Small business owners understandably may be reluctant to use non-compete agreements for many reasons.  The desire to divert precious resources to paying an attorney to prepare a contract is hardly appealing.  Similarly, businesses may feel that such agreements are unnecessary because they have few employees.  But as Ben Franklin once wisely advised, an ounce of prevention is worth a pound of cure. 

The term “non-compete agreement” technically refers to a contract that preclude a person from engaging in certain acts of competition for a prescribed period of time within a prescribed geographic area.  In common usage, however, the term often is used more broadly to refer to any contract by which someone has any type of competitive restrictions, including non-solicit, non-recruit, non-disclosure and confidentiality agreements.  Simply put, non-competes come in all shapes and sizes, but the reasons small business owners should use one or more of these covenants are equally diverse.

1. Enhance the value of your company if you think you may sell someday – If you think someday you may wish to sell your business, it is important to protect the value of your company by requiring employees to sign restrictive covenants.  When someone purchases a business, they want to know that they will get what they pay for.  If they believe key employees with access to customers and relationships may not stay on board after a merger or acquisition, they may balk at the price or even walk away.  You may think that you can always sign employees up to a non-compete later, but such afterthought covenants present their own challenges.  You can protect the value of your company and its assets by using appropriately tailored non-compete agreements.

2. Qualify for trade secret protection – Generally speaking, any valuable business information that you try to keep secret from competitors is subject to trade secret protection.  But to state the obvious, to be a trade secret, the information must in fact be secret.  When determining whether information should be entitled to trade secret protection, courts look at many factors including the extent to which the owner of the secret took reasonable steps to preserve its secrecy.  A widely recognized precaution includes requiring employees to agree not to use or disclose confidential information.  In addition, if customer information is a trade secret, a covenant not to solicit customers (i.e., a non-solicitation agreement) may well be appropriate.

3. Protect your customer relationships –Small businesses tend to place client relationships in the hands of fewer employees.  Consequently, when an employee resigns, the client relationship may walk out the door with the employee.  Just as importantly, you may need time to rebuild your clients’ confidence and to show that your other employees are equally capable of serving their interests.  Clients are the lifeblood of any business; but this is particularly true for small businesses.  A small business simply cannot afford to lose its clients. 

4. Enhance client confidence – Would you do business with a company if you felt your personal financial information was at risk?  Of course not.  Your clients feel the same way.  If your clients entrust their personal or business information to you, they want to know that your employees are not going to take it when they leave.  Requiring employees to sign restrictions on their use and disclosure of confidential information is a good way to make your clients confident that their data is safe in your hands.

5. Protect your investment in training – Training employees is a worthwhile expense, and the training resources you provide may even help you to attract talented employees.  But steps should be taken to prevent your competitors from swooping in to hire your employees after you invest the time and expense to train them.  For this reason, courts commonly recognize that employers have a legitimate interest in protecting their investments in specialized training.

6. Clarify expectations with employees – Do your employees realize that you expect them to leave behind the information you entrusted to them if they decide to move on to a new job?  Do they understand that the relationships you paid them to cultivate and maintain belong to you?  The best time to clarify expectations with your employees is before a dispute arises.  Doing so may influence a departing employee’s conduct and provide you with the leverage you need to protect your company.

7. Shape ground rules for potential litigation – Litigation against departing employees can be expensive, but when your business is on the line, you may have little choice but to protect your interests through legal action.  Although no contract can eliminate the expense associated with litigation, careful forethought can help to minimize your costs.  Restrictive covenants are a perfect opportunity to reach agreement with employees about some of the ground rules that will apply if litigation becomes necessary, such as whether you are entitled to recover attorneys’ fees and costs if you prevail, whether lawsuits should be filed in a local forum, and whether you are entitled to certain remedies such as an injunction or liquidated damages.

8. Deter competitors from hiring your employees –  Deterring competitors from hiring your employees is not a sufficient fact in and of itself to warrant the imposition of a restrictive covenant.  In fact, courts will not enforce restrictive covenants if they serve no purpose other than to restrict competition.  But assuming you have a legitimate purpose for requiring employees to sign such agreements – such as a need to protect confidential information or customer relationships – sending a message to your competitors that you are prepared to protect these interests is a nice side effect.

In short, there are advantages to using non-compete agreements that may not be apparent until it is too late.  Small business owners should think about protecting their business in advance.  Please let me know your thoughts in the comment section below.

What does Obamacare have to do with non-compete agreements?  Well, technically speaking, nothing.  But the Supreme Court recently focused on what it should do with the remainder of the healthcare law if it decided to strike the individual mandate.  Justice Scalia asked, "Once you cut the guts out of it, who knows which parts were desired and which ones weren't?"  The manner in which courts treat overly broad non-compete agreements is not terribly different.  If a court finds part of a non-compete agreement unenforceable, what should it do with the rest of the agreement?  The answer varies from state to state, and unlike Congress with the healthcare bill, employers should include language that clarifies their intent. 

First, consider the approach employed by various courts.  Generally speaking, there are three approaches.  In some states (e.g., Vermont), if a covenant is overbroad by an inch, it might as well be overbroad by a mile because overly broad covenants will be invalidated in their entirety.  In other states (e.g., Arizona), overly broad covenants will be blue-penciled – meaning that courts will strike through offending language but will stop short of rewriting the agreement.  In still other states (e.g. Ohio), courts are free to reform restrictive covenants so that its restrictions are reasonable under the circumstances.

Recognizing the different approaches among states, employers should consider including severability clauses in their agreements.  But caution is required concerning how such a clause should be worded.  This is because the law from state to state with regard to modification and enforcement of overly broad non-compete agreements varies, and an argument can be made that a severability clause gives an employer less protection than it otherwise would receive absent its inclusion.  Stated differently, depending on the wording of a severability clause, an overly broad restriction might just get severed from the agreement (i.e. not modified) leaving an employer with little or no protection.

How can this happen?  A typical severability clause in a non-compete agreement might provide that “the provisions of this agreement are severable. If any provision is deemed to be invalid, void or unenforceable, the remaining provisions shall not as a result be invalidated.” Such a clause can be of great help in states like Louisiana or Wisconsin where overbreadth can be fatal. Upon finding a non-compete provision unenforceable, courts in these states are powerless to modify or blue-pencil the agreement. Under these circumstances, a severability clause may salvage a separate, independent non-solicitation or confidentiality provision contained in the same agreement.

So what’s the problem? Unless your severability clause is carefully drafted, a compelling argument can be made that the parties’ inclusion of a severability clause precludes modification of an overly broad non-compete in states like Ohio and Pennsylvania where courts are empowered to judicially modify overly broad covenants.  After all, if an agreement provides that unenforceable provisions should be severed, judicial modification of overly broad provisions would ignore the parties’ clear intent as set forth in a severability clause. The consequences can leave employers with little or no protection.

For example, consider an employment agreement that contains a fifty-mile non-compete clause, a customer non-solicitation clause, and a confidentiality clause. Imagine that an employee accepts employment with a competitor right across the street in violation of the non-compete, but complies with the non-solicitation and confidentiality clauses. What happens if the court finds the non-compete clause to be ten miles overbroad? If it chooses to strictly apply the severability clause as written and severs the overly broad non-compete provision instead of modifying it, the employer would be powerless to prevent the employee’s employment with its competitor. In the absence of such a severability clause, a court might choose to modify the fifty-mile non-compete downward to a forty-mile radius. In the presence of a poorly worded severability clause, a court may simply sever the non-compete based on the parties’ intent as reflected in the clause.

Such unintended results might be avoided by including a carefully drafted severability clause that takes into account the difference between jurisdictions that blue pencil, modify, or strike overly broad provisions. For example, consider the following clause:

"If any provision of this Agreement is held to be unenforceable, then this Agreement will be deemed amended to the extent necessary to render the otherwise unenforceable provision, and the rest of the Agreement, valid and enforceable. If a court declines to amend this Agreement as provided herein, the invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the remaining provisions, which shall be enforced as if the offending provision had not been included in this Agreement." 

This sample clause may enable an employer to reap the benefits of a court’s common law discretion to modify overly broad provisions, while providing the same benefit needed in states where overly broad provisions must be struck. In other words, this clause may provide the best of both worlds. If a non-compete provision is overbroad, the clause provides that a court may modify and enforce it to the extent permitted by law. If the court chooses not to modify the restraint, the invalid provision may be severed, leaving in place the remaining, and hopefully enforceable, provisions.

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

Many companies have employees located in states across the country.  Drafting restrictive covenants for employees in all of these locations can be a daunting task.  To minimize the burden, some employers opt for a one-size-fits-all approach -- that is, every employee across the country signs the exact same agreement.  Depending upon the locations of these employees and the interests sought to be protected by the employer, this approach may work out.  But just as commonly, it may not.  This does not mean that employers need to draft fifty different agreements for use in all fifty states.  Here’s a quick sketch alternative to the one-size-fits-all approach:

1.  Categorize Locations – Although the law governing restrictive covenants varies from state to state, most states can generally be placed into one of three categories:

(a) states where courts are empowered to modify, sever, or blue pencil overbroad agreements -- The vast majority of states fall into this category.  For example, if you have employees located in Pennsylvania and Ohio, the law is substantially similar, and to the extent it varies, the courts in each state are empowered to modify contractual provisions they deem to be unenforceable.  Consequently, employers might consider using one form of agreement for employees located in the states that fit within this category.

(b) states where overbreadth will be fatal to the entire agreement -– A handful of states fall into this category.  In these states, if a non-compete is overly broad in any respect (e.g., if it lasts too long or covers too broad of a geographic area), courts will strike the entire agreement even if a simple modification would cure the overbreadth.

(c) states where the law is so unique that nothing but a state-specific covenant will do -– California and Louisiana are the quintessential examples of states that fall within this category.  The law in each state is so unique that virtually all covenants an employer may desire require adjustments to meet applicable legal requirements.

2.  Categorize Employees and Interests to be Protected – It is well known that restrictive covenants come in all shapes and sizes ranging from non-solicitation agreements to full blown non-competition agreements to confidentiality and non-disclosure agreements.  These different types of restrictions protect different types of interests.  For example, a customer non-solicitation agreement protects employers from the exploitation of customer goodwill acquired by employees during employment, and it can also protect against the misuse of confidential information.  In contrast, a confidentiality and non-disclosure agreement is more narrowly tailored to address the possible misuse of proprietary information.  Companies should give some thought to the types of employees that will be signing agreements and the types of interest sought to be protected.  If salespeople will be signing the agreements, the company may choose to require both a confidentiality and a non-solicitation agreement.  If a non-sales related employee is signing the agreement, the company’s interests may possibly be protected by a confidentiality agreement alone.  In contrast, senior executives might be expected to sign a non-solicitation, non-compete and a confidentiality agreement.

Juggling the competing concerns raised by differences in state law can be difficult, but it is not impossible.  Methodically identifying the types of employees who will sign covenants, the interests sought to be protected, and the jurisdictions within which each employee works will go a long way.

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

Protecting a company's non-compete and trade secret interests can be a daunting task.  There are so many things to consider.  Here's a list of ten things to keep in mind and some resources to help you take action. 

1. Implementing a Trade Secrets Protection Program – Protecting your trade secrets cannot be left to afterthought.  Companies are well advised to implement a trade secrets protection program.  If you don’t know where to start, consider conducting an audit of your company’s confidential information.

2. Drafting Non-Competition Agreements --  Many employers with offices or employees located in multiple states use the same non-compete/confidentiality agreement in each state in which they do business. Typically, the form of the non-compete/confidentiality agreement originated in the employer’s home state, and the employer went on to use this same agreement wherever the employer does business. However, these employers may find out too late that a non-compete/confidentiality agreement enforceable in their home state may not be enforceable in another state.

3. Online Social Networking Policies -- Chances are that one-quarter to perhaps as much as one-half of your workforce (or more if your workforce is younger) are regular users of social networking websites.  Any business that does not have a social networking policy or does not train its employees on the do’s and don’ts of social networking may have a critical security gap in the protection of its trade secrets.  A recent case suggests that LinkedIn can present a threat to your trade secrets.  If you have expectations concerning the manner in which your employees may or may not use LinkedIn, it is wise to address these concerns upfront through contracts and written policies.

4. Can Your Lawyer Keep a (Trade) Secret? -- Ensuring that your trade secrets are kept secret is not a new requirement.  Internal controls on use and dissemination of confidential information may not be entirely sufficient.  Businesses need to recognize that risks sometimes involve the handling of their data by third parties specifically entrusted for that purpose, such as their attorneys.  Remote storage of client data presents several concerns including unauthorized access to confidential client information by a vendor’s employees or by hackers, a failure to adequately back up data, or insufficient data encryption. 

5. Can Litigation Place Trade Secrets at Risk? --  The last place you might expect your trade secrets to be at risk of disclosure is in a court action intended to protect them, but courts around the country have held that plaintiffs alleging trade secret misappropriation must identify the secrets at issue with specificity. So what is a plaintiff to do if it wishes to minimize disclosure of its trade secrets during litigation while maximizing its ability to discover what information may have been taken by the defendants?  Click here.

6. Open Source – Hidden Exposure --  Open source code is computer code that is publicly available on the internet for use by anyone.  Typically, in order to copy open source code from the internet, a party must agree to the terms of a “click” or similar pop-up license.  Although there are hundreds of different open source code licenses, many require that the user of the code must make publicly available any subsequent use of the code.  In other words, if your software programs are built using open source code, it may be more difficult to claim trade secrecy for such programs.

7. Taking Control of Litigation Budgets in Non-Compete Cases -- Litigation budgets can be difficult to prepare under the best of circumstances.  Budgeting for non-compete litigation, with its unpredictable nature and often front-loaded cost structure, is even more difficult.  Although many factors are outside the control of parties and their counsel when it comes to litigation costs, the litigation strategy you choose can have a particularly significant impact on your budget in a non-compete case.  Moreover, given the fast pace of non-compete litigation, there is an increased need to continually reassess your budget early on as developments unfold.

8. Handling Employee Defections -- When employees leave to join a competitor, you can often be taken by surprise.  In order to secure your confidential information and customer relationships, rapid action may be required.  Consider these ten tips for responding to employee defections.

9. Advising Recruits -- Just as employers must be prepared to respond to employee defections, they must be prepared to advise their incoming recruits on what not to do when resigning from a former employer.  Here are ten things to keep in mind.

10. Mergers and Acquisitions -- Good mergers can turn bad without attention to employee retention -- be sure to carefully analyze the existence and enforceability of non-competes signed by key employees early in the process.

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

The United States District Court for the District of Minnesota recently upheld a magistrate judge’s decision to issue a protective order precluding a school from enforcing confidentiality obligations against employees who disclose information in connection with “formal and informal discovery” in a lawsuit commenced by the ACLU.

The ACLU filed suit against Tarek ibn Ziyad Academy (“TiZA”) arguing that its use of public funds violates the First Amendment because TiZA advances and prefers Islam over other religions and nonreligious approaches.  To aid its investigation, the ACLU sought to interview current and former TiZA employees to ask questions about how the school operates.  During these interviews, employees expressed reluctance because they feared the school would take steps to enforce a confidentiality clause in its Staff Handbook.  The ACLU contacted the school to seek confirmation that it would not commence legal action against employees who cooperate, but the school refused and reaffirmed its belief that the confidentiality clause applied.  In response, the ACLU sought a protective order from the court specifying that individuals can disclose information in connection with this case without fear of sanctions resulting from the secrecy clauses in the school handbook and related non-disclosure agreements.

The magistrate judge issued a briefly worded order stating that “[p]ursuant to its inherent authority to maintain the integrity of the proceedings, this Court orders TiZA not to commence legal action against its former or current employees for disclosures they may make in connection with this litigation.”  TiZA appealed this order to the district court, but the district court was even less understanding.  Observing that TiZA does not want its employees to provide information relevant to the lawsuit, the district court threatened that it “may be required to weigh the evidentiary implications of TiZA’s conduct should TiZA attempt to prevent current or former employees from providing information in this action.”  The court noted that such “implications” may include drawing adverse inferences about how the school operates, and it further warned TiZA that its conduct “may not sit well with a fact-finder such as a jury.”   

In fairness, the district court’s decision was heavily premised on TiZA’s status as a “public entity.”  In fact, the court observed that TiZA was “behaving more like a private institution by maintaining that a confidentiality clause in its employee handbooks may be grounds for termination or legal action if a current or former employee provides relevant, public information in this action.”  Regardless, the court’s opinion expressly left undecided the issue of whether the confidentiality clause was unenforceable because the school was a public entity.  Instead, it found that TiZA’s threats on the record before it were not “consistent with a good faith search for the truth.”  Whether the court would reach the same result in a case involving a private entity is debatable.

A copy of the district court's opinion, the magistrate judge's order, and the ACLU's memorandum of law are available in pdf format below.

ACLU v. Tarek ibn Ziyad Academy District Court Order.pdf (20.82 kb)

ACLU v. Tarek ibn Ziyad Academy Magistrate Judge Orderl.pdf (10.41 kb)

ACLU's Memorandum re Motion for Protective Order.pdf (42.30 kb)

Many employers consider their customer list to be a trade secret.  As this blog has previously noted, 46 states plus the District of Columbia have enacted a version of the Uniform Trade Secrets Act.  In some states, the statute goes so far as to expressly provide that a customer list may qualify for trade secret protection.  For example, in Colorado, a trade secret may include “names, addresses or telephone numbers, or other information relating to any business or profession which is secret and of value.”  See Colo. Rev. Stat. Ann. § 7-74-102(4).  Other states are more generic and do not expressly mention customer lists.  Rather, generally speaking, a trade secret is a (1) compilation of information, (2) that derives independent economic value to the owner, (3) because it is not generally known or easily ascertained by others through proper means.  It is important to note, however, that trade secret status is not automatic in any state.  Stated differently, although a customer list may qualify for trade secret protection, the trade secret owner will bear the burden of showing that the information is in fact a secret and valuable.

There is no magic “formula” for achieving trade secret status for a customer list, but there are many different steps a company can take to improve its odds.  Here are five:

1. Establish Ownership. Contractual clarity is helpful.  Employment agreements should require employees to acknowledge that customer records and information, specifically including their identities and other data about their preferences, contact information and the like belong solely to the employer and are considered to be the company’s trade secrets.  This may even mean taking steps to ensure customer information is not disclosed through social media such as LinkedIn, Facebook or Twitter.

2. Prohibit Misuse Through Nondisclosure Agreements. Employment agreements should contain nondisclosure agreements with language stating that employees may not use or disclose customer information except for the sole purpose of conducting business on behalf of the  employer.

3. Maintain Computer Security. Customer information should be protected in all forms, including on computers.  Maintaining a secure computer system is not a simple task, but the following steps should be considered: require passwords; limit employee access to certain information on a need-to-know basis; implement controls on what can be downloaded; make sure your system has all of the latest security patches and fixes installed; and if the company’s system is on the internet, use a firewall and routinely audit servers for security gaps. 

4. Remind Employees. Don’t let employees forget that your customer information is company property and may not be disclosed. Flag computer systems with messages and dialog boxes with reminders. Include confidentiality language in policy manuals and handbooks. Send written reminders in annual compliance or business practice updates.  Remind employees during meetings and review sessions.  Periodic emails can be used.  In short, take advantage of natural opportunities to remind employees.

5. Limit Access. In addition to protecting computer systems, carefully monitor and limit access to customer files. Do not store customer records in areas that are accessible to the public or to all employees. Limit employee access to information only about the customers they personally service.

For more details on protecting your trade secrets, see our prior post regarding implementing a trade secrets protection program.  And as always, please feel free to let us know your thoughts and questions in the comment section below.

In today's competitive business environment, it is imperative that companies take steps to protect their intellectual property, including trade secrets, customer relationships, proprietary computer software, and business methods.  Taking appropriate steps will enable companies to protect and leverage their own intellectual property and to manage the risk from claims that they are improperly using the intellectual property of others.   To this end, this post summarizes some of the primary types of intellectual property protections available: contracts, trade secrets, copyrights; trademarks; and patents. 

Contracts

The most widely-recognized contractual restriction is the “non-compete agreement.”  A “non-compete agreement” technically refers to a contract in which a person agrees not to engage in any acts of competition with a company for a certain period of time.  In common usage, however, the term often is used more broadly to refer to any contract by which someone has any type of competitive restrictions, including non-solicit, non-recruit, non-disclosure and confidentiality agreements:

• A non-solicitation agreement normally refers to a contract by which an employee agrees not to solicit customers for a period of time after termination of employment.  Sometimes the agreement will be broader and will prohibit the acceptance of business from certain customers, as well as solicitation of business.  Generally speaking, to be enforceable in court, such an agreement must be reasonable, and no more burdensome than necessary to protect the legitimate interests of the employer.

• A non-recruitment agreement refers to a contract by which an employee agrees not to recruit, or solicit for recruitment, employees of a company for a certain period of time following the termination of employment.  Sometimes the agreement will be broader and prohibit hiring, as well as solicitation of employees or recruitment.  Normally, courts do not subject these types of restraints to the same level of scrutiny applied to non-compete and non-solicitation agreements.

• A confidentiality agreement is a contract in which a party agrees to maintain certain information as confidential and not to disclose the information to third parties.  It often is used to prohibit employees from disclosing certain information they learn as a result of their employment.  Normally, courts do not subject these types of restraints to the same level of scrutiny applied to non-compete and non-solicitation agreements.

• A non-disclosure agreement, which is similar to a confidentiality agreement, is a contract in which a party agrees not to disclose certain information to third parties.  The agreement typically covers certain types of information gained by the employee in the course of employment.  The agreement also frequently has a prohibition on “using” information, as well as disclosing it.  Normally, these types of restraints are not subjected to the same level of scrutiny applied to non-compete and non-solicitation agreements.

For a discussion of the issues presented when using non-compete agreements in multiple jurisdictions, click here.

Trade Secrets

Generally, a trade secret is information, including a formula, pattern, compilation, customer list, program, device, method, technique or process that derives independent economic value to the owner or gives the owner an advantage over competitors from not generally being known and not being easily ascertained by others through proper means.  The recipe for Coca-Cola, for example, is a widely recognized trade secret.  Although the requirements for trade secret eligibility vary from state to state, 46 states plus the District of Columbia have enacted a version of the Uniform Trade Secrets Act.  Generally speaking, any valuable business information that one tries to keep secret from competitors is subject to trade secret protection. Although some trade secrets may also be subject to copyright or patent protection (as discussed below), some information can only be protected as a trade secret .  For example, because a customer/client list is not a creative work of authorship, it cannot be protected through copyright; because it is not a novel and non-obvious invention, it cannot be protected through a patent.  However, because such lists do derive value for their owners if they are maintained in secrecy, they are eligible for trade secret protection.

Unlike trademarks, copyrights, and patents, registration for trade secret protection is not required.  Nor do trade secrets need to be reduced to a tangible form to be protected.  Generally, to protect a trade secret, the owner simply needs to make reasonable efforts to keep the information at issue confidential.  Trade secret protection can be perpetual, so long as the secret is kept a secret. 

To see our prior post regarding implementing a trade secrets protection program, click here.

Copyrights

A Copyright is the exclusive right to (i) reproduce a work and copy it, (ii) prepare derivative works based on the copyrighted work, (iii) distribute copies to the public; and (iv) publicly perform/display the work – if applicable.  Any original work of authorship in a tangible form (i.e., in writing, in film, in a sound recording, saved onto a computer hard-drive, or otherwise recorded) is eligible for copyright protection.  Ideas cannot be copyrighted, but the expression of ideas in a tangible form is subject to copyright protection.  For example, the idea of a lovable, drunken, dimwitted male is not protectable, but the expression of such an idea that is Homer Simpson is protectable. 

Generally speaking, a copyright is owned by the author of the work.  One exception is the “work made for hire” doctrine.  Under that doctrine, all copyrightable works created by employees in the scope of their employment are owned by the employer.  Also, certain types of works made by independent contractors can constitute works made for hire provided that they meet certain conditions.  Copyright protection begins when the work is created, and lasts for the life of the author plus 70 years.  Works made for hire are protected for 95 years from the date of the first publication, or 120 years from the date of creation of the work, whichever is shorter.

Trademarks

A trademark is a word, symbol, or other identifier (e.g., shapes, sounds, colors, etc.) that identifies one’s goods and distinguishes them from the goods of others.   A service mark is a word, symbol or other identifier used to distinguish one’s services from the services of others.  Anything that serves to indicate the source of one’s goods or services functions as a trademark.  Words and symbols (e.g., “Kleenex”) are subject to trademark protection.  Colors (the pink color of Owens-Corning fiberglass), shapes (the distinctive shape of the Coca-Cola bottle or Apple's iPod) and sounds (NBC’s three-tone chime) may also be subject to trademark protection.  A mark can be registered with the United States Patent and Trademark Office if it meets certain conditions.  Trademark protection is perpetual, but there are various post registration filing requirements, such as affidavits of continued use and filing for renewals. 

Patents

A patent is the grant of a property right to the inventor of a process or other invention, and it may be issued by the United States Patent and Trademark office.  A patent gives the owner of the patent the exclusive right to prevent others from making, using or selling the patented invention in the United States.  This right includes a right to prevent reverse engineering.  Patents cover “any new and useful process, machine, manufacture or composition of matter, or any new and useful improvement thereof”.  (35 U.S.C. 101).  In order to qualify for patent protection, a process, machine, or other invention must be novel and non-obvious, which means that it must never has been made or practiced before.  Non-obviousness is an even more difficult to establish because the new invention must be more than an obvious extension of past knowledge or invention. 

Patent rights apply as soon as the PTO issues the patent, and patents last for 20 years.  As part of the patent application process, the inventor must disclose the “best method” for practicing the invention.  Consequently, once the patent expires, with limited exceptions, anyone may make, use, sell, offer for sale, and/or reverse engineer the patented invention. 

In sum, it is important for companies to recognize and understand the difference between the types of protection outlined above.  Doing so will enable companies to protect and leverage their own intellectual property and to manage the risk from claims that they are improperly using the intellectual property of others. 

A few days ago, I wrote about the top ten things a company should do when an employee resigns to join a competitor (click here to see that post). But what about the flip side of that coin?  What mistakes should be avoided by departing employees and the firms that hire them?  Here are ten things to keep in mind:

1. Avoid Taking Business Records
Taking business records and information may be a bad idea for many reasons. It may be a violation of a confidentiality or nondisclosure agreement, and depending upon the content of the records, it may also constitute misappropriation of trade secrets. It may also give rise to a claim for conversion of property. In addition to these possible legal reasons, taking  business records angers employers and augments their suspicions. When a company learns that a former employee has e-mailed information to a home e-mail account, or, that a previously full file cabinet is now empty, a number of questions arise. Why did the employee take it? What else did the employee take? What does the employee plan to do with it? Upon asking these questions, employers may begin to “re-think” a previous decision to permit the employee to accept a new job free from litigation. The employee may no longer seem trustworthy, and the company may feel it can no longer rely on assurances that the employee’s new job poses little or no competitive threat.

2. Sabotaging Records
Refraining from taking records is a good start, but respecting the integrity of records is a good follow-up.  Some employees mistakenly feel they can secure an undetectable advantage by altering company records on their way out the door. For example, departing employees can be tempted to alter a telephone number in a computer system by one digit simply to gain a head start by slowing down the company’s ability to contact clients, or to delete key information, assuming that no one will ever find out. In this time of technological advancements, however, employers are gaining more and more investigative resources that enable them to discover such misconduct, and computer sabotage easily begets claims for a violation of the Computer Fraud & Abuse Act. Departing employees should be reminded that the “gain,” if any, secured by sabotaging records is far outweighed by the “pain” that may follow when their misconduct is uncovered.

3. Soliciting or Telling Clients Prior To Resignation or Departure
Even if an employee lacks a non-solicitation agreement, it is wise to remind departing employees not to begin soliciting clients until after their departure. Soliciting clients or advising them of the employee’s plans prior to resigning can lead to problems. Although the law varies among states as to the propriety of an employee giving clients advance notice of his/her departure, solicitation prior to the employee’s departure generally is not permitted. Pre-resignation solicitation may give rise to claims for breach of duty of loyalty and may serve as an aggravating factor for a judge who later considers the equities when contemplating injunctive relief. Departing employees often feel that if they do not advise clients of their impending departure, the clients will hold it against them. Although this is possible, employees should be reminded of the possibility of being enjoined from doing business with clients who were improperly solicited prior to resignation.  Moreover, solicitation of clients prior to resignation may result in the employer finding out about the impending resignation from the client, and not from the employee, resulting in a heightened mistrust of the employee. The safest route is for an employee to continue to serve the interests of the employer until the very last moment of employment.

4. Soliciting/Telling Fellow Employees Prior To Resignation or Departure
Similar to solicitation of clients prior to resignation or departure, solicitation of fellow employees may also be a bad idea. Departing employees often misjudge whether they can trust their colleagues to keep their impending resignation a secret.  Moreover, even if their colleagues do keep the secret, they frequently become witnesses after the employee’s departure as the former employer will turn to its remaining employees when it conducts its investigation. Employers resent being the last to know about an employee’s departure for a competitor, and they may scrutinize the former employee’s actions with greater vigor if they believe the employee was trying to encourage others to join in the move to a new company.

5. Failing To Segregate Non-Public vs. Public Data
Departing employees sometimes take information for innocent reasons, unintentionally creating the appearance of an intentional misappropriation of trade secrets or conversion of property. A common example includes employees taking contact data that contains not only personal contact information, but also professional contact information. Other employees remove sales records with the intent of retaining information to enable them to substantiate their entitlement to commissions after they depart. Another common example includes employees taking articles or studies they wrote simply because the employees feel proud of their work product, not realizing that the employer views the work product as belonging to the company. It is wise to remind a departing employee that the removal of “personal” information and property should be carefully analyzed to ensure that unwanted and allegedly proprietary or non-public information is not inadvertently taken.

6. Granting An “Exit Interview”
In some instances, it may be advisable for an employee to resign without giving prior notice. Negotiations concerning the parameters of the employee’s subsequent employment with a competitor may well be more successful if conducted by counsel after the employee has resigned. The simple truth is that no matter how well you coach employees about how to resign, they rarely appreciate the legal consequences of their words. Moreover, savvy employers may use an exit interview effectively to create evidence that later shows up in support of a motion for a temporary restraining order. If delicate legal issues surround the departure of an employee from one competitor to another, the discussion with a former employer may well be left to counsel, and the employee should be advised to avoid granting an exit interview.

7. After-Hours Access
Employees planning to leave for a competitor often access their offices or computers during odd hours with the intention of preparing for their departure when no one is around.  After-hours access can be detected by security systems, or in some cases, it can be recorded by computer systems. If such access deviates from an employee’s normal course of conduct, it may tip off the employer of the impending resignation. Even if such access is not detected until after the employee’s resignation, it creates the appearance of impropriety. If coupled with other common mistakes discussed in this article (e.g., after-hours removal of business records), the appearance of impropriety grows stronger.

8. Badmouthing The Firm
Any time an employee leaves to join a competing firm, there is likely to be some hard feelings. Nothing compounds these hard feelings like an employee who badmouths the former employer on the way out the door or even after departure. Departing employees should be reminded that badmouthing the former employer to fellow employees accomplishes little -- other than providing motivation for the former employer to make the transition difficult. Moreover, badmouthing the former employer to customers can have the additional effect of backfiring, resulting in the loss of otherwise attainable business and perhaps leading to defamation claims. Employees should be advised to take the high road.

9. Failing to Work Until The Last Minute
Understandably, it is hard for a departing employee to be motivated when a new job is on the horizon. In some instances, after providing notice of resignation, employers may limit the departing employee’s access to information and customers. But a decrease in productivity in the weeks or months leading up to a resignation or departure may tip the employer off about the impending resignation, and worse yet, it may create the appearance that the departing employee was holding off on completing work with the intent to divert such work to their new employer.

10. Failing To Consult With Attorney Prior To Resignation
Many hiring managers make the mistake of waiting until after an employee has been hired to get counsel involved, by which time the departing employee may have made many of the mistakes outlined in this post. Counsel should be included early in the hiring process so that departing employees obtain the advice they need. If there are attorney-client privilege concerns, the employee should be advised to consult with an attorney of his/her choosing. No matter what, transitioning employees from one competitor to another is a process filled with tension. Foolish mistakes can increase that tension and may lead to litigation or strengthen a party’s desire to litigate. Careful planning and early advice can minimize this risk.

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

In the business world, protection of trade secrets can make the difference between success and failure, or profit and loss.  This post seeks to show you how to protect your company’s trade secrets so that in the event one of your employees steals a trade secret, you will be in the best possible position to succeed in litigation stemming from this theft. 

How to Implement a Trade Secrets Protection Program

First, you need to identify your trade secrets (or perhaps more pointedly, the information for which you seek trade secret protection).  The next step is to identify the specific physical, information technology and other security protocols your company can take to protect such information.  The first line of defense against any form of corporate espionage is to implement a trade secrets protection program.  This consists of a three-pronged approach: (i) addressing employment relationships; (ii) controlling access to your company’s trade secrets; and (iii) knowing your company’s employees.

A.        Address Employment Relationships

i.          Require Your Employees to Sign Confidentiality Agreements, Non-Solicitation Agreements, Covenants not to Compete, and Assignment of Invention Agreements

As a basic first step, to the extent permitted by applicable law, you should have your company’s employees sign confidentiality agreements, non-solicitation agreements, covenants not to compete, and assignment of invention agreements.

A confidentiality agreement accomplishes four primary purposes: (i) it acknowledges that the employee has been or will be exposed to certain company trade secrets and other confidential and proprietary information; (ii) it identifies this information with at least some degree of particularity; (iii) it prohibits unauthorized use or disclosure of this information; and (iv) it requires the return of all trade secrets and other confidential and proprietary information on separation from employment and requires employees to sign a termination certificate declaring that all trade secrets have been returned.

A non-solicitation agreement prohibits a departing employee from soliciting, directly or indirectly, the company’s customers or clients, regardless of where they are located, to do business with the employee.   The primary requirement for a non-solicitation agreement is to identify the customers or clients that an employee cannot solicit.  As a general rule, courts do not require that a specific geographical territory be included in the agreement, although various states do differ on this issue.  In addition, when determining whether a non-solicitation agreement is reasonable, courts will often consider the extent to which the employee had actual contact with the customers or clients.  Some states, like Louisiana, are more restrictive and require that, in order to be enforceable, a non-solicitation agreement must contain certain language required by statute. 

A covenant not to compete – also known as a “non-competition agreement” or “non-compete agreement” – protects two aspects of corporate life: (i) customers or potential customers, and business interests that a company has spent considerable effort developing and which are vital to its financial health; and (ii) confidential information, which, if possessed, used or disclosed to unauthorized third parties could result in significant financial harm to the company.  Most courts will enforce covenants not compete, as long as they are drafted in accordance with state law.   As a general rule, covenants not to compete are enforceable only to the extent that they protect the legitimate business interests of companies (such as protecting trade secrets) and they contain reasonable time and territory restrictions.    To be reasonable as to territory, a covenant not to compete should at most only address that territory which the company actively conducts business (although it is safer to restrict the territory to that in which the employee was actively engaged).  To be reasonable as to time, a good rule of thumb is that most courts will enforce restrictions up to two years; three to four years will be closely scrutinized and held to a more rigorous standard; and five years or more will be virtually unenforceable (except perhaps in a sale of business context). 

An assignment of invention agreement is a provision or separate document that “assigns” to the company any inventions or new discoveries made by an employee or independent contractor during the course and scope of his or her employment or work for hire.    Some states, such as California, regulate the use of assignment of inventions agreements by requiring certain notice to employees (Lab. Code § 2870).

            ii.         Implement Appropriate Security Policies

Second, implement policies, to be signed by all of your company’s current employees and new-hires, addressing the following areas: (i) the use of computers, e-mails, voice mail and the internet; (ii) physical access to trade secrets; (iii) telecommuting; (iv) employee privacy concerns; and (v) vendors and third party access to confidential information. 

            iii.        Train Your Company’s Employees

Third, train your company’s employees and new-hires annually in basic security awareness, the company’s security policies and procedures, their security responsibilities, and the proper procedures for reporting and dealing with theft of trade secrets.

Furthermore, consider including in the employees’ personnel files documents that show the steps taken to inform him or her about the confidentiality obligations – such as a copy of the signed confidentiality agreement, receipt of the employee handbook and other key policies, a review of the trade secrets protection program, and a record of attendance at training meetings that address the need to protect trade secrets.

iv.        Protect Your Company’s Trade Secrets Upon an Employee’s Termination

Employee terminations create a particularly likely window for loss of trade secrets.  Failure to take reasonable steps in the event of a termination can result in loss of critical information, or loss of trade secrets protection.  In order to preserve your company’s trade secrets, the termination or resignation of an employee with access to this highly sensitive information should trigger related security precautions.

You should immediately disable the accounts and access privileges of the terminated employee, and change all passwords, remote access codes, and, in appropriate instances, even VPN and dial-in numbers immediately at the time of termination.  Also, you should “unplug” terminated employee’s computer systems and remove dial-up modems from the terminated employee’s workstation.  Such actions will prevent the employee from accessing files after leaving.  Examine the employee’s computer/laptop before he or she leaves to determine if the employee has accessed  and/or copied sensitive information in recent months.  Conduct an exit interview and remind the employees during the exit interview of his or her continuing duty not to disclose trade secrets, and reference any documents to the effect.  At the exit interview, request that the employee return all company property.  Consider using a checklist for returning company equipment, keys and confidential information.  You might also consider obtaining from the departing employee information about his or her new employer, which could help you determine the potential risk of any unauthorized disclosure or use of trade secrets.  

B.        Control Access to Your Company’s Trade Secrets

Controlling access to your company’s trade secrets means keeping the trade secrets confidential and providing access only to those having a legitimate need for it.   This is especially important in protecting trade secrets because one or more critical elements of proof under most state laws is showing that steps were taken to protect the secrecy of the information.

i.          Secure the Physical Environment

Examples of how you can secure the company’s physical environment include:

·        Restricting access to servers, routers, and other network technology to those whose job responsibilities require access;

·        Installing surveillance equipment to monitor access to servers and other critical systems;

·        Keeping wire closets, server rooms, phone closets, and other locations containing sensitive equipment locked at all times;

·        Keeping an inventory of the equipment and periodically check for missing equipment;

·        Placing locks on computer cases to prevent hardware tampering;

·        Locking file cabinets and offices that store sensitive information;

·        Designating all documents containing trade secrets or confidential information as “confidential” and implementing procedures to help ensure that all documents deserving the “confidential” designation are appropriately marked when initially created;

·        Cross-shredding all paper documents containing confidential information before trashing them;

·        Securing all dumpsters and posting “NO TRESPASSING” signs; and

·        Making sure all discarded magnetic media is erased;

While it is not necessary for your company to utilize every one of the above-mentioned protocols in order for information to qualify as a trade secret, your company’s failure to take routine physical precautions may lead a court to deny trade secret protection.

ii.         Manage Access to the Company’s Computer System Resources

Examples of how you can manage access to the company’s computer system resources include:

·        Implementing passwords for all employees for access to all critical system resources;

·        Making sure passwords are set up with multiple characters (including numbers and letters);

·        Requiring employees to change their passwords at least every 60 days and preventing them from reusing old passwords;

·        Periodically training employees in password selection and protection and training them not to tell their passwords to others;

·        Implementing controls on employees’ use of the internet, the sites they can visit, and the software they can download; and

·        Monitoring and logging employees’ internet actions.

iii.        Secure the Company’s Computer System and Network

Examples of how you can secure the company’s computer system and network include:

·        Keeping audit logs of all access requests to critical systems and sensitive information;

·        Encrypting sensitive information;

·        If the company’s network is on the internet, using a firewall and auditing the servers for security holes on a regular basis;

·        Making sure the system has all of the latest security patches and fixes installed;

·        Making sure all floppy disks brought into the company are scanned for viruses before use;

·        Backing up all workstations and servers at least weekly and storing backups offsite;

·        Keeping a log of all backups, including backup date, backup locations, and the employee performing the backup;

·        Periodically testing the backup system to ensure the ability to restore date if necessary;

iv.        Protect Against Third Party Disclosure

Examples of how you can protect the company against disclosure of its trade secrets to third parties (such as independent contractors, vendors and suppliers) include:

·        Training your company’s employees not to discuss the company’s trade secrets or confidential information around third parties;

·        Instructing employees to report any repair people that show up without being called, and to not grant access to equipment until their identities are established;

·        Requiring all visitors to wear visitor tags and be escorted at all times;

·        Utilizing contract and licensing agreements that expressly state the parameters for using certain information, and that include restrictions on “reverse engineering” or disclosing that information during activities such as a contract bidding process;

·        Utilizing confidentiality provisions in standard contracts with any subcontractors or suppliers; and

·        Meeting with third parties to stress the need for confidentiality for certain projects or other situations.

C.        Knowing Your Company’s Employees

One of the best ways to protect your company’s trade secrets is not to hire a thief in the first place. When hiring employees in sensitive areas, or who will have access to confidential information, you should do a thorough pre-employment screening of those individuals.    You might also consider performing background checks on current employees, as long as those checks are done in accordance with applicable laws (such as the Fair Credit Reporting Act and analogous state laws).

In the broadest sense, the term “pre-employment screening” is shorthand for the process of assessing applicants for a company’s particular job or category of job.  The assessment is performed according to company policies, based upon the nature of the job category and applicable laws (such as the Fair Credit Reporting Act and analogous state laws), which are designed not only to reveal fully qualified applicants, but also to potentially weed out those employees who may end up stealing your company’s trade secrets.  The elements of a pre-employment screening may include the following: education and credentials verification; past employment references; criminal history; motor vehicle report; social security number trace; credit report; workers’ compensation records; civil lawsuits; judgments, liens and bankruptcies; security clearances; and merchant databases.

Conclusion

The day is past when trade secrets can be adequately protected merely by requiring employees to execute confidentiality agreements, non-solicitation agreements and covenants not to compete.  Such traditional contractual protections can be of critical importance as a deterrent and in increasing the success in trade secrets litigation, but now companies must deploy an arsenal of modern electronic weapons and physical barriers to protect their trade secrets and retain their competitiveness.  In today’s increasingly complex electronic world, effective protection against hi-tech theft must include proactive and reactive weapons.  Without them, companies may have little chance of protecting the information upon which their business depends.