The law surrounding trade secrets and restrictive covenants continued to evolve greatly in 2024, and it is anticipated that several legislative and judicial attempts (as well as, potentially, agency-driven priorities) to limit restrictive covenants will continue to be seen in 2025. Given this anticipated trend, protection of intellectual property such as trade secrets will be more critical than ever.
That said, given the new Trump administration, the trend of federal agencies tightening the screws on restrictive covenants may be coming to an end. Regardless, trade secret protection should remain a key priority for businesses, particularly given evolving technologies and legislative and judicial hostility towards restrictive covenants (especially, but not limited to, non-competes).
Federal Restrictions on Non-Competes
The big news in 2024 was the attempt of the Federal Trade Commission (FTC) to ban non-competes, implementing a rule that had been set to go into effect in September 2024. This precipitated a handful of lawsuits by businesses or associated groups attacking the FTC's authority to implement the rule. Those legal challenges will continue into 2025, as the FTC appealed two cases in which a district court determined that the FTC lacked the authority to issue the ban.
It is expected that these appeals will not be successful, as the FTC faces tough audiences in the Fifth and Eleventh Circuits. Moreover, President Trump has replaced former chair Lina Khan (widely viewed as the primary driver and champion of the proposed non-compete ban) with Republican FTC member Andrew Ferguson – who had vociferously dissented from the FTC's rule, calling it "unlawful" and "forbid[den]" by the United States Constitution. President Trump also intends to fill the fifth, currently vacant agency seat with Mark Meador, who will be the third Republican member of the agency – assuming he is confirmed. While there is some bipartisan support for a federal non-compete ban, it is doubtful that Ferguson (or another Republican FTC commissioner) will continue to press the ban, particularly given the bruising losses the FTC has already faced at the district court level. It is unclear whether a reconstituted FTC would withdraw the appeals (which seems unlikely at this point) or simply wait for a presumed loss at the Fifth or Eleventh Circuit and use the loss as a statement regarding the bounds of the FTC's authority. The path that the FTC takes will also presumably depend on how quickly (and whether) Meador is confirmed, which would give the agency a Republican majority.
Despite the fact that the non-compete rule is unlikely to survive appellate scrutiny, the firm anticipates that the widespread media coverage of the (currently ineffective) rule could result in an increase in non-compete litigation, as certain employees may be unaware of the court decisions putting the rule on hold and thus may erroneously believe that their non-competes (or other restrictive covenants) are now unenforceable. If such individuals ignore their contractual obligations and join competitors in roles that violate their agreements, it is likely that an uptick in lawsuits seeking to enforce non-competes would be seen.
Additionally, regardless of the FTC's view on the proposed non-compete ban, even after the shakeup in leadership, the FTC under the Trump Administration has expressed a priority of attacking the abuse of non-compete by certain businesses. In fact, Ferguson recently announced the launch of a joint labour task force to focus on enforcing federal antitrust laws to protect competition in labour markets, including targeting unlawful restrictive covenants. Thus, even assuming the non-compete ban does not survive judicial scrutiny, US-based employers should not presume that the FTC will turn a blind eye to misuse of restrictive covenants.
In addition to the FTC's attempts to regulate non-competes, the National Labor Relations Board (NLRB) continued to focus on restrictive covenants in 2024, including its now-former general counsel Jennifer Abruzzo having issued memoranda in 2023 and 2024 targeting employers who require employees to sign non-competes and so-called "stay-or-pay" provisions. However, the NLRB has a new acting general counsel who rescinded those memoranda, and just as with the FTC, it is anticipated that the leadership change at the NLRB means that employers may face weaker headwinds from the NLRB in 2025.
State-Level and Judicial Initiatives
Regardless of what happens at the federal level, it is anticipated that the trend of state legislatures tightening laws on restrictive covenants will continue. Recent years have brought not only industry-specific legislation limiting the scope of permissible covenants (most notably in the healthcare industry, in which approximately half of the states impose bans or significant limitations on restrictive covenants for employees in this industry), but also a general ban of employee non-competes in Minnesota, as well as a pair of draconian new California statutes, one of which required notification to employees and former employees regarding unenforceable covenants. The other purported to invalidate all non-competes in California, regardless of where the employee lived, or provided services when the agreement was executed. A spate of cases (on top of those already filed) on a dual-jurisdiction track is anticipated, in which employees who have decamped to California after resigning seek a declaratory judgment that their non-compete (or other restrictive covenants) is unenforceable, while the former employer files in a more friendly state, seeking to uphold the covenants. The firm predicts inconsistent judgments in such actions, with a potential circuit split arising in the future.
Employers should expect states to continue implementing laws targeting restrictive covenants for low-wage workers, imposing industry-specific restrictions (or outright bans) and requiring notifications to employees that may be onerous and confusing. Businesses should also anticipate that the patchwork of state laws will become even more varied, further underscoring the need for well-drafted agreements that contemplate the laws of the states where employees may live or provide services – as well as underscoring the need for robust trade secret protections in the event such covenants do not survive judicial scrutiny.
Finally, it is not just legislative action changing the playing field. Many courts nationwide have begun to curtail the use of restrictive covenants without clear legislative action, including most notably in Delaware (which many businesses use as the governing law and/or forum in their agreements). This trend is not limited to employment agreements, but includes restrictive covenants entered into in the sale of a business. For example, multiple cases in 2024 affirmed that Delaware courts generally hesitate to "blue pencil" or modify overbroad covenants. See Hub Grp., Inc v Knoll, 2024 WL 3453863, at *1 (Del. Ch. July 18, 2024) (refusing to modify an overbroad covenant, and noting that blue-penciling risks a "perverse incentive towards overbreadth or lack of clarity" and citing Kodiak Bldgs. Partners, LLC v Adams, 2022 WL 5240507, at *5 (Del. Ch. Oct. 6, 2022), a sale of business case); Fortiline, Inc v McCall, 2024 WL 4088629, at *4 (Del. Ch. Sept. 5, 2024) (similarly refusing to judicially modify an overbroad-as-drafted covenant, and opining that blue-penciling "supports a regime of 'sprawling restrictive covenants'") (citing Kodiak and Sunder Energy, LLC v Jackson, 305 A.3d 723, 746 (Del. Ch. 2023)). Other courts have recently held that non-competes that prohibit an individual from joining a competitor in any capacity likely violate the so-called janitor rule and are generally overbroad and unenforceable – eg, Med-1 Sols., LLC v Taylor, 2024 WL 4876906, *8 (Ind. Ct. App. Nov. 25, 2024) (non-competes prohibiting work for a competitor "in any capacity", even as a security officer or custodian, are unreasonable and unenforceable "because they extend beyond the scope" of any legitimate interests).
In sum, whether to comply with federal agency priorities, new legislation or evolving judicial attitudes towards restrictive covenants, it is more important than ever for employers to ensure that the scope of their restrictive covenants agreements is reasonably limited and calculated to protect legitimate business interests.
Trade Secret Trends
As the enforceable scope of restrictive covenants becomes more limited, trade secret protection will become more important – and trade secret litigation more prevalent. Indeed, given that non-competes are often a business's first line of defence against trade secret theft, employers with personnel in jurisdictions that limit non-compete enforceability in particular will need to embrace technology tools and robust policies to protect critical intellectual property assets. Even where restrictive covenants are permissible, given the judicial trend away from enforcing broadly drafted covenants, it behoves employers to redouble their efforts to properly train their workforce about the importance of confidentiality, implement strong policies to protect critical assets and prepare critical teams (including but not limited to human resources, legal and IT) to spring into action when there is a risk of trade secret misappropriation.
The firm expects that courts will continue to place high burdens of proof on plaintiffs asserting trade secret misappropriation claims, emphasising the need to clearly establish the impacted trade secret's unique value and the specific harm caused by misappropriation of the trade secret. It will be more important than ever for companies to maintain documentation showing the distinct competitive advantage provided by their trade secrets to support claims of misappropriation – and not just the collective competitive advantage of the trade secret portfolio, but ideally the advantage conferred by individual assets. Additionally, keeping thorough records of trade secret identification, protection measures, and employee access can strengthen businesses' position in potential disputes.
This is all the more important with continued global competition, and it is also particularly notable given the rise of artificial intelligence (AI), which is rapidly transforming workplaces and posing new challenges for trade secret security. As companies leverage AI tools for data analysis, innovation and operational efficiency, they must be vigilant about safeguarding their proprietary algorithms, data sets and analytical methods classified as trade secrets (or risk losing them entirely). AI's potential misuse could also make it easier for nefarious actors (whether company insiders or competitors) to extract sensitive information from complex data systems. To mitigate these risks, companies should develop specific, robust protocols regarding the use of AI and ensure that proprietary AI-related information is shielded with comprehensive digital and legal safeguards.
Despite the challenges (and price tag) associated with trade secrets litigation, parties that successfully prove trade secret misappropriation may recover eye-popping verdicts. In one recent case, an insulin pump manufacturer obtained a jury verdict of over USD450 million against a competitor and certain of its former executives after proving that the defendants had misappropriated trade secrets associated with the insulin pump to develop a competing product. In that case, the trade secret owner also convinced the jury that the defendants' misappropriation of several of the trade secrets at issue was "willful and malicious", justifying punitive damages that dwarfed the compensatory damages the plaintiffs were entitled to (namely, the unjust enrichment that the defendants had improperly obtained through their unlawful misappropriation). See Insulet Corp v EO Flow Co, United States District Court, District of Massachusetts, C.A. No 23-11780-FDS. Similar trends of "nuclear" verdicts in trade secrets cases are anticipated where trade secret owners have properly documented the existence and value of such assets.
However, damages awards are also subject to reversal on appeal – as seen in the Virginia Court of Appeals' July 2024 decision reversing the largest jury award in state history when it determined that the trial court had made significant errors leading to a USD2 billion award in Pegasystems Inc v Appian Corp. That trend, combined with varying standards for recoverable damages in different jurisdictions, weighs in favour of employers engaging damages experts early on if they learn of trade secret misappropriation, to best set up a potential recovery that will compensate the harm done by bad actors.
Conversely, the significant trade secrets verdicts that have been seen in recent years make it clear that businesses hiring employees from competitors must implement strict protocols to guard against misappropriation of the former employer's critical trade secret assets, which can lead to damages awards that may even have the potential to bankrupt the company. Even if the defendant company defeats a trade secret claim, it can spend millions of dollars defending against such suits, further underscoring the need to avoid threatened lawsuits entirely.
Conclusion
Businesses should regularly review their restrictive covenants agreements to ensure compliance with various state laws, federal rules and/or judicial trends. They should also take measures to prevent information loss and mitigate harm that may occur notwithstanding best efforts to prevent trade secret misappropriation.
Originally published by Chambers Trade Secrets Global Practice Guide, 24 April 2025
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
