HMMC Conference: of Trade Secrets and Non-Competes

Edition: February 2004 - Vol 12 Number 02
Article#: 1772
Author: Repertoire

That employer doesn’t get jumpy about the prospect of losing a top employee to the competition? After all, that employer has invested time and money in developing the person. What’s more, the employee might possess valuable trade secrets, which, if shared with the competition, could lead to some significant market-share losses.

That’s why many employers attempt to get new hires (and even current ones) to sign non-compete agreements.

Most states do indeed enforce non-compete agreements, said Jeff Mayes, general manager and general counsel for seca’s North American Division, and a lawyer since 1993. But just because an employer has a non-compete agreement in hand doesn’t necessarily mean that he or she can prevent that former employee from becoming a direct competitor.

Mayes made the comments at the recent fall conference of HMMC, the association for senior-level sales and marketing executives with medical products manufacturers. Mayes himself is an HMMC member.

Because non-compete agreements can potentially prevent a person from pursuing his or her livelihood, judges exercise caution when hearing non-compete cases. According to Mayes, they will enforce such agreements only if they meet four criteria:

• Are they enforced by adequate consideration?

• Is the restriction reasonable?

• Is the non-compete agreement related to a valid transaction or relationship, such as employment?

• Is the agreement in writing?

Adequate consideration is, in most cases, money (though it can be other things, such as special knowledge or training, or change in employment status). Simply put, has the employee been compensated fairly for signing away his right to compete with his former employer? If the judge decides that is not the case, then the non-compete agreement probably will not be enforceable.

Employers can ask current employees to sign non-compete agreements as well. But, said Mayes, they must compensate them over and above what the employee is currently receiving – perhaps a raise or percentage of profits.

Is the restriction reasonable? Again, because you’re talking about potentially restricting someone’s ability to practice his or her profession, the restrictions that an employer tries to place must be reasonable, noted Mayes. Courts look at three things to help them determine if restrictions are reasonable:

• The duration of the restraint. For a national sales manager who was involved in setting pricing policies and marketing strategies, a restriction of 12 to 18 months is probably reasonable. But for a regional sales manager who was not involved in major policy decisions, 12 to 18 months is probably too long.

• The geographic area covered by the non-compete. It’s not reasonable to try to prevent a salesman who owned the market in Chicago from picking up with a competitor and selling in Detroit. But it might be reasonable to restrict a national sales manager from working for a competitor anywhere in the country, at least for a reasonable period of time.

• The scope of activity that is restricted. Here’s the rule of thumb: Judges will enforce non-compete agreements that prevent an employee from doing the same thing for a competitor that he or she did for the prior company.

Trade Secrets

Some states – such as Michigan and California – flat-out prohibit non-compete agreements, said Mayes. Others (including Georgia, Wisconsin, Oregon, Louisiana and others) have dramatically raised the burden on employers. But even in those states, employers have a right to protect their trade secrets and hence to restrict certain activities by former employees.

What is a trade secret? It is any information that has independent economic value, is not generally known to the rest of the industry or to the public, and is reasonably protected from disclosure. It can cover certain customer and supplier lists, business plans, marketing strategies, pricing policies, information about employees, and so on.

Not surprisingly, defining a trade secret is anything but cut and dried, said Mayes. Often, it’s a matter of degree.

For example:

• A list of hospitals and surgery centers in the Greater Chicago area is not a trade secret, because anyone could compile it.

• A list of all department heads in those hospitals and surgery centers probably wouldn’t be considered a trade secret either, because even though it has some economic value, it can be compiled by anyone in the business.

• But a list of all departments who bought your company’s products might very well be considered a trade secret, said Mayes.

• Furthermore, a list of customers who received a demo of your company’s product, but elected not to buy it would also probably be considered a trade secret.

The tricky thing about trade secrets is that they’re often carried inside your employees’ heads. Some courts look askance at any claims of trade secrets, ruling that it’s ridiculous to expect employees to wipe their minds clean of all the information they picked up working for your company. Other judges, however, believe that information can be a trade secret regardless of where it resides – on paper or in someone’s brain.

To show that they’ve been (or could be) harmed by the divulgence of trade secrets by a former employee, employers must show that trade secrets are in fact being used against them. This so-called misappropriation of trade secrets can be difficult to prove, said Mayes.

Employers got a boost by a 1995 court case in which an employee of Pepsico – maker of All Sport, a sport drink – was prohibited from going to work for Quaker Oats, maker of the market leading drink, Gatorade. The court ruled that it was inevitable that the employee would end up divulging and using the trade secrets he had gained at Pepsi for his new employer. This so-called “doctrine of inevitable disclosure” was a real shot in the arm for employers who seek to avoid harm before it happens.

If you’re the one who’s hiring someone from a competitor, know that you’re at significant risk, said Mayes. “If you hire an employee and you know he has a non-compete agreement, you can be held liable for inducing a breach of that agreement. Furthermore, if you know or should know that the employee is carrying his employer’s trade secrets, you can have direct liability to that former employer.”

Protect Yourself

If you’re an employer, act now to protect your company’s trade secrets, advised Mayes. Be sure the non-compete agreement:

• Clearly specifies what activities by the employee would be considered in breach of the agreement.

• Clearly identifies the interests your company is trying to protect.

“Specificity is critical,” said Mayes. “You’re often asking a judge, through an injunction, to stop someone from earning their living.” A judge will have a problem doing that unless the employer can show the judge that the employee clearly understood what would happen if he or she violated the terms of the non-compete agreement.