Small business owners understandably may be reluctant to use non-compete agreements for many reasons.  The desire to divert precious resources to paying an attorney to prepare a contract is hardly appealing.  Similarly, businesses may feel that such agreements are unnecessary because they have few employees.  But as Ben Franklin once wisely advised, an ounce of prevention is worth a pound of cure. 

The term “non-compete agreement” technically refers to a contract that preclude a person from engaging in certain acts of competition for a prescribed period of time within a prescribed geographic area.  In common usage, however, the term often is used more broadly to refer to any contract by which someone has any type of competitive restrictions, including non-solicit, non-recruit, non-disclosure and confidentiality agreements.  Simply put, non-competes come in all shapes and sizes, but the reasons small business owners should use one or more of these covenants are equally diverse.

1. Enhance the value of your company if you think you may sell someday – If you think someday you may wish to sell your business, it is important to protect the value of your company by requiring employees to sign restrictive covenants.  When someone purchases a business, they want to know that they will get what they pay for.  If they believe key employees with access to customers and relationships may not stay on board after a merger or acquisition, they may balk at the price or even walk away.  You may think that you can always sign employees up to a non-compete later, but such afterthought covenants present their own challenges.  You can protect the value of your company and its assets by using appropriately tailored non-compete agreements.

2. Qualify for trade secret protection – Generally speaking, any valuable business information that you try to keep secret from competitors is subject to trade secret protection.  But to state the obvious, to be a trade secret, the information must in fact be secret.  When determining whether information should be entitled to trade secret protection, courts look at many factors including the extent to which the owner of the secret took reasonable steps to preserve its secrecy.  A widely recognized precaution includes requiring employees to agree not to use or disclose confidential information.  In addition, if customer information is a trade secret, a covenant not to solicit customers (i.e., a non-solicitation agreement) may well be appropriate.

3. Protect your customer relationships –Small businesses tend to place client relationships in the hands of fewer employees.  Consequently, when an employee resigns, the client relationship may walk out the door with the employee.  Just as importantly, you may need time to rebuild your clients’ confidence and to show that your other employees are equally capable of serving their interests.  Clients are the lifeblood of any business; but this is particularly true for small businesses.  A small business simply cannot afford to lose its clients. 

4. Enhance client confidence – Would you do business with a company if you felt your personal financial information was at risk?  Of course not.  Your clients feel the same way.  If your clients entrust their personal or business information to you, they want to know that your employees are not going to take it when they leave.  Requiring employees to sign restrictions on their use and disclosure of confidential information is a good way to make your clients confident that their data is safe in your hands.

5. Protect your investment in training – Training employees is a worthwhile expense, and the training resources you provide may even help you to attract talented employees.  But steps should be taken to prevent your competitors from swooping in to hire your employees after you invest the time and expense to train them.  For this reason, courts commonly recognize that employers have a legitimate interest in protecting their investments in specialized training.

6. Clarify expectations with employees – Do your employees realize that you expect them to leave behind the information you entrusted to them if they decide to move on to a new job?  Do they understand that the relationships you paid them to cultivate and maintain belong to you?  The best time to clarify expectations with your employees is before a dispute arises.  Doing so may influence a departing employee’s conduct and provide you with the leverage you need to protect your company.

7. Shape ground rules for potential litigation – Litigation against departing employees can be expensive, but when your business is on the line, you may have little choice but to protect your interests through legal action.  Although no contract can eliminate the expense associated with litigation, careful forethought can help to minimize your costs.  Restrictive covenants are a perfect opportunity to reach agreement with employees about some of the ground rules that will apply if litigation becomes necessary, such as whether you are entitled to recover attorneys’ fees and costs if you prevail, whether lawsuits should be filed in a local forum, and whether you are entitled to certain remedies such as an injunction or liquidated damages.

8. Deter competitors from hiring your employees –  Deterring competitors from hiring your employees is not a sufficient fact in and of itself to warrant the imposition of a restrictive covenant.  In fact, courts will not enforce restrictive covenants if they serve no purpose other than to restrict competition.  But assuming you have a legitimate purpose for requiring employees to sign such agreements – such as a need to protect confidential information or customer relationships – sending a message to your competitors that you are prepared to protect these interests is a nice side effect.

In short, there are advantages to using non-compete agreements that may not be apparent until it is too late.  Small business owners should think about protecting their business in advance.  Please let me know your thoughts in the comment section below.

What does Obamacare have to do with non-compete agreements?  Well, technically speaking, nothing.  But the Supreme Court recently focused on what it should do with the remainder of the healthcare law if it decided to strike the individual mandate.  Justice Scalia asked, "Once you cut the guts out of it, who knows which parts were desired and which ones weren't?"  The manner in which courts treat overly broad non-compete agreements is not terribly different.  If a court finds part of a non-compete agreement unenforceable, what should it do with the rest of the agreement?  The answer varies from state to state, and unlike Congress with the healthcare bill, employers should include language that clarifies their intent. 

First, consider the approach employed by various courts.  Generally speaking, there are three approaches.  In some states (e.g., Vermont), if a covenant is overbroad by an inch, it might as well be overbroad by a mile because overly broad covenants will be invalidated in their entirety.  In other states (e.g., Arizona), overly broad covenants will be blue-penciled – meaning that courts will strike through offending language but will stop short of rewriting the agreement.  In still other states (e.g. Ohio), courts are free to reform restrictive covenants so that its restrictions are reasonable under the circumstances.

Recognizing the different approaches among states, employers should consider including severability clauses in their agreements.  But caution is required concerning how such a clause should be worded.  This is because the law from state to state with regard to modification and enforcement of overly broad non-compete agreements varies, and an argument can be made that a severability clause gives an employer less protection than it otherwise would receive absent its inclusion.  Stated differently, depending on the wording of a severability clause, an overly broad restriction might just get severed from the agreement (i.e. not modified) leaving an employer with little or no protection.

How can this happen?  A typical severability clause in a non-compete agreement might provide that “the provisions of this agreement are severable. If any provision is deemed to be invalid, void or unenforceable, the remaining provisions shall not as a result be invalidated.” Such a clause can be of great help in states like Louisiana or Wisconsin where overbreadth can be fatal. Upon finding a non-compete provision unenforceable, courts in these states are powerless to modify or blue-pencil the agreement. Under these circumstances, a severability clause may salvage a separate, independent non-solicitation or confidentiality provision contained in the same agreement.

So what’s the problem? Unless your severability clause is carefully drafted, a compelling argument can be made that the parties’ inclusion of a severability clause precludes modification of an overly broad non-compete in states like Ohio and Pennsylvania where courts are empowered to judicially modify overly broad covenants.  After all, if an agreement provides that unenforceable provisions should be severed, judicial modification of overly broad provisions would ignore the parties’ clear intent as set forth in a severability clause. The consequences can leave employers with little or no protection.

For example, consider an employment agreement that contains a fifty-mile non-compete clause, a customer non-solicitation clause, and a confidentiality clause. Imagine that an employee accepts employment with a competitor right across the street in violation of the non-compete, but complies with the non-solicitation and confidentiality clauses. What happens if the court finds the non-compete clause to be ten miles overbroad? If it chooses to strictly apply the severability clause as written and severs the overly broad non-compete provision instead of modifying it, the employer would be powerless to prevent the employee’s employment with its competitor. In the absence of such a severability clause, a court might choose to modify the fifty-mile non-compete downward to a forty-mile radius. In the presence of a poorly worded severability clause, a court may simply sever the non-compete based on the parties’ intent as reflected in the clause.

Such unintended results might be avoided by including a carefully drafted severability clause that takes into account the difference between jurisdictions that blue pencil, modify, or strike overly broad provisions. For example, consider the following clause:

"If any provision of this Agreement is held to be unenforceable, then this Agreement will be deemed amended to the extent necessary to render the otherwise unenforceable provision, and the rest of the Agreement, valid and enforceable. If a court declines to amend this Agreement as provided herein, the invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the remaining provisions, which shall be enforced as if the offending provision had not been included in this Agreement." 

This sample clause may enable an employer to reap the benefits of a court’s common law discretion to modify overly broad provisions, while providing the same benefit needed in states where overly broad provisions must be struck. In other words, this clause may provide the best of both worlds. If a non-compete provision is overbroad, the clause provides that a court may modify and enforce it to the extent permitted by law. If the court chooses not to modify the restraint, the invalid provision may be severed, leaving in place the remaining, and hopefully enforceable, provisions.

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

A case pending in New York federal court, BLT Restaurant Group LLC v. Laurent Tourondel, Michael Cinque and LT Burger, Inc., provides a reminder of important lessons for professionals in the food services and restaurant industry regarding employee defection and trade secrets issues.  The case arose out of a dispute between BLT Restaurant Group and its accomplished executive chef, Laurent Tourondel.  BLT was formed in 2004 and operated eighteen restaurants across in the United States and internationally.  BLT hired Tourondel as its Executive Chef.  As part of the agreement between BLT and Tourondel, BLT incorporated Tourondel’s name and initials into the branding of the BLT restaurants, hence the acronym: Bistro Lourent Tourondel.  One of the restaurants in the BLT family was BLT Burger.    

After Tourondel left BLT, he opened a new restaurant named “LT Burger”.  BLT sued Tourondel, a colleague who left with him, and LT Burger, and alleged that the LT Burger menu copied the BLT menu “almost exactly” and was based on BLT’s confidential and proprietary information.   BLT also claimed that LT Burger and Tourondel used the same proprietary recipes at LT Burger as were used at BLT Burger.  BLT further alleged that LT Burger misappropriated elements of BLT’s marketing strategy by promoting Tourondel through similar media as were used by BLT.  In addition to violating Tourondel’s contractual confidentiality and non-disclosure obligations, BLT alleged that LT Burger and Tourondel breached Tourondel’s duty of loyalty to BLT and that Tourondel and LT Burger engaged in unfair competition. 
 
In support of its claims that Tourondel breached his contract by using and disclosing confidential information, BLT alleged that this information consisted of its proprietary business models, financial and contractual information, “know-how,” the development of the BLT Burger Menu, the use of BLT Burger’s proprietary recipes, and the promotion of Tourondel and LT Burger through a magazine used by BLT Burger to promote itself.  Tourondel argued that these claims should be dismissed because all of the information – except for the recipes – cannot be a trade secret as a matter of law.  Notably, Tourondel conceded that the proprietary recipes could serve as the basis of a breach of contract claim. 

There are some important lessons to note from this dispute for restaurateurs and those investing in or launching restaurants:

• Make sure that agreements address confidentiality and non-disclosure obligations of key talent in the kitchen.  These individuals can constitute a competitive threat if they leave, which makes it important that they agree at the outset to not disclose the restaurant’s confidential and proprietary information.  Such agreements can also help to support claims for special or emergency injunctive relief, such as a temporary restraining order, in the event a case requires some speedier action by a Court.   

• Use employee policies that also define confidential and proprietary information and  the ethical and permissible uses of such information.  While the Court in Tourondel did not discuss the existence of an employee manual, it can be an important tool to establish an employee’s knowledge and understanding of what types of information are confidential and proprietary.  This, in turn, can support claims for breach of contract and fiduciary duty.  

• Ensure the proper protection of confidential information by limiting access to that information and securing it on the premises.  To the extent a restaurant has confidential or proprietary recipes or unique business methods and strategies, it should be sure to disclose them only on a “need to know” basis, and it should implement and enforce policies that strictly prohibit employees from copying or distributing the information or physically or electronically removing it from the restaurant for any reason.

Many companies have employees located in states across the country.  Drafting restrictive covenants for employees in all of these locations can be a daunting task.  To minimize the burden, some employers opt for a one-size-fits-all approach -- that is, every employee across the country signs the exact same agreement.  Depending upon the locations of these employees and the interests sought to be protected by the employer, this approach may work out.  But just as commonly, it may not.  This does not mean that employers need to draft fifty different agreements for use in all fifty states.  Here’s a quick sketch alternative to the one-size-fits-all approach:

1.  Categorize Locations – Although the law governing restrictive covenants varies from state to state, most states can generally be placed into one of three categories:

(a) states where courts are empowered to modify, sever, or blue pencil overbroad agreements -- The vast majority of states fall into this category.  For example, if you have employees located in Pennsylvania and Ohio, the law is substantially similar, and to the extent it varies, the courts in each state are empowered to modify contractual provisions they deem to be unenforceable.  Consequently, employers might consider using one form of agreement for employees located in the states that fit within this category.

(b) states where overbreadth will be fatal to the entire agreement -– A handful of states fall into this category.  In these states, if a non-compete is overly broad in any respect (e.g., if it lasts too long or covers too broad of a geographic area), courts will strike the entire agreement even if a simple modification would cure the overbreadth.

(c) states where the law is so unique that nothing but a state-specific covenant will do -– California and Louisiana are the quintessential examples of states that fall within this category.  The law in each state is so unique that virtually all covenants an employer may desire require adjustments to meet applicable legal requirements.

2.  Categorize Employees and Interests to be Protected – It is well known that restrictive covenants come in all shapes and sizes ranging from non-solicitation agreements to full blown non-competition agreements to confidentiality and non-disclosure agreements.  These different types of restrictions protect different types of interests.  For example, a customer non-solicitation agreement protects employers from the exploitation of customer goodwill acquired by employees during employment, and it can also protect against the misuse of confidential information.  In contrast, a confidentiality and non-disclosure agreement is more narrowly tailored to address the possible misuse of proprietary information.  Companies should give some thought to the types of employees that will be signing agreements and the types of interest sought to be protected.  If salespeople will be signing the agreements, the company may choose to require both a confidentiality and a non-solicitation agreement.  If a non-sales related employee is signing the agreement, the company’s interests may possibly be protected by a confidentiality agreement alone.  In contrast, senior executives might be expected to sign a non-solicitation, non-compete and a confidentiality agreement.

Juggling the competing concerns raised by differences in state law can be difficult, but it is not impossible.  Methodically identifying the types of employees who will sign covenants, the interests sought to be protected, and the jurisdictions within which each employee works will go a long way.

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

For any company seeking to protect its trade secrets, it is important to take reasonable measures designed to maintain the secrecy of the information at issue.  Following is a list of question companies ought to consider:
 
1. Do your employees execute a confidentiality agreement?
2. Do your employees with significant customer relationship responsibilities have agreements not to solicit your customers after termination?
3. Do your employees with access to your key business strategies and/or with significant customer relationship responsibilities have limited agreements not to compete, in states where permissible?
4. Do you have agreements preventing departed employees from raiding your current workforce?
5. Have you recently reviewed any of the above-mentioned agreements to make sure they comply with current law in the states in which you operate?
6. Have you made sure that your severance/release agreements do not supersede any of the above-mentioned agreements?
7. Do you implement policies, signed by all of your current employees and new hires, addressing the use of computers, emails, voice mail and the internet?
8. Do you implement policies, signed by all of your current employees and new hires, addressing physical access to trade secrets and/or confidential information?
9. Do you implement policies, signed by all of your current employees and new hires, addressing vendors and third party access to trade secrets and/or confidential information?
10. Do you periodically audit your personnel files to make sure that critical employees executed the above-mentioned agreements and acknowledgments regarding the above-mentioned policies?
11. Do you mark important documents containing your trade secrets and/or confidential information as “Confidential”?
12. Do you limit access to your trade secrets and/or confidential information to only those employees with a legitimate need to access such information?
13. Do you lock file cabinets and offices that store trade secrets and/or confidential information?
14. Do you cross-shred all paper documents containing your trade secrets and/or confidential information?
15. Do you secure all dumpsters and post “NO TRESPASSING” signs in appropriate locations?
16. Do you train your employees not to discuss your trade secrets and/or confidential information around third parties?
17. Do you instruct your employees to report any repair people that show up without being called, and to not grant access to equipment until their identities are established?
18. Do you require all visitors to wear visitor tags and be escorted at all times?
19. Do you utilize confidentiality provisions in standard contracts with subcontractors, vendors and suppliers?
20. Do you utilize contract and licensing agreements that expressly state the parameters for using certain information, and that include restrictions on “reverse engineering” or disclosing that information during activities such as a contract bidding process?
21. Do you meet with subcontractors, vendors and suppliers to stress the need for confidentiality for certain projects or other situations?
22. For your sales force (if applicable), do you limit each employee’s access to the customer database to only those customers for which the employee is responsible?
23. In states where appropriate, do you update employee agreements when employees change job duties?
24. Do you limit access to your trade secrets and/or confidential information on your computers to only those employees with a legitimate need to know?
25. When an employee is terminated, do you immediately delete the employee’s access to computers, phone systems, and private property areas?
26. When an employee is terminated, do you conduct an exit interview wherein you remind the employee of his or her continuing duty not to use or disclose your trade secrets and/or confidential information?
27. When an employee is terminated, do you request that the employee return your property, including your trade secrets and/or confidential information?

When is it okay for an employee to steal trade secrets?  According to the New Jersey Supreme Court, the answer is when an employee is trying to preserve evidence of discrimination. 

In Joyce Quinlan v. Curtiss-Wright Corporation, the New Jersey Supreme Court addressed the question of whether an employee may take confidential documents from his or her employer for the purpose of helping in the prosecution of a discrimination claim. (Click here to read the opinion.)  The Court emphasized that it had to strike a careful balance between an employer’s right to conduct its business while safeguarding its confidential information and an employee’s right to be free from discrimination and retaliation for speaking up about perceived discrimination.  The Court observed that neither right is absolute, and achieving the appropriate balance requires an intensive analysis.

Factual Background

Quinlan worked for Curtiss-Wright for approximately twenty years when she was passed over for a promotion by a male employee whom she believed to be less qualified.  In her role as the Executive Director of Human Resources, Quinlan had access to many employee files.  She began to review these files looking for evidence to support her claim that Curtiss-Wright engaged in a pattern of widespread gender discrimination.  She collected 1,800 pages of documents, some of which contained employees’ confidential personal information, including Social Security numbers and salary information.  Some time later, Quinlan was given another document concerning the job performance of the male employee whom she believed had been wrongfully promoted.  She gave all of these documents to her lawyers, and needless to say, the parties had widely different opinions on whether she should be permitted to use them in litigation against the company.  After learning that her pilfering of documents was an ongoing affair, Curtiss-Wright terminated her, and she amended her complaint to assert a claim for retaliation.

"Totality of the Circumstances" Test

After a tortured procedural history, the case found its way to the New Jersey Supreme Court.  In deciding the issue, the Court adopted what it termed a “flexible, totality of the circumstances approach that rests on consideration of a wide variety of factors.”  These factors are as follows:

First, courts should evaluate the manner in which the employee obtained the documents.  Were they stumbled upon innocently in the course of the employee’s ordinary duties?  Or did the employee rummage through files or snoop around someone’s office?

Second, courts should consider what the employee did with the documents.  Did the employee simply give the documents to his or her attorney for the purpose of obtaining legal advice?  Or did the employee leak the documents to third parties not entitled to see them?

Third, courts should evaluate the content of the documents to assess the strength of the employer’s interest in maintaining confidentiality.  Does the document contained privileged or proprietary information?

Fourth, did the employer have a clearly defined confidentiality policy?  Has the employer routinely enforced that policy in the past?  Did the employee act in violation of the duty of loyalty to safeguard confidential information obtained during employment? 

Fifth, was the document disclosed in a manner that was unduly disruptive to the employer’s business?  This factor should be assessed in conjunction with the degree of relevance of the document.  In other words, was the document taken merely for the purpose of casting aspersions, distracting from the issues, or to sensationalize a claim?  Or was the document central to the discrimination claim?

Sixth, why did the employee take the document instead of merely describing it to counsel so that it could be sought in discovery? 

Seventh, all of the above factors must be considered in the context of the strong competing interests – the employee’s interest in being free from discrimination and retaliation, and the employer’s interest to operate it business within the bounds of the law with an expectation that its employees will behave with loyalty.

A "Hair-Splitting Distinction?"

Applying these factors, the Supreme Court upheld the jury verdict and punitive damages awarded in favor of Quinlan.  In doing so the Court observed a fine line.  Curtiss-Wright could terminate Quinlan for the act of taking documents, but it could not terminate for her for using them in her claim against the company.

In a scathing dissent, Justice Albin criticized what he saw as a “hair-splitting distinction made by the majority…that defies ordinary understanding.”  According the Justice Albin, the majority’s holding “sends a disturbing signal to both the business community and the bar that employee theft may actually pay.” 

The majority opinion was reached after a painstaking review of analogous federal decisions.  It underscores the lesson that employers should not assume that they can terminate an employee for taking documents in support of a discrimination claim.  Employers may feel uncertain about their authority under these circumstances, but the New Jersey Supreme Court believes employees are on equally uncertain ground because they “run the significant risk” that their conduct will be found unprotected by the courts.

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

Protecting a company's non-compete and trade secret interests can be a daunting task.  There are so many things to consider.  Here's a list of ten things to keep in mind and some resources to help you take action. 

1. Implementing a Trade Secrets Protection Program – Protecting your trade secrets cannot be left to afterthought.  Companies are well advised to implement a trade secrets protection program.  If you don’t know where to start, consider conducting an audit of your company’s confidential information.

2. Drafting Non-Competition Agreements --  Many employers with offices or employees located in multiple states use the same non-compete/confidentiality agreement in each state in which they do business. Typically, the form of the non-compete/confidentiality agreement originated in the employer’s home state, and the employer went on to use this same agreement wherever the employer does business. However, these employers may find out too late that a non-compete/confidentiality agreement enforceable in their home state may not be enforceable in another state.

3. Online Social Networking Policies -- Chances are that one-quarter to perhaps as much as one-half of your workforce (or more if your workforce is younger) are regular users of social networking websites.  Any business that does not have a social networking policy or does not train its employees on the do’s and don’ts of social networking may have a critical security gap in the protection of its trade secrets.  A recent case suggests that LinkedIn can present a threat to your trade secrets.  If you have expectations concerning the manner in which your employees may or may not use LinkedIn, it is wise to address these concerns upfront through contracts and written policies.

4. Can Your Lawyer Keep a (Trade) Secret? -- Ensuring that your trade secrets are kept secret is not a new requirement.  Internal controls on use and dissemination of confidential information may not be entirely sufficient.  Businesses need to recognize that risks sometimes involve the handling of their data by third parties specifically entrusted for that purpose, such as their attorneys.  Remote storage of client data presents several concerns including unauthorized access to confidential client information by a vendor’s employees or by hackers, a failure to adequately back up data, or insufficient data encryption. 

5. Can Litigation Place Trade Secrets at Risk? --  The last place you might expect your trade secrets to be at risk of disclosure is in a court action intended to protect them, but courts around the country have held that plaintiffs alleging trade secret misappropriation must identify the secrets at issue with specificity. So what is a plaintiff to do if it wishes to minimize disclosure of its trade secrets during litigation while maximizing its ability to discover what information may have been taken by the defendants?  Click here.

6. Open Source – Hidden Exposure --  Open source code is computer code that is publicly available on the internet for use by anyone.  Typically, in order to copy open source code from the internet, a party must agree to the terms of a “click” or similar pop-up license.  Although there are hundreds of different open source code licenses, many require that the user of the code must make publicly available any subsequent use of the code.  In other words, if your software programs are built using open source code, it may be more difficult to claim trade secrecy for such programs.

7. Taking Control of Litigation Budgets in Non-Compete Cases -- Litigation budgets can be difficult to prepare under the best of circumstances.  Budgeting for non-compete litigation, with its unpredictable nature and often front-loaded cost structure, is even more difficult.  Although many factors are outside the control of parties and their counsel when it comes to litigation costs, the litigation strategy you choose can have a particularly significant impact on your budget in a non-compete case.  Moreover, given the fast pace of non-compete litigation, there is an increased need to continually reassess your budget early on as developments unfold.

8. Handling Employee Defections -- When employees leave to join a competitor, you can often be taken by surprise.  In order to secure your confidential information and customer relationships, rapid action may be required.  Consider these ten tips for responding to employee defections.

9. Advising Recruits -- Just as employers must be prepared to respond to employee defections, they must be prepared to advise their incoming recruits on what not to do when resigning from a former employer.  Here are ten things to keep in mind.

10. Mergers and Acquisitions -- Good mergers can turn bad without attention to employee retention -- be sure to carefully analyze the existence and enforceability of non-competes signed by key employees early in the process.

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed.

In a sobering reminder that online social media is changing the way many companies do business in unforeseen ways, a federal court recently shot down an employer's trade secret claim based largely upon the availability of information via the internet.  In Sasqua Group, Inc. v. Courtney, a magistrate judge for the United States District Court for the Eastern District of New York held that although an employer's customer list may have been a trade secret years ago, "the exponential proliferation of information made available through full-blown use of the Internet [presents] a different story."  The district court subsequently adopted and approved the magistrate's lengthy and detailed opinion.

Sasqua Group is an executive search consulting firm specializing in the recruitment and placement of professionals for the financial services industry.  When it parted ways with a former recruiter named Lori Courtney, Sasqua sought an injunction to preclude Courtney from misappropriating its trade secrets.  According to Sasqua, Courtney had access to its customer database prior to her departure, and the database was the "lifeblood" of its business.  The database contained client contact information, individual candidate profiles, contact hiring preferences, employment backgrounds, descriptions of previous interactions with clients, resumes and other information.  From Sasqua's viewpoint, the database was highly proprietary.  Courtney had a different perspective, and the Court agreed.

Courtney testified that "virtually all personnel in the capital markets industry...have their contact information on Bloomberg, LinkedIn, Facebook or other publicly available databases."  During the hearing, Courtney was asked what she would do "if she had amnesia tomorrow, lost her blackberry" and "needed to identify" decision makers and prospective clients.  Her answer resonated with the court: she would use the internet and the vast amount of information available on it, which she claimed she could find through a five-minute search.  Courtney explained that she could start with LinkedIn "because people put their whole profile on LinkedIn."  She explained that if she wanted to find the decisionmaker at a particular company, she could simply enter the name of the company in the search box.  Seconds later, she would have a list of employees, their positions, current title, prior jobs, undergraduate school, dates of attendance, experience, objectives, and even contact information.  If she wanted more information, she could do a search on Google and she would have thousands of search results, many of which pointed to news stories recounting companies' hiring plans.  The court concluded that the information publicly available "exceeded the amount and level of detail contained in the Sasqua database."  The clients, their contact information, and other data was readily accessible.

Does this mean that employers seeking trade secret status for customer lists and related information should throw up their hands and surrender?  No.  This case presents a textbook example of what not to do if an employer regards its client information as confidential.  For starters, Sasqua did not require Courtney to sign a confidentiality or nonsolicitation agreement.  Nor did it take reasonable measures to protect the database in question.  Its computers were not password protected; all employees had free access to the database, including at work and remotely from home.  The database did not contain legends designating confidential information embedded within its pages to remind employees that the information was confidential.  The database was shared with potential business partners without restriction.  Firewalls and security software were not installed.  As the court stated, "Sasqua failed to take even basic steps to protect the secrecy of the information contained in its database."

The "takeaway" from this case is not that social media and the proliferation of information via the internet will undermine protection of customer lists and related information.  Rather, the lesson is that employers need to be vigorous in the efforts to keep their secrets secret.  A copy of the magistrate judge's opinion and the district court's confirmation is available in pdf format at the bottom of this post.  As always, please feel free to share your comments, thoughts and questions in the comment section below.

Sasqua Group Magistrate's Report & Recommendation.pdf (202.46 kb)

Sasqua Group Order Adopting Magistrate's R&R.pdf (11.84 kb)

The United States District Court for the District of Minnesota recently upheld a magistrate judge’s decision to issue a protective order precluding a school from enforcing confidentiality obligations against employees who disclose information in connection with “formal and informal discovery” in a lawsuit commenced by the ACLU.

The ACLU filed suit against Tarek ibn Ziyad Academy (“TiZA”) arguing that its use of public funds violates the First Amendment because TiZA advances and prefers Islam over other religions and nonreligious approaches.  To aid its investigation, the ACLU sought to interview current and former TiZA employees to ask questions about how the school operates.  During these interviews, employees expressed reluctance because they feared the school would take steps to enforce a confidentiality clause in its Staff Handbook.  The ACLU contacted the school to seek confirmation that it would not commence legal action against employees who cooperate, but the school refused and reaffirmed its belief that the confidentiality clause applied.  In response, the ACLU sought a protective order from the court specifying that individuals can disclose information in connection with this case without fear of sanctions resulting from the secrecy clauses in the school handbook and related non-disclosure agreements.

The magistrate judge issued a briefly worded order stating that “[p]ursuant to its inherent authority to maintain the integrity of the proceedings, this Court orders TiZA not to commence legal action against its former or current employees for disclosures they may make in connection with this litigation.”  TiZA appealed this order to the district court, but the district court was even less understanding.  Observing that TiZA does not want its employees to provide information relevant to the lawsuit, the district court threatened that it “may be required to weigh the evidentiary implications of TiZA’s conduct should TiZA attempt to prevent current or former employees from providing information in this action.”  The court noted that such “implications” may include drawing adverse inferences about how the school operates, and it further warned TiZA that its conduct “may not sit well with a fact-finder such as a jury.”   

In fairness, the district court’s decision was heavily premised on TiZA’s status as a “public entity.”  In fact, the court observed that TiZA was “behaving more like a private institution by maintaining that a confidentiality clause in its employee handbooks may be grounds for termination or legal action if a current or former employee provides relevant, public information in this action.”  Regardless, the court’s opinion expressly left undecided the issue of whether the confidentiality clause was unenforceable because the school was a public entity.  Instead, it found that TiZA’s threats on the record before it were not “consistent with a good faith search for the truth.”  Whether the court would reach the same result in a case involving a private entity is debatable.

A copy of the district court's opinion, the magistrate judge's order, and the ACLU's memorandum of law are available in pdf format below.

ACLU v. Tarek ibn Ziyad Academy District Court Order.pdf (20.82 kb)

ACLU v. Tarek ibn Ziyad Academy Magistrate Judge Orderl.pdf (10.41 kb)

ACLU's Memorandum re Motion for Protective Order.pdf (42.30 kb)

A sales manager has signed a contract with his employer agreeing that client lists are confidential and agreeing not to solicit clients for a period of six months after the end of his employment.  Shortly after resigning to join a competitor, the sales manager updates his LinkedIn profile to reflect that he has changed jobs and is now working for the competitor.  The profile update is broadcasted by LinkedIn to the sales manager’s contacts, which includes dozens of the clients he serviced at his previous employer.  Has the sales manager breached his contract?  Arguments can be made on both sides.

The former employer will argue that its customer list is confidential and that the sales manager obtained his knowledge of the clients’ identities by virtue of his employment.  The employer will note that even novices on LinkedIn understand that the service will notify contacts of a user’s profile updates.  After all, why bother updating your profile if you don't intend to share this information with others? And many, though admittedly not all, courts have held that contacting former clients regarding a change in employment constitutes a solicitation.  See e.g., Merrill Lynch v. Schultz, 2001 WL 1681973, *3 (D.D.C. 2001) (noting that “such initiated, targeted contact is tantamount to solicitation because there is no reason to believe that a customer on the receiving end of such a [communication] does not assume that the [employee] wishes for him to transfer his account.”).

The sales manager will undoubtedly take a different view.  He will argue that he didn’t take any records or other information with him when he left, and that the identity of his former employer’s clients has always been publicly available to anyone who wanted to look at the sales manager’s LinkedIn contacts.  He will also note that he did not initiate contact with clients.  Rather, all he did was update his profile to reflect a change in employment and sat back providing clients – or anyone else for that matter – with the option to contact him.

So who is right?  As with any non-compete case, the answer may vary on a case by case basis and require a close examination of the contract language and the surrounding facts and circumstances.  A court is likely to ask the following questions (among others):  Does the contract specify that client information (such as client identities, names, addresses, and other contact information) is confidential?  Did the former employer actually treat such information as confidential?  What is the wording of the non-solicitation agreement? 

Because the enforceability of a restrictive covenant is highly discretionary in many states, employers who seek to preclude employees from contacting clients via LinkedIn may take steps ahead of time to eliminate any confusion.  Such steps may include any or all of the following:

1. Draft non-solicitation agreements that:

• expressly preclude employees from contacting clients to notify them of the employee’s change in employment;
• specify that communications made through an online social networking website such as LinkedIn, Facebook, etc. constitute a violation of the contract.

2.  Draft confidentiality agreements that:

• expressly define confidential information to include client identities and contact information;
• unambiguously state that confidential information may not be used or disclosed for any purpose other than on behalf of the employer, including through social media.

3. Include a social media paragraph in non-competes that specifically addresses the use of computers and social media.  The paragraph should state that:

• It is not intended to limit the scope of the confidentiality and non-solicitation covenants;
• Employees may only use the employer’s computer systems (e.g., computers, internet, servers, internal e-mail, external e-mail, World Wide Web access, etc.) for business purposes only.  Recognizing the rigid – perhaps impractical nature of this restriction – the agreement may provide that incidental personal use of computer systems is permitted, but state that such usage shall not violate the terms contained the confidentiality and non-solicitation provisions; 
• All e-mail and internet usage is subject to monitoring and that access to any website on the Internet must be for legitimate business only;
• The Employer may choose to block access to certain sites on the Internet at its discretion, and that available access to a site does not constitute approval to use or access that site by the employer.
• The employee is not permitted to have a webpage or website on the Internet for business purposes through a provider without prior written approval from the employer.  This includes social networking sites like Linked-In for business purposes.  The employee should agree that mentioning his or her affiliation or employment with the employer on these types of sites without prior written approval of the content by the employer is not permitted.  If the employee is permitted to connect with clients via LinkedIn, they should be required to set their settings so that other users cannot see their contacts. 
• The employee agrees that the use of text messages, e-mails, IM’s, and/or other communications via Blackberry or other wireless service/devices not routed through the employer’s systems is not permitted for business communications with Clients;
• The employee agrees that participation in chat rooms or other online forums for business purposes is not permitted, and that the employee will not direct Clients to chat rooms, blog sites, or other social networking sites which contain information prohibited by the employer or applicable regulatory authorities;
• The employee agrees that he or she will not discuss the employer, its business relationships, its managers and employees, its customers or its products/services in any chat room or other online forum without prior express written permission from the employer’s management;
• The employee agrees that the restrictions outlined above apply to his or her use of any computer (within or outside of the employer) for any business purpose.

In short, businesses that do not address social networking through their contracts and written policies may find that they have a critical security gap in the protection of their trade secrets and customer relationships. 

Michael R. Greco is a partner in the Employee Defection & Trade Secrets Practice Group at Fisher & Phillips LLP.  To receive notice of future blog posts either follow Michael R. Greco on Twitter or on LinkedIn or subscribe to this blog's RSS feed.