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Noncompete Ban Turns Patents, Copyrights Into Corporate Shields

May 29, 2024

By: Brian T. Moriarty, Timothy J. Meagher, and Alice O. Carroll

Bloomberg Law

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Photo Illustration: Jonathan Hurtarte/Bloomberg Law; Photos: Getty Images

The new Federal Trade Commission ban on noncompete agreements will unleash two contradictory threads: more innovation and inventions, and more intellectual property theft. Effective use of patents, copyrights, and other IP protections can address both situations.

The ban on nearly all noncompetes, approved last month, will take effect Sept. 4. Theft of trade secrets and confidential business information is expected to rise as more technology workers change jobs.

To combat the expected rise in IP misappropriation, the FTC has recommended enforcing trade secrets laws, confidentiality agreements, and patents.

However, in its 870-page report, the FTC barely mentioned using copyright laws as another alternative. Copyright protection is essential to protect against theft of artificial intelligence assets, which are heavily based on software and data.

Companies should first identify and protect their most important IP with the most powerful tools: patents and copyrights. Next, they should invest in systems to identify, enforce, and protect trade secrets and confidential information.

Patents

Most technology and science-based companies have procedures to identify and gather new patentable ideas. These systems typically involve “invention disclosure” forms and patent committees.

Companies should ensure that all employees have assigned all IP rights arising from their work. They also should revamp their invention disclosure process to encourage employees to submit more invention disclosure forms. Even if the disclosed information falls short of patentability, it still may be considered a trade secret or confidential information.

Patents are a more powerful tool than trade secret laws to protect IP. Patents are easier to enforce because the patent claims already spell out the technology in question. The company doesn’t need to describe its technology to show that it possessed it while the ex-employee worked there. There is no requirement to show intent to infringe, or prior knowledge of, the patent.

Patents also can serve as an important employment retention tool. Most named inventors on patents relating to an actual product have a vested interest in seeing their idea come to fruition. Participating in developing an invention can create major incentives for employees to stay.

Companies should notify a former employee’s new company of all its patents and pending applications related to that employee’s work at the former company. Most will try to steer clear of such patents.

Copyright and AI

The key point with copyrights is that a party must register its copyright with the US Copyright Office before suing for infringement, so it behooves a company to regularly review its technological improvements and file copyright applications for important software and other copyrightable materials, particularly improvements in AI technology.

Companies will want to seek patent protection for AI and use trade secret protection to protect algorithms and other soft IP that is used to make and operate AI systems.

They should ensure all employees have assigned all copyrightable information arising from the employment. If the employer doesn’t receive such an assignment, the copyrightable work may remain owned by the employee.

Trade Secrets

Almost all states have adopted the Uniform Trade Secrets Act, and Congress enacted the Defend Trade Secrets Act eight years ago. To make a case of theft under either the UTSA or the DTSA, against a competitor now employing its ex-employee, a company will need to:

• Clearly identify the company’s trade secret or confidential information and show it is and was secret information
• Demonstrate that the ex-employee had access to that information
• Show that the ex-employee’s new company is using that technology and didn’t develop the technology independently

Proving each of these elements is difficult. The initial problem is to find the most important trade secrets among a mass of possible ones. It’s much better to clearly define a smaller number of economically important trade secrets than to compile a long list of ill-defined and less important secrets and know-how.

Once the key trade secrets are identified, it must be shown that the departing employee had access to those secrets, such as by computer searches and interviews of employees. Showing that the new company is using trade secrets may require surveillance of trade shows, industry publications, and patent publications.

Typically, a company doesn’t discover its trade secrets have been stolen until that other company is far along in the development process. That’s why a company must keep detailed records of specific identifiable trade secrets that were stolen. Generalized information won’t be enough.

The FTC’s bold action in banning nearly all noncompete agreements will lead to a more robust technology economy. But by encouraging employees to find new, better jobs, the law also has a downside: an expected significant increase of technology theft. It is important for technology companies to take advantage of the new law, but to also protect themselves by refocusing on patents, copyrights, trade secrets, and confidentiality agreements before any losses of important technology occur.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Reproduced with permission. Published May 29, 2024. Copyright 2024 Bloomberg Industry Group 800-372-1033. For further use please visit https://www.bloombergindustry.com/copyright-and-usage-guidelines-copyright/