How possible is it that your firm can keep a secret

May 11, 2009
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What are your company's most important assets? For many businesses, they are customer lists, pricing information, quotation logs — any information that a competitor could use to unfairly compete for your customers.

In the legal world, such assets are known as "trade secrets." The classic definition of a trade secret is a formula (such as Colonel Sanders' secret recipe of 11 herbs and spices), but any company information that is valuable because it is not known to the general public may qualify as a trade secret subject to legal protection.

Unfortunately, many companies do little to protect their trade secrets. When an employee leaves to work for a competitor (or start a competing business) and takes confidential company information, it is often too late to undo the damage.

Michigan law provides some protection of a company's trade secrets. For example, under the Michigan Uniform Trade Secrets Act, it is unlawful to use or threaten to use another's trade secrets without permission. A violator of the Act can be ordered by a court not to use or disclose trade secrets, to return the trade secrets, to pay a royalty or other damages, and to pay the company's attorneys' fees for an intentional or malicious theft of trade secrets.

Extreme cases have resulted in criminal sanctions. For example, in a "classic" trade secret dispute, three people were sentenced to prison for conspiring to steal trade secrets from Coca-Cola and sell them to rival Pepsi.

However, the actual effectiveness of the Trade Secrets Act is often limited. First, it is frequently difficult to prove that a former employee has taken trade secrets. Second, it is often difficult to prove that the information was actually used by the former employee, as most former employees will deny using the information. Finally, once your company's confidential information is out in the marketplace and has been used, it is often impossible to "put the toothpaste back in the tube" and undo the damage to your business.

One measure many companies take to help protect confidential information is entering into confidentiality agreements with employees. The agreement can make clear what information is confidential, can aid in obtaining relief from a court if confidential information is taken, and can provide for damage remedies, such as payment of attorneys' fees by the party wrongfully taking or using the information. However, confidentiality agreements still have many of the same limitations as lawsuits under the Trade Secrets Act.

A better means of protection for most companies are non-compete agreements with key employees. Such agreements can help prevent an employee from using confidential information to unfairly compete against you.

With a non-compete agreement, the burden is no longer on your company to prove that a former employee has taken or has used your company's confidential information. The mere fact that your employee is engaged in a competing business is usually sufficient to obtain relief from a court. There is also much less temptation for an employee to take confidential information in the first place if they cannot use it in a competing business. A non-compete agreement also may buy your company time to investigate whether a former employee may have taken confidential information before it can be used against your company in a damaging way.

Non-compete agreements are enforceable if they are deemed reasonable by the court. They must be reasonable in (1) geographic scope, (2) duration and (3) the line of work prohibited. For example, it is probably unreasonable to impose a nationwide non-compete restriction on an employee who had a local or regional role (such as a specific sales territory). Similarly, in some circumstances a short non-compete period (three to six months) is all that is needed to protect your company's business interests, while in other industries with longer product development and lead times, a year or more restriction on competition might be considered reasonable by a court.

Many companies are reluctant to enter into non-compete agreements for fear that they are viewed negatively by employees. However, presenting employees with non-compete agreements that are reasonable can help alleviate these concerns. When a company explains why the non-compete agreement is needed, most employees understand. Most employees have no problem signing non-compete agreements that are reasonable and not punitive or overreaching. Your company can always choose not to enforce a non-compete with a former employee who leaves on good terms and does not threaten your business.

For "at will" employees not already under an employment contract, a non-compete agreement can be entered into at any time as a condition of continuing employment. Entering into a non-compete agreement does not affect your company's ability to discharge or discipline an employee consistent with company policy and applicable laws.

Non-compete agreements are inexpensive to draft and implement and can be tailored to your company's needs. The potential benefits of having such agreements with key employees, particularly those with access to confidential company information, are substantial. Don't wait until your company's confidential information is out the door to protect your business.

Bryan Walters is a partner with the law firm of Varnum, Riddering, Schmidt, & Howlett LLP in Grand Rapids.

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