How to protect your confidential business information Featured

7:00pm EDT November 25, 2010

In addition to real estate and equipment, many companies count business information among their most valuable assets.

“Protecting intangible assets varies according to state law,” says A. Patricia Diulus-Myers, a partner with Jackson Lewis LLP. “Pennsylvania courts are amenable to the enforcement of post-employment restrictions on employees’ use and disclosure of business information.”

Smart Business spoke with Diulus-Myers about how businesses can protect their valuable information.

What types of business information is protectable under the law?

Protectable business information includes trade secrets, proprietary information and certain other confidential information. Trade secrets are not generally known in the public domain or easily discoverable by competitors. Courts have found business information — planned acquisitions and divestitures, cost data and customer lists — to be trade secrets, provided that they are subject to adequate protections by the company.

How do trade secrets differ from proprietary and confidential information?

Proprietary information is any information that the company owns. It could be purchased, like computer software and manuals, or developed by the company through the expenditure of its time and expense.

Confidential information is any other information that the company keeps in confidence, including personal information regarding and/or provided by its employees.

What practical steps are recommended for the protection of business information?

Companies should consider both physical and virtual security protections, including keeping highly confidential information under lock and key, stamping documents ‘confidential,’ training employees on the protection of business information, and limiting access to or encrypting sensitive information stored on computers.

What about information used by employees and others who have access?

Companies should clearly set forth in their employee policies, handbooks, codes of conduct and vendor agreements the requirement to maintain the confidentiality of business information. Require that all property and documents obtained during and as a result of employment be returned, except for individual compensation and benefits information. This will avoid any problem with interpretation should litigation ensue.

What is the importance of restrictive covenants in protecting business information?

Except in the most egregious and unusual circumstances, such as when an employee steals business information, the best way to get post-employment judicial relief is through properly drafted and executed restrictive covenants. More and more, companies are looking to non-competition, non-solicitation and nondisclosure agreements to prevent the loss of business information. These covenants allow companies to protect goodwill with customers, vendors and employees that are unprotected outside of a contractual agreement.

Reliance on confidentiality agreements alone, or even on statutory claims under the uniform trade secrets acts, is often not effective in preventing the loss of important trade secrets. As part of an overall plan to protect business information, non-compete agreements can help a company protect the loss of information by keeping its former employees from using it, whether intentionally, inadvertently or inevitably.

What should be considered in non-compete agreements?

Very important to the covenant’s enforceability is that its ‘reasonableness’ be clear. It should afford only a fair protection to the employer’s interests and not be so broad as to interfere with the interests of the public or prevent an employee from engaging in his or her livelihood. What is reasonable for one industry may not be reasonable for another. Six factors should be considered in the covenant:

  • Length of time of the restriction
  • Geographical area covered
  • Scope of business covered
  • Fairness of and business need for the protection accorded to the employer
  • Extent of the restraint on the employee’s opportunity to pursue his occupation
  • Extent of interference with the public’s interest

Are there specific provisions that should be included in non-compete agreements?

Because non-compete agreements must be predicated on the protection of a legitimate business interest, protection of business information usually suffices. Therefore, it is critical to include an explanation of the company’s business and the nature of the information to be protected.

A work-for-hire provision allows parties to agree that the scope of an individual’s employment includes preparing written or electronic works on particular subjects. A prohibition against soliciting or hiring the company’s employees should be included to protect against employee raiding. Also significant to the agreement is a customer non-solicitation provision or prohibition against doing business with the company’s customers.

Choice of law and choice of forum provisions can be very helpful, but the choice of forum should be exclusive, rather than merely consenting to jurisdiction provisions. Tolling provisions allow a court to extend the time restriction by the time during which a former employee has been in non-compliance.

Finally, companies should consider including an attorneys’ fee provision by which companies can recoup what are often their only provable ‘damages.’ It also can give the company leverage over an employee in breach of an agreement and may provide a deterrent from breaching in the first place.

A. Patricia Diulus-Myers is a partner with Jackson Lewis LLP. Reach her at (412) 232-0180 or diulusmp@jacksonlewis.com.