Whether you are CEO of a public company or owner of a private company, it’s never fun when a valued employee submits a letter of resignation. You know this employee signed a confidentiality or nondisclosure agreement (NDA), so you feel some sense of relief. The NDA restricts disclosure of confidential information both during employment and for a specifically stated time after the employment relationship ends. Additionally, the NDA contains a “covenant not to compete” provision, commonly referred to as a “non-compete,” which prevents the employee from working with any company which is in the same or similar business as your company. Because the departing employee signed an NDA with a non-compete, you tell yourself that everything is going to be fine—isn’t it?
To the dismay of many an employer, especially those not well-versed in employment law, the law regarding NDAs is not so clear cut. An additional perturbation exists if you have employees in several states, as the laws within each state are different and extremely fact-specific. As such, an NDA is not a surety against revolving employees. See, e.g., Strata Marketing v. Murphy, 317 Ill. App.3d 1054, 1066 (2000). At their root, prohibitions against using methods and manners learned during employment following termination of that employment will not be enforced except in unusual situations. NDAs should be as specific as possible as to what is confidential and contain various exclusion clauses that outline the types of information deemed not to be confidential within the terms of the agreement. And, lastly, NDAs should have a reasonable time constraint. As the advocate of your firm’s intellectual property, your attorney must persuade the court that the confidential information at issue contains methods and manners that are truly unique and zealously guarded.
The ability to present actual in-place procedures, such as password-protected or encrypted information on separate servers, as well as utilizing network-secured areas on employee computers, is a very favorable position from which to mount your defense. This is a favorite of law firms dealing with highly confidential information on planned publicly traded corporate mergers and acquisitions, which, if made available to people outside the law firm, could sway the stock market and subject the firm to serious SEC violations. And, paradoxically to this writer, most courts warrant the existence of a non-compete agreement as a determinable fact whether the information warrants the designation of “confidential.”, Maw v. Adv. Clinical Communications, 359 N.J. Super. 420 (2003). This places an additional hurdle to what initially seemed determinable objectively from the existence or nonexistence of the aforementioned zealously protective policies and procedures in place.
Referring back to the NDA, you soon realize that the hurdles to validate an NDA pale as compared to those regarding a non-compete. The law regarding a non-compete provision varies significantly from state to state. Each state balances the right to keep the benefit of the fruit of your ingenuity, and reward the entrepreneur daring to take risk, against the right of the worker to employment. In the past, courts saw the non-compete as similar to a contract and, as such, a requirement of consideration existed. See Timenterial v. Dagata, 277 A.2d 512, 515(Conn. Super. Ct. 1971) (employment alone is not sufficient consideration).
However, present-day courts have gradually yet affirmatively moved toward the view that employment is itself sufficient consideration, and non-competes indicate an intention to bind the parties and are necessary to protect a business owner’s investments or “trade secrets.” Raimonde v. Van Vlerah, 325 N.E.2d 544 (Ohio 1975). In furtherance of the employers’ rights, courts have often found that a trade secret process may be established if known components are assembled and known techniques are combined to produce a useful process which is not known in the industry. Penalty Kick Management Ltd. v. Coca-Cola Co., 164 F.Supp.2d 1376, 1379 (N.D.Ga. 2001).
As such, a disgruntled employee may not merely cross the street from Macy’s to Gimbels and gain commercial advantage. The courts in most states take great pains to keep your competitor from, in effect, stealing your company’s trade secrets, damaging years of hard work and impeding the rewards of capitalism. To such end, courts in most states have designated a very business-friendly means of maintaining this restrictive covenant, known as the “red pencil” vs. “blue pencil” distinction. The red pencil designation—viewing non-competes as simply not enforceable—is held by only four states: California, Arizona, Nevada and Virginia. Blue pencil states will “rescue” a portion of the contractual provision by striking out offending language, as long as the remaining contract is enforceable. Approximately 15 states follow the blue pencil rule. However, the majority of states—approximately 30, including New Jersey—follow the equitable reformation philosophy, where the court will extend its power to actually redraft and thereby make a substantive or affirmative change to the contractual arrangement between the parties itself to enforce the non-compete. In the new world of information technology on steroids, the non-compete has most certainly become a solid defense against employee dissatisfaction and desertion resulting in damages from disclosure of confidential information and fervently guarded trade secrets. However, there has been some significant jurisdictional push-back to courts’ cavalier and seemingly non-reflective ease in modifying arms-length contractual arrangements. For example, some courts, remanding for the benefit of the employee, even in reformation states, impose a reasonableness standard on the non-compete based upon: (1) the geographic restrictions in the agreement; (2) the duration of the agreement; and (3) the interests of the employer, employee and the public policy effect from converting and modifying the terms of an otherwise invalid agreement. See, e.g., Omniplex World Services Corp. v. U.S. Investigations Services, 618 S.E.2d 340 (Va. 2005).
In North Carolina, the Court of Appeals made a candid affirmation that the law will not enforce non-compete agreements that are intended to “merely stifle normal competition.” Starkings Court Reporting Services v. Collins, 67 N.C. App. 540, 541-42 (1984). Clearly, the apparently ardent terms and conditions of a NDA and non-compete are in fact more nuanced, diverse, complicated and unclear than this article could fully embrace. So, it is understandable that modern-day companies frequently find they are in need of a good employment lawyer. Perhaps there is a more prudent manner of protecting your confidential trade secrets than relying on the red pencil, blue pencil or equitable reformation distinction. Unlike the Greatest Generation, or even the Baby Boomers, in this climate of mergers, acquisitions and downsizing, Generation Y, Generation Z and the new Millennials simply cannot imagine a generation where a person would join a company and stay there throughout his or her professional life. This very new and different labor force has no allegiance to employers. And why should they?
According to the very bright people at Forbes Magazine—the top three reasons people choose to leave their current company for a new jobare: stability, compensation and respect. ( Meghan Casserly, “The Top Five Reasons Employees Quit in 2013,” Jan. 2, 2013.) The fourth and fifth (health benefits and work-life balance) are discussions for another day. All that financial cost, attorney fees and possible stress over confidential trade secret information can be most securely protected through a reasonable conversation between employer and employee. Stability: perhaps an earnest look at your company’s financial condition and the employee’s performance. Compensation: what is the normal compensation in the industry? Respect: seems a small price compared to that of a lawsuit.
by Anthony Palazzo,General Counsel and Attorney at Law
Re-published with permission from the November 24, 2014 edition of New Jersey Law Journal. © 2014 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.