By Richard Darwin
Non-compete agreements have been held invalid and unenforceable in many states, leaving employers to struggle with crafting an agreement that complies with the law and still protects them against unfair competition by departing employees.
Accomplishing this has become increasingly difficult in light of recent developments in the law regarding non-compete clauses, non solicitation agreements, and trade secrets.
In 2008, the California Supreme Court held that all non-compete and non solicitation agreements run afoul of the state’s public policy favoring employee mobility, regardless of whether those agreements are narrowly drawn. (See Edwards v. Arthur Andersen LLP, 2008).
Further, even the “trade secret” exception to the prohibition on non-competes has been called into question and appears to be falling out of favor. (See The Retirement Group v. Galante, 2009). Solicitation of customers using a trade secret customer list “is enjoinable not because it falls within a judicially created ‘exception’ to section 16600’s ban on contractual non solicitation clauses, but is instead enjoinable because it is wrongful independent of any contractual undertaking.”
An increasingly popular strategy for overcoming the boundaries created by these non-compete laws is the utilization of broad restrictions on the disclosure and use of “confidential information.” These restrictions are frequently found in employment agreements, separation agreements, and/or in stand-alone nondisclosure agreements. Typically, the agreement will define the “confidential information” belonging to the company, and obligate the employee to refrain from using or disclosing that “confidential information” during and after the term of their employment.
The use of confidentiality agreements of this sort is generally recommended for any company that has valuable, proprietary information to protect. Indeed, a company’s failure to impose some sort of restriction on the disclosure and use of its confidential information by its employees can be fatal to any subsequent efforts by that company to prove ownership of a trade secret. (See, Uniform Trade Secret Act, Section 1(4)(ii). Required element of a trade secret is proof that the information is “the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”.
The problems with confidentiality agreements arise when the “confidential information” that the agreement is intended to protect is defined so broadly that it is impossible, as a practical matter, to determine what it covers, and whether that information is truly secret.
Most lawyers and human resources personnel who work in the area of employee mobility have seen examples of these “kitchen sink” confidentiality agreements; the supposedly confidential and proprietary information the employee is obligated to keep secret includes everything from their former colleagues’ e-mail addresses to the name of the company janitor.
Despite the fact that much of the identified information is neither valuable nor secret, the terminated employee has typically signed an acknowledgement that this information is “proprietary” and constitutes a trade secret belonging to his or her former employer.
Confidentiality agreements of this sort create problems for everyone involved.
For the employee, it can quite literally be impossible for them to discern what their obligations are. Can they contact their former colleagues if that means using e-mail addresses or phone numbers that they still remember? Must they throw away that five-year-old marketing brochure in the junk drawer at home?
Faced with what they perceive as unfair, unreasonable and/or ambiguous obligations, many departing employees simply choose to do nothing, thus potentially setting themselves up for an action for breach of contract or trade secret misappropriation.
Employers who use a “kitchen sink” confidentiality agreement, on the other hand, face the risk that it will be struck down as an unenforceable non-compete agreement.
In the recent California case of Dowell v. Biosense Webster, Inc., 2009, a company sought an injunction against several former employees on the basis of a non-solicitation and confidentiality agreement. The court struck down the agreement, rejecting the company’s argument that it was valid because it was “tethered” to the misuse of confidential information and trade secrets.
The term “confidential information” in the agreement was broadly defined to include the “names of customers, customer preferences, needs, requirements, purchasing histories, or other customer-specific information.” The court found that the definition was so broad and inclusive that was virtually impossible that the former employees, who as sales representatives had worked directly with customers, would not have possession of this information.
The way to avoid these problems – and to enhance the chances that former employees will actually comply with their post-termination obligations – is to avoid the temptation of using broad, “catch all” language to define a company’s confidential information. Instead, spend some time thinking about what the company really wants and needs to protect, and craft a definition that will capture that information without resorting to bland generalities.
As a rule of thumb, if it is not information that the company would be willing to file a lawsuit to protect (or that the company is otherwise legally obligated to protect), it should not be included in the definition. It is a bit more work, but the extra effort will pay dividends down the line both in increased compliance, and saved attorneys’ fees.