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By Kristin Casler
Featuring C. Lawrence Holmes, partner, Dilworth Paxson; Eric Meyer, partner, Dilworth Paxson; and Sterling Miller, general counsel, Sabre Corporation (retired), and senior counsel, Gober Hilgers PLLC
You should never be too busy or too short on resources to ensure your non-compete and non-solicitation agreements are up to snuff and that you know how to defend them. It only takes one disastrous bit of litigation to have your agreements thrown out and put your trade secrets, valuable employees and important customers at risk. Spending time and money now on a more systematic, tailored way of creating these restrictive agreements will save you considerable effort, stress and money in the long run.
Why do companies need a non-competition agreement?
Non-competition and non-solicitation agreements are designed to protect legitimate business interests, such as trade secrets and good will—intangibles such as customer relationships, internal relationships, the time you spent on training an employee. These have value and could be lost if your employee leaves. Eric Meyer, a partner at Dilworth Paxson, said it has to be a legitimate business interest in order to enforce a restrictive covenant. Last year, a sandwich restaurant chain tried to make every employee, from the CEO to the kid on the sandwich assembly line sign a non-compete agreement.
“Why would you want to restrict people who are making sandwiches from earning a living? What secret sauce do they have that would create a competitive risk or somehow harm your business unduly?”
Determining when to have an employee sign an agreement can be tricky. Depending on the law of the applicable state, you may only be able to have them sign at the commencement of employment or when there is a status change, such as a promotion, said C. Lawrence Holmes, also a partner at Dilworth Paxson.
“If you’re not sure in your state, err on the side of additional consideration. Negotiate the agreement rather than hand the employee a boiler plate document in microscopic print. Give them 24 hours to take it home and talk with their own lawyer about it,” Holmes said. “Even if you’re in a state that is extremely pro-business, you do have to think about the fact that your case will ultimately be decided by a person in a robe, who is probably going to try to do what they think is right and fair. Don’t do the absolute bare minimum.”
What is the best scope of the agreements?
The scope of the agreements must be reasonable. A court will not enforce an agreement that prohibits the employee from ever working again in their chosen field or for any of your competitors anywhere in the nation. The court will either rewrite the agreement or throw it out. Your agreement should have a reasonable geographic restriction. Meyer said it might say, “You can’t compete where we engage in business, where we have physical operations, or where we do such and such amount of business.”
The choice of law should be the state or region in which the employee actually works, unless it is an executive position—then it should be the law of the state for the corporate headquarters, and the geographic restriction should be the area that the entire company works in, Holmes said. A company that works in six states has so many different strata of employees. Each level should have its own agreement tailored to the work they do and what it is the company’s trying to protect. Try to match the remedy with the potential harm. Meyer said the woman sewing shoulder pads into a high-end garment in Milan does not have the same impact when leaving the company as the designer does.
“To me, the document that wins in court is the document that was drafted for that person or for that person’s job,” Holmes said. “When that person changes jobs, the agreement must change, too.”
Additionally, your competitors should be consistent in how you define competition across all agreements.
“If you’ve tailored your agreements along those strata, you’ve already built in a structure that helps you explain to the court why you need this agreement,” Holmes said. “You don’t have the effort of trying, after you’ve done a one-size-fits-all and realized that one size fits none, to shoehorn each of the different types of people and types of workers into one big, generic agreement.”
In-house counsel should employ outside firms to make sure these agreements will work for them. It’s worth the money, Holmes said.
What if you hire someone who has a non-compete?
If you find out the day your new vice president arrives that he has a non-compete, you should have a long talk with your HR people and whoever else had a conversation with him. This should have come up in initial conversations.
“You can’t say, ‘I didn’t know anything about a non-compete.’ That is not 2015 practice, to act surprised when somebody—especially at an executive level—comes on board to your company and you didn’t know that they may or may not have been subject to a contractual agreement not to compete,” Holmes said.
By the time that person arrives, your own lawyer should have looked at the non-compete. You should already have made provisions for and budgeted what it will cost to litigate, what it will cost to sit this person on the bench for six months. You also should think about a reasonable approach. You may be able to come to an agreement with the previous employer to split the cost of keeping your new hire at home for the duration of the non-compete period.
“It’s amazing what people will do who want to keep their employee from working for somebody else,” Holmes said. “It’s amazing what they will contribute to if they know that you recognize they have rights, and that what they’re trying to do isn’t just trying to deprive this guy of a living or career advancement.”
The new company also should ask what information the old company is targeting and what the circumstances of the departure were. Was the employee offered a lot of money to stay? Evaluate whether the job you’re hiring this person for is what this person did at the old company. If the tasks are different, they don’t overlap, and you may be able to talk your way out of litigation, Holmes said. You can even put in writing an acknowledgment of the non-compete and establish that trade secrets won’t be violated.
Of course, it’s an entirely different story if you are hiring that person precisely because their brain is chock full of specialized knowledge. You could be misappropriating trade secrets.
Does it matter how the employee left?
It does matter how or why the person left. But how that impacts the non-compete varies by state, Meyer said. In Pennsylvania, an employee who is fired for being lousy at her job makes the judge think that she is not a competitive threat. The opposite is true in New York, where the employee would be deemed to not have held up her end of the contract by not doing a good job. Similarly, a salesperson terminated because of a chronic drug problem but who was good at his job is deemed in Pennsylvania to be a good employee against whom a non-compete is enforceable.
What can you do to enforce a non-compete?
If the departure is not adversarial, the employer should conduct an exit interview. Find out the why and the where. Figure out quickly what type of information this employee possesses and how vulnerable you and your clients are. If your engineer is switching to sales at a new job, it may be less of a threat than a regional sales rep taking a position covering the entire Northeast.
“Right there in the exit interview, you’ve got a chance to get basically free discovery of what’s happening,” Holmes said. “That’s the place to put that agreement back in front of the person and say, ‘Remember, you are subject to this. Remember, we are authorized, under this document, to park you at home, to garden,’ as the English say.”
The attorneys from both companies should talk, too. And you should think about what you are really trying to enforce. Do you simply feel betrayed, or is there a real threat? Get a second set of eyes to look at the agreement for enforceability. Do you have support for the argument you’re going to make?
What if you don’t have an agreement in place?
Generally, if you don’t have an agreement, you’re up a creek, except for some narrow exceptions. Meyer cited a Third Circuit U.S. Court of Appeals case, Bimbo Bakeries v. Botticella, in which a secret-knowing executive was switching from Bimbo to its chief competitor, Hostess. He did not have a non-compete. The lower court agreed with Bimbo that it was inevitable that the executive was going to reveal trade secrets and enjoined him. The Third Circuit affirmed.
“But that’s not something an Old Co. would want to have to rely on,” Meyer said. “You’re much better off with a narrowly tailored, carefully drafted non-competition and non-solicitation agreement, if that’s what you want. If you want to stop someone from competing, have them sign an agreement.”
What qualifies as a trade secret?
Trade secrets and non-competes are two different areas that overlap. Trade secrets laws vary state by state, but 47 of the 50 states have adopted the Uniform Trade Secret Act. In general, it’s never okay to give trade secrets to the new company, and it’s never okay for the new company to encourage others to disclose the trade secrets. It is proper to discover it by your own independent invention. If you can reverse-engineer a project, that is okay. If you can discover it under a license, observe the item in public use or on public display and then glean from it the secrets that make it up, or obtain the trade secret from public literature, that is allowed. If a fact is not generally known by the public but it is generally known among people who would know this type of information, it is not a protected trade secret.
The key to maintaining that you have a trade secret is to show that you take reasonable efforts to protect it. And the secrets need to be well-defined. Meyer said you can’t list everything under the sun as confidential.
Some states don’t include customer lists in their trade secret protections, so you’re going to have a hard time explaining that your customers are a trade secret. Know your individual law with regard to that.
What are key provisions of a non-solicitation agreement?
Non-solicitation agreements work well to prevent poaching of employees and customers, provided that they’re carefully and narrowly tailored. Where a non-compete agreement has to be reasonable both in geography and time, the geographic scope isn’t really germane here. Customers may be located anywhere throughout the country or the world. Instead, the time element becomes important. A prohibition of two years or less tends to be reasonable, Meyer said.
The agreement should spell out who the customer is—so create a current list of your customers and a list of the services you provide them. The list can also include prospective customers that you’ve had fairly recent contact with. You should define “solicit” to include “communicate with” or “attempt to do business with” or “get business from.” Be as broad as possible, Meyer said. Be sure to also prohibit indirect solicitation from another employee at the new company. The agreement should apply during current employment and post-employment, to prevent employees from lining up customers before leaving. And it should include or exclude customers that the employee may have brought with him when he first joined your company.
“At the end of the day, you don’t want your employees to have to guess as to what they can and can’t do,” Meyer said. “You want to be able to articulate that to them in the agreement; you want to remind them of that at various intervals, train them on that, put it in an employee handbook as well.”
Holmes advised reminding employees of the agreements during annual reviews. You can even ask them to sign an acknowledgment that they reviewed it. “It’s hard for that person later to say, ‘I never believed I was subject to it,’ or, better yet, ‘I don’t believe the company takes this seriously.’”
If you are defending an agreement, you need to look at your previous record of enforcement and be able to explain it to the judge.
In the end, it’s about making a good enough agreement that it is more difficult and more expensive for the new company than the price of luring the person away.
Is social media a recruiting tool?
If you simply update your LinkedIn® profile with your new job information, and that is blasted to your contacts, that is not solicitation, Meyer said. Courts understand that. What they won’t allow is sending a separate group text or email to customers announcing that you’ve moved. The grey area is a hybrid—is the non-solicitation agreement broad enough to prevent you from talking to a customer who responded to that initial LinkedIn blast?
Also on the topic of social media is, who owns the accounts when an employee leaves. You need to spell that out up front and that any corporate social media account is corporate, not personal.
Staying ahead of the game
If you haven’t done it lately, it is probably time to review and update your non-compete and non-solicitation agreements. Make sure people know where they are. Change your review process to make sure that the employees acknowledge them. Partner with inside and outside counsel and HR to make sure you have and adhere to an exit interview process. Make sure you control the versions of documents so everyone is using the correct one. And finally, inventory your trade secrets so you know what you are trying to protect.
This article is based on a LexisNexis® Webinar, moderated by Sterling Miller, general counsel, Sabre Corporation (retired), and senior counsel, Gober Hilgers PLLC.