Don't lose your business secrets along with your employee

Don't lose your business secrets along with your employee

Lose staff - not sacrets

Your top salesperson has just resigned to start their own business. Next you hear she's been in contact with the customers she dealt with when she worked for you - your customers! And the next you know some of those customers are switching to her firm.

The danger presented by ex-employees extends further than the possibility that they might hijack your customers. They can take knowledge of your proprietary processes and other trade secrets to use on their own behalf or that of their next employer. That means your competitive edge may walk out the door with them.

A non-compete agreement (NCA) is a way of protecting your business' competitive edge by preventing employees from using your proprietary information against you when they leave you. Any employee likely to come in contact with valuable business knowledge should be required to sign a non-compete agreement.

Developing a legally defensible NCA

NCAs are court enforceable only when they are constructed properly. An NCA is likely to be most defensible in court when it conforms to generally accepted practice. This involves writing it up so that it defines limitations that apply to an ex-employee using the information they have about your business that can be considered both fair and specific.

To be fair and specific an NCA should cover off three areas in particular and place reasonable limitations around each:

Scope,
Time and
Geographical area

Scope refers to the items that are covered by the non-compete agreement. While many things can be protected including procedures, techniques and client or customer lists, a court will need to be convinced it is in fact something vital to the operation of your business. You must be careful about defining the scope and demonstrate by other measures that you consider the item is important - mark documents that include the information "confidential", lock them up, put a computer access password on them, limit the number of people who have access to them. Courts won't prevent employees from using information that isn't proprietary or treated as confidential by the business itself.

An NCA can't be applied for an indefinite time but deciding what sort of time limit a court will find reasonable can be an interesting exercise. Try to work out some logical relationship between the information you wish to protect and the enforcement period you apply in the NCA. In the case of employees who are in a position to develop close relationships with customers the danger of them poaching is significant so the employer, who is considered to own that relationship, should protect it with a non-compete agreement. However, the non-compete period that can be applied is not likely to be legally binding beyond the time it would reasonably take to get a new employee up and running and with their own track record so that a customer wouldn't see any difference between the new person and the old one. It's a mistake to impose time restrictions which have no basis in how long the item being protected will remain valuable.

A non-compete agreement may also need to cover a geographical area such as your sales territory or distribution network. Again, care is needed in defining the extent of your restriction in terms of business logic. Usually it must conform to the area in which you operate. Courts won't agree with a geographic prohibition that is broader than necessary.

Fairness to the employee

Courts are more likely to accept your right to impose an NCA when it can be demonstrated that the employee knew they were subject to one and had openly agreed to abide by its terms. The fact that they will be subject to an NCA should be mentioned as early as interview time to job applicants and they should be provided with a copy to review before they accept an offer of hire. The same applies to current employees being offered a move that puts them in contact with protected information and requires them to sign an NCA. Give them a chance to consult legal counsel and ask you questions about it.

Take legal advice

An NCA can be a valuable weapon in defending your competitive edge but it has to be drafted according to law.

Courts in general try to balance your right to protect your trade secrets with the employee's right to make a living. While some cases are quite clear cut - for example an employee you trained in general laboratory techniques can get a job as a lab technician elsewhere but they can't use your patented formulas - others are not.

When it comes to NCAs the advice and assistance of a registered lawyer is a must in drafting a defensible form of agreement.

For more information contact your RAN ONE business professionals at
Academy of Business Excellence Limited