Covenants Not to Compete and Trade Secrets

Legal Compliance Resource
April 11, 2013 — 1,111 views  

Protecting one's trade secrets has become extremely important in the present-day job market. Employees get enticed by rivals or fired without any prior notice. The high rates of turnover today means that there's a good chance that one employee, whom the company has entrusted with confidential data, may indeed be working in its competitor's office tomorrow. Employees can also easily transfer large amount of information to their home systems, or simply publish it on the Internet. As such, there's a need for comprehensive programs that safeguard trade secrets and similar confidential knowledge.

Trade secrets

Trade secrets are proprietary information that a company protects from misappropriation. These secrets, if revealed to the competition, can be detrimental to a company. Customer information, financial and business information, employee know-how, data compilations and computer programs, and manufacturing methods are all trade secrets. The following steps can be followed to safeguard a company's trade secrets:

  • Confidentiality policy - Companies should have a confidentiality policy in place when signing in new employees. This policy should state very clearly the repercussions of disclosure or improper use of the confidential information. Companies should explain these policies to the employees in detail. Also, they should make sure that the policy is workable and reasonable, while still safeguarding the information. Marking the information as “Confidential”, “Trade Secret”, or “Do Not Copy”, will send the appropriate message across to the employees.
  • Restrict access - The trade secrets should only be available on a need-to-know basis. Such information should be stored in very secure areas, which restrict unauthorized employees from accessing the information.
  • Shred documents and take exit interviews - To protect confidential information, the documents should be shredded before disposal. Also, organizing exit interviews helps in reminding the employees about the confidentiality of some information. Remove departing employees' passwords from the company’s computer systems.

Covenants Not to Compete (CNC)

Restrictive covenants are usually inserted in the employment agreements. The CNC or the non-compete clause includes the following categories:

  • Covenants not to compete against the former employer's business.
  • Covenants not to provide services or solicit businesses of the previous employer.
  • Covenants not to hire or solicit employees working for the erstwhile employer.

In order to successfully enforce a restrictive covenant, the employer should be able to prove that the covenant follows the requirements given below:

  • Is designed so as to protect an employer's protectable interest.
  • Doesn't cause any harm to public.
  • Isn't unreasonably onerous to employees.
  • Is reasonable in duration and scope.

To protect the competitive business interests and confidential business information through restrictive covenants, the following cases are eligible for protection:

  • Customer lists
  • Ordering patterns and preferences of customers
  • Computer software and related information developed by the employer's company
  • Pricing information
  • Business goodwill
  • Extraordinary or unique employee service
  • Non-solicitation of the employees

Protecting or safeguarding company secrets eventually falls on the employer, and he or she should carefully draft the guidelines and policies to effectively curb any data theft or information misappropriation by employees leaving the company.

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