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Protecting Your Company with Restrictive Covenants

Losing a valued employee to a competitor, along with proprietary and confidential information and possibly other employees that person may recruit, is a problem that many employers face in today's robust job market. How can you protect your business from the risks of losing more than just an employee?

One solution is to require new employees to sign restrictive covenants, either as part of a comprehensive employment agreement or as a separate agreement. Generally, there are three types of covenants that restrict what an employee may and may not do when the employee leaves your company.

Non-Compete Agreements
The first type of restrictive covenant is a non-competition covenant. It typically specifies that should the employee choose to leave the company, he or she will not compete with the former employer by working with any competitor in a specific geographical radius or with companies specifically identified in the agreement. To be valid, the covenant must be reasonable in terms of 1) length of time; (2) geographic scope; and (3) type of business activity restricted. Once the duration of the covenant expires, the former employee is free to compete.

Non-Disclosure Agreements
The second type of restrictive covenant prohibits disclosure of confidential information or trade secrets. To maximize legal effectiveness, such agreements should define the types of information specifically that the company considers confidential or trade secrets.

Trade secrets consist of non-public information that gives a company an actual or potential economic advantage over its competitors and that a company takes reasonable measures to protect. Formulas, recipes, manufacturing technology, and quality control procedures typically are handled as trade secrets. Confidential information can include general information about the company and about the industry that the employee has gathered during the course of his or her employment with the company. Customer lists and supplier information (such as discounts, etc.) typically are considered "confidential information." The employer must have a legitimate interest in protecting the information classified as confidential or trade secret.

To determine whether information is a trade secret, the employer should evaluate:

  • The extent to which the information is known inside the company;

  • The extent to which the information is known outside the company;

  • The measures taken to guard the secrecy of the information;

  • The value of the information to the company or to its competitors;

  • The ease with which the information could be legally acquired or duplicated.

Trade secrets should never be disclosed to a competitor or outsider. Access to trade secrets should be controlled closely internally and made available only to those employees that need to know the information in order to perform their jobs, using techniques such as employee passwords, locked areas, encryption, and even biometric devices, depending on the value and importance.

Non-Solicitation Agreements
The third type of restrictive covenant is the covenant not to solicit employees. This type historically has been restricted to key employees of the company; however, with today's highly mobile workforce, these agreements are finding their way into all levels of employment. Although state law usually imposes an implied duty of loyalty on an employee to his or her employer, this implied duty exists only during the employment relationship. Like a non-compete agreement, a non-solicitation agreement can extend for a reasonable period of time post-employment.

The above types of agreements may be used individually or in combination to protect your company. Laws governing restrictive covenants vary from state to state, however. This article merely discusses general principles relating to these types of agreements. Consult with your legal advisor to make sure you understand the laws that apply to your operations, and how to adopt training, annual reminders, internal security, and other techniques to reinforce these agreements.


Sheila A. Millar, a partner with Keller and Heckman LLP, counsels both corporate and association clients. Contact her at 202/434-4143; This email address is being protected from spambots. You need JavaScript enabled to view it.; PackagingLaw.com


 

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