The FTC’s Final Rule and its Implication for the Protection of Intellectual Property

The Federal Trade Commission’s eradication of non-competes leaves intellectual property, primarily trade secrets, at risk of losing its inherent value. Non-competes serve a myriad of purposes for employers by generally preventing employees from working for competitors within a specified area for a select amount of time. Effective 4 September, 2024, the FTC’s 89 FR 38342 (the Final Rule) will make all but a minor sect of non-competes unenforceable. One of the primary roles played by a non-compete is the protection of trade secrets, among other forms of intellectual property. Up to this point, employers were granted peace of mind that employees could not move to a competing employer, and with that move, bring in tow valuable, profitable information that was previously only known by the original employer. The eradication of non-competes, poised to take effect in September, raises questions of how to protect such intellectual property when the prophylactic barriers is stripped away. The inevitable disclosure doctrine may provide something of a roundabout solution.

The inevitable disclosure doctrine allows “plaintiffs in a trade secrets case to establish threatened misappropriation by showing that the defendant’s new employment will inevitably lead the defendant to reply on the plaintiff’s trade secrets.” Thus, in the absence of non-competes following the FTC’s Final Rule, the inevitable disclosure doctrine provides recourse for an employer who can prove that their valuable intellectual property will inevitably be disclosed to the new employer. Concerns raised by commentors to the Final Rule mirror this idea. Many employers feel that prophylactic protection, or protection that preemptively prevents disclosure, needs to exist for trade secret protection—as opposed to the collection of damages following the disclosure of the intellectual property serving as the only recourse. When confidential IP is disclosed, it inherently loses its value, and the collection of retroactive damages does not always adequately compensate for this loss. Further, this confidential information can be exploited for economic gain even without express disclosure by the employee. This leaves the aggrieved employer without adequate legal recourse following the loss of their intellectual property’s value. The inevitable disclosure doctrine thus serves as a way for employers to intervene prophylactically before the loss of IP value by establishing that their IP will ultimately be misappropriated. 

In PepsiCo, Inc. v. Redmond, the seminal case which established the idea of the inevitable disclosure doctrine, the defendant was enjoined from working for an employer because "there is a high degree of probability of inevitable and immediate … use of … trade secrets." PepsiCo, Inc. was decided in the 7th Circuit in 1995—but not all states are on board. The reasoning behind some states’ disfavor towards the inevitable disclosure doctrine is that “it potentially ‘requires a court to recognize and enforce a de facto noncompetition agreement to which the former employee is bound, even where no express agreement exists.’” According to a 2019 survey, only the following seventeen states have adopted the inevitable disclosure doctrine into its state trade secret laws: Arkansas, Connecticut, Delaware, Florida, Indiana, Illinois, Iowa, Minnesota, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Texas, Utah and Washington. Further, five states have outright rejected the doctrine including California, Colorado, Louisiana, Maryland and Virginia. 

However, the inevitable disclosure doctrine and its scant acceptance still may not become an issue. The FTC’s Final Rule is already facing a number of legal suits all of which make similar arguments challenging the doctrine’s constitutionality. Cases out of Texas and Pennsylvania are expected to issue rulings in the coming months. Should the Final Rule stand the test of litigation, the inevitable disclosure doctrine may have its moment in the sun. States could begin to integrate the inevitable disclosure doctrine language into its trade secret laws. There is a heightened probability that this could occur should businesses turn to, or rather begin to put pressure on their legislators to create a viable means of protecting their intellectual property following the FTC’s elimination of the non-compete. 

Olivia Lane is a 2L at Wake Forest University of Law. She has experience in Intellectual Property, Data Security, and Artificial Intelligence law and plans to practice in the transactional IP space following graduation. Before starting law school, Olivia worked as an Intellectual Property Assistant at a firm in Birmingham, Alabama. She completed her undergraduate degree at Rhodes College where she double majored in Business Marketing and Art History. In her free time, Olivia likes to paint, go on walks, and watch new releases at Aperture Cinema.  

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