Protect your trade secrets before workers leave

PBN Staff

06/13/2009

When an employee leaves an organization, the employer often does not just lose an employee and a goodwill contributor to the organization. If an employer is not careful, an employee’s departure can lead to loss of much more. With reductions in force, valuable trade secrets, confidential information, and/or customer goodwill could be walking out the door with the departing employees.
Employers should take measures to limit this potential damage, such as:
• Consider having employees (both new employees and current employees) sign agreements containing provisions regarding nonuse and nondisclosure of confidential information, noncompetition and/or nonsolicitation of customers and employees, and return of company property upon termination;
• Limit current employees’ access to confidential information to a need-to-know basis.
• Implement best practices regarding data security.
• Ensure consistent enforcement of former employees’ post-employment restrictions.
These measures can certainly go a long way in ensuring that an organization has itself covered from all aspects, however, the first measure – the noncompete and nondisclosure agreements – are the foundation of this protection.
Noncompete and nondisclosure agreements are the first and best line of defense against unfair competition by departing employees. These agreements are typically signed when the employee accepts a new job or a new position.
Several challenges are presented by these agreements, challenges that are even greater for companies that do business in several states or throughout the country. It is almost certain that no noncompetition agreement can be guaranteed as enforceable in every state. It is even more certain that agreements drafted five years ago are woefully out of date.
Well-drafted, particularized, negotiated noncompete agreements for which consideration was provided are more likely to be enforced than boilerplate clauses that have been foisted upon the employee.
The noncompete agreement should specify the scope of the restriction, i.e., what competitive activity should the employee avoid. Simply stating that the employee may not work for a competitor is inadequate. Ideally, the agreement should specify exactly the nature and scope of the employee’s current position. In addition, the agreement should have a time limitation that does not exceed two years. Finally, the agreement should contain a geographic limitation that does not exceed the area in which the employer does business. Of course, agreements that prohibit the disclosure of confidential information need not contain any such limitations. Employers must consider such factors as: the breadth of the noncompete clause; whether the clause is boilerplate or negotiated; the consideration given the employee in exchange for his noncompete agreement; whether the employee will continue to be paid during the period of the noncompete restriction; the effort and expenditures made by the competitor in developing its employees’ client relationships; the overall significance of the prospective employee’s client relationships to the competitor; how the employee developed his or her client relationships and whether the employee acquired or had access to the trade secrets and confidential information of the competitor.
To supplement these agreements, employers can also look to the Uniform Trade Secrets Act, which is the law in Rhode Island and the vast majority of the states, for additional protection. The Act defines a trade secret as “information, including a formula, pattern, compilation, program, device, method, technique or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”
In other words, information such as customer lists, chemical formulas, marketing strategies and customer preferences can be considered trade secrets if the employer took reasonable measures to ensure their secrecy. Such measures can include requiring employees to execute noncompete and confidentiality agreements, restriction of access to confidential information both in terms of physical access and computer access, stamping documents as “confidential” or “proprietary,”and restricting access to the area of the business where confidential information is housed.
In today’s economy, whether you successfully protect the lifeblood of your business – your trade secrets and confidential information – can determine whether your business will succeed. Companies that fail to take protective measures do so at their peril. •

Neal J. McNamara is the managing partner of Nixon Peabody LLP’s
Providence office.

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