Eight Tips to Protect Your Trade Secrets with Effective Restrictive Covenant Agreements
Dec. 16, 2019
Trade secret theft is often an inside job. Employees who know they’re about to leave for a competitor or start their own competing business will sometimes try and get an unfair head start by taking their employer’s confidential information—customer lists, strategic plans, etc.—as they head out the door. A necessary tool for preventing the misappropriation and use of a company’s valuable trade secrets is a well-crafted employee restrictive covenant agreement.
Having employees under at least some form of such an agreement is important for two reasons. First, both state and federal trade secret statutes require employers to take reasonable steps to protect the secrecy of information sought to be protected under those statutes. Second, restrictive covenant agreements provide employers contractual remedies, over and above the statutory trade secret protections, that can be used to prevent theft and use of a company’s confidential information.
Restrictive covenants in the employment context are contractual provisions designed to restrict the competitive activities of an employee both during and after the term of the employment relationship. There are a number of key provisions for employers to consider including in their employee agreements to aid in combating unfair competition from trade secret thieves.
Nondisclosure covenants, also known as confidentiality clauses, prohibit the use or disclosure by employees of a company’s confidential information both during and after the term of employment. Confidential information is usually defined in these provisions as information that pertains to the employer’s business and is not readily available to the public. At a bare minimum, employers should have all employees sign nondisclosure covenants because they highlight the important obligation that all employees have to protect a company’s valuable information, and the agreements further help satisfy the statutory trade secret requirement of taking reasonable measures to ensure the secrecy of confidential company information.
2) Employee Duties/Conflict of Interest
Contractual trade secret protection involves controlling pre-termination as well as post-termination activities. Effective employee agreements should have provisions that ensure the employee is not torn between competing interests, including those addressing the following:
Duties of loyalty to the employer
Best efforts in furtherance of employment duties
Duty of employee to devote full business time and attention to the interests of the employer
Avoidance of conflicts of interest
Noncompete covenants are the most controversial of restrictive covenants, but also the most effective at preventing unfair use of trade secrets if they’re enforceable (and that’s a big “if” in some states). A noncompete provision prohibits a former employee from competing within a specified geographic area (usually tied to the area in which the employee worked) for a specified period of time (usually 1-2 years). These covenants are especially useful for protecting against use of stolen trade secrets because it is usually easier to prove that an employee is working for a competitor in a restricted area than it is to show he or she stole and is using trade secrets. If the former employer can stop the employee from competing altogether, it will be difficult for the employee to benefit from any misappropriated confidential information.
One size does not fit all when it comes to noncompete covenants. State law governing noncompete agreements varies widely, and some states (e.g., California and North Dakota) don’t allow them at all. Additionally, there’s a recent trend of state legislation limiting and regulating the use of noncompetes. Accordingly, all noncompetes, to improve the chances of being enforced, should be drafted by attorneys well-versed in the noncompete law of the state where the employee bound by the agreement is located, as well as any other state’s laws that might come into play.
4) Customer Nonsolicitation
Stolen trade secrets often involve confidential customer information, such as customer lists with key contacts and other beneficial information that provide a strategic benefit to the person or company who possess them. For that reason, customer nonsolicitation covenants should be considered for all employees who have interaction with customers or access to confidential customer information. These provisions prohibit, for a defined period of time, a former employee from soliciting (i.e., initiating contact for business purposes) the former employer’s customers. If an employee cannot use a customer list by calling on the customers on the list, the employee may be dissuaded from stealing the customer information in the first place. Furthermore, with a customer nonsolicitation provision, a victim of stolen customer data does not have to prove the theft or use, but just the result of the illegal activity—the contact with the customer.
Customer nonsolicitation provisions typically work hand-in-hand with noncompete agreements in providing ammunition for combatting trade secret theft and other unfair activities. As with noncompetes, the requirements for enforceability of nonsolicitation covenants vary from state to state, so careful attention should be paid to the governing state law when drafting such provisions.
5) Employee Nonsolicitation
Employee nonsolicitation covenants prohibit a former employee from recruiting current employees of the former employer for a specified period of time. These provisions can provide yet another claim against trade secret bandits. If a former employee is willing to use stolen company information to unfairly compete, they certainly will have no problem trying to persuade their former colleagues to join them, possibly bringing additional trade secrets with them as well. The suggested goal for employers should be apparent by now—give yourself as many potential claims as possible for seeking judicial relief from former employees behaving badly.
6) Garden Leave
A “garden leave” provision is yet another tool available to employers to help slow down the employee considering taking advantage of trade secrets upon exiting the company. A garden leave clause requires an employee to provide a certain period of notice to the employer before voluntarily terminating employment (usually 30-60 days) and restricts the employee from competing against his or her employer during the notice period. During the notice period, the employee is paid full salary and benefits and is usually directed not to report to work during the notice period. Thus, the “garden leave” term comes from the notion that, at least metaphorically, the employee will stay at home and tend to his garden during the restricted period, while the employer secures its customer relationships and confidential information. The potential benefit to garden leave clauses is that they are viewed more favorably by courts from an enforcement standpoint because the employee is still being paid during the restricted period.
7) Return of Materials
A straightforward, but important, provision that should be in every employee agreement is the “return of materials” clause. Not surprisingly, these provisions require a departing employee to return all records, property or information (or delete electronically-stored information on personal devices) obtained or created by the employee in the course of his or her employment, regardless of whether the information is confidential or not. The enforcement of these clauses is relatively easy because there’s no need to prove that the information qualifies as a trade secret or was even used.
8) Ownership of Created IP
A final type of provision useful in preventing the theft and use of trade secrets is one that makes it clear that any intellectual property created by an employee in connection with the employee’s employment is solely the property of the employer. These provisions can help to head off the claim that a customer list or similar work-related trade secret was created by the employee for “personal” use and therefore not the property of the company.
Keep Your Options for Justice Open
When it comes to protecting your company’s valuable trade secrets, doing nothing is not an option. Employers should work with their attorneys to consider which of the foregoing provisions should be included in the company’s employee agreements to ensure that if a former employee goes rogue, the employer has plenty of options for pursuing justice.