Non-Compete and Trade Secrets Overview Part 3: My Clients' Top 5 "Wish I Would Have Knowns"

It never fails.  A client comes to me with a non-compete or a trade secret issue of some kind and when I give them the law that applies to their situation, inevitably they say, "Ugh!  Wish I would have known!!"  If you've read the last two posts in this series, you now have a basic understanding of what some of these concepts are.  But how can you synthesize all of that information and apply it to your situation?  Well, you're in luck, because today, I am identifying 5 situations that my clients have found themselves in where if they had the little nuggets I'm going to share with you, they likely would have had more success in their non-compete or trade secrets battle.

Wish I Would Have Known #1: I wish I would have had an agreement!  

Yes, you read that right: some companies have no agreements in place at all!  As I told you in Part I of this series, it's overkill to ask the mail room clerk to sign a non-compete agreement, but employers should have all key employees sign one.  Key employees have specialized training, have personal relationships with customers, or possess confidential information.  And employees aren't the only ones who should have such agreements: independent contractors who are important to a business's livelihood should have them too.

Wish I Would Have Known #2: I wish I would have had a lawyer draft my agreement.

I agree, this one is a bit self-serving.  (Yes, I do write non-compete agreements.  Because I know the pitfalls, I write them well and I charge a flat rate to do it.  We should talk.)  But this is where an attorney like me can really bring a business value - before there is a dispute.  There are form agreements available all over the internet, but most of them are overly broad and have little chance of being enforced.  A great example is the agreement I described in my first War Stories post.  It did nothing more than prevent competition and, as a result, was held invalid by a court.  Had the company seeking enforcement of that non-compete consulted an attorney  and gotten a better agreement in place before the dispute arose, the company would have gone into battle against my client with much better ammunition and a much better chance of winning the case.  Spending a little money on the front end to do some proper planning saves big money on the back end.  Litigators like me are custodians: we clean up the mess that results from poor planning and it's very expensive.  Get ahead of the problem! 

 

Wish I Would Have Known #3: I wish I would have developed a better program and enforced it. 

Worse than the companies that fail to use appropriate agreements are the companies that have no program whatsoever for protecting themselves against unfair competition or the theft of their trade secrets.  Consider this: your key salesperson goes to work with a competitor.  He takes nothing with him, but since he's dealt with all of your customers, he solicits many of them and they stop doing business with you.  Without an agreement or some kind of program in place to protect yourself, you have no recourse.  And other employees start following him.  This obviously leads to a bad outcome.  A non-compete agreement is critical, but so is enforcing it against the first person who tries to breach it.  If other employees know you mean business, they won't try the same thing. 

Wish I Would Have Known #4: I wish I had better protected information I consider confidential.          

Just because you say something is confidential does not make it so.  There are three key questions to ask yourself about any information you wish to protect: 

 

        (1) Where is the information kept?

 

        (2) Who has access to the information?

 

        (3) Is the provided to customers, vendors, suppliers, or any other third-party? 

 

If the answers to these questions show broad access to your company's information by many people, it's time to develop a better confidentiality policy.  Limited access to information that is kept under lock and key is more likely to be considered a trade secret than information that is widely disseminated and, therefore, more likely to receive court-ordered protection.   Here are some rules of thumb that will give you a good start: 

 

Information about pricing, suppliers or vendors that is given to customers is not secret.

 

Information that you allow employees to take home or access from their personal computers is probably not secret.

Information that doesn't truly belong to you is not secret.  For example, if you are a distributor of a product, the product is not secret as to you.  Maybe the customers you sell to or your profit margins are secret (and that's a BIG maybe!), but nothing about the product itself is secret.  Another example that I'm seeing frequently is information that belongs to a client of an outsourcing company.  If a business outsources its IT work, the deliverable that is created by the outsourcing company is based on the customer''s information.  Maybe the methods used by the outsourcing company are secret (again, a BIG maybe!), but the outsourcing company has no ownership in the information in the first place.  

 

Wish I Would Have Known #5: I wish I had lived by the agreement.

 

Some clients do everything right: they have solid, enforceable agreements in place and they diligently protect their confidential information.  But then they commit the gravest of sins: they don't follow the agreement they are seeking to enforce.  The law is clear that he who breaches the contract first cannot enforce it.  So, if a "for cause" employee is fired without cause, for example, that employee will likely be free to go compete against you, regardless of any non-compete clause in his agreement.  Other common employer breaches include failing to compensate a departing employee, either pursuant to his agreement or under the law, and failing to follow buy/sell provisions with a corporate shareholder. 

 

These client mistakes are common and avoidable.  I've said it before and I'll say it again: planning is key!  Working with a lawyer either when you set up your business or when you're starting to expand makes such a difference.  I promise you that my services cost far less in the planning stages than in the litigation stages.  Don't hire a lawyer to clean up messes - hire one to prevent those messes from happening.  Your business is worth it! 

 

Liza Favaro 

Non-Compete Counsel 

 

* Disclaimer: The ideas and opinions shared on this site are my own and are not attributable to my employer. No amount of interaction on this site will create an attorney-client relationship. If you have a legal question and you ask it here, I will also answer it here (if I can), but such answers do not guarantee results and do not create an attorney-client relationship. If you wish to contact me directly, you may do so at efavaro@gmhlaw.com.

 

 

Non-Compete and Trade Secrets Overview: Part 2

Yesterday, we took a closer look at the oh-so-fascinating world of non-competes.  (Fascinating to me, maybe not to you, but as I’ve told you and will continue to tell you, this stuff is really important).  Today, the issue is trade secrets, which definitely has more sex appeal. 

What Is A "Trade Secret"?

Top secret liquid gold ...

When lawyers talk about “trade secrets,” we’re talking about business information that gives that business a major competitive edge.  Trade secrets are things like the Coca-Cola formula, Google’s proprietary search algorithm, and the method by which books are selected for the New York Times Best-seller List.  Trade secrets are what make businesses unique and make them a LOT of money.  Lawsuits ensue when departing employees or business owners take those trade secrets to a competing enterprise and use them to their former employer’s detriment.  Top-secret information and theft?  Folks, this is the stuff of commercial espionage!   

But here’s the problem with a trade secrets lawsuit: the plaintiff will NEVER be successful unless the “secret” it seeks to protect is truly, truly secret.  “Secret” means unknown to others.  I know this sounds obvious but I see people mess this one up all the time.  For example, consider the plaintiff-corporation that claims that the profit margins for its specialized machine are secret.  What happens when that same plaintiff publishes a price list and a list of suppliers?  The profit margin isn’t so secret any more.  Another example: a customer list downloaded by a departing employee the night before he quits.  That employee did a really bad thing for which he should be punished, right?  Think again.  While it’s true that taking something that doesn’t belong to you is morally wrong, if the information was downloaded from a personal computer that the employer allowed the employee to use to access all of this information, the law says that the information isn’t secret.  The key to a successful trade secrets lawsuit is how the employer treated the information before it was stolen.  Employers should be vigilant in protecting information they consider to be “secret.” 

It's Misuse, Not Possession That Matters.

 

Here’s another little hiccup I see in trade secrets cases – the information is truly secret and the employee took it, but there is no evidence the employee actually used it.  It is the “misappropriation” of a trade secret that is illegal, not necessarily the possession of it.  My favorite example of this is information that salespeople must – as a matter of job security – keep in their heads.  They could probably rattle off the names of thirty customers off the tops of their heads.  They know where customers are located, what those customers’ needs are, and how to best serve them.  What is a business to do when such a person leaves? 

Such was the case in a recent lawsuit I handled.  There was no evidence that my client had taken or used any information – but he had lots of business information in his head.  When I took the deposition of his former employer’s corporate representative, I asked very specifically what information my client had taken or used that belonged to his former employer.  Her response?  “He has knowledge!  So much knowledge!”  Her fear was that in order to perform at his new job, my client necessarily would use the information he learned while working for her.  It wasn’t any tangible information she was worried about – it was the knowledge he had in his head!     

Let me be clear: knowledge just isn’t enough.  There is a very famous case from a federal court based in Chicago, which stated that, “Any other rule would force a departing employee to perform a prefrontal lobotomy on himself ….”[1]  Employees get to take knowledge that is in their head with them when they leave.  And there’s little an employer can do about it.    

So what makes a good trade secrets case?  I’m going to give you the wishy-washy lawyer answer and tell you that it all depends on the facts.  It depends on how secret the information was kept in the first place, it depends on the role the departing employee had at the old company and what role he will have at the new company.  There is no right answer when it comes to trade secrets, which is why lawyers who practice in this area love it so much. 

But there are things businesses can do to protect their information.  For that little tidbit, you’ll have to come back tomorrow ….

Liza Favaro

Non-Compete Counsel

 

* Disclaimer: The ideas and opinions shared on this site are my own and are not attributable to my employer. No amount of interaction on this site will create an attorney-client relationship. If you have a legal question and you ask it here, I will also answer it here (if I can), but such answers do not guarantee results and do not create an attorney-client relationship. If you wish to contact me directly, you may do so at efavaro@gmhlaw.com.

 

 

 

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[1] AMP v Feishchacker, 823 F.2d 1199, 1205 (7^th Cir. 1987). 

 

Non-Compete and Trade Secrets Overview: Part 1

 

I’m going to be throwing around the terms “non-compete” and “trade secrets” quite a bit around here, so it’s important that I explain precisely what I mean when I talk about those things and give you the rules regarding each. Today I will give you an overview of non-compete agreements. The trade secrets overview will be published on Tuesday, November 27th. I’ll finish out this short holiday week by explaining the rules for each. This is fascinating stuff, I tell you! I kid, I kid. Even if you’re not so fascinated, this information is important – I would even say critical – for readers who have signed an employment agreement of any kind. 

Speaking of readers, I should mention that I am well aware that the vast majority of my current readers (if there are any of you out there!) already know a lot about non-compete agreements and trade secrets. But this blog isn’t intended to be just for lawyers. It’s also for business people who encounter these things on a regular basis in the course of their careers, but who may not fully understand what they are. Non-lawyer readers, this series is for you!!

What is a “Non-Compete” Agreement?

A non-compete agreement is a restriction against competition. Non-compete agreements can be found in any number of contexts, but are most commonly found in agreements between employers and employees or between shareholders or members of a company and a departing owner.

Non-competes haven’t always been legal. By definition, they inhibit competition, so they run counter to the notion that competition in the marketplace is a good thing. 

Think about it: competition benefits consumers because it keeps prices low and the quality and choice of products and services high. And competition benefits businesses because it promotes innovation. This is also true when it comes to the ability of an individual to work where he or she chooses: a competitive market, in any industry, promotes excellence in the workforce, which in turn helps businesses perform their best. It is for this reason that case law on this subject is often quoted for the proposition that non-competes are “disfavored.”

But in most states, lawmakers had to find a way to encourage competition, while at the same time prohibit departing employees and business owners from unfairly competing against their former company. Unfair competition happens when a departing employee or business owner capitalizes on knowledge and information that they would not have received but for their employment with or ownership in a company. The law makes unfair competition illegal.

This must have been an important employee!

A Closer Look: When Should Non-Compete Agreements Be Used?   

I would argue that courts should non-competition agreements only when the company seeking enforcement has carefully tailored the agreement to the individual who signed it.  It’s total overkill to ask all employees to sign the same agreement with the same language.  There is a big difference between someone who works in the mail room and the vice president of sales and marketing.  The mail room employee is making small wages, has little opportunity for advancement and is, therefore, unlikely to stay in that position for long.  Most importantly, the mail room employee has little, if any, access to a company’s important business information. 

In contrast, the vice president of sales and marketing has involvement and input in the company’s pricing strategy, marketing plans and customer base.  This is a person who has likely received some specialized training and has personal relationships with customers.  If such a person were to leave a company to join a competitor, it is likely that the training he or she received and the relationships he or she has with customers would be put to good use with the competitor.  It is this problem that non-competes are designed to solve.  They are not designed to completely eliminate individuals from the job market. 

If you are an employer and you have a non-competition clause in your standard employment agreement, it’s worth taking another look at it.  Who are you asking to sign it?  Will that person still be able to find a job in his or her chosen industry after the employment relationship ends?  And if you are an employee who has signed an agreement containing a non-compete clause, ask yourself this: what do I know about my company?  What information do I have that could really hurt the company if I used it somewhere else?

Access to confidential information is they key – the employees with such access pose the biggest threat to their employers.  Apart from non-competes, there are other tools employers have to protect their business information, which is also known as “trade secrets.”  Stay tuned for tomorrow’s post on this topic.

Liza Favaro

Non-Compete Counsel
 

* Disclaimer: The ideas and opinions shared on this site are my own and are not attributable to my employer. No amount of interaction on this site will create an attorney-client relationship. If you have a legal question and you ask it here, I will also answer it here (if I can), but such answers do not guarantee results and do not create an attorney-client relationship. If you wish to contact me directly, you may do so at efavaro@gmhlaw.com.

 

 

 

War Stories: My Favorite!

I promised war stories!  Friday seems like a good time to share these and I thought I'd begin with my favorite one.  I like this one for a lot of reasons, but the primary reason is because it's a great example of why "one size fits all" non-compete agreements don't work.

 

My client was working as a sales manager for a medical supply distribution company until she could no longer stand her boss's bad behavior.  After she resigned, she joined a new company that also distributed medical supplies.  But my client's role with the new company was distinct from what she did for her prior employer: she would service different clients in a different geographic location.   

 

My client's previous employer sued her for breaching the non-competition provision in her employment agreement.  The agreement provided that for two years after her employment ended, she would not "directly or indirectly ... accept employment with ... any business that is competitive with" her previous employer. 

 

At first blush, this may seem like an open-and-shut case.  Two medical supply distribution companies obviously are "competitive" with each other, right?  Wrong.  

 

The law authorizes non-competition agreements only to the extent they protect a prior employer's legitimate business interests.  Simply preventing competition is not a legitimate business interest.  Rather, the agreement must protect the prior employer from a departing employee  gaining an unfair competitive advantage at her new place of employment.

 

The problem with the agreement in this case is that it simply prohibited competition, without regard for the type of work my client would be performing at her new job or the types and locations of the customers she would be serving.  The trial court agreed with my argument that such agreements are unenforceable and invalidated the non-competition provision in my client's employment agreement.

 

This was a big win for me.  It occurred during my sixth year out of law school and I was opposing a lawyer who had been in practice since before I was born.  I'd like to think this lawyer learned two valuable lessons from the  case.  The first is to NEVER, EVER call a younger, female attorney "young lady."  (Yeah, he did that.  And yeah, I reacted poorly.  But I digress.)

 

The second, more important lesson is that  form non-compete agreements, which this one clearly was, have little chance of being enforced.  Non-competition agreements need to be specifically tailored to an employer's business, as well as to the work being performed by the employee.  Non-competition provisions should focus on restricting a departing employee as it relates to a particular product, service or customer.      

 

And I think my client learned something valuable too: retaining a lawyer who is a specialist in this area saves big bucks.  The nine-month case cost my client $20,000 and she walked away without any restrictions and without paying her former employer a dime.  My client's former employer spent $80,000 on its lawyer and walked away a loser.

 

Liza Favaro

Non-Compete Counsel   

* Disclaimer: The ideas and opinions shared on this site are my own and are not attributable to my employer.  No amount of interaction on this site will create an attorney-client relationship.  If you have a legal question and you ask it here, I will also answer it here (if I can), but such answers do not guarantee results and do not create an attorney-client relationship.  If you wish to contact me directly, you may do so at efavaro@gmhlaw.com. 

 

 

You Should Start A Blog!

"You should start a blog," they said.  "It will help you build your law practice," they said.  "It will be fun," they said!  Let's hope "they" are right on all three counts!  So away we go ...

What is "Non-Compete Counsel?"  It is a place for sharing information and ideas in the area of non-compete and trade secret law.  The Wall Street Journal reported in August that non-compete litigation has increased by 60% in the last decade.  60%!  That's a tremendous jump.  And it's a good indication of what's happening in the economy: we have become a transient workforce, rarely staying in the same job or with the same employer for long. 

The law in this area is easy to state, but very difficult to apply.  The facts always, always matter.  The very same non-competition agreement could be ratified in one court and shot down by another because of something as simple as the territory to which a departing salesperson is assigned at their new job.  What may seem like a slam-dunk of a trade secrets claim can become a tricky proposition if employers miss even one step in adequately preserving the secrecy of their company's information before a departing employee leaves. 

And so this is where a lawyer like me can actually provide value!  In this place, I will demonstrate the pitfalls many businesses find themselves in when they seek to protect their interests through a non-compete agreement or in a trade secrets situation.  I will discuss relevant case law on these topics.  And I will tell my own war stories.  I've won some and I've lost many (any lawyer who tells you otherwise is a liar!).  But in each case is a lesson and I'm happy to share those lessons with you.

Drop me a line sometime if you have a question.  I look forward to taking this journey with you!

Liza Favaro
Non-Compete Counsel