“The ultimate solution to reducing risk to a company’s information assets is to cultivate relationships with those who have access.”
It’s getting pretty brutal for employers who want to control their employees’ behavior. Think back to March 2020, when the pandemic had just started. We focused on the new phenomenon of widespread remote work. We imagined managers fondly recalling the Renaissance era, where craftsmen were imprisoned or even threatened with death to keep from betraying their trust. At least in modern times, companies can take advantage of non-compete agreements with departing employees to avoid nasty and unpredictable lawsuits over trade secrets.
It may not be long. As we learned last month, the FTC is on the road of war on non-competition and it may not be long before the entire country is forced to emulate California and do without it.FTC Whatever the proposal, it is clear that non-compete obligations are also under attack from states whose new laws limit their effectiveness.
So it’s probably wise to at least prepare for a world where non-compete agreements are prohibited, at least for the general public. Welcome to sunny California. Since 1872 we have lived under that regime. This is thanks to laws prohibiting contracts that “restrict anyone from engaging in any lawful profession, trade, or business of any kind.” What must companies do to maintain control of their trade secrets if they can’t prevent their staff from jumping into competition?
Downside of non-competition
More on that later, but first, let’s comfort ourselves with the realization that life without a non-compete obligation might not be so bad. Not a perfect solution for protection. When permitted, courts often limit scope to what is “reasonable” in terms of time, geography, and subject matter to the minimum necessary to protect the interests of the company. Some courts have also demanded that employers continue to pay salaries during the non-compete period, and former employees prepare plans to start competing businesses on the day the restrictions expire.
Second, non-compete agreements can create resentment and strife in the relationship between the company and its employees. This can have the negative effect of increasing the risk to confidential information as employees seek workarounds to circumvent legal restrictions. Third, managing a system where these agreements have varying effects in individual states or foreign countries can be a nightmare for human resources departments. And fourth, overreliance on non-compete obligations can cause a company to neglect the important task of managing confidential relationships (more on that below).
In California, you don’t have to worry about these issues. Others say the state is doing pretty well, producing the world’s fourth largest economy. This is largely the result of the innovations generated by Silicon Valley. Indeed, there is a common perception that a lot of valuable information is compromised by the free movement of senior management and engineers (the euphemism applied to that loss is “Ripple Effect”). Still, the general assumption is that the resulting flow of information will result in a rising tide that lifts all ships. . This should come as no surprise. If the non-compete obligation is withdrawn, litigation may be the only last resort.
Overly broad NDA as non-competitive
At the very least, you can rely on an employee nondisclosure agreement (NDA) or an old standby for nondisclosure agreements. Sorry, but before that I have a bit of bad news. As you know, the FTC proposed a “feature test” to bar his NDA which amounted to non-competition. But the FTC didn’t pull this idea out of thin air. Even if that proposed rule does not become law, the risk of the ‘cultivar’ nondisclosure agreement being broken needs to be addressed. It even created a basis for allegations that the company was involved in unfair competition.
What should I do? The employee’s NDA is built on the incontrovertible assumption that the law already implies confidentiality when an employee is entrusted with confidential information. Contracts simply reinforce that concept, provide notice, and serve to show that the company has made “reasonable efforts” to protect its trade secrets.
The problem stems from how companies define what information must remain confidential even after an employee leaves the company. Naturally, these definitions are a bit broad and vague. This is because it is impossible to know exactly what secrets an employee will be exposed to at the beginning of a relationship. We recommend expanding the scope of the NDA in a way that yields more. Two cases demonstrate the dangers of this approach.
in the first one, TLS Management vs. Rodriguez, the employee worked for a tax planning and consulting firm and left to pursue his own tax practice. Employers are entitled to “all information . . . about TLS business methods . . The only exception is information made publicly available by TLS. The court dismissed the contract on the grounds that it covered employees’ “general knowledge” and other publicly available information.
Recently, in the California Court of Appeals, Braun vs. TGS Management“confidential information,” similarly defined, overturns a decision of an arbitrator to enforce an employee’s NDA, is or is created, developed or obtained for use in the employer’s business, or Including those relating to the employer’s business. Exceptions provided for in the contract were very limited (e.g., information previously known to the employee “as evidenced by the employee’s written records”). ), the court deemed them evidence that the NDA was designed to prevent fair competition.
Drafting a clear NDA
What should companies do to preserve the usefulness of non-disclosure agreements and avoid being construed as non-competitive? ensure that it is targeted to the company or its customers’ information deserving of the label, to provide a public benefit. Second, clarify the definition with exceptions that allow employees to control their own skills and general knowledge. Third, include language that allows a judge, when enforcing the agreement, to adjust its limitations as necessary to make the agreement reasonable (sometimes called a “blue pencil”).
But these mechanisms for drafting NDAs are only part of the effort. While these may be necessary to avoid reclassification as a non-compete, they are not sufficient to establish trade secrets and maintain control. Getting new hires to sign restrictive agreements is just the first step in managing relationships for clarity and understanding of confidentiality.
Trust relationship management
Whatever the deal, you’re giving this individual access to the most competitively sensitive information, possibly for years. Contracts alone cannot bear the weight of ongoing responsibilities when an employee leaves the company. By then, her NDA would be less than perfect if she had not sufficiently and often communicated what that confidential information was and how she expected employees to act to protect it. It doesn’t help.
Between the contract at onboarding and the exit interview at departure, trust building takes place. Although the NDA does not specifically define “confidential information,” the company, through rigorous training and guidance, helps employees understand what kinds of secrets are most important to the business. can. This understanding is reinforced throughout and lays the foundation for a “culture of confidentiality” where a departing employee is prepared to do the right thing rather than discuss the language of her NDA.
You can find research that shows that employees are willing to share confidential information of their employers, but this is usually due to misunderstandings and mixed signals rather than malicious intent. Therefore, the ultimate solution for reducing risk to a company’s information assets is to cultivate relationships with those who have access. If you can’t use a non-compete agreement, you also can’t bring a trade secret misappropriation suit against all leaving employees. Your main protection comes instead from their clear appreciation for the trust placed in them.
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