Safeguarding Trade Secrets: What You Need To Know
November 16, 2015
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Safeguarding Trade Secrets: What You Need To Know
Chances are your business is built on carefully cultivated client lists and finely honed business-development strategies. You might believe that such information is a trade secret and assume that it’s automatically protected under trade secret law or contract law covering confidentiality.
Think again.
In the eyes of the law, trade secrets can actually be a very weak form of intellectual property — difficult to prove and limited to very specific circumstances, such as complex technology or sophisticated research and development. The confidential client lists and other information that many businesses collect on a regular basis may not be considered legally protected trade secrets.
So, protecting such information will likely come down to having an enforceable contract or agreement, known as a “restrictive covenant.” We’re not talking about a few lines in the employee handbook, but a carefully written legal agreement that will stand up in court.
Three key elements of restrictive covenants
Restrictive covenants are detailed, signed agreements specifying what employees can and cannot do with confidential business information. In general, they are typically noncompete, nondisclosure, or nonsolicitation agreements.
But these agreements are only enforceable if they’re not overly broad and if they adhere to the following three legal principles:
- Supported by adequate consideration. Consideration is an exchange of benefits or promises. This means that in return for receiving salary and benefits, the employee agrees to honor any and all restrictions placed on sharing specified information.
- Reasonably necessary to protect legitimate business interests. The employer must have a good reason to put restrictions in place. The agreement needs to spell out the nature of the business and the potential damage that would result from loss of sensitive information.
- Reasonably limited in scope, duration, and geography. Restrictive covenants constitute a restraint on trade and the employee’s ability to make a living. If they end up in court, an overly broad covenant may be construed against the employer. Any restrictions on employment or contacts with competitors should last no more than a couple of years. Remember, the courts will be asking this question: What is reasonable under the circumstances?
A matter of scrutiny
Every restrictive covenant will differ based on circumstances, industry, and employer. Still, with attention to a few details, employers can use covenants to keep sensitive information in-house. Effective restrictive covenants:
- Should accompany a job offer. Don’t wait until after the hire is finalized. Employment should be contingent on signing the agreement. When employees depart, they should be reminded of the agreement.
- Should apply the entire time employees work for the business. In an age of instantly shared information, anything said over drinks or even at home can find its way out into the broader world. The restrictive covenant should be in-force during the scope of employment, and it should clearly state that certain provisions apply even after the employee has left the company.
- Can warn of “liquidated damages” for violations. Putting a dollar amount on lost profits is a challenge and, in the case of a violation, can add significantly to the costs of litigating. Instead, the agreement can specify an equitable remedy – say, $10,000 — that applies to a breach of contract, should it occur.
Knowledgeable counsel is essential for properly drafting enforceable restrictive covenants. Laws change, and they differ by state. If a current or former employee violates the agreement, first remind that person of the restriction, then issue a cease and desist letter, then, as a last resort, move toward enforcement in the courts.
Bottom line: Employers who go about it the right way can protect their business interests and avoid any legal slip-ups that may allow sensitive information to pass into the hands of competitors.
Courtney J. Miller is a member of the Intellectual Property Group and Patent Division in McNees Wallace & Nurick LLC’s Columbus, Ohio, office. He counsels a wide variety of clients on patent matters, intellectual property strategy, and business agreements. He can be reached directly at 614-719-2858 orcmiller@mwncmh.com
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McNees is a full-service law firm based in central Pennsylvania with more than 130 attorneys representing corporations, associations, institutions and individuals. The firm serves clients worldwide from offices in Harrisburg, Lancaster, State College and Scranton, PA; Columbus, OH; and Washington, D.C. McNees is also a member of the ALFA International Global Legal Network. www.mwn.com | @McNeeslaw | LinkedIn
