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.