COVENANTS NOT TO COMPETE AND TRADE SECRETS
Confidential information can be just as valuable, if not more valuable, than any real property or physical equipment leased or owned by your business. Equipment is replaceable — but if your company’s formulas, databases, recipes, software, or strategies are ever released to your competitors, the financial damage can be next to impossible to mitigate. This information is considered to be “trade secrets” and companies need to take measures to protect their secrets. It is essential that companies take proactive legal measures to limit the likelihood of trade secrets being made public. One such measure is non-disclosure agreements and placing “need to know” restrictions and controls on important company information.
Non-Disclosure Agreements are distinct from Non-Compete Agreements and are often confused. An employer should not use a non-compete agreement to protect trade secrets or they may find themselves vulnerable. Non-compete agreements are highly disfavored, limited or outright banned in many jurisdictions. But trade secrets and agreements related to protecting those are uniformly protected. So be sure to use the right tool for the job.
By identifying potential issues before they develop through Bellatrix PC’s Business Risk Review, your company will give itself a greater chance of avoiding costly and disruptive litigation. However, even if a dispute has already arisen due to an alleged violation of a non-compete agreement, non-disclosure agreement, or other breach of contract, a Bellatrix PC attorney can help your entity meet its objectives. Our team has extensive experience handling a wide variety of employment law matters, and is committed to supplying aggressive yet cost-effective legal representation on behalf of employers and business owners.
To begin exploring your options in a confidential legal consultation, call our law offices today at (800) 449-8992.
What is a Non-Compete Agreement?
Non-compete agreements are sometimes referred to as covenants not to compete, or non-compete clauses. They are relatively common in employment agreements, but are grossly overused and misunderstood.
The purpose of these agreements is to prevent former employees from working for a similar company in a similar field and directly competing with the business that they have just left, for a limited period of time.
An employer may wish to include such a provision in a key employee’s contract in order to discourage them from leaving the business or avoid them taking their knowledge or customer relationships to a competitor.
Are Covenants Not to Compete Enforceable in California?
No, not with respect to employees.
Covenants to Compete in California are only enforceable with respect to your current and former business partners or against someone from whom you just bought a business. Specifically, the law outlines the following two scenarios:
- When they arise during the business dissolution of or dissociation from a partnership, or when they arise from the sale of a limited liability company, in accordance with Business & Professions Code §16601.
- When someone is selling the goodwill of a business, and/or his or her entire ownership interest in a company, and/or the goodwill, along with either all of the operating assets, all of the operating assets of a division, or all of the ownership interest in a subsidiary, in accordance with Business & Professions Code §16602.
Because the vast majority of scenarios will preclude the successful use of non-compete agreements in the state of California, California-based employers may wish — or be required — to use non-disclosure agreements instead.
Are Covenants Not To Compete Enforceable in Other States?
California is not the only state that does not allow Covenants Not to Compete. Another states where they are prohibited include: Alabama, Colorado, Florida, Hawaii, Illinois, Minnesota, North Dakota, Oklahoma, Oregon and Rhode Island. This matters because those states refuse to enforce agreements as a matter of public policy. So, for example, if you have an employee in Arizona with a non-compete move to your competitor in California, you will not be able to prevent it even if the agreement says that Arizona law applies.
Other states allow for non-competes, but they are subject to various restrictions. The law seems to be heading towards restricting them more and more. Missouri has certainly seen a trend lately away from enforcement. And Illinois went from enforcing with restrictions to virtually unenforceable. Other states are following similar patterns.
The point is: non-competes are not that useful except in rare situations related to key employees. You should get counsel before working them into any employment relationship. And you certainly should not rely on them to protect your trade secrets and customer lists.
How Are Non-Disclosure Agreements Different?
Employers can still protect their vital interests through the use of non-disclosure agreements. Non-disclosure agreements have become especially commonplace in high-tech fields, particularly for Internet and computer companies. But how do these agreements differ from covenants not to compete?
A non-disclosure agreement, or NDA, is a contract in which both parties promise to protect the confidentiality of secret information disclosed during employment, or during business transactions. However, NDAs can be categorized as either “mutual” or “one way.” A “mutual” NDA is one in which both parties share trade secrets with each other, while a “one-way” NDA is one in which only one party makes a disclosure.
This confidential information can take many forms, including:
- Trade Secrets
- Product Details
- Marketing Plans
- Manufacturing Processes
- Client/Customer Lists
- Business Practices
- Development Strategies
NDAs are also used to protect confidential information, shared by an employer with an employee, that provides the business a competitive advantage in the marketplace. This type of information is commonly referred to as a “trade secret.” The NDA acts as the legal written confirmation that the trade secret shall remain confidential between the person or entity who holds the trade secret, and the person or entity to whom the secret was disclosed.
Factors to Consider When Drafting NDAs
When drafting non-disclosure agreements, it is critically important that an experienced employment law attorney reviews all documentation. If you are not an attorney, it is very easy to miss crucial elements that could cause your trade secrets to go unprotected. The non-disclosure agreement attorneys at Bellatrix PC are well versed in NDAs and can provide advice on your current NDA, or draft a personalized NDA for your business if you haven’t prepared one already.
In either case, there are five basic elements that all NDAs should include to afford maximum protection. These elements are:
- Definition of confidential information:
Clearly define and provide boundaries on what information and/or trade secrets should be kept confidential.
- Exclusions from confidential information:
State what information is excluded from the NDA and can be shared with another party without consequence.
- Obligations of receiving party:
State that the receiving party must hold and maintain the information in confidence and limit its use.
- Time periods:
State how long the receiving party must keep the information confidential, typically five years.
- Miscellaneous provisions:
State which U.S. state will have jurisdiction should the agreement be breached, and define liability for paying attorneys’ fees and other legal expenses.
Finally, it is essential that the business take additional steps to protect their trade secrets besides NDAs. Publicly available information or widely distributed information is not “secret” by definition and therefore cannot be covered by an NDA. If an employer is overbroad or fails to protect their secrets, the agreement won’t be enforceable.
If your business needs assistance protecting its trade secrets and other confidential information, Bellatrix PC can help. Contact our firm online, or call us at (800) 449-8992 to schedule a confidential consultation. Ask about our Employer Protection Package.