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Protecting Trade Secrets Using Employment Agreements

Trade Secrets Protection Through Employment AgreementIntroduction

Most California business owners know that a provision in an employment contract which purports to prevent a former employee from competing with the employer’s business is unenforceable in California. Under California law, there is a strong and clear policy favoring the free and unfettered rights of workers to find work where they can, using all their skills and experience to command the best wages they can find. This policy is expressly codified in California Business & Professions Code §16600, which provides:

Except as provided in this chapter, every contract by which
anyone is restrained from engaging in a lawful profession, trade, or
business of any kind is to that extent void.

This section of the California code is confirmed in abundant case law as our commercial and business litigation lawyers can attest. But while non-compete provisions may be upheld in some commercial contexts, California courts have consistently interpreted the code to find that any employment agreement which restrains the free movement of a former employee is presumptively unenforceable, no matter how the agreement is labeled. So how can you protect your business’ trade secrets from misuse by former employees?

Protection of Trade Secrets

In California, the principle means of protecting your business from the harms of departing employees is by establishing procedures and employment agreements to clearly identify and protect your business’ “trade secrets”, which are generally protected by state law. See California’s Uniform Trade Secrets Act, CA Civ. Code Sections 3426 et seq. Employment contract provisions which clearly and reasonably designate trade secret protections are enforceable in California. A knowledgeable business lawyer can help you draft contract provisions which define, with reasonable precision, the nature of the important, protectable trade secrets of your particular business. Your business attorney can also help prepare written acknowledgement forms for your employees to acknowledge, by signature, that they have been advised of particular trade secrets, and of the importance of those trade secrets to the success of the business. Any failure to adequately define your business’ “trade secrets”, and establish your employee’s understanding of same, will diminish the likelihood a California Court will enforce any restriction against a departed employee. See Motorola, Inc. v. Fairchild Camera & Instrument Corp., 366 F. Supp. 1173, 1185 (D. Ariz. 1973) (applying California law).

Non-Disclosure Agreements

A related contractual tool your business attorney may suggest is to have your employees sign written “nondisclosure agreements” whenever confidential information is created, gathered or identified. The legal basis of such agreements is the same as in the context of general employment agreements, i.e. the protectability of adequately described, acknowledged, actual “trade secrets”. However, by setting them forth in separate non-disclosure agreements, the employer is establishing a strong evidentiary record to show that the employee was advised and acknowledged the existence and importance of the confidential information or trade secrets. This can greatly facilitate establishing the required legal elements of proof by your business litigation lawyer, (including but not limited to the employer’s “reasonable efforts” to protect the trade secrets), should legal action to protect your trade secrets becomes necessary.

Agreements to Return Confidential Documents and Media

As a practical procedure, to help establish the existence of “trade secrets,” and to protect against their unwanted disclosure, employees should also be required to acknowledge their responsibility to return confidential materials. The employment agreements, or other corollary written agreements, such as non-disclosure agreements, should require the employees to return, upon termination of the employment relationship, documents, notebooks and information storage media like computer disks, which contain related information.

Non-Solicitation of Customers

While there is some ambiguity in the case law[1], the great weight of California authority suggests that employment contract provisions which purport to prevent former employees from soliciting their former employer’s customers are enforceable only as violations of trade secret law.  In other words, a non-disclosure provision is likely to be enforced only to the extent such solicitation requires use of the former employer’s trade secrets. For this reason, the best way to prevent former employees from soliciting your business’s customers is typically to design policies and procedures to identify and protect customer identities and information as confidential and valuable “trade secrets”, and to have your employees acknowledge and conform to such policies and procedures. Here, again, a knowledgeable business lawyer can be invaluable in designing business procedures for maintaining customer confidentiality, and employment and non-disclosure agreements with provisions which specifically identify customer information as important, confidential information, i.e. “trade secrets.”

Conclusion

While California business owners can’t stop their employees from going to work for competing businesses in most instances, or leaving to establish their own competing businesses, they CAN draft employment agreements and implement business policies to prevent their employees from taking their “trade secrets” to another business to compete against them. If your company depends on confidential information, i.e. “trade secrets” to maintain its competitive position, it is of paramount importance to consult with a knowledgeable business lawyer when drafting your employment agreements and procedures.

Well-drafted employment agreements, non-disclosure agreements, and company policies and procedures for identifying and protecting the confidentiality of your business’s valuable confidential information is often the best way to protect your company’s trade secrets.  The knowledgeable business lawyers at Gehres Law Group can help your California business protect itself from the theft of trade secrets by employees and former employees. Contact us today for a complementary consultation or browse our website for more information.

[1]  e.g., Dowell v. Biosense Webster, Inc., 179 Cal.App.4th 564, 577 (Cal. Ct. App. 2009), which suggests that “non-solicitation” clauses may be enforceable independent of the protections afforded “trade secrets”, i.e. even if the customer lists or names of the customers are not “trade secrets”.

By | 2017-09-11T06:20:54+00:00 February 28th, 2016|Business Contracts, Business Law, Business Litigation, Commercial Law, Contract law, Labor & Employment Law|Comments Off on Protecting Trade Secrets Using Employment Agreements