You Can’t Take It With You When You Go: Non-Competes and Trade Secrets

On July 2nd, 2009 Emma Oliver celebrated her fiftieth year as an employee of Burger King in St. Petersburg Florida. When asked if she was going to retire she said, "I want to, but I don't want to. My daughter says I'm going to push 60 years." Ms. Oliver's accomplishment is an unusual one in the current employment environment, with fast promotion and tentative reciprocal loyalties.

From the employer's standpoint, companies often invest assets in training employees, and providing them with confidential information about company processes, products and pricing, essential for the company to remain competitive. As the employee rises in seniority, access to increasingly restricted information is provided to allow decision-making.

From the employee standpoint, the current market values the bottom line over seniority, often resulting in the need to "downsize" to remain competitive. These two conflicting forces have come together to create the perfect storm: Companies, forced to lay off valuable employees, possessing high level of technical expertise, market knowledge, and experience.

Recognizing the potential exposure of valuable information and skills companies will often ask employees and key managers to sign covenants not to compete - or simply "non-competes." The degree to which these agreements are enforceable depends on a number of factors which may make the difference between restricting an employee from working in his or her field for months or sometimes years, or going to work directly for the competition.

Non-Competes 101

Generally, the agreements in restraint of trade, including non-competes are disfavored in the United States. As a matter of public policy, the right to work, compete and make money in the market place is a fundamental value we share as Americans. Accordingly the courts and legislatures crafted specific rules which must be followed for a non-compete to be enforceable.

Typically, there are two types of Non Competes. The first is a standard form of agreement which must be made at the time of hire, or "bone-fide advancement." What this means is the courts look to see when the agreement was signed and negotiated. If it was not signed at hire, they will look to see if it was signed as part of a legitimate promotion, entailing an increase in responsibility and compensation. Also critical is whether there is valid consideration given in exchange for the promise not to compete- that is whether the compensation offered was sufficient to justify surrendering the right to compete.

The second type of agreement, a Bonus Restriction Agreement, is given as part of a profit sharing or bonus package which, like a standard agreement, limits or restrains employment after termination of employment, but the restraint is limited to a period of time, a geographic area and specified activities. The logic behind these agreements is the ownership of stock. With the stock, the employee has now changed in status, to include "substantial involvement in management" of the employer's business, personal contact with customers, knowledge of customer requirements related to the employer's business or knowledge of trade secrets or other proprietary information of the employer.

The bonus restriction agreement is also different from the standard form of Non Compete because it limits the damages to forfeiture of the profit sharing.

Drafting the Agreement

In crafting the agreement, both the employer and employee will want to be sure the terms are carefully crafted, reasonable as to scope and duration and are clear from the outset. Taking the time to have the provisions reviewed or tailored will define expectations, and prevent costly litigation later. As a practical matter, employers seeking to enforce a non-compete after the fact, after realizing the potential for a problem, will only buy heartache if they try to get the agreement signed without the proper formalities.

Trade Secrets

The courts have also imposed an independent duty on former employees from sharing "trade secrets". The formula for Coca Cola® is the most famous trade secret, but millions of processes and formulas are considered "trade secrets". The law recognizes a separate right of employers or owners of this kind of information, regardless of whether there is a non-compete. Employers must take special care to identify the information as "commercially sensitive" or "proprietary". The courts have found employers who did not take adequate steps to protect the information, could not claim it was a trade secret. Departing employees should take care to avoid sharing this information with subsequent employers. The irony is that the experience and knowledge the departing employee possesses is often the very thing which makes them attractive as a hiring candidate.

Cry Havoc

"Cry Havoc, and let slip the dogs of war", is a fitting description for the atmosphere that takes over, when a highly placed employee departs to a competitor. The reasons for the departure, and the factual background leading up to it, may involve years of discussions, and will inevitably be colored by strong feelings on either side. Given the nature of the dispute, the remedy if an injunction, or potentially a Temporary Restraining Order. In short, the litigation stakes are high.

This process is usually done on accelerated schedule, with a large investment of time, effort and resources. For the corporation a quick response is essential to prevent the spread of information. For the departing employee, timely response to a Petition for preliminary injunction can mean cutting off damages and preparing a complete defense. Assistance of counsel is critical at this point.

In the end, the successful relationship, including departure and preservation of company trade secrets, is based on clear enforceable and agreed terms. At the Mead Law Firm P.C., our business attorneys have protected the rights of Oregon-based individuals and companies in restrictive covenant and trade secret litigation for over two decades.