Therese’s software company had a competitive advantage…until one of her employees quit and took her product source code with him…then started a competing company with it! And because Therese’s company is in California, the employment contract was not permitted to have a non-compete clause. “The mistake we made was not having specific clauses in our employment contracts regarding confidentiality and reusability,” Therese said.
You think this situation does not apply to you because your company is not in California? Think again! Even in states where non-competition clauses are permitted, they must be narrowly tailored in time and geography, and have a legitimate business purpose. Most state courts look for ways to void those clauses. For example, if you sell your product in a wide region, it will be impossible to prohibit an ex-employee from opening shop outside your region and selling into your region.
What can you do to avoid just giving away the keys to your company to every employee you hire?
Well, take a step back and think of what it is you really want to protect. It certainly is not that you want to limit another competitor from entering the market. Competitors can come from anywhere, not just ex-employees. What you really want to protect against is a competitor coming into your market using your own secret sauce! And that is where the law actually can help you.
While most courts are loath to limit the ability of an ex-employee to earn a living, even at a competing company, those same courts are eager to enforce trade secret laws. A trade secret is a type of intellectual property, and it enjoys protections similar to personal property. If someone takes your property without your permission, they are subject to penalties under the law. The Uniform Trade Secret Act, which most states use, says a Trade Secret is
A formula, practice, process, design, instrument, pattern, or compilation of information which is
1.not generally known or reasonably ascertainable,
2.by which a business can obtain an economic advantage
3.the subject of reasonable efforts to maintain its secrecy
Therese’s source code falls into this category of intellectual property. So do things like your customer and prospect list, your internal handbooks and manuals, training materials, supplier list, product designs and sketches, your financials and your business and marketing plans. Literally anything that gives you an advantage over your competitors falls into the trade secret bucket, as long as you take reasonable efforts to maintain its secrecy.
Enhanced protection of your client and prospect list may be had by including a non-solicitation clause in your agreements, which is more likely to be enforced than is a non-compete clause.
Make sure your employment contracts and employee handbooks tell your employees that your trade secrets are company property and all copies must be returned when the employee leaves the company. Since May 2016 there is also a federal law against theft of trade secrets. Your contracts must have specific language in order to use that law, so check with your attorney about whether you need to update your employment agreements.
You should also have your attorney look at your independent contractor agreements for marginally enforceable non-compete clauses and wording that protects all of your intellectual property. There’s something else about using independent contractors for creative services that you need to be mindful of, but that comes from Copyright Law and is the subject of a different article.
Entrepreneurs are going to save the world, and Argent Place Law wants to help. That’s why we work very hard every day to earn the title “The Law Firm For Entrepreneurs.” In providing Legal Business Counsel to Entrepreneurs just like you, we focus on protecting ideas and drafting and reviewing contracts of all kinds…including employment agreements and independent contractor agreements.