The basic rule of fair competition for a departing employee is easy to state and appeals to common sense:
Employees owe their employer a duty of loyalty while employed and, absent an enforceable non-competition agreement, the employee is free to go into competition with employer and use his or her general knowledge, skills, and experience.i
That simple statement becomes a complicated reality when one starts to look at issues such as the skills and knowledge the employee brought to the employer, the discoveries and inventions that may have been made by or disclosed to the employee during employment, and the competitive niche to which the employee proposes to migrate with his or her skills.
Here are a few suggestions -- distilled from the experiences of companies that unfortunately had to litigate these issues -- that will help navigate through the mine field of employment agreements, confidential information, and trade secrets.
- DO PAY ATTENTION TO EXISTING AGREEMENTS AND OBLIGATIONS
Everyone in the business world has agreements in their files that have not seen the light of day in years.
Individuals should comprehensively collect and review all prior agreements – including employment, non-compete, confidentiality, and invention assignment agreements – to be familiar with ongoing obligations before a change of employment. Most employee agreementsii for technology companies include a clause that states all confidential information of the employer belongs to the company and requires the employee to assign all inventions and other intellectual property to the company. It is good practice for the employee to disclose all such obligations to a prospective new employer.
It is likewise good practice for the new employer to request, in writing, disclosure of any existing contracts and agreements from a prospective employee before making any offer of employment.
Employers should make sure that their employment records are up to date because employers are not immune from the forgotten agreement syndrome. It is a very common occurrence that a long-time, departing employee of the company may never have signed the employee agreement which is now routinely being required of new employees, creating uncertainty as to which, if any, of such terms apply to that person.
In addition, the original offer of employment or acceptance may have identified and excluded pre-existing information and inventions that the employee claims as his or her own. This may be especially true of employees who were already named inventors on a number of patents and have worked for several companies or have done a stint of consulting.
- DO RESPECT TRADE SECRETS BUT DON’T ASSUME THEY PROTECT THEMSELVES
- Employees: Respect the Employer’s Trade Secrets
Most people think of “trade secrets” as “formula for Coke” type information and it is evident that such types of business secrets can be protected.iii
Even in the absence of a specific “formula for Coke” type of trade secret, an employee who has gained substantial knowledge of the employer’s trade secrets during employment and who goes to work for a competing company to perform the same or closely related tasks and duties may be enjoined from employment by a Court because of the “inevitability” that he or she will use the former employer’s trade secrets. iv
What separates a company trade secret from an employee’s general skill, knowledge and experience? The answer depends on the efforts of the company to protect the information, the state of the art, and the custom of the industry, and the skill level of the employee. That is because a trade secret, unlike other forms of intellectual property such as patents, copyrights, and trademarks which are objectively defined, depends on the circumstances in which it is learned and the duty that arises from those circumstances.v
A well written confidentiality agreement puts the employee on notice that there is information that is considered confidential and both creates and proves the existence of a duty in the employee who signs it.
However, a confidentiality agreement cannot make a trade secret out of something that is generally known and, for the most part, courts will not restrain competition for alleged, but unproven, trade secrets.vi
- Employers: Do Vigilantly Identify and Protect Company Trade Secrets
It is not enough – repeat, not enough – for a company to assert that it has trade secrets and then assume that the burden is on the employee to prove that it does not.vii A company wishing to rely upon trade secret protection must do three things in an ongoing, affirmative fashion.
First, the company must be aware of what information it considers a trade secret. Before the company can enforce a trade secret the company must identify it. Any company will have a very hard time convincing a Court that it is irreparably harmed by the potential use of some general, internal information if the company cannot point out to the Court what is secret and how it provides a business advantage.viii
Second, the company has to keep the information secret. Trade secret protection is lost when the information is disclosed without restrictions.
There are several ways that companies inadvertently disclose their trade secrets and forego protection. For example, describing a trade secret in a patent application will destroy the trade secret when the application is published and applications are now published whether or not you ever get a patent.
Any type of printed disclosure not subject to confidentiality agreements such as business plans, white papers, and poster sessions at conferences may also destroy your patent rights, a topic beyond the scope of this article but one that is separately worth a discussion with counsel so that you understand the potential consequences of public statements and actions.
Finally, any feature that may be discerned from a product sold or even offered on the public market is no longer a secret, although an indiscernible improvement in the manufacturing process may be.
Third, the company must make its employees conscious that certain information is confidential and is not to be disclosed outside the company. A general confidentiality agreement is insufficient to protect particular trade secrets absent some specific effort by the company to communicate that particular information is considered a trade secret.ix
There are any number of checklists, articles, and consultants who will advise on steps that need to be taken. One such checklist is attached as Exhibit B. Suffice it to say that efforts to demonstrate in an open and ongoing way that the company takes confidentiality seriously – locked drawers and files, locked rooms, employee sign-in and sign out sheets for files and samples, employee security access passes, limited access notices, confidentiality legends, and employee training – will all go far both to protect information and to prove that the company has taken reasonable measures to do so.
- DON’T LIE
This one should be obvious.
Absent an enforceable non-compete agreement, an employee is free to go into competition with the employer including planning to do so with other employees of the company. The employees do not have to tell the employer about those plans. However, if questioned or confronted by the employer with questions about their plans, employees must resist the defensive instinct to deny them.
So many otherwise proper activities have foundered on this principle that it bears repeating.
The deception will eventually come to light and future credibility with the employer (and perhaps with a jury) will be shot.
A better approach is not to allow oneself to be confronted. As soon as practical, the departing employees should approach the employer and tell them of their plans and offer assurances that they have and will continue to respect their obligations to the company.x
- DON’T TAKE ANYTHING AWAY FROM THE COMPANY THAT HAS NOT BEEN REVIEWED
For employees, the most powerful way to demonstrate good faith and fair competition, as well as to save a lot of headaches and explanations, is to walk out the door empty-handed. A departing employee should take nothing when he or she leaves: no laptops, thumb drives (an earlier version of this article said “diskettes” at this point!), no paper or electronic files, no books or magazines, no supplies, no diaries, nothing. For any personal property that the employee might have at work, he or she should make a detailed list and allow the employer to review the list and the corresponding materials. The employer should then be willing to provide an acknowledgement in writing that the property was removed with permission.
For employers, it is very important to conduct an exit interview that goes over existing agreements and obligations, the status of projects, the whereabouts of files and information, the personal versus company property discussed above, and the ongoing duty of confidentiality. Having a set format for an exit interview and conducting it consistently via a skilled management level employee is good policy for a company and will make it possible to get through the exit interview even in contentious situations.
- DO FULFILL DUTIES AND RESPONSIBILITIES OF EMPLOYMENT WHILE STILL EMPLOYED
Employees, even at will employees, have a duty to the employer while still employed commensurate with the duties and responsibilities of employment.
Even though planning to compete while still employed is permissible in the absence of a non-compete agreement, the employee takes upon himself or herself the responsibility to insure that preparation activities do not cause the neglect of existing employment duties. Employees must give full attention to the job during working hours and should not use any of the employer’s facilities or property (phone or Internet service or accounts which, by the way, the employer has a usage record of, on-line subscription services, support staff, etc.) in planning activities.
It is also extremely important that the employee, especially a management level employee, continues to present all business opportunities and ideas to the employer to the same extent that the employee would if he or she had no plans to enter into competition. If an opportunity is worth pursuing, the employee should say so and give the employer the benefit of a good faith assessment preferably in writing. Whether or not the employer decides to pursue the opportunity, the memo will evidence exactly what the idea was and that the employer had the information necessary to pursue it.
Duties of employment also prohibit an employee from soliciting the current employer’s customers or vendors for the new business while still employed, even if their identities are public knowledge.xi
- NON-COMPETE AGREEMENTS
- Employees: Don’t sign non-compete agreements.
The best way to avoid the terms of a non-compete is not to sign one. So, every time an employee changes jobs and before accepting a new position, employees should ask whether there any agreements they will be required to sign as a condition of employment. Insist upon time to review them with an attorney. With the advice of an experienced attorney, the employee may be able to avoid non-compete provisions altogether. Alternately, the employee can negotiate key terms such as the length of the obligation, compensation for periods of non-compete, and a clear definition of the “competitive” activity.
- Employers: Require tailored non-compete agreements prior to commencement of employment that have been approved by counsel.
The most straightforward way to protect the company against the sudden departure of a key employee, or a group of employees, to a competitor is to have clear, enforceable noncompete agreements in place at the start of employment.xii
As a contractual restraint on competition, non-compete agreements are strictly scrutinized by Courts and their enforceability is a matter of local law. In most states, reasonable noncompete agreements are enforceable. California will not enforce non-compete agreements and several other states have specific limitations regarding them.xiii Therefore, employers must have legal advice of an attorney well-versed in the applicable laws as to what a non-compete may include and when and how the company may impose one on employees.
The nature of the employee’s responsibilities, the length of the obligation and the definition of “competing business” are all key terms. By using a generic form without advice, the company exposes itself to a false sense of security and the risk that the Court will invalidate the non-compete agreement. This would leave it with the burden of showing, at a preliminary injunction stage, that the employee had access to trade secrets and confidential information and that his or her use of them in the new employment is “inevitable,” and, at trial, that the employee actually took and used trade secrets.
- Employers and Employees: Negotiate
Since paragraphs A and B, above, appear to be in tension, note that non-compete agreements can be negotiated at the beginning of employment and during the exit process. Prospective employees may have more leverage than they imagine at the outset of employment, especially today where states are requiring more and more advance disclosure of the obligation, and that is a good time to negotiate a specific, non-compete obligation that makes sense.
For example, an employee may be able to negotiate for a non-compete agreement that requires the employer to pay compensation for the periods of non-competition, or for one that has different periods of non-competition depending on the nature of the “competing” business.
Employers may be able to offer compensation for a period of non-competition at the time the employee gives notice even if there is not presently a non-compete agreement. In addition, provided both employee and employer are being forthcoming in negotiation, they may be able to shorten the period of non-competition or narrow the scope of the obligation.
When these issues are broached in a business-like way, differences of opinion are far more likely to be resolved in a mutually acceptable way than by rolling the dice in litigation.
- DO GET ADVICE (AND FOLLOW IT).
Employees may be realizing that they might need legal or career counseling and coaching and employers may be thinking it is time to review the contents of their “standard” employee, confidentiality, and non-compete agreements. It bears repeating that one should obtain this advice well in advance of changing jobs or making a hire.
Especially for employees, in this day and age, when every individual is a “corporation of one,” obtaining appropriate advice in advance is really the minimum investment to make in an individual career.
Seeking and following competent advice demonstrates good faith and will help to navigate complicated and overlapping obligations.
One last tip for employees: Do not approach the company’s attorneys for legal advice or a referral even if a previous working relationship exists; e.g., on patent applications. Those attorneys represent the company and have a duty to them, not to the employees.
Click here to see Exhibit A
Click here to see Exhibit B