Protecting Your Company's Trade Secrets: Confidentiality Agreements and Non Competes

Did you know that your company has trade secrets? Many companies assume that only exotic information like the formula for Coca Cola or Styrofoam constitutes a trade secret. However, the concept is much larger. Your customer lists, business practices, business plans, and much of the information which you use to run your business—all are trade secrets. Keeping that information confidential and out of the eyes of your competitors or the public is important.

How do you protect your trade secrets and other proprietary data? The answer is to require all employees to sign confidentiality agreements, also known as non-disclosure agreements or “NDA’s.” These are agreements that should be signed on the first day of employment by every employee who has access to any proprietary data. A copy should also be included in your employee handbook.

In the agreement, the employee will promise to keep all proprietary information obtained in the course of his or her employment confidential both during his employment and for a reasonable period of time afterward. The agreement may define what information is considered proprietary or confidential. You may consider adding language that provides that any breach of the agreement by an employee is grounds for immediate discharge. In addition, you may consider requiring that if the employer must sue an employee or former employee to enforce the agreement, the employer can recover legal fees and the costs of litigation.

You may also want to consider having employees sign non-competition agreements. Although such agreements are unlawful in California, most states allow them so long as they are reasonable in time and geography. For example, if you have a software company, you might require that former employees refrain from recruiting your customers, hiring your employees, or competing with you within a radius of 100 miles for a period of two to three years. Generally non competition covenants cannot have the effect of prohibiting the former employee from earning a living in his or her area of expertise. That is, the restrictions cannot be so great that the employee cannot work for any other employer anywhere. However, the agreements can prevent an employee from learning your business and then opening up a competing business in the same town or region.

Some non-compete agreements extend to a much broader area, but the larger the geographic area and the longer the effective period of the agreement, the greater risk the agreement will not be enforced. Some state courts will “blue line” agreements, striking any part that is not enforceable and upholding the rest. Other state courts will simply throw the whole agreement out if it is not deemed “reasonable.”

Here, too, you may want to consider adding that the former employee must pay the legal fees and litigation costs if the former employer sues successfully to enforce the non-compete covenant.

It is important to know that in most states, any non-competition agreement must be supported by independent consideration i.e., providing a benefit or payment to the employee in exchange for a commitment not to compete. Therefore, you should have employees sign a non-competition agreement when they begin employment, making it a term and condition of hiring the employee. If you initiate such agreements later, in most states you will have to provide some additional payment or benefit, typically something other than continued employment.

It may be that you will never have to face an unscrupulous employee taking your proprietary information and converting it for his or her own use, or an employee taking advantage of your training only to open up a competing company not far away. However, if you do face that challenge, a well-crafted confidentiality and non-compete agreement can save you considerable headache, and reduce your financial risk.