Beyond Noncompete Agreements: The Best Tools for Protecting Your Business Secrets in California...

Beyond Noncompete Agreements:The Best Tools for Protecting

Your Business Secrets in California

Wednesday, September 21, 2011Presented by the Employer Resource Institute

© 2011 Employer Resource Institute. All rights reserved. These materials may not be reproduced in part or in whole by any process

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About Our SpeakerMary L. Topliff, Esq., is the founder of the Law Offices of Mary L. Topliff in San Francisco.

She has specialized in employment law counseling, training, and compliance for more than 20 years. She regularly advises business owners and human resources professionals on all aspects of workplace issues with the goal of preventing costly disputes. She also negotiates employment and separation agreements for executives.

Mary is a frequent speaker on practical applications of workplace legal issues and recent legal and legislative developments. She served as an adjunct faculty member with San Francisco State University’s College of Extended Learning from 1999 to 2008, where she taught Employee Relations and Legal Aspects of Human Resources Management.

[email protected]

BeyondNoncompete Agreements:

The Best Tools for ProtectingYour Business Secrets in California

Mary L. Topliff, Esq.

The Law Offices of Mary L. Topliff

www.joblaw.com

Noncompete Agreements: Introduction

Noncompete Agreements Short-hand term True NCA prohibits or restricts former

employees/others from future employment in some manner

Usually geographic and/or time

Typically matter of state law re enforcement

Copyright 2011 BLR Inc. – SLIDE 1

California Business & Professions Code

• California B&P Code §16600 reflects pro-competition, pro-employee mobility perspective

• Subject to narrow exceptions (e.g., sale or dissolution of business or partnership), “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."


CA Supreme Court Case

• Edwards v. Arthur Andersen, LLP, 44 Cal.4th 937 (2008) – Court held even the most carefully, narrowly drawn noncompete restrictions for employees are contractually invalid unless they fall within the specific statutory exceptions of Section 16600. Employer violated public policy by demanding that Edwards sign termination of noncompete agreement before it released him from illegal noncompete provision.


Further Limitations

• For contracts performed in CA, courts will not generally apply another state’s law via a “choice of law” provision (Dowell v. Biosense Webster, Inc., 179 Cal. App. 4th 564 (2009))

• In CA, employers cannot rely on courts to enforce remainder of agreement if part of agreement held invalid• Upshot: Avoid overly broad restrictions• Some states will enforce valid part of otherwise invalid

agreement, but courts tend to avoid rewriting contracts


Further Limitations

• What about former employees who will inevitably disclose confidential information or trade secrets in order to perform work at their new jobs?

• Some state courts restrict employment with competitors under this theory

• Edwards court explicitly rejected this theory

Copyright 2011 BLR Inc.- SLIDE 5

Confidentiality/Nondisclosure Agreements

• Rely upon agreements that ARE still enforceable in California: Confidentiality/Nondisclosure Agreements

• These agreements protect unauthorized or wrongful possession or disclosure of the company’s “confidential information” and trade secrets during and after employment• Departing employees are prohibited from using such data to

unfairly compete • Must be narrowly tailored so that they are reasonable and

protect only the employer's legitimate business interests– Overly broad provisions can lead to unfair business practices claims under

B&P §17200



• What are “trade secrets”?• California has enacted the Uniform Trade Secrets Act, or UTSA

• Formulas, patterns, devices, methods, techniques, or processes that derive independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and are the subject of efforts that are reasonable under the circumstances to maintain its secrecy.



• What constitutes “confidential information”?• Not in public domain, generally known or readily available to

anyone in your line of work (or would not take much effort to replicate information from public sources)

• Typically, covers technological developments, formulas, proprietary systems, copyrighted material

• Not all customer lists are confidential or trade secrets

• Carefully determine and identify company’s “confidential information” and “trade secrets”• How is it maintained? Who has access to it? Who is authorized to

possess or disclose it?

• What information do we publicize (e.g., customers listed on websites)?



• Non-solicitation of employees, consultants, etc, (“employee raiding”) must also be limited in scope• Thomas Weisel Partners v. BNP Paribas (N.D. Cal. 2010) held

provision invalid that prohibited solicitation of employees for 12 month period



• Agreements may include employee’s assignment of inventions with limitations• Employers may not require an employee to assign rights to an

invention that was developed outside of the employment relationship, e.g., if employer's supplies, facilities, equipment, or trade secret information was not used; invention was developed entirely on the employee's own time; invention does not relate to the employer's anticipated research or development or current business; and invention does not involve work that is performed by the employee

• Must be limited to those ideas and inventions that employees conceive while employed by the company



• Determine which employees need to sign these agreements and whether customization is necessary• Different considerations regarding executives,

inventors/engineers, sales, finance/HR employees

• Have employees sign agreements as condition of employment• Avoid providing agreement after employee has begun working


Action Steps

• Review all employment and “NCA” agreements and templates• Long-term employees may have old, unenforceable agreements• Different hiring managers may be using old templates• Ensure that other agreements, e.g., severance, compensation, stock

option plans, do not contain inappropriate noncompete provisions

• Have legal counsel prepare, update, and/or approve agreements• Ensure that your agreements are consistent with current state of the

law

• If multi-state employer, ensure that agreement for each state is enforceable

Copyright 2011 BLR Inc. = SLIDE 12

Cautions

• What if a new hire refuses to sign our Confidentiality Agreement? • Jury award of more than $1 million in punitive damages given to

an employee who was fired for refusing to sign an NCA presented to her after her company merged with a competitor. The court ruled that employers violate public policy and incur tort liability if they terminate (or refuse to hire) individuals who refuse to sign unlawful NCAs. Walia v. Aetna, Inc., (Cal. App. 2001)

• Upshot: Limit risk by ensuring that agreement will be enforceable before taking any adverse employment action for new hire or existing employee’s refusal to sign


Cautions

• Can we terminate an employee if we discover that the employee has a NCA with a former employer? • Employer terminated a recently hired employee after it became

aware that she had a noncompete agreement with her former employer. She sued, claiming that her new employer's action violated public policy. The court of appeals agreed, reasoning that the firing, in effect, allowed the former employer to accomplish indirectly what it could not do directly under California law. Silguero v. Creteguard, Inc., (Cal. App. 2010)

Copyright 2011 BLR Inc. - SLIDE 14

Action Steps

• Handling situations in which potential new hires have entered into NCA agreements with former employers• Critical pre-hire questions regarding NCA agreements• Require copy of agreement or written verification that there is no

agreement• Have counsel review enforceability and impact of agreement

(whether entered into in CA or elsewhere)• Negotiations may be necessary with former employer. Issues

must be resolved before individual begins working.


Departing Employees

• Formalized exit procedures are critical• Exit interviews to include questions about next job and what

company data and property employee possesses• Ensure all access to computers, email, etc is terminated• Termination certification as part of Confidentiality Agreement or

confirm terms of Confidentiality Agreement (i.e., on-going responsibility to protect confidential information)

• Exit checklists are helpful to ensure all information has been covered and all property has been identified and returned. Have employee sign confirmation.


Departing Employees

• For employees who are or might be going to work for competitor (or starting own competitive business)• Remove employee's computer from active use, or download and

save contents of hard drive. Check computer for unusual downloads or destruction of files and emails in days and weeks before departure.

• Move your clients over to other employees ASAP. Doing so will solidify those client relationships, while also allowing you to monitor for signs that your former worker is trying to poach these clients.

• Put new employer on notice that you will act to protect your trade secrets and request that employee be assigned work unrelated to their former job. Additional steps may be necessary/appropriate based on legal advice.


Questions?

Mary L. Topliff, Esq.

Law Offices of Mary L. Topliff

555 Montgomery Street, Suite 1650

San Francisco, CA 94111

Phone: (415) 398-9597

Fax: (415) 398-9599

www.joblaw.com

[email protected]

Copyright 2011 BLR Inc.


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