Facing the competition Featured

8:00pm EDT April 25, 2009

If you think that the noncompete agreement you have employees sign will keep your company safe, you may be thinking wrong. In fact, the agreements may do you more harm than good if an employee leaves and challenges it.

“Companies may find that the effort to enforce that noncompete may actually result in liability,” says Ron Hodges, partner and director of the litigation department at Shulman Hodges & Bastian LLP.

The tide turned on noncompete agreements last year when the California Supreme Court ruled in Edwards v. Arthur Andersen that any agreement intended to limit someone’s ability to engage in lawful trade or profession is unenforceable, with three limited statutory exceptions.

Smart Business spoke with Hodges about noncompete agreement alternatives that can help protect your company and how to limit your liability if you have noncompete agreements in place.

Are noncompete agreements enforceable?

Probably not. With the generic noncompete agreement that a person thinks of in terms of an agreement with an employee that would prevent that employee from going to a competitor, recent case law would seem to indicate that with limited exception it is not enforceable. And, in fact, companies may face liability for attempting to enforce the agreement based on claims of attempting to interfere with that former employee’s right to work.

What can a company do instead to protect trade secrets and other proprietary information?

First thing is to explore the possibility of a nondisclosure agreement. Employees can leave, but employers need to focus on, ‘What can I prevent them from taking with them?’ This is important for companies to focus on now so their coffers aren’t raided by employees when they leave the company.

Nondisclosure agreements protect the assets and/or trade secrets of the company. When you are faced with an employee leaving and you have a noncompete agreement — which may not be enforceable — you need to look further to see whether there’s appropriate language that prevents them from taking certain things with them, whether it’s customer lists, employee lists or intellectual property.

The other type of agreement to consider is a nonsolicitation agreement. This is typically used when you are fearful that not only are they going to go to a competitor but they are then going to solicit employees away from your company.

What other steps can a company take to keep trade secrets when employees leave?

Many companies like to stake a claim that a certain idea or practice is a trade secret, but what they fail to appreciate is that they must specifically identify what those trade secrets are, and they must have certain mechanisms in place to protect those trade secrets from being disseminated into the public. They must also actually enforce violations by any employee that attempts to misuse a trade secret or disseminate it to the public. If they do not take these steps, they will likely lose trade secret protection.

It is very important that you specifically identify what is considered to be trade secrets and why. Make sure that all employees sign a document acknowledging they have been made aware of what these trade secrets are and what mechanisms are in place to ensure that they are not disseminated to the public without the permission of their employer/supervisor.

If it is intellectual property or information stored electronically, you need to make sure the information is password protected and that certain security clearance is appraised. You need to make sure that certain warnings are placed on pop-ups that appear before you access information that say you are about to access trade secrets of the company.

That way, the company knows who’s accessing trade secrets, what’s being done with them and, in the event of violations — such as allowing someone else to improperly access trade secrets with the employee’s password — that the company takes immediate steps to rectify that situation.

If it is a more tangible asset, then you need to make sure these things are preserved in safes or in locked file cabinets that are not accessible to the general public traffic or to certain employees that do not have certain classified security levels.

If a company has a noncompete agreement in place that is virtually unenforceable, how can it move toward more enforceable agreements?

The first thing they need to do is evaluate their current employment policies and practices, and second, they need to confer with legal counsel regarding enforceability of specific terms of any employment contract they may have.

Employers may very well find themselves bound by the existing agreement and lack the ability to renegotiate the agreement with a particular employee. If they are not bound by a particular contract and the employer has reserved the right — in the employee handbook, for example — to change terms of employment or they have recently developed new ideas or trade secrets that need to be protected, they can prepare an amendment to the handbook or an addendum to the employment agreement. So even though you may have questions about the enforceability of the noncompete agreement, you are still making sure employees are not able to raid the company coffers when they leave.

Ron Hodges is a named partner and the director of the litigation department at Shulman Hodges & Bastian LLP. Reach him at (949) 340-3400 or rhodges@shbllp.com.