The U.S. economy remains fragile and the business environment has become fiercely competitive, as too many suppliers chase too few consumers. Guarding one’s customer base, trade secrets and branding has become critical to survival. Although not a new phenomenon, the risk of raiding by former employees has become acute, especially in the technology and government contractor spaces where talent and turnover remain high.
The first line of defense is to require key employees to sign covenants prohibiting them from soliciting business from customers, hiring away other employees, or disclosing proprietary information. These restrictive covenants are the subject of much litigation, now more than ever. With unemployment rates hovering over 9%, a former employee may feel he has no choice but to exploit customer relationships he formed while on the job. At the same time, faced with the threat of losing a precious chunk of its customer base, the employer has every incentive to bring legal action to protect its interests. The result has been an unusually high, and perhaps even unprecedented, level of law suits brought by companies against former employees.
Without well drafted restrictive covenants in place, there is little a company can do to prevent former employees from raiding its customer base. In order to be enforceable, these covenants must be precise and easily understood. Any ambiguity will be construed in the employee’s favor. Obviously, the covenant should go as far as possible to protect the company’s interest. If the covenant is onerous, however, it may be struck down by a court. A highly qualified employee may also be less likely to sign a covenant that goes too far. Finding the right balance is important. There are three basic types of restrictive covenants an employer should consider including in its standard employment agreement.
- Covenant Not to Compete.In a covenant not to compete, an employee typically agrees that he will not compete with his former employer for a stated period of time after termination of employment. To be enforceable, the covenant must be reasonable in scope and duration. In most cases, the restriction will last two or three years and will be limited to a certain geographical area. A restriction will be considered reasonable to the extent the court finds that it is necessary to protect the employer’s business, while not unduly depriving the employee of a livelihood. Courts view these restrictions critically, which has led to the myth that non-competition covenants are unenforceable. Properly drafted, however, they are quite enforceable and can be a powerful legal weapon against unfair competition.
- Non-Solicitation Covenant.A non-solicitation covenant is far less restrictive in that it only prohibits the former employee from soliciting customers or from hiring away employees of the business. The employee remains free to compete with his former employer, provided he does not steal the employer’s business in the process. Consequently, the non-solicitation covenant is more likely to be enforceable because it does not prevent employees from obtaining gainful employment. Perhaps more importantly, employees may be more likely to sign a non-solicitation covenant because it is less restrictive.
- Non-Disclosure Agreements. The agreement should prohibit the use or disclosure of the employer’s proprietary information, including customer lists, financial records and computer software. The Maryland Uniform Trade Secret Act does also provide some protection from misappropriation of trade secrets (i.e. information that is not generally known or readily accessible to the public). To be considered a “trade secret,” however, the information must be subject to efforts by the employer to keep the information secret. In other words, the employer is more likely to enjoy trade secret protection if procedures are in place to protect the information, including labeling sensitive documents “confidential,” locking information away after hours, securing computer data, and having employees sign a confidentiality agreement.
The dramatic increase in the use of social media sites, including Facebook and LinkedIn, has added a complexity to the world of restrictive covenants which should be considered by every company. Consider, for example, that an individual accepts a new position with a competitor of his former employer and updates his social media profiles with his new employer’s information. The new profile is then broadcast by the social media sites to all of the individual’s contacts and friends, including many of whom are clients of his former employer. Has the former employee violated his agreement with his previous employer not to solicit company clients?
While the law is still in its infancy on this topic, there is an increasing trend by courts in considering updates on social media sites to be tantamount to overt contact with those contacts that are clients of the individual’s former employer. After all, the very purpose of updating employment information on a social media site is to ensure that all of the individual’s contacts are notified or are at least aware of the individual’s new employment. How a court ultimately rules on such an issue will depend on numerous factors, including whether the former employer deemed client information confidential and the exact wording of the non-solicitation provision of the agreement.
To have teeth, restrictive covenants should permit the employer to obtain a court order (known as an injunction), prohibiting the employee from violating the covenants. A lawsuit for monetary damages can drag on for years, whereas a temporary injunction can be imposed within a matter of weeks. Once the injunction is entered, the employee must discontinue engaging in the prohibited activity throughout the duration of the suit. In addition to preventing the employee from raiding the business during this time, the injunction may also cut off the employee’s financial support and, consequently, his ability to pay legal fees. The Uniform Trade Secret Act also provides for the recovery of attorneys’ fees and punitive damages in certain cases. Finally, the new employer may also be dragged into the suit, placing the employee’s job security in jeopardy. These may be harsh tactics, but you may not think so when your business and livelihood are threatened.
A business’ intellectual property, including its confidential and proprietary information, its clients or customers, and its hard-earned reputation is often one of its greatest assets. Treating it as such requires a meaningful and legally binding agreement, including provisions that address social networking sites and company-specific issues. Considering a restrictive covenant agreement as nothing more than a boiler-plate agreement is likely to leave the business with critical security gaps in the protection of its confidential information and client relationships.
For more information, contact the Davis, Agnor, Rapaport & Skalny attorney with whom you typically work, or one in our Business Planning & Transactions Practice Group.
