NON-COMPETES: SHOULD YOU HAVE THEM, AND WHAT TO DO

WHEN FACED WITH ONE?

Jonathan A. Keselenko

PartnerFoley Hoag LLP

February 6, 2008

What is at stake?

Every Day, Your Intellectual Property Walks Out the Door

Employee Mobility –Competition Ability to Hire

Recent Phenomena

Non-Disclosure (NDAs) and Non-Competition Agreements increasingly prevalent Upside and Downside

Substantial Increase in Litigation of Issues Involving Enforcement of Restrictive Agents

Recent Phenomena (Continued)

Other causes of the increase in litigation: Managers, rather than Human Resources

department, identifying new talent Human Resources has less control over process (what is said and

done before official offer made)

It’s an electronic world Companies willing and able to scrutinize departing employees’

computers to assess their pre-termination conduct

General Legal Landscape

At-will Employees Can Change Employers Freely

Can Plan to Compete Can Take Active Steps to Do So While

Employed Caveat: not on your dime/time!

Types of Restrictive Agreements

Nondisclosure/Inventions Agreements Noncompetition Agreements Nonsolicitation Agreements

Customers Employees Suppliers

Enforceability of Non-Competes

Not Automatic Must Be Necessary to Protect Legitimate

Business Interests and Not to Protect From Ordinary Competition

Reasonable in Time and Geographic Scope

Interests

Protection of Customer Good Will, Relationships Protection of Trade Secrets/Confidential

Information

What Information is Protectable?

Customer Information Manufacturing Processes and Methods Business/Financial Information

Sales Figures Marketing Forecasts Future Plans

Computer Programs and Data Compilations

What is Not Protectable?

General Knowledge/Skills/Abilities Publicly Available Information Information Resulting From Reverse Engineering

Tips for Maximizing Protection:

Develop Comprehensive Program to Protect Trade Secrets and Other Information Confidentiality Policy Educate Employees About Policy Restrict access to information Label confidential documents (electronic too)

“Confidential. Do Not Copy, Do Not Distribute”

Tips for Maximizing Protection (Continued):

Focus Your Agreement on Protecting Your Information Specify the kinds of information that are confidential Specific is better than generic Spell out what is “competition”

Tips for Maximizing Protection (Continued):

Common Mistake: The “Naked” Non-Compete or “One Size Fits All” Approach

Swinging for the Fences Often Results in Strike-outs: Tailor Your Agreement to Your Interests

Make sure You Have Consideration Inception of employment is best If not, tie to other benefits

Tips for Maximizing Protection (Continued)

Act Quickly/Aggressively to Protect Your Rights Investigate Employee’s Actions Letters to Former Employee, New Employer Litigation

Tips for Maximizing Protection (Continued)

Consider State of Employment State laws very widely The California Problem Options

Menu of Litigation Options

Immediate Request for Injunction Expedited Discovery Arbitration?

Hiring Employees With Non-Competes

The other side of the coin – risks Have practice of inquiring about getting existing

agreements Study the risks

Agreements Trade Secret laws Duty of Loyalty

Hiring Employee With Non-Compete…(Continued)

Just Because There Is A Non-Compete Doesn’t Mean No Hire: Competitors? Legitimate Interest? Other Positions? Weigh Risk

Hiring Employee With Non-Compete…(Continued)

Document expectations/restrictions Employee warranties

Effectively Managing The Hiring Process

Departing employees sometimes do stupid things Outline parameters for communication about new

employment Not on company time Not with use of company equipment Best advice to employee: assume every key stroke on every

computer will be seen by your former employer

Effectively Managing The Hiring Process (Continued)

Managing managers who recruit/start hiring process: Trainings on protecting your company’s intellectual

property/confidential information should include a discussion of how this goes both ways, so that in the enthusiasm to lure friends/former coworkers from other places, employees do not get the company into trouble

Advise about parameters relating to solicitation Do not inform of plan to depart; wait until termination is

effective before communicating with customers

Effectively Managing The Hiring Process (Continued)

If information is taken (customer list, etc.), investigate former employer’s efforts to protect the information

Do not forget written agreements: scrutinize language in agreements

Hiring Employers Have Some Recourse Against Overly Aggressive Former Employers

Recent significant case: Brooks Automation, Inc. v. Blueshift Technologies, Inc., et al. Plaintiff sought to enforce a non-competition agreement

against a former employee and his new employer Court refused to enforce the agreement, granted defendant’s

Chapter 93A (unfair competition) counterclaim, ordered plaintiff to pay defendants’ attorneys’ fees as a penalty for initiating the action

Hiring Employers Have Some Recourse Against Overly Aggressive Former Employers (Continued)

Court held that plaintiff company had no reasonable basis to believe its suit would succeed

Plaintiff company acted with a purpose other than adjudicating its claims: to prevent the defendant company from entering a contract with a 3rd party

The plaintiff company filed a frivolous lawsuit, and willfully violated Chapter 93A The court trebled the damage award to $627,900, plus attorneys’ fees

Should Non-Competes Be Illegal?

Proposals in Massachusetts The California Model

Questions/Discussion

Jonathan A. Keselenko, Esquire

Foley Hoag LLP

155 Seaport Boulevard

Boston, MA 02210

Phone: (617) 832-1208

Fax: (617) 832-7000

jkeselenko@foleyhoag.com