With the downturn in the economy, non-compete agreements have become more difficult to enforce. Think that means no limits? Think again.
Employee non-compete agreements prohibit employees from engaging in conduct competitive with their employers after the employment relationship terminates. In many states, such agreements have historically been the most effective way for a company to protect a company’s investment in training, the development of special skills, trade secrets, confidential information and goodwill. Now, that’s all changing. In recognition of our currently dismal economy and the need to permit people to work, some courts — even in states that generally enforce non-compete agreements — have demonstrated a reluctance to enforce these agreements.
Nonetheless, employees may find that they are no more free to pursue a new job than they were before. That is because most companies can arm themselves with several tools to achieve nearly the same protections that used to be obtained with a non-compete agreement. Given the change in the non-compete enforcement climate, many companies have already begun supplementing their non-compete agreements with such additional tools — and technology companies are especially likely to do so.
The first step for a company seeking to protect itself with tools beyond non-compete agreements is to conduct a trade-secret audit, a process for assaying the company’s trade secrets, confidential information and other protectable interests (such as goodwill) and determining how each may be misappropriated. Once all such assets are identified and valued and the risk of their loss has been assessed, the company designs and implements a comprehensive protection program, typically involving some combination of written agreements (called “restrictive covenants”), written policies concerning the appropriate use of company information, defined security measures and a detailed enforcement scheme, including not only enforcement of each of the applicable agreements, but also reliance on both established and novel legal claims and theories.
The standard restrictive covenants are as follows:
“Garden leave” clauses: A type of non-compete agreement that compensates an employee during the period that the employee’s competitive activities are restricted. In a traditional garden leave clause, the employment relationship technically continues during the restricted period. However, the legality of such an obligation remains dubious. Forfeiture-for-competition agreements and compensation-for-competition agreements: Agreements by which an employee either forfeits certain benefits or pays some amount of money if he engages in activities that are competitive with his former employer.
Forfeiture agreements: Agreements by which an employee forfeits benefits when his employment terminates, regardless of whether he engages in competitive activities. Nondisclosure/confidentiality agreements: Agreements by which an employee agrees not to use or disclose an employer’s confidential information.
Non-solicitation agreements: Agreements by which an employee agrees not to solicit — and, if well drafted, not to accept — business from the employer’s customers.
Anti-piracy agreements: Agreements by which an employee agrees not to solicit — and, if well drafted, not to hire — the employer’s employees. Invention assignment agreements: Agreements by which an employee assigns to the employer any potential inventions conceived of during employment.
Although, with the exception of invention assignment agreements, these agreements are generally reviewed under the same analytical framework as non-compete agreements (i.e., they must be reasonable in scope, geographic reach and duration, and they may restrict the employee’s conduct only as far as necessary to protect the employer’s legitimate business interests), courts are nevertheless more likely to enforce these agreements than non-compete agreements. For example, garden leave clauses are more likely to be enforced because of the palliative effects of the compensation paid during the restrictive period. Similarly, forfeiture-for-competition and compensation-for-competition agreements are more likely to be enforced because they impose only financial disincentives — not a bar — to an employee’s employment by a competitor.
While the remaining agreements may impose significant restrictions on the employee’s post-employment conduct, they do not impose direct restrictions on potential job opportunities, and therefore have an even greater likelihood of being enforced. That said, if the employee’s primary value to a potential employer is his relationship with the employer’s customers, he may find that a non-solicitation agreement will have precisely the same practical effect on his job search as a non-compete would.
With or without these agreements in place, employees may also be bound by restrictions imposed by law. Chief among these are: 1) the duty of loyalty; and 2) the obligation not to misappropriate trade secrets or confidential information. These obligations prohibit employees from engaging in certain conduct harmful to their employers. In particular, an employee can take no steps to take his employer’s customers, employees, trade secrets or confidential information. Employees who do so may find themselves liable for monetary damages and subject to a court order (called an “injunction”) preventing them from using any of their ill-gotten gains, including not doing business with the customers post-employment.
Moreover, if an employee goes to work for a competitor in a position through which he will inevitably use and disclose his prior employer’s trade secrets and confidential information, he may be required to leave the job under the so-called inevitable disclosure doctrine. Although the doctrine is not recognized in many states and rarely used even in the states that do recognize it, it is a powerful weapon that effectively provides the employer with an “implied” non-compete agreement.
Similarly, there has been some indication that a claim may exist under the Computer Fraud and Abuse Act against an employee who retains his laptop — or even a BlackBerry — or wrongfully deletes company information. This law gives employers the right to recover not only the hardware, but more importantly, the value or cost of recovering the information, regardless of whether it constitutes trade secrets or proprietary information. This is likely to be even truer when the employee’s conduct violates company policies addressing such property.
In the end, these cases typically turn on the equities. Where an employee’s conduct has been unassailable, he is most likely to have the least restrictions imposed upon him. However, where the equities are not on his side, a company has many tools that even in the absence of an enforceable non-compete — or any non-compete at all — all parties must be aware of and consider.
