Normally, I write about executives from the perspective of promoting their individual rights and liability. But it is also important to keep in mind that executives have a fiduciary duty to the company and are trusted with protecting trade secrets and confidential information. That includes creating policies that help shore up the company’s position should it need to go to court.
It is important for executives to regularly examine company policies to keep confidential information confidential. Most legitimate non-competes are designed to protect the company and its assets, especially trade secrets and confidential materials. Executives need to ensure that is the case.
Executives should ensure that companies regularly audit their non-compete and confidentiality agreements. There are a variety of reasons for periodic audits:
- It is a must to ensure that all employees with access to confidential information have confidentiality agreements and that those in sensitive positions have reasonable non-compete agreements.
- The law changes, and non-compete agreements need to be updated accordingly
- An employee’s position or the company may change, and this may require a change in the non-compete language.
In updating the agreements, the following can provide a good checklist:
- Make sure your non-compete is reasonable, given the employee’s responsibilities, access to confidential information and contacts with customers and other employees. In non-compete agreements, one size does not fit all.
Almost all states have a reasonability requirement, which means that a non-compete can be no broader in scope of activity, restrained, geography and time than is reasonably necessary to protect the company’s legitimate business interests.
Rarely do I see a non-compete written reasonably. Many states do not allow a non-compete to be modified, so they must be able to stand on their own. If the agreement is unreasonable as written, it will be struck down.
Even in those states that have a so-called “blue pencil” provision allowing a non-compete to be reformed, some courts can require a non-compete to be reformed before enforcing it.
- Ensure that the non-compete obligations flow to all assignees and successors. Employees can move between subsidiary and affiliate corporations, and this can add protection if the non-compete is not updated every time the employee moves.
- Protect all your confidential information with a confidentiality agreement and protect your most confidential information as trade secrets.
In general, a trade secret must have economic value and be subject to reasonable measures to keep it a secret. The company should ensure that steps are taken to secure their most confidential information as trade secrets.
- Move once an employee leaves for a competitor.
Delay often kills a non-compete case.
If there is evidence that an employee took confidential material, that will greatly enhance any non-compete case because it demonstrates the need and urgency for an injunction.
It is important to have the employee’s computer sent immediately to review specialists, and certainly before another employee starts using it. Most non-compete cases are accompanied by a request for a restraining order and/or injunction. Such relief is an extraordinary remedy, granted only to protect against an imminent threat. Delay will indicate to the court that it can’t be that big a threat.
I don’t advocate the indiscriminate use of non-compete agreements – those designed just to prevent competition. But when an executive finds it necessary to enforce a non-compete agreement to protect the company’s legitimate business interests, the executive must ensure that the company is in the right position to go to court.