scope and duration of non-compete agreements against the potential harm to both employers and employees, a task made increasingly complex by varying state laws and evolving legislative reforms.[45]
Policy Implications and Conclusion
As non-compete agreements face growing scrutiny, alternative mechanisms like non-disclosure agreements (NDAs) and non-solicitation clauses offer ways to protect trade secrets without restricting employee mobility.[46] These tools can provide employers with necessary safeguards while allowing workers greater freedom to pursue new opportunities.[47] Globally, countries like those in the European Union have adopted more balanced approaches, emphasizing employee rights while maintaining strong trade secret protections.[48]
In light of the FTC’s proposed ban on non-competes and ongoing state-level reforms, the legal landscape is poised for significant evolution. Future trends may favor narrower, more targeted restrictions to address employer concerns while fostering competition and innovation.[49]
Ultimately, resolving the tension between trade secret protection and employee mobility is critical to promoting fairness and economic growth. Striking the right balance will shape the future of innovation and ensure that both businesses and workers can thrive in a competitive economy.
[1] Iain Ross, Non-compete clauses in employment contracts: The case for regulatory response, Econ. and Labour Rels. Rev. 1 (2024).
[2] Amanda Hoover & Paresh Dave, Noncompetes Are Dead—and Tech Workers Are Free to Roam, Wired (Apr. 23, 2024, 7:21 P.M.), https://www.wired.com/story/noncompetes-are-dead-tech-workers-free-to-roam.
[3] Id.
[4] Ross, supra note 1.
[5] Victoria Graham, FTC Announces Rule Banning Noncompetes, Fed. Trade Comm’n (Apr. 23, 2024), https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes.
[6] Ryan, LLC v. Fed. Trade Comm’n, No. 3:24-CV-00986-E, 2024 WL 3879954 (N.D. Tex. Aug. 20, 2024).
[7] Unif. Trade Secrets Act (amended 1985) (Nat’l Conf. of Comm’rs of Unif. State Laws 1979)
[8] Id.
[9] An Introduction to Trade Secrets Law in the United States, Cong. Rsch. Serv. (Jan. 27, 2023), https://sgp.fas.org/crs/secrecy/IF12315.pdf.
[10] Id.
[11] Iain Ross, Non-compete clauses in employment contracts: The case for regulatory response, Econ. and Labour Rels. Rev. 1 (2024).
[12] Id.
[13] Hill Mayfield & Patricia Borstorff, Is It Time to Eliminate Non-Compete Agreements?, 22 Jordan Whitney Enters, Inc. 12, 13 (2015).
[14] Id.
[15] Id.
[16] Id.
[17] Id.
[18] AMN Healthcare, Inc. v. Aya Healthcare Servs., Inc., 28 Cal. App. 5th 923, 239 Cal. Rptr. 3d 577 (Cal. Ct. App. 2018).
[19] Id. at 926.
[20] Id. at 927.
[21] Id. at 930.
[22] Id. at 930–31.
[23] See AMN Healthcare, Inc.,28 Cal. App. 5th at 939.
[24] See Emily Peck, Mapped Where noncompete agreements are banned or restricted, Axios (Apr. 25, 2024), https://www.axios.com/2024/04/25/noncompete-agreement-ban-us-states-2024#.
[25] Id.
[26] Id.
[27] Total Quality Logistics, LLC v. BBI Logistics LLC, 2024-Ohio-2597, ¶ 1, appeal not allowed sub nom. Total Quality Logistics, L.L.C. v. BBI Logistics, L.L.C., 2024-Ohio-5340, ¶ 1, 175 Ohio St. 3d 1530.
[28] Id. at ¶¶ 1–10.
[29] Id. at ¶ 37.
[30] Victoria Graham, FTC Announces Rule Banning Noncompetes, Fed. Trade Comm’n (Apr. 23, 2024), https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes.
[31] Id.
[32] Id.
[33] Id.
[34] Ryan, LLC v. Fed. Trade Comm’n, No. 3:24-CV-00986-E, 2024 WL 3879954 (N.D. Tex. Aug. 20, 2024).
[35] Id. at *12.
[36] Charles Knapp et al., FTC Files Opening Brief in Fifth Circuit Appeal Defending Noncompete Rule, JD Supra (Jan. 9, 2025), https://www.jdsupra.com/legalnews/ftc-files-opening-brief-in-fifth-4439530.
[37] Amanda Hoover & Paresh Dave, Noncompetes Are Dead—and Tech Workers Are Free to Roam, Wired (Apr. 23, 2024, 7:21 P.M.), https://www.wired.com/story/noncompetes-are-dead-tech-workers-free-to-roam.; Todd Ehret, Important considerations surrounding the FTC ban on noncompete contracts, Thomson Reuters (May 20, 2024), https://www.thomsonreuters.com/en-us/posts/government/ftc-ban-noncompete-contracts/.
[38] An Introduction to Trade Secrets Law in the United States, Cong. Rsch. Serv. (Jan. 27, 2023), https://sgp.fas.org/crs/secrecy/IF12315.pdf.
[39] Viva Moffat, Human Capital as Intellectual Property? Non-Competes and the Limits of IP Protection, 50 Akron L. Rev. 903 (2017).
[40] Matt Marx & Lee Fleming, Non-compete Agreements: Barriers to Entry … and Exit?, 12 Innovation Pol’y and Econ. 39, 45 (2012).
[41] Id. at 47-50.
[42] Id. at 50.
[43] Id. at 46-47.
[44] Viva R. Moffat, Making Non-Competes Unenforceable, 54 Ariz. L. Rev. 939, 945 (2012).
[45] Id. at 945, 977-78.
[46] Matt Marx & Lee Fleming, Non-compete Agreements: Barriers to Entry … and Exit?, 12 Innovation Pol’y and Econ. 39, 42–43 (2012); Charles Tait Graves & James A. DiBoise, Do Strict Trade Secret Laws and Non-Competition Laws Obstruct Innovation?, 1 Entrepreneurial Bus. L. J. 323, 334–35 (2006).
[47] Marx & Fleming, supra note 46 at 43–44.
[48] Christopher McMahon & Alan Eustace, Nothing to Lose but Their Restraints of Trade: Lessons for Employment Non-Compete Clauses from EU Competition Law, 52 Indus. L. J. 409, 410–11 (June 2023).
[49] Bonnie Lau et al., Trends in Non-Compete Litigation and Enforcement, 34 Competition J. 35 (2024).