Well-Crafted Agreements Protect Trade Secrets Michelle Martinez

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Every day in courtrooms across the country, employers and employees are seeking to enforce, limit or get out from under noncompete and confidentiality agreements. "This is the hottest area of litigation we've seen," notes Dallas-based Jordan Cowman, an employment law attorney for Baker & McKenzie.

Though such agreements have been standard practice for many industries—especially in science and technology—usage is broadening because intellectual capital is becoming more valuable, and in many cases, is the business itself.

Case Examples

Dow Chemical accused GE Plastics of hiring 14 mid-level managers for their knowledge of Dow's trade secrets. Volkswagon paid a reported $100 million to General Motors as compensation for hiring a GM executive and using information deemed "proprietary" that the former executive supplied.

"These cases are unusual only for their very high profiles," notes Debbie Rodman Sandler, partner in the labor and employment practice group at White and Williams, a Philadelphia-based law firm.

Last year, fiber-optic equipment provider Ciena Corp., sued three former highly specialized employees for breach of contract when they left to join competitors. Several years ago, three employees left Fluent Inc., a privately held scientific software developer to start a competing company nearby. But, no action could be taken against the former employees because they had not signed noncompete agreements while working at Fluent.

Learning from the experience, Fluent immediately implemented a policy in which every employee—from administrators to senior-level executives—signs a noncompete agreement that bars them from working at a competitor for one year. Though there has been some discussion about the terms of the agreement, "for the most part, people are willing to sign," a spokesperson for the company explains.

Noncompete agreements vary in the way they are written, as well as how they are enforced. For example, each state has its own laws that interpret how noncompete agreements are enforced. In California, for example, the courts do not enforce such agreements.

Some agreements stipulate that employees cannot work for competitors for a certain period of time. Other agreements want ex-employees to keep away from their territory when they leave, typically stating a mileage radius, such as 50 or 100 miles or more. All prohibit employees from taking company secrets with them to the competition, notes Cowman.

"In some instances, when an employee who has signed a noncompete agreement moves on to a competitor, a single letter from the company's lawyer to the competitor will be enough to prevent any harm," Sandler explains. "In other cases, a war of attrition can erupt, with both sides battling in court for weeks or months."

Take for example, the case of Mark Stultz, a marketing executive who signed a noncompete when taking a job with Minneapolis-based medical-device manufacturer Medtronic. For five years, he worked at Medtronic, marketing its spinal-cord simulation device, an implant that reduces chronic pain. In June 2000, Advanced Bionics, a competitor based in Sylmar, Calif., hired Stultz to launch its new spinal-cord stimulator product.

Three hours after Stulz gave notice to Medtronic, his new employer sued Medtronic to have Stulz's noncompete agreement declared unenforceable by California state law. Medtronic got an injunction in Minnesota to stop Stulz from working on the competing device.

"You just can't go rushing off across the state line and thumb your nose at lawful contracts," Medtronic's attorney Roman Silberfeld, reportedly said. The case, Advanced Bionics v. Medtronic, is still pending before the California Supreme Court.

Think Before You Write

No agreement can completely insulate a company from departing employees who go to work for a competitor or start their own business. However, drafting noncompete agreements can provide some control over timing, terms and the effect of employee departures.

To draft accurate agreements, Sandler suggests asking these key questions:

• Exactly what activity needs to be prohibited?
• How long would it take to overcome the competitive harm caused by a defecting employee?
• Can you explain, in 10 words or less, what harm you will suffer if the competitive activity is not stopped?
• Is there a sum of money that would compensate you for that harm?

"Doing the hard work before formulating noncompete agreements will also help you explain to a judge why violation of the written agreement is unfair," Sander said.

According to Larry Lorber, partner with Proskauer Rose, LLP in Washington, D.C., courts generally don't like noncompete agreements because of their general theme of restricting individuals from earning a living in the field of their choice. He says the use of confidentiality agreements is much more widespread because they pinpoint the exact actions and items (client lists, pricing information, etc.) deemed trade secrets. Confidentiality agreements basically state that an individual can't use the "knowledge" gained from working at company X, when switching jobs to company Y, explains Lorber.

Here is a sample confidentiality agreement:
"Employee understands and agrees that in the course of his or her employment, he or she will receive and become aware of information, projects, practices, customer contacts and potential customers, which are sensitive and confidential in nature. Employee agrees to keep all such information strictly confidential, and further agrees that he or she will not communicate, disclose, divulge or otherwise use-directly or indirectly-such confidential and/or sensitive information."

Improve Chances of Enforcement

With noncompete and confidentiality agreements, there are steps you can take to improve the chances of enforcement, such as:

• Target restrictions to cover your most important concerns only. Courts often disallow noncompete agreements that are too broad.
• State when the actual restriction will be triggered. For example, some restrictions automatically apply, no matter if the employees' termination is for cause, without cause or happened as part of a layoff. Other limitations will only apply if the employee resigns or is terminated for cause.
• Resist the temptation to write a tough, all-inclusive agreement, have everyone sign it, and then decide—when and if the time comes—if you will fight to enforce it. Employers that fail to enforce them will find their former employee's attorney arguing that the prior failure to enforce reveals there is no pressing need for the restriction in the first place.
• If you claim that the knowledge the employee has is confidential, you need to take adequate precautions to safeguard the material from people who do not "need" to see it. For example, stamp key customer information and other important data with "confidential information" and similar labels.
• Talk to employees who quit. Doing so, makes them more aware of the seriousness of the agreement, and aware of the fact that if violated, the company is ready to take action.
• Pay former employees not to compete. "Courts like this practice," says David Carr of Ice Miller law firm in Indianapolis. "Ongoing employment may not be considered sufficient consideration in some jurisdictions; a simple 50 percent signing bonus or a holiday bonus may be enough."
• Get warranties from new employees. Have new hires sign a warranty that they are not being asked to violate noncompete obligations of their former employers. "Wrap key information in appropriate language," Carr advises. "Workplace conduct can't be separated from the language of a noncompete agreement.
• Include a "blue-pencil" clause, which allows the courts to reform provisions to enforce them. Carr says: "But don't count on a court being willing to rewrite an agreement after the fact."
• Check the individual state laws because some won't enforce a noncompete provisions from another state. "The noncompete (as well as the confidentiality agreement) works best as an addendum to an employment contract," Carr says. "It's better to sign a noncompete before employment starts."

Michelle Martinez is a Leesburg, Va.-based writer specializing in recruitment, human resources and workplace management issues.