Career Development: Keeping Your Secrets in Your Company

July 1, 2004
Donald A. Beshada

BioPharm International, BioPharm International-07-01-2004, Volume 17, Issue 7

The employer's first step in considering whether to use non-competition and non-disclosure agreements is to assess, analyze, and understand the benefits of such agreements.

The biopharmaceutical industry features growth and job mobility. Competition for talented employees creates opportunities for them but headaches for management.

The key employees are a company's greatest assets. Besides losing the talent when they quit, the second biggest loss could be confidential, proprietary, or trade secret information. Your strongest defense is requiring employees to sign non-competition and non-disclosure agreements.

These agreements are legal documents and must be written broad enough to protect the company and narrow enough to be enforceable. We have prepared a series of three columns to describe the basic components of such agreements. If you are an employer or employee in the US, you want to know what you are signing.

THE PURPOSE OF NON-COMPETITION AND NON-DISCLOSURE AGREEMENTS

Generally speaking, the purpose of non-competition and non-disclosure agreements is to protect the confidential, proprietary, and trade secret information of employers. The aim of these agreements is to ensure that competition in a given marketplace is conducted on an equal footing and that no company can inappropriately use another's secret information to gain an unfair competitive advantage. However, the courts view non-competition and non-disclosure agreements as, in part, restraints on trade and restraints on an individual's ability to earn a living. Therefore, courts scrutinize non-competition and non-disclosure agreements to ensure that they serve the limited purpose of protecting confidential, proprietary, or trade secret information.

The definition of confidential, proprietary, or trade secret information varies from state to state. Generally speaking, product formulations, manufacturing processes, client lists, customer lists, database information, and marketing and strategic plans fall within this definition. These are the appropriate topics for non-competition and non-disclosure agreements. Conversely, information that is generally regarded as public record and standard knowledge in a given industry is not properly subject to protection by non-competition and non-disclosure agreements. This is the first level of narrowing.

THE ASSESSMENT PROCESS

The employer's first step in considering whether to use non-competition and non-disclosure agreements is to assess, analyze, and understand the benefits of such agreements. The first step in the assessment process is identifying the types of information categorized as confidential, proprietary, or trade secret. Then identify particular employees or groups of employees who possess or will learn about that information. The best and most-enforceable non-competition and non-disclosure agreements are ones that are narrowly tailored to ensure that those employees do not disseminate the information following cessation of their employment with the company.

The simplest and most cost-effective way to address non-competition and non-disclosure issues is to do so at the drafting stage. Properly thought-out and drafted agreements will provide employers with sufficient protection and will likely preclude dissemination of its confidential, proprietary, and trade secret information. In contrast, "boilerplate" agreements, with no thought or legal guidance behind them, put employers and their most important information at risk.

Companies should perform the above-referenced assessment as a matter of course when drafting non-competition and non-disclosure agreements. Courts are notorious for subjecting agreements to intense scrutiny. Advising the court of such an assessment at the litigation stage of any non-compete case will certainly benefit the company. It demonstrates to the court that the employer is, in good faith, simply trying to protect its most important information and not unduly attempting to restrain trade or an individual's right to earn a living as a trained specialist.

THE MAW CASE

Maw v. Advance Clinical Communications, Inc. 359 N.J. Super. 420 (App. Div. 2003)

went to two levels of state court. The case underscores the importance of the assessment process and provides employers with a clear view of how strictly courts may assess non-competition and nondisclosure agreements. The New Jersey Appellate Court sided with an employee, a graphic designer, who refused to sign a non-competition and non-disclosure agreement and was terminated for her refusal to do so. The court's decision was that the employee could properly assert a cause of action for retaliation and wrongful discharge. Essentially, the court concluded that the employee's position with the company did not provide her with access to any confidential or proprietary business information. Thus, the court concluded that the employer had no legitimate, good-faith basis to compel her to execute a non-competition and non-disclosure agreement, as there was no need to restrain her future employment.

The Maw case was recently overturned by the New Jersey Supreme Court [Maw v. Advance Clinical Communications, Inc. 2004 WL 941640 (N.J. Supreme Ct., May 4, 2004)]. While the New Jersey Supreme Court did, ultimately, dismiss the employee's retaliation claim, the Appellate Division's decision demonstrates the hesitancy of courts to provide blanket approval to non-competition and non-disclosure agreements and illustrates that it is imperative for employers to engage in an assessment process prior to requesting that employees sign non-competition and non-disclosure agreements. Executives, research and development employees, and sales people certainly possess information subject to protection. There are other classes of employees who do not possess sensitive information. So, in addition to assisting employers in non-compete litigation, a proper assessment process also limits an employer's potential liability for retaliation and wrongful discharge litigation.

THE REASONABLENESS STANDARD

Companies can't protect their employees from competitors forever. So, when drafting non-competition and non-disclosure agreements, address the scope and time of any non-competition clause. Courts teach that in order for a non-competition clause to be enforceable, the clause must be "reasonable" in both scope and time.

Similar to the definition of "confidential, proprietary, and trade secret information," the definition of "reasonable in scope and time" varies from state to state. Generally, non-competition clauses that restrict an individual's ability to work in a given industry across the United States for many years will be deemed to be unenforceable (unless there is some extraordinary reason for such a broad restriction). Conversely, the courts look at non-competition clauses that are narrowly drawn to prevent employees from causing substantial harm to a company more favorably, and they are more likely to enforce such clauses exactly as written.

What if an employer is concerned about a high-level salesperson leaving its employ for one of its two chief competitors but is not concerned with the employee going to any of its other competitors? That issue should be dealt with at the drafting stage. Specifically, the non-competition clause should state, in clear and concise terms, that the employee is not permitted to work for either of the chief competitors for a certain period of time. Such a specific clause heads off any argument by the employee that the clause is too broad and restrictive and makes it likely that the court in any non-compete litigation will enforce the clause.

CONCLUSION

We have found, when faced with potential or actual non-compete litigation, that many employers do not appreciate the nuances and potential risks associated with such agreements. The scope of such risk, and an explanation of typical non-compete litigation, will be the subject of the next column in this series.

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