Employment Agreements Protect Proprietary Information
Q. One of our employees has accepted a position with a competitor, and we are worried he is going to disclose some of our processes and pricing. How can we prevent such disclosures?—J.A.
A. We strongly recommend employers have prospective and current employees sign employment agreements to protect confidential information and trade secrets and to guard against unfair competition. Non-competition, non-solicitation and confidentiality agreements are commonly being made a condition of obtaining and continuing employment. Below is a description of the agreements.
These agreements bar a former employee from accepting employment with a competitor. Employers can require both prospective as well as current employees to sign these agreements as a condition of obtaining or continuing employment. Generally, to be enforced in court, a non-compete agreement must be reasonable in terms of its geographic scope, time duration and type of work it prohibits. A non-compete agreement must be drafted with the purpose of protecting a valid business interest, such as trade secrets or goodwill. Though time duration restrictions can vary by state, courts will typically enforce a non-compete agreement if it restricts a former employee’s work activities for no longer than one year in the specific geographic area in which the employer does business and in the particular product market in which the employer competes. For some businesses, however, a reasonable geographic restriction could be the entire U.S. or even worldwide. These agreements may be enforced by suit for injunctive relief and money damages. A business bringing suit to enforce a non-compete must do so quickly in order to effectively persuade the court that an immediate injunction to stop the alleged unfair competition is necessary to protect vital business interests.
A non-solicit agreement can be drafted to prohibit a former employee from soliciting a business’s actual as well as prospective or targeted customers. A non-solicit agreement can be a powerful tool when used in conjunction with a non-compete agreement. However, even if a business opts not to require a non-compete agreement, it still may require employees or prospective employees to sign a non-solicit agreement. Commonly, employees are prohibited from soliciting customers for one year after leaving employment.
A non-solicit agreement can also be drafted to prohibit former employees from soliciting his or her former colleagues. It is not unusual to see individuals attempt to raid talent from a former employer, and a non-solicit agreement can prohibit these contacts for a reasonable period and protect a company’s investment in its employees. These agreements also may be enforced by suit for injunctive and other relief. Again, such a suit should be brought immediately.
These agreements help protect a business’s investments in its trade secrets and other confidential business information. Protectable trade secrets and confidential information can include, among other things: customer lists, customer preferences, prospective customers, prices and pricing policies, costs, margins, internal weaknesses, business marketing, strategic and sales plans, business processes, planned products and services, mergers and acquisition targets, and information about suppliers and employees.
Naturally, to be protected, trade secrets and confidential information must be provably “secret.” If the information is truly valuable, its confidentiality can be demonstrated by establishing/practicing some or all of the following:
- Locked storage of information
- Need-to-know access
- Electronic key access to rooms/information
- Clear marking of confidentiality
- Limited access of computer-stored information
- Visitor restrictions
- Employee policies on protecting confidential info
- Routine verification of confidentiality procedures
- Routine employee reminders of confidentiality policy
- Pursuit of departing employees with access to confidential information
- Prohibition against removal of information from company premises
- Restrictions against copying of information
Confidentiality agreements should be part of employment agreements and policies for any employer possessing confidential business information. Courts commonly order former employees not to use or disclose trade secrets and other confidential business information in subsequent employment, even if that former employee never signed a non-solicit or non-compete agreement. Unlike non-compete or non-solicit agreements, in which time restrictions must be reasonable, a confidentiality agreement can prohibit disclosure for any length of time.
The Importance of Enforcing Agreements
Sometimes, employers negotiate a shortening of the non-compete or non-solicit period to allow an employee to depart and work sooner for another employer. Other times, employers are aware that a former employee is violating, or is about to violate, a non-complete, non-solicit or confidentiality agreement, but the employer chooses not to expend resources to enforce those agreements. The business decisions behind amending or failing to enforce these types of agreements should be balanced against the serious risks caused by not doing so.
By reducing or eliminating restrictions for one former employee, that employer may be setting a precedent that a court may follow later in a litigated case against a different former employee where such a reduction may well not be desirable. Moreover, informal discussions that indicate a willingness to shorten a non-compete may be used against the employer in court to demonstrate that the employer’s need to protect certain information or eliminate competition was not as vital as the employer claimed. The net effect of such discussions and decisions can be a serious shortening of the time period in which a non-compete, non-solicit or confidentiality agreement may be enforced or may cause a court to refuse to enforce an agreement altogether.
The bottom line is that reasonable, well-drafted non-compete, non-solicit and confidentiality agreements are valuable business tools. They can prevent unfair competition, preserve key employee relationships and protect a company’s intellectual property.
Regan Dahle, of Butzel Long’s Ann Arbor, Michigan, office and James S. Rosenfeld, of the firm’s Detroit office, contributed to this article.
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