People Processes: Deep Dive into Non-Compete Agreements

What this episode covers

Noncompetition Agreements and Trade Secrets Introduction Whenever an employer hires a new employee, the employer provides that person with access to the organization’s most valuable assets: its people, its customers, and its way of doing business. Given that the average American will change jobs seven times over a work life, chances are high that some of that information will eventually find its way to a competitor. More frequently than ever, companies are trying to protect themselves and their assets from the damage that can result when employees depart to work for a competing business or set up a competing enterprise. An employer should require employees to sign employment agreements wherein they agree to maintain the secrecy for all of the organization’s trade secrets. In addition, an employer may consider a covenant not to compete that has geographic, scope, and duration limitations. Such terms should be included in an initial employment agreement entered into at the start of the employment relationship. While it may not be easy to go back and add these terms, because there must be adequate consideration in exchange for these post-employment obligations, if an employer will be paying the employee anything more than absolutely legally owed, the employer may be able to condition the bonus on having signed an agreement to maintain the trade secret as confidential and to provide the employer with written assurances that the employee no longer has any proprietary or trade secret material. Please note, however, that state law governs restrictive covenants, trade secrets, and other noncompetition agreements. While many of the general legal principles set forth here apply universally, there can be significant differences among states. The most obvious distinction is that some states, notably California, prohibit restrictive covenants that inhibit an employee’s ability to find new employment. Other distinctions among the laws of various states may be less dramatic, but under certain circumstances, no less important. Such differences are particularly critical if the agreement is intended to apply to employees who may be located in different states, such as a sales force. The substance of individual state laws is beyond the scope of this discussion, which is intended to offer a general understanding of the concepts involved. Individual state laws should be reviewed before any agreement discussed in this material is drafted. General Protections Employers have certain limited protections — recognized by the law under a variety of theories — against unfair competition, disloyal employees, and overreaching competitors. Turning legal theory into meaningful remedies requires attention to detail and an appreciation for conflicting public policies. The Duty of Loyalty An organization’s current employees are under a “duty of loyalty” to the organization. Each state defines that duty a bit differently. In general, employees are not permitted to induce current customers, suppliers, or other employees to leave the organization, nor are they allowed to operate a competing business while still employed by the organization. When that duty is breached, the employer may be entitled to collect lost profits, punitive damages, and out-of-pocket costs incurred to train replacements. Offending employees may be forced to forfeit their salaries and to give up any profits they made as a result of the disloyal conduct. In addition, courts may issue injunctions forbidding the employees to engage in similar conduct for a specified period. Under the duty of loyalty, the law generally prevents an individual from using trade secrets or proprietary information of a current or former employer to the detriment of that employer. An employer need not do anything special to create this duty, and the employee need not sign any agreement to be covered by it. The law recognizes the duty of loyalty and the value of...