Protecting an Employer’s Most Valuable Assets: Employers Should Remember to Revisit Non-Compete Agreements & Confidentiality Agreements

Author: Dean LeDoux

The beginning of a new year is a good time for employers to consider reviewing and possibly revising any non-compete and confidentiality agreements in place for their workforce or to consider putting such agreements in place. Generally, courts look more favorably upon the enforcement of confidentiality agreements than on non-compete or non-solicitation restrictions and all are subject to state law, as discussed more below. It is also possible that the federal law landscape on non-compete agreements might change significantly under the new administration of President Biden. Statements made by the Biden campaign prior to the election included a focus on limiting the use of non-compete restrictions.

Non-Compete/Non-Solicitation Agreements

As a general warning point, employee restrictive covenants (non-compete and non-solicitation restrictions) are covered by state law, which can vary significantly. Some states, including California, broadly prohibit such restrictions, while other states will enforce them to varying degrees. Many states that do enforce these restrictions require that employees enter into such agreements prior to the commencement of employment or that, if executed later, additional consideration be provided to the employee, e.g., a signing bonus, enhanced compensation, stock options, etc. 

Key points of which employers should be mindful with respect to non-compete/non-solicitation agreements include the following:

• Provide notice of the requirement for a non-compete/non-solicitation agreement as part of an employment offer, including providing a copy of the agreement; ensure signature by the employee prior to the start of employment.
• Be aware of applicable state (or states) law for your workforce.
• Include a meaningful definition of your company’s business and what is to be considered a “competing” business or company.
• Avoid over-reaching on duration and geographic restrictions.
• Consider using a customer non-solicitation restriction rather than a broader, industry-wide, non-compete restriction.
• Be mindful of any requirement (again under state law) to provide new consideration to employees entering into these agreements after the start of their employment.
• Check on any unique state law prohibitions or restrictions on agreements that impact whether you can have an agreement, how it should be drafted, and what choice of law or venue to put into the agreement.
• Remind departing employees of their agreements and be prepared to enforce them.

Confidentiality Agreements & Protection of Confidential Information

As noted, most state courts look more favorably upon confidentiality agreements and they are, generally, more likely to be enforced. Regardless, these agreements should be drafted with care. At a time when companies’ most sensitive confidential and proprietary business information is becoming ever more digitalized – and thus easily transportable – all employers should maintain vigilance in protecting their crucial business information.

Key points of which employers should be mindful with respect to confidentiality agreements include the following: 

• Consistently ensure that the agreements are promptly signed at the start of the employment.
• It is important to specifically and meaningfully identify your confidential information and trade secrets and avoid general, cookie-cutter references to “the company’s confidential business information.” (Remember, if a company informs its employees that essentially “everything” is deemed to be confidential information, there is a very real risk that a court would determine that nothing constitutes legally protectable confidential information.)
• Consider updating confidentiality agreements to include language that is legally required to take advantage of certain rights and remedies in the federal trade secrets law.
• Remind departing employees of their agreements and be prepared to enforce them.

In addition, both state and federal law have trade secret protection statutes. Trade secrets have generally been recognized under existing law as including confidential and valuable information regarding a company’s products, services, processes, business operations, financial and pricing information, and sometimes sensitive customer-related information. Protected information includes formulas, patterns, compilations, programs, devices, methods, techniques, and/or processes. The federal law, the Defend Trade Secrets Act (“DTSA”) was enacted in 2016. The DTSA is, however, greatly duplicative of pre-existing trade secret laws enacted by almost all states, which are mostly modeled on the Uniform Trade Secrets Act (“UTSA”). Forty-eight states have adopted a version of the UTSA, including, for example, Minnesota and Missouri. Although there is significant similarity between most states’ version of the UTSA, some differences do exist and, perhaps more importantly, the courts in some states are more receptive to claims under that statute than courts in other states. The DTSA does not preempt (supplant and replace) state law and claims may now exist under both federal law and state law for the misappropriation of trade secrets. 

The use of confidentiality agreements is an important step to protect trade secrets. Other important steps to take to protect trade secrets and other confidential information include:

• Update employee handbooks to include detailed confidentiality policies tailored to address your company’s confidential information.
• Provide orientation or other training to employees to discuss specific types of information considered to be confidential and to review policies and procedures for handling confidential information.
• Limit access to your company’s computer system and to the company’s most sensitive business information.
• Prohibit or significantly restrict use by employees of cloud-based file storage programs or websites, such as Dropbox or Google Docs.
• Use exit interviews with all departing employees to remind them of confidentiality obligations and to also retrieve all confidential information and company devices.
• Act promptly upon learning that a former employee may have taken confidential or trade secret information. 

Each employer’s situation and possible need for these types of agreements vary, of course, but all employers should give at least some thought to the possible use of these agreements to protect a company’s most valuable assets. If these agreements are used, they should be drafted with care and companies should avoid using “cookie cutter” or “one-size fits all” agreements.