Protecting Your Secrets (Part 1)
Understanding the basics of trade secret and non-compete law is essential for many lawyers.
Summary: This is the first of a four-part series on trade secret and non-compete law in the employment context. This article focuses on non-compete agreements, which can generally be used to restrict a former employee from performing their trade or skills in particular geographic areas for a specific length of time if the restrictions are reasonable.
Maintaining a company’s trade secret, proprietary and otherwise confidential information is critical in our increasingly knowledge-based economy. Litigation is becoming more frequent between companies and their former employees over the alleged theft, disclosure, and use of confidential information, making this a critical area of the law. Understanding at least the basics of the applicable laws is important for most lawyers, whether you’re a plaintiff’s lawyer in a small shop or in-house counsel at a multinational company.
It’s also important to have at least a basic understanding of the applicable laws because these cases usually move very fast (especially on the front end). It’s also somewhat common to get in front of a judge very early in the case for an evidentiary hearing. Plus, the legal and factual issues are usually fairly complex.
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With all of this in mind, I’m writing a four-part series on this, one of my favorite parts of my practice. Each part will cover the basics of the topic along with some interesting nuances. (I’ll dive into more advanced topics in future articles.) This article, Part 1, focuses on restrictive covenants in employment contracts, aka non-compete agreements. Part 2 will focus on some of the key statutes and common law theories relevant to the theft/use/disclosure of trade secrets and other confidential information. Part 3 will focus on enforcement, and Part 4 will be dedicated to preventing the theft/use/disclosure of trade secrets and confidential information.
So, what exactly is a non-compete agreement? At its core, it’s a contract between an employer and an employee in which the employee agrees to not work for a competitor of the employer for a defined period of time and/or in a defined geographical area after leaving the employer. The law of non-compete agreements varies state by state, although there’s general agreement on a lot of the basic principles. Three states, however, prohibit non-compete agreements altogether: California, North Dakota, and Oklahoma.
In states where non-competes are permitted, courts typically focus on two factors to determine whether a non-compete is enforceable: (1) whether the agreement seeks to protect a legitimate interest of the employer; and, (2) the degree of hardship imposed on the employee by enforcement.
As to the first factor, what property interests can an employer protect with a non-compete? Courts usually require that an employer have a “legitimate interest” in the form of confidential or proprietary information, trade secrets, and/or certain relationships. For example, in Touzot v. ROM Dev. Corp., 2016 U.S. Dist. LEXIS 55766 (D.N.J. 2016), the Court held that existing customer relationships are a legitimate interest subject to non-compete protection.
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Other examples could be secret formulas, processes or business and growth plans or projections. But you get the idea: it’s got to be something really important to the company’s business and not generally known or available to the public to be considered a “legitimate interest.” Something like a desire to simply prevent competition in the marketplace is typically not considered a legitimate interest.
Courts interpret and apply the second factor, degree of hardship on the employee, very differently depending on jurisdiction. It’s safe to say, however, that courts generally want the restrictions on the employee’s future employment options to be reasonable in light of the company’s protectable interest. As noted above, employees are typically restricted in a non-compete from performing their trade or skills in particular geographic areas for a specific length of time.
The geographic scope of an employer’s operations usually significantly impacts the reasonableness of location restrictions on employees. Let’s say that a company has operations only in Florida, but wants to restrict a former employee from working in Texas, where the company has no operations or clients. A court would probably have a hard time enforcing such a restriction, as opposed to a situation in which a company has significant operations in the geographic area where the employee is relocating.
A restrictive period placed on an employee in a non-compete is usually six months to two years. Courts evaluate these durational restrictions based on reasonableness in the circumstances. Courts typically take into account the length of time the employer’s confidential information known by the employee will be competitively viable. Also, courts will usually only enforce non-compete agreements to prevent an employee from practicing the same particular trade or skill the employee performed for the employer.
Other restrictions that may be permitted (and are often seen) in non-compete agreements include non-solicitation of an employer’s existing customers/clients and employees. Most states enforce such non-solicitation provisions if, again, such restrictions are reasonable in duration and geographic scope. Some courts will only enforce non-solicitation agreements as to existing clients of the employer with which the departing employee actually dealt. Also, courts usually won’t enforce non-solicitation provisions preventing an employee from contacting prospective clients of the employer.
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If a non-compete provision is unreasonable in any of its restrictions, is the entire thing void? It depends on the jurisdiction. Some jurisdictions will “blue pencil” or equitably reform the agreement and narrow the restrictions to more reasonable and enforceable terms. Others will not. Take, for example, the Nevada Supreme Court’s recent decision in Golden Rd. Motor Inn, Inc. v. Islam, 376 P.3d 151 (Nev. 2016), in which the Court declined to “blue pencil” overly broad restrictions primarily because “parties are not entitled to make an agreement . . . [to be] bound by whatever contract the courts may make for them at some time in the future.” Id. at 159.
That does it for non-compete agreements and Part 1 of this series. My next article, Part 2, will address the key statutes and common law theories relevant to the theft/use/disclosure of trade secrets and other confidential information.
Evan Gibbs is an attorney at Troutman Sanders, where he primarily litigates employment cases and handles traditional labor matters. Connect with him on LinkedIn here, or e-mail him here. (The views expressed in this column are his own.)
