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Restrictive Covenants and Trade Secrets

by: David Kight

Introduction

Overview of Non-Competes

Litigating Non-Competes

Drafting Do’s and Don’ts

Considerations for

Enforcement/Defense

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Non-Competes Generally

Typically designed to address Solicitation and servicing of clients

Solicitation and hiring of employees

Competition in designated areas

Confidential Information

Trade Secrets

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The Cold Hard Facts

Non-Competes cannot stop competition.

Non-Competes are generally enforceable where they are reasonable in most states.

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Typical Protections?

Customer Contacts Trade Secrets

Under both Kansas and Missouri law, restrictive covenants which have as their primary protection, these issues can be enforceable.

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Caution: State Law Issues

State law defines the limits of employee covenants.

Just because an agreement works in Kansas, doesn’t necessarily mean it will work in Nebraska or Missouri.

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Caution: State Law Issues Controlled Rain, Inc. v. Sanders, 2006 WL 1222772 (Neb. App. 2006)

In this case, the employer had a non-compete agreement with two key paragraphs: a) a non-solicit agreement; and b) a 100 mile radius non-compete agreement.

The court found that the non-solicit paragraph was enforceable, but concluded that the 100 mile radius non-compete was not enforceable under Nebraska law. The court held that the employment agreement was not a collection of severable provisions, but rather was an integrated agreement for which it was seeking reformation. The Court refused to enforce the agreement citing a prior Nebraska Supreme Court opinion which held that covenant not to compete could only be valid if it restricts a former employee from working for or soliciting the former employer’s clients or accounts.

This agreement could have been enforced – at least in part – in Kansas and Missouri.

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Covenant Not to Compete

This is the most restrictive type of covenant an employee and

employer can sign. Covenants not to compete typically bar a

former employee from engaging in competition with his former

employer for a period of time and in a particular geographic

region.

Typical language is: “Employee will not directly or indirectly

perform services for any business which performs services

materially similar or competitive with those provided by the

company for a period of xx months in the following geographic

area…”

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Non-Solicit as to Customers The analysis for a court is different because the former employee

is more free to compete in the open market with a no-solicit/no-raid

agreement. Because the employee is free to work for anyone

(including themselves) there is much less chance that enforcement

of a no-solicit/no-raid agreement would prevent a person from

working altogether. Also referred to as a no-raiding clause.

Typical language: “I agree that for two (2) years following my

employment I will not solicit divert or take away any of the

Company’s customers, clients or accounts...”

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Employee Non-Solicitation

These covenants seek to prevent a former employee from soliciting or

hiring the former employer’s employees. Employers seek these provisions

to prevent employee raiding by competitors. Many employees who leave

their employers may want to take an employee with them to their new

employer. These provisions are generally enforceable in Kansas.

Typical language: “I agree that for two (2) years following my employment,

I will not solicit or encourage any employee to leave the Company’s

employ…”

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Non-Disclosure Agreement

The least restrictive covenant is the non-disclosure agreement.

Rather than preventing competition or solicitation of clients, this

covenant seeks to ensure that the employee does not disclose the

employer’s confidential information or trade secrets after the employee

leaves the employer. Actually enforceable in California.

Typical language: “I agree that I shall not disclose, misuse,

misappropriate any confidential information or trade secrets except as

required in the scope of my employment…”

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Common Confidentiality Provisions

Acknowledgement of Employee’s Receipt of Confidential Information or Trade Secrets.

Agreement to Return all Such Information. Agreement not to Disclose any Such

Information. Reasonable Liquidated Damage Clauses

Related to Breach of Confidentiality Provision.

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Client Compensation Agreement In Varney Business Services, Inc. v. Pottroff, 275

Kan. 20, 59 P.3rd 1003 (Kan. 2002), the Kansas Supreme Court was asked to review an agreement between an accounting business corporation and a former accountant. The agreement provided that any signatory to the agreement that left the firm would agree to compensate the firm for any of its clients that it serviced over the next five (5) years.

The Supreme Court held the contract enforceable.

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Deferred Compensation Forfeiture Agreement Some employees are offered deferred

compensation (either bonuses, or retirement funds) that are part of their typical benefits plan.

As part of those plans, some employers have language which provide that benefits would be forfeited and terminated in the event the employee began competing against the employer.

The type of agreement – profit sharing, bonus plan, retirement plan, etc. – may ultimately play a role in how courts evaluate the agreement.

Kansas has not yet ruled upon this issue but Missouri (approve) and Iowa (disapprove) have.

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Trade Secrets

Uniform Trade Secrets Act Both Kansas and Missouri have trade

secrets laws. Both provide independent protection to

employers from disclosure of information which qualifies as a trade secret.

Just because you don’t have a non-compete doesn’t mean you can protect trade secrets.

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An example of this.

The Kansas Uniform Trade Secrets Act creates an independent legal duty regarding trade secrets which is different from any legal duty owed pursuant to a restrictive covenant. All West Pet Supply Co. v. Hill's Pet Products Div., Colgate-Palmolive Co.,847 F.Supp. 858 (D.Kan.,1994)

“[T]he contractual duty of confidentiality on the part of Hill's is independent of its statutory duty under the Uniform Trade Secrets Act not to use or disclose information that falls within the definition of a trade secret.” Id. at 861

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Drafting Do’s and Dont’s

Before You Start Drafting Ask

What are you fearful of? What information do you want to protect? Other than the agreement, what else are you

doing? (What does the handbook say?) What protocols do you have in place for

signing, and exit interviews? Think about how the agreement fits with

their overall protection plan.

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Keys to an Enforceable Contract

Protects Legitimate Interests

Trade Secrets

Customer Contacts

Reasonable Time

(i.e. Not Forever)

Reasonable geography

(i.e. Not The World)

Consideration

What did you give to get?

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Extras to Consider Liquidated Damages (Reasonable) Attorney’s Fees for Prevailing Waiver of Bond for Injunction*** Severability Clause Extension of covenant during breach Extension of covenant during litigation Assignment clause for successors At will employment reaffirmation

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Considerations for Enforcement / Defense Do the terms of the agreement prohibit the

specific acts in question?

Is the former employee truly competing – same type of business, same customers?

Does the agreement prevent general competition or is it centered on protectable interests such as customer contacts, confidential information or trade secrets?

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Considerations for Enforcement / Defense

Is the information which is at issue truly confidential and if so, what can be said about efforts to safeguard it?

Has the enforcing party breached – in a significant way – the agreement?

If there are geographic restrictions, how reasonable are they in comparison to the area of service or the employee’s area of service?

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Considerations for Enforcement Defense

If there are time limitations, how reasonable are they given the type of relationship the employer has with its customers?

Has there been any modification or alteration of the agreement which could impact its enforcement?

What has been the history – if any – of the employer’s enforcement of the agreement or similar agreements?

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Considerations for Enforcement / Defense Does the agreement have a choice of law

provision? If so, would the law of another state be more favorable?

Will the state in which the suit is brought (or the state upon which the contract is governed) “blue pencil” or cut out portions of the agreement if the agreement is deemed overly broad?

In what context did the agreement arise: sale of business, employer-employee, independent contractor, etc?

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So, in conclusion…

The agreements can be enforceable if they are reasonable.

The agreement should be tailored to the client and the position if possible.

The agreement should be part of an overall plan of protection.

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