Unfair competition agreements — which include nonsolicitation, noncompete and confidentiality agreements — are not uncommon in the business world. The intent of these agreements is to limit unfair competition or prevent the theft of trade secrets.
But employees cannot be unduly restricted in their rights to work for competing businesses. The key phrase is unfair competition. However, while employees typically do have the right to work for a competitor (anywhere, at any point in the future), they can be restricted from:
n Breaching confidentiality, like downloading customer lists or stealing trade secrets;
— Soliciting customers with whom the employee worked, since a company that paid an employee to build customer relationships has a right to protect those relationships; or
— Breaching the duty of loyalty, such as using company equipment or resources to compete against the employer.
The “duty of loyalty” is commonly recognized by courts. However, this duty is not without boundaries. For example, an employee could start her own business in competition with her employer. However, if she is soliciting customers from her employer or using her employer’s time or resources to advance her business, this would be a breach of the duty of loyalty.
Keep in mind that, even without such a breach, employment is at will in all states except Montana, so the employer could still terminate the individual. However, the employer would not have grounds for legal action, such as a court injunction to restrict the competition.
What are trade secrets?
Trade secrets are not limited to things like the secret formula for a soft drink. The term includes any information that has economic value or provides a company with a competitive edge. Essentially, trade secrets are bits of information a company would not want a competitor to know or have, including customer lists or procedures used to create a product that are not generally known. Nearly every employer has trade secrets it should take steps to protect.
To demonstrate that information is a trade secret, the employer must take reasonable steps to guard that information. If the information is openly available to all employees, the employer would likely face a considerable challenge in showing that the data is a trade secret.
On the other hand, even the simple step of keeping the information in a locked filing cabinet can demonstrate the company’s intent to protect that information on a “need to know” basis. Limiting access to electronic information using passwords can also show intent to protect the data. Another reason for security measures is that the manner in which an employee obtained the information is a consideration when enforcing an unfair competition agreement. If an employee obtained data by hacking into a computer system, the employer should have a lesser burden in showing an unfair breach.
Unfair competition agreements may hinge on whether the company has a protectable interest. Obviously, trade secrets (whether a secret formula or a list of customers) would be an interest that a company desires to protect. Even a close relationship with a customer, developed over time, can be a protectable interest.
Reasonable in duration and scope
To be enforceable, unfair competition agreements must be reasonable in duration and geographic scope. An agreement that restricts a former employee from working for any competitor in the state for one year would likely be excessive, since it would interfere with the former employee’s ability to earn a living. However, an agreement that prohibits the employee from contacting customers with whom he or she developed business relationships for one year might be reasonable.
Each case is unique, but enforcing an unfair competition agreement requires an employer to show that it had a protectable interest that was reasonably guarded. The employer must also show that the employee used company information to gain an unfair competitive advantage or that the employee’s use of the protected information caused economic damage to the employer.
The key to remember is this: To enforce an unfair competition agreement in court, an employer must prove that the agreement was reasonable and necessary to protect against unfair competition.
Ed Zalewski is an editor at J.J. Keller & Associates Inc., a compliance resource company that offers products and services to address the range of responsibilities held by human resources and corporate professionals. Zalewski specializes in employment law issues such as discrimination and harassment, overtime, exemptions and labor relations. For more information, visit http://www.jjkeller.com and http://www.prospera.com.