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Using Non-Competes For Intellectual Assets

Walking away with trade secrets is easier in the Internet age

February 19, 2003

Authors: Glenn M. Cunningham

If you look at your company's balance sheet, your most important asset is not readily apparent. Why? Because it is information, and without this precious commodity your company would be dead in the water.

Every company has its share of unique knowledge that provides a competitive advantage in the marketplace. The frightening thing is just how easy it is for an employee, vendor or joint venturer to procure and run away with this vital information in today's hi-tech workplace. Proprietary information is an asset that probably took years and a sizeable financial investment to cultivate and create. Yet, an employee can walk out the door with this information and 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 have had to walk out the front door with shopping cartloads of documents. Such behavior would not have gone unnoticed. Today, anyone with access to an electronic database can copy it to a disk, slip the disk into a pocket and walk away. Luckily, 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.

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

Trade secrets come in all shapes and sizes. Trade secrets can 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 secrets may be found.

If you want to determine whether a particular piece of 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 to create?

  • How difficult would it be for your competitor to assemble this same information without 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 to be deemed a secret. To be a trade secret, reasonable steps must have been taken to guard the secrecy of the information.

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

From employee intake through exit, companies should be reminding employees and potential employees that they will be privy to confidential information, the secrecy of which must be maintained. Third-parties should not be given access to any confidential information without agreeing in writing not 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 and should not be disclosed to unauthorized parties. Finally, limit exposure and access to sensitive information to only those who need to use it to perform their job functions.

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

Courts universally review the enforceability of a non-compete agreement based on the particular facts of any given case. This frustrates employers because 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 possible to be enforced.

Courts will generally enforce a non-competition agreement if 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 whether or not an agreement will be enforced. Courts will look to see how long a restriction operates and over what geographic area the covenant restricts activities. In general, a court wants to see precisely what is it that the employee is restricted from doing.

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

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

In such a case, a one-year non-compete that prevents an 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 every six 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-month period.

Suppose your company's major concern is a loss of customers due to a mobile sales force jumping to a competitor. In that case, it would be best to craft a non-compete agreement that prohibits an employee from soliciting the company's customers or prospects for a reasonable length of time. These so-called "non-solicitation clauses" are generally enforceable because there is a direct relationship between the employee and a customer with whom he or she dealt. The goodwill associated with that relationship belongs to the company -- not the employee -- and the company should have a sufficient amount of time to bring in a new salesperson to maintain the customer relationship.

No Free Lunch
A final word on non-competes -- "consideration." You cannot get something for nothing. This adage goes for non-competition agreements as well as lunches. Any agreement, including non-competition agreements, must be supported by sufficient consideration to be enforceable. The law of consideration in non-competition agreements varies greatly from state to state.

However, there is one universal truth: If you want a 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 condition of employment. If the employee accepts your offer of employment and executes a non-competition agreement, there should be no question that consideration in this case of employment is adequate and that the terms of the agreement are reasonable.

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.

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