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Noncompetes that Will Stick

There are some very basic and common sense steps that a company can take to decrease the chances of having their confidential information misappropriated and used competitively against them.

July 20, 2001
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Related Topics: Staffing and the Law
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If you look at your company's balance sheet, your most important asset is notreadily apparent. Why? Because it is information, and without this preciouscommodity your company would be dead in the water.

Every company has its share of unique knowledge thatprovides a competitive advantage in the marketplace. The frightening thing isjust how easy it is for an employee, vendor or joint venturer to procure andrun away with this vital information in today's hi-tech workplace. Proprietary information is an asset that probably took years and a sizeable financial investmentto cultivate and create. Yet, an employee can walk out the door with this informationand put it to use before you are aware that it has been misappropriated.

It did not used to be so easy. Only a few years ago,if someone wanted to walk away with your customer database, they would havehad to walk out the front door with shopping cartloads of documents. Such behaviorwould not have gone unnoticed. Today, anyone with access to an electronic databasecan copy it to a disk, slip the disk into a pocket and walk away. Luckily, thereare some very basic and common sense steps that a company can take to decreasethe chances of having their confidential information misappropriated and usedcompetitively against them.

What we are talking about here is the stealing tradesecrets. A trade secret is information which is valuable to a company becauseit is not generally known to the outside world. It is also something that wouldnot be easy for people outside the organization to compile on their own.

Trade secrets come in all shapes and sizes. Trade secretscan take the form of a formula, device, technique, drawing, process, data, or a client list. This is not an exclusive list of the forms in which trade secretsmay be found.

If you want to determine whether a particular pieceof information may be considered a trade secret ask yourself these questions:

  • How difficult was it to gather?

  • How much time, people-power, money, and other resources did it take tocreate?

  • How difficult would it be for your competitor to assemble this same informationwithout using what you already have put together?

  • What steps have been taken to maintain the secrecy of the information?

This last point is worth a few extra words of explanation.The more you have done to protect the information, the more likely it is tobe deemed a secret. To be a trade secret, reasonable steps must have been takento guard the secrecy of the information.

Reasonable steps will differ depending on the circumstancesof each case. However, there are certain simple precautions that can be takento enhance the chances that your information will be considered to be a secret.

From employee intake through exit, companies shouldbe reminding employees and potential employees that they will be privy to confidentialinformation, the secrecy of which must be maintained. Third-parties should notbe given access to any confidential information without agreeing in writingnot to disclose or use the information.

If the information can be found in printed reports,make sure that such reports indicate that the information is confidential andshould not be disclosed to unauthorized parties. Finally, limit exposure andaccess to sensitive information to only those who need to use it to performtheir job functions.

For an added level of comfort, many employers now utilize noncompete agreements. These agreements help preserve confidential informationbut also protect the goodwill that the company has built up with its customers.Noncompete agreements are the subject of varying laws from state to state.However, in states that allow non-compete agreements to exist, there are somecommon, basic legal principles to which you can adhere to enhance the likelihoodthat a court will deem a non-compete agreement enforceable.

Courts universally review the enforceability of a noncompete agreement based on the particular facts of any given case. This frustrates employersbecause they are looking for a full-proof agreement that will always be enforced.The goal should be to come up with an agreement that is as likely as possibleto be enforced.

Courts will generally enforce a non-competition agreementif it is reasonable under the circumstances. How about that for a test? Luckily,over time, we can point to some more specific factors to help determine whetheror not an agreement will be enforced. Courts will look to see how long a restrictionoperates and over what geographic area the covenant restricts activities. Ingeneral, a court wants to see precisely what is it that the employee is restrictedfrom doing.

The best policy when crafting a non-competition agreementis to use a "less is more" approach. A company should identify specificallywhat it is trying to protect and then determine the steps necessary to createa reasonable protection of these business assets. Not long ago it was safe toassume that a non-compete agreement that applied for one year would be enforceablein court. However, times have changed.

With the advent of the Internet and the rapidity withwhich technical information can become obsolete, courts are beginning to realizethat one size does not fit all. For example, suppose a technology company producesa new version of a product every six months which obsoletes the prior version.

In such a case, a one-year non-compete that preventsan employee from working at a competitor on the same type of product may be unreasonable. A court could determine that since a new product comes out everysix months, any information that an employee possesses today will be of no competitive advantage to another company after six months. When faced with that type of a situation, the company is wise to scale down its non-compete to a six-monthperiod.

Suppose your company's major concern is a loss of customersdue to a mobile sales force jumping to a competitor. In that case, it wouldbe best to craft a non-compete agreement that prohibits an employee from solicitingthe company's customers or prospects for a reasonable length of time. Theseso-called "non-solicitation clauses" are generally enforceable becausethere is a direct relationship between the employee and a customer with whomhe or she dealt. The goodwill associated with that relationship belongs to thecompany -- not the employee -- and the company should have a sufficient amountof time to bring in a new salesperson to maintain the customer relationship.

A final word on noncompetes -- "consideration."You cannot get something for nothing. This adage goes for non-competition agreementsas well as lunches. Any agreement, including non-competition agreements, mustbe supported by sufficient consideration to be enforceable. The law of considerationin non-competition agreements varies greatly from state to state.

However, there is one universal truth: If you wanta non-compete to be enforceable, you must inform employees that they will be subject to a non-competition agreement before they actually become employed and you must make it plain that the execution of the agreement is a conditionof employment. If the employee accepts your offer of employment and executesa non-competition agreement, there should be no question that considerationin this case of employment is adequate and that the terms of the agreement arereasonable.

The bottom line here is that your most important asset"goes down the elevator at night" (to quote advertising guru David Ogilvy). Protect that information and you protect your business.

The information contained in this article is intended toprovide useful information on the topic covered, but should not be construedas legal advice or legal opinion.

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