Part I:  The Employment Agreement/Confidentiality Agreement

It is common for a business to maintain information that gives it an edge over its competition.  Such information can be as varied as customer lists, supplier lists, scientific formulas, pricing information, unique procedures, etc.  It derives independent economic value from the fact that it is not generally known within a particular industry.  As such, it is essential that this type of information be maintained in a confidential manner.  This is not always an easy task as greatest danger is often close to home; the most common way in which a business loses its competitive edge is by disclosure of information through a disaffected employee who has set up a competitive business or who has transmitted the information to a new employer.

How can you prevent an employee from disseminating valuable information?  Generally not by requiring employees to sign covenants not to compete.  Courts have consistently ruled that the interests of the employee in his or her mobility and betterment outweigh the interests of the competing employer.  Thus, your ability to restrain the employee from seeking competitive employment is severely limited.  For example, California Business and Professions Code § 16600 invalidates, with certain exceptions, every contract by which anyone is restrained from engaging in a “lawful profession, trade or business of any kind.”  This section effectively prohibits covenants not to compete except where there has been a sale of business equity.

However, an exception to the policy prohibiting restraints on trade has been carved out in the law of unfair competition.  Partially codified in the Uniform Trade Secrets Act, this body of law prevents employees from unfairly competing with their former employer through the disclosure of trade secrets or confidential information.  In order to ensure that your valuable assets will qualify as trade secrets or confidential information, the prudent employer should take several steps to maintain their confidentiality.

In a two-part series, I will outline the most important actions a business should take to preserve its trade secrets and confidential information.  The first and foremost step is an employment agreement and/or confidentiality agreement.

I.          The Employment Agreement/Confidentiality Agreement

An employment agreement and/or confidentiality agreement can provide assistance in defining your trade secrets and confidential information.  In addition, a well drafted agreement can create contractual obligations which extend beyond those offered by law.  Perhaps most importantly, the mere presence of a written contract may cause an employee and his new employer to have second thoughts before they engage in unlawful competition.

Of course, an employment agreement and/or confidentiality agreement is not absolutely necessary for the protection of trade secrets and confidential information.  Assuming you take other reasonable steps to maintain your trade secrets and confidential information, the protection offered by unfair competition common law and the Uniform Trade Secrets Act will operate in the absence of an employment agreement and/or confidentiality agreement.

Moreover, where the employer hires individuals on an at-will basis only, the employment agreement may operate to create contractual terms of employment where none previously existed.  These terms of employment could then conceivably be used against the employer in a wrongful termination lawsuit or other legal proceeding.  In the end, the decision of whether an employment agreement is appropriate for a particular employer must be considered on a case-by-case basis.  Where an employment agreement is unnecessary, many of the terms below should be included in a confidentiality agreement or, at minimum, an employee handbook.

Assuming the decision is made to utilize an employment agreement and/or confidentiality agreement, you should consider including the following provisions where appropriate.  You might also consider including these provisions in a termination agreement to be executed by the employee during the exit interview:

  • Length of employment.  For a key employee, you may wish to create a binding employment contract for a specified period of time.  This type of contract can limit the ability of a competitor to solicit a valuable worker.
  • Confirmation of Employee’s Availability.  The agreement (and employment application or offer letter) should confirm that the employee is not restricted from accepting the proposed employment in any way.  More importantly, the agreement should state that the employee will not use any prior employer’s property and confidential information and/or trade secrets in the proposed employment.  Such an agreement can reduce the possibility of an unfair competition type of claim being brought in connection with the new employment relationship by a competitor.
  • Nondisclosure covenant.  While a provision defining trade secrets and confidential information will not create trade secrets where none previously existed, this type of provision will put the employee on notice as to the information you consider valuable and proprietary.  The provision should emphasize that the employee specifically agrees that he or she will not disclose the defined information to anyone without your consent and that he or she will take steps to ensure that the confidentiality of the information is maintained.
  • Employee’s duties upon termination.  The agreement should require the employee to return all your property to you upon termination.
  • Sole efforts clause.  The employee should be forbidden from participating in any business which competes with your business throughout the duration of his or her employment.
  • Covenant against competitive employment.  The agreement should prohibit any form of competition during the period of employment.  In addition, the agreement should forbid the employee from undertaking any employment in which the employee would use or reveal trade secrets or confidential information.
  • Non-solicitation covenant.  You may forbid your employee from soliciting any of your customers to divert their business to a competitor.  In order for this clause to be effective after the employee is terminated, the identities of your customers must be confidential, proprietary information and qualify for trade secret protection.
  • Organizing a competitive business.  You may arguably forbid the employee from organizing a competitive business during the period of his or her employment.
  • Non-interference covenant.  This covenant restrains the former employee from disrupting, impairing or interfering with your business by raiding or soliciting your employees and independent contractors.
  • Covenant not to compete.  As mentioned above, these covenants are illegal and will void an otherwise lawful agreement unless they are made in connection with the sale of the employee’s interest in a business pursuant to Business and Professions Code § 16601, et. seq.
  • Rights to the fruits of the employee’s labor.  The agreement should state that all efforts of the employee undertaken during the course of employment, including drafts, formulas and other ideas, shall be the sole property of the employer.  Such a clause must contain “work for hire” language for copyright and trademark issues and must quote Labor Code §2870 for inventions coverage.
  • Continuing obligations of the employee.  The employee should acknowledge that the obligations contained in the employment agreement continue beyond the period of his or her employment and, in particular, that he or she has a continuing obligation to maintain as confidential your confidential information and trade secrets.
  • Consultation provision.  For key employees, you might consider including a consulting agreement that will allow you to retain former key employees as consultants for a specified period of time after their termination.  Bona fide consulting contracts can restrain the former employee from working for competitors for the duration of the consulting period.
  • Restrictions on the use of the company computer system.  Employees should be informed that the company computer system is for business purposes only and, as such, is subject to monitoring at all times.  Access to individual computers and hard drives as well as any information sent through the company server is often the best method to discover improper conduct on the part of workers.
  • Other standard contract provisions.  It is important that you include a provision regarding the severability of any particular provision which a court may hold unenforceable.  This type of clause may allow the remaining provisions to continue to be binding and enforceable.  Such a clause will not, however, save an agreement which violates Business and Professions Code §16600.  The agreement should provide for the possibility of injunctive relief in view of the irreparable harm that could occur in the event of a breach.  You should also consider including an attorneys’ fees provision to allow the prevailing party to recover its attorneys’ fees and expenses incurred in any attempt to enforce the terms of the agreement.