In this series of blog posts we will examine the use of injunctive relief in state and federal courts in response to employees who have misappropriated confidential information and trade secrets, who solicit clients and employees, or who violate non-compete agreements. We will address strategic decisions that must be made quickly when unfair competition is first discovered, examine the legal process of securing equitable relief, and explore other remedies available in these situations.
First, we consider best practices for ensuring that a company’s house is in order—well before it needs to seek injunctive relief. Central to improving a company’s likelihood of success in an injunction action is that it uses narrowly tailored restrictive covenant agreements and that it implements cultural and practical best practices for protecting its confidential information.
Narrowly Tailored Agreements
In addition to ensuring that post-employment restrictive covenant agreements are supported by adequate consideration, companies should resist the temptation to draft overly broad restrictions solely for an in terrorem effect. While overly broad restrictions may deter employees from competing and testing the agreement’s enforceability, at some point the company will likely want to enforce the agreement to protect against threatened or actual competitive activities. Oftentimes, the former employee who is willing to pay an attorney to challenge the agreement is the one who has the most to gain and can harm the company. The most common and expensive mistake made by companies with large, multi-jurisdictional workforces is trying to use a “one-size-fits-all” agreement for all employees. These types of agreements are almost never consistently enforceable.
Generally, most jurisdictions prohibit the use of agreements that restrain trade. The law will often allow post-employment restrictions but only to the extent necessary to protect a company’s legitimate protectable business interests and to the extent they are narrowly drafted to reasonably protect that legitimate business interest. Reasonable agreements will focus on:
- limiting agreements to certain job classifications (e.g., sales, R&D, finance, management);
- identifying the protectable interests (e.g., trade secrets and confidential information, specialized training, customer relationships, etc.), which are not the same in all jurisdictions (e.g., Missouri law will only protect actual trade secrets and customer relationships);
- including reasonable definitions of “confidential information” and trade secrets (e.g., not everything an employees knows about a company);
- limiting the scope of prohibited activities to the employee’s actual responsibility and duties (i.e., no “in any capacity” restrictions);
- using reasonable temporal and geographic restrictions (e.g., one year in the geographic area or territory where the employee actually worked or represented the employer);
- limiting non-solicitation restrictions to those customers with whom the former employee actually had material business contact; and
- limiting employee non-solicitation restrictions to offers to work in a competitive position.
Companies should also consider incorporating some of the following provisions into their agreements:
- a clawback provision requiring forfeiture of certain benefits—to operate as a possible disincentive to employees from joining a competitor and provide monetary payback if they do;
- liquidated damages—for an amount that is reasonable and related to the potential harm to avoid being struck as a mere penalty. (As will be discussed in a future post in this series, companies should also be aware that these clauses and clawback provisions can sometimes undermine their ability to demonstrate the irreparable harm element when seeking injunctive relief.);
- prevailing party attorneys’ fees;
- allowing the company discretion to consent to the employee working for a competitor;
- representation that the employee will not be substantially harmed by enforcement of the agreement and can find other work;
- representation that employee is not subject to a prior restrictive covenant agreement and will not use any prior employer’s confidential information which can serve as an effective defensive measure if the company is sued for hiring the employee in violation of the employee’s agreement with his or her prior employer;
- agreement to pay the employee during some part or all of a post-employment non-compete period while the employee seeks non-competitive employment;
- acknowledgement that the company can freely communicate with and disclose the restrictive covenants agreement to any subsequent employers;
- tolling provisions;
- a successors and assigns clause; and
- choice of law, venue, and jurisdiction provisions.
Stay tuned for future installments of our series on “Watch Your Assets,” where we will continue to discuss best practices for protecting confidential information.