Protecting Your Business Without a Non-Compete

Last month, I wrote an article explaining California’s position on non-compete agreements. In short, courts in some states, including California, have held that agreements preventing a former employee from taking gainful employment are simply not enforceable – even if the position is with a direct competitor, and even if the former employer believes that the employee is likely to reveal confidential, proprietary, and trade secret information belonging to the former employer to the new employer. So how does a business possibly protect itself? With some solid planning, diligence, and a few important agreements.

Restrict moonlighting by current employees. Just as it is important to understand the exceptions to the rule, it is also important to understand the scope of the limitation on non-competes. For example, in California, non-compete agreements that prevent employees from future gainful employment are void, but this ban only applies to non-competes that are or remain effective after the termination of employment. A company may – legally and for very legitimate reasons – prohibit its employees from moonlighting during the term of their employment, particularly when the moonlighting it performed for a competitor. There are a myriad of reasons why companies would demand loyalty of current employees. Thankfully, the California legislature and the courts alike have recognized a business’s need to monopolize a current employee’s commitment to the success of the venture and minimize the risk of corporate espionage. Many companies find that these policies are best shared with prospective employees before they begin their term of employment. Most also insert provisions restricting moonlighting in their employee handbooks to serve as a reminder to existing employees.

Protect the company’s intellectual property. As I have stated before, it is imperative that a company protect its intellectual property. This means filing trademark, copyright, and patent applications as may be necessary, and having the correct assignments in place to ensure that any processes, inventions, systems, or the like developed by employees during business hours and using company resources belong to the company, and not to the employee who actually developed them on behalf of the company. It also means having similar agreements in place with independent contractors. In some cases, patent protection may be necessary to prevent others from using the technology for their own benefit.

Understand trade secret law. A trade secret is information, including a formula, pattern, compilation, program, device, method, technique, or process that derives independent economic value from not being generally known to the public or competitors and is the subject of reasonable efforts to maintain its secrecy. An agreement by an employee not to use his or her employer’s trade secrets, both during and after the term of employment or contractual engagement, has been upheld even in places, like California, where non-compete agreements are not enforceable against employees. However, courts will not apply or extend this duty of confidentiality to information which is known to the public, not held in secrecy, a party will inevitably disclose in connection with performing the new job (which often arises in the context of the development of efficient processes or systems), or which has been independently developed by a third party. In other words, these agreements will only protect actual trade secrets. Your attorney can help you understand whether certain information relevant to your company qualifies as a trade secret.

Limit access to confidential information. While we can all agree that not everything needs to be under lock and key, certain information may legitimately need to be on a “need to know” basis. For example, if the crux of your operation depends on a few special secrets that give you your organization an edge over competitors and companies seeking to gain entry into your industry, by all means safeguard that information, and limit access to it to only those in the company who truly need to know. There is no reason everyone in the company needs to know your margins and profits, your secret recipe, or have access to your customer lists or other sensitive information. If it is practical, the company should also maintain a log identifying what trade secrets have been provided or made available to the employee, and when. Companies should consult with their attorneys to determine what information may need to be protected, and to decide how best to protect such information.

Consider having employees sign confidentiality and non-disclosure agreements. Employers should work with their attorneys to prepare confidentiality agreements that identify the information they seek to protect, to the fullest extent these agreements are valid in the state(s) in which they operate. This may include customer lists, customer contacts, vendor lists, vendor contacts, pricing lists, product information and testing results, and strategic business and other similar information as may be appropriate for the business. Although the employee may later be free to accept employment with a director competitive of the (former) employer, because of this agreement, the employee may not use the protected information against the employer in carrying out his or her work. Companies should resist the urge to duplicate agreements drafted for companies in other industries, or even for competitors within their own industry. Such agreements are most effective when drafted with the company, its procedures, its business, and its information in mind.

Require the return of company property before the termination of the employment. There is no reason employers should not require employees to return all company property upon leaving the company, including without limitation laptops, electronic storage devices, notebooks, and any hard copies of documents. Despite this, businesses frequently forget to collect these materials, and leave them in the hands of former employees – including those who may at some later point directly compete with the company, or work for a direct competitor. Something as simple as a checklist on an existing exit interview form may be all that’s necessary to remind human resources or the office manager to collect these items from employees before their last day – and doing so can help safeguard the company’s information.

Consider non-solicitation agreements. A narrow non-solicitation clause can also prove to be an effective tool. Such a provision can protect not only the poaching of other employees, and potentially also help limit the former employee’s contact with the company’s clients or customers, subject to certain conditions. Because of the myriad of judicial decisions interpreting non-solicitation provisions, a company would be best served discussing specifics with its counsel and adopting a provision or agreement carefully crafted to its interests and which is likely to be upheld in the state(s) in which the company operates.

For key employees, consider optional “Garden Leave” policies. Courts differ on its application, but some employees request lengthy notice periods for employee resignations. Provisions like this are impossible to require or to enforce in an at-will employment state like California, but, if the employee is amenable to exercising the option, may buy the former employer some time to prepare before the key employee leaves to work for a competitor. Garden Leave policies are periods of time during which the former employer pays an employee his or her full pay and benefits, but does not require the employee to report for work – and prohibits the employee from taking on additional work during that time. Instead, the former employee can tend to his or her garden (ergo the name). Companies frequently use that time to firm up intellectual property rights, implement new policies or procedures, and put other measures in place to protect information critical to the company and its operations.

Require arbitration of employment and related disputes. Finally, to the extent the company is concerned that litigation regarding the trade secrets or other information disclosed by the former employee will become a matter of public record, the company may wish to consider requiring all employment-related disputes to be arbitrated, a private method of adjudication in which filings are not a matter of public record, which often takes place before a retired judge. For some companies, arbitration may be cost-prohibitive and there may be other downsides to arbitration. An employment attorney can help explain the options and discuss which may be best given the business’s particulars.

Notwithstanding the limitations on non-compete agreements, companies can still employ a variety of carefully crafted procedures, agreements, provisions, and policies to effectively protect the very things that give their business value. The success of your company may depend on it.

The foregoing is provided for informational purposes only, is not an advertisement, does not constitute legal advice or legal opinion, and does not create an attorney-client relationship. The content may not apply to the specific facts or a particular matter. You should not act or rely on any information contained in this article without first seeking the advice of an attorney licensed to practice in your jurisdiction.

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