By: Alex B. Leeman, Employment and Litigation Attorney
November 2nd, 2017
(Part 4 of a 5-Part Non-Compete Series)
In Parts 1, 2, and 3 of this series, I discussed using Restrictive Covenants (like non-compete agreements, non-solicitation agreements, no-hire clauses, and similar provisions) to protect an employer’s “legitimate business interests”, such as its innovation, investment, and goodwill with its customers, suppliers, vendors, distributors, etc. Restrictive Covenants are valuable and powerful when used correctly. But they are by no means the only tools available to employers. In Part 4 of this series, I discuss other ways employers can protect themselves and their blood, sweat, and tears.
Confidentiality and Non-Disclosure Agreements:
One of the most basic items in every employer’s toolbox is the confidentiality agreement. Whether used as a stand-alone contract, a provision in a larger employment agreement, or a policy in an employee handbook, confidentiality and non-disclosure agreements have become ubiquitous in the modern workplace, and can be an effective way to protect the company’s “secret sauce.” Despite being common, they are often carelessly drafted and inconsistently followed, often making them largely ineffective. When using confidentiality agreements or policies in the workplace, two basic rules need to be followed:
- Rule #1: A confidentiality agreement is only enforceable as far as it clearly defines what constitutes “confidential information.” Courts will often reject policies and provisions that prohibit disclosure of “confidential information” but fail to describe precisely what that is. Catch-all language in a confidentiality provision is useful, but no substitute for clear identification of information the company wants to keep secret. Why leave your company’s “secret sauce” to the whims of a judge? If it’s important, mark it “CONFIDENTIAL.”
- Rule #2: Employers should take care to ensure that confidential information is treated as such. If you don’t carefully guard your company’s confidential information, don’t expect the judge to do it for you.
Properly drafted confidentiality policies and agreements should restrict an employee from both using confidential information and disclosing the information to others. A confidentiality clause should also expressly survive termination of the employment relationship.
State and federal law provides additional protection for certain types of confidential information. The Utah Uniform Trade Secrets Act (the “UTSA”) and the federal Defend Trade Secrets Act (the “DTSA”) each provide power protections for employers.
Trade secrets law will receive in-depth treatment in a future article, but a few basic points are worthy of discussion here. First, both state and federal law first require that information meet the definition of a “trade secret” before it is entitled to legal protection. In the UTSA, a trade secret is defined as follows:
“Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:
(a) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and
(b) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
A similar definition is found in the DTSA. In other words, a “trade secret” must be two things: secret (because you work to keep it that way), and valuable (because it is secret).
If the information meets the definition of a trade secret, the law provides powerful protections. The UTSA provides injunctive relief, monetary damages, and recovery of attorney fees and costs in certain cases. The DTSA provides these remedies, and may even allow for exemplary damages and criminal prosecution in certain cases.
The Duty of Loyalty:
What if you don’t have a non-compete or a confidentiality agreement? Courts have long recognized that employees have a basic duty of loyalty to their employer both while employed and when approaching separation from the company. This duty of loyalty prevents the employee from competing with the employer while still employed, and from using the employer’s resources or taking business opportunities for themselves. The duty of loyalty is even more restrictive for corporate officers or directors, who “are obligated to use their ingenuity, influence, and energy, and to employ all the resources of the corporation, to preserve and enhance the property and earning power of the corporation, even if the interests of the corporation are in conflict with their own personal interests.”
The duty of loyalty frequently arises when employees are in the process of moving from one job to another. It commonly applies in situations like these:
- Example 1: A sales employee is moving from one telecommunications company to another. As she approaches her planned separation date, she decides not to pitch her last few leads and instead tells the customers she’ll contact them the following week after she moves to her new company.
- Example 2: An accountant is moving from one firm to another. As he approaches his planned separation date, he uses his office computer to prepare and print announcements regarding his move, which he mails to his entire customer list using the employer’s postage machine.
The duty of loyalty has its limits, and courts have cautioned that it should not be applied too broadly. Employees undoubtedly cannot compete with their employer, or solicit customers elsewhere while still employed, or use company resources to set up a competing business. However, courts have allowed employees to plan to go into competition and even make preparations to do so which still employed. In fact, an employee can even tell customers he is going to quit and will soon be working elsewhere—he just can’t ask the customers to follow until he has officially separated from employment.
Alex B. Leeman is a shareholder in Prince Yeates’s commercial litigation section where he assists Utah business of all sizes with their legal needs. Mr. Leeman has experience with a range of employment-related matters.