The Cure for Noncompete Whiplash
I get questions all the time from employers who are firing an employee and are scared to death of their going to work for a competitor. Images run through their heads of this disgruntled employee handing over the company’s crown jewel trade secrets to their fiercest competitor — like Fredo setting his brother Michael up in Godfather II by dishing secrets to Johnny Ola and Hyman Roth.
For the record, I have not and will not ever advise an employer in such a position to whack the employee like Michael did Fredo. No Tom Hagen am I.
Usually these employers want to have the departing employee sign nonsolicitation agreements to prevent them from stealing their clients or employees or, better yet, noncompete agreements to prevent them from going to work for a competitor. There are few problems with noncompetes. Frist, if they are not reasonable in scope in both geographic and time, a court won’t enforce them. Second, unless the employee has an existing contract, the employer will have to pay the departing employee to obtain an enforceable nonsolicitation or noncompete agreement. Third, and most importantly, the Federal Trade Commission and Federal Courts have been engaging in a tug-of-war recently over the legality of noncompetes, with the FTC outright banning them and the uber-conservative Fifth Circuit Court of Appeals banning the FTC’s ban as unconstitutional. So the ultimate fate of noncompetes will not be known for quite a while. So what should an employer do if it wants to avoid the whiplash of watching this banning back and forth?
Trade Secret Law
The irony is that employers are generally clueless that the issue of which they are concerned — trade secrets — has its own eponymous area of law — trade secret law.
Protection of trade secrets has long existed under common law. More recently, the Uniform Trade Secrets Act has been adopted by 45 states and provides even more muscle than the common law protections.
But to use the Act, employers must act proactively by implementing a policy and program that identities trade secrets and treats them as secrets. To qualify as legally protected trade secrets, information must have the following essential characteristics:
A trade secret must truly be secret. If an item of information is commonly available to any employee in the company or, worse, is available to the public, then it will not be a protected trade secret.
A trade secret must have real economic value or bestow a competitive advantage. Time can be a factor. Some trade secrets, like Coca-Cola’s secret formula, hold their value for many years. A company’s current strategic plan may very well qualify as a trade secret, but its plan from 2002, even if it is kept secret, probably has no value at all.
The owner of a trade secret must take reasonable steps to protect it from disclosure both outside and inside the company. As technology has made it possible to compress file cabinets worth of info into a thumb drive, the need for HR and the IT department to work together to restrict access to trade secrets is vital.
If an employer takes the reasonable measures to protect its secrets and later a former employee violates the Act, the employer can take action in the form of injunctions and seek damages for the violations.
Confidentiality and Nondisclosure Agreements
Another type of protection requiring planning and practice measures is the tried-and-true Confidentiality and Nondisclosure Agreement. Sometimes referred to as NDAs, these contracts can be used by employers to create a contractual relationship with employees — even at-will employees — that restricts them from using confidential information outside of their employment or with a new employer.
The key to both NDAs and trade secrets is educating employees about the issues so they are aware of how serious the company takes the protection of its vital information. Employers should take the time to identify the information it possesses that truly is a trade secret or that it wants to protect as confidential. It should adopt a policy to protect such information by implementing the correct procedures to label information as trade secret or confidential, and train employees on the issues.
Lastly, it is always a good idea to remind departing employees of the trade secret program and their NDA by referencing them in their separation letter and providing a copy of their executed NDA. Employees should also sign a statement that they have returned all company property and do not possess any other copies. Such reminders should avoid sounding threatening, but should ensure the issue is fresh on the employee’s mind as they leave the company.
Hopefully, this helps you understand your options better. As always, if you need help, please reach out to me at tmckee@tmckeelaw.com or 615.916.3224.