Breaking Up Is Hard To Do: Protecting Your Company When High-Level Employees Depart

by Downs Rachlin Martin PLLC
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Trade Secrets, non-d9sclosure, non-competition, assignmentI have previously written about how courts will ask, when presented with a claim of trade secret misappropriation, whether the trade secret owner took reasonable steps to maintain the confidentiality of its information (see here and here).  One of the most important ways to protect your information – and to later improve the chances of prevailing in court – is to obtain written agreements from your key employees both when they are hired and throughout their employment.

 

The most common agreements are:

1.  Confidentiality/non-disclosure agreement – employees affirm that they understand what it is you are claiming as your confidential information and agree to keep it confidential;

2.  Invention-assignment agreement: employees agree that any relevant inventions, developments, and ideas they come up with while employed by the company belong to the company; and

3.  Non-competition agreements – employees (or even consultants), who have acquired unique or valuable knowledge while working for you, agree not to compete with you for a period of time after they leave.

The most important – and controversial – of these agreements are non-competition agreements.

If your ex-employee can’t legally compete with you after leaving (i.e., can’t start a competing business or go to work for one of your competitors), then anything he or she learned while employed by you is less of a concern.  On the other hand, if a former employee can compete, you may never know if your confidential information is being used, in which case a signed confidentiality agreement does not protect you. If you suspect the confidentiality agreement has been breached, proving it is very hard to do.

When a non-competition agreement is challenged, courts will enforce it as long as it is “reasonable.”  Reasonableness depends on:  1) whether the terms are more restrictive than necessary to protect your legitimate needs; and 2) whether the terms unnecessarily deprive the your former employee of an opportunity to use her or her skill, knowledge, and training to earn a living.

Properly Crafting An Agreement Is Not Difficult, But Requires Thoughtfulness

Trade Secrets, non-competition, non-disclosure, agreementsUse these points as a guide when thinking about your non-competition agreement (when in doubt consult an attorney; laws and enforceability differ by state.)

  • Should everyone who works for you sign a non-competition agreement?

The short answer is no.  These agreements can be difficult to enforce, so they should only be used when necessary.  Thus, limit the use of these agreements  to executives and key employees who have access to sensitive business, financial, or technical information.

It makes little sense – and would be counter-productive – to require every employee in your company, including clerks, secretaries, receptionists, etc., to sign a non-competition agreement.  Moreover, doing so weakens the impact of an agreement you want to enforce as courts may find that the agreement is merely a form document, not to be taken seriously, and that you, in some instances, are using clearly in violation of public policy.  For example, a non-competition agreement prohibiting a secretary without access to confidential information from working at another company after leaving your establishment would probably be deemed unfair and contrary to public policy because it would be keeping a person without critical business information from earning a living.

  • Can I stop the employee from doing everything related to her former job?

Again, the short answer is no.  Careful consideration should be given to the “scope” of the non-competition agreement.  An agreement that prohibits a software programmer from working “in the software industry” or a physician from working in the “health care industry” will undoubtedly be found by a court to be overbroad and unenforceable.  By contrast, suppose that your company develops software programs specially designed for the health care industry.  Courts would likely have no problem enforcing an agreement that prohibits one of your software programmers who specializes in writing code for certain aspects of your programs, from going to a company that also produces software programs for the health care industry.

  • How long is too long?

There is no magic formula to determine the appropriate term, but, as a rule, the shorter they are, the more likely courts will enforce them.  The term should be based on the nature of the information the employee possesses and the pace of change and development within the particular industry in question.  Thus, as an example, for a critical sales or marketing executive, two years may be appropriate because the information known to the employee may have value for that period of time.  Or, for a software engineer with special programming expertise, one year may be appropriate because software programming changes quickly and his special knowledge may be obsolete after that time.

  • How far is too far?

There is no per se rule for the appropriate geographic scope; it depends upon the nature of the industry.  In the restaurant business, for example, it may be reasonable to prohibit a former manager or chef, who has acquired a certain customer loyalty, from working at a competing restaurant within the same city, but unreasonable to prohibit him from working anywhere within the same state.  In the high tech field, by contrast, where there may be only a few companies nationwide engaging in the same specialized business, it may be entirely appropriate to prohibit a former employee from competing anywhere in the U.S.

  • What should I give in exchange for the employee signing the agreement?

When facing the question of whether to enforce a non-competition agreement, courts will often ask if the employee was given something (i.e., “consideration”) in exchange for “giving” the employer an agreement not to compete after he or she leaves.  The best strategy is to have the employee sign the non-competition agreement when he or she is hired, in which case the “consideration” is the job offer.  However, if you are seeking to have an employee sign a non-competition agreement sometime after he or she has been working at your company, the best time to do it is in connection with an annual review when you are giving that employee a promotion or a raise.  Even without such considerations, if it’s appropriate for an employee to sign a non-compete agreement, by all means ask him or her to  do so.  Some courts will find that the mere offer of continued employment is,  in itself, sufficient ”consideration.”

  • Is the agreement assignable to someone else?

Suppose your employee signs a non-competition agreement, and some time later you sell your company.  Can the company that purchases your business then enforce the non-competition agreement against the employee?  The answer to this might be “no,” because non-competition agreements are deemed to be personal between the employee who signs it and his or her employer.  However, courts will typically uphold the transferability of such agreements between the selling company and the buying company if the non-competition agreement contains explicit language saying that it is transferable.

  • Are non-compete agreements enforceable everywhere?

In some states, such as California, non-competition agreements are invalid as a matter of public policy.  As an employer, you should be aware if your state is one of those states and consider strategies you might be able to take to avoid the ban.

Posted in General IP, Trade Secrets

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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