noncompetes & trade secret protection: an in-house counsel's guide to a big year of change...
TRANSCRIPT
Noncompetes & Trade Secret Protection: An In-House Counsel's
Guide to a Big Year of Change
Presented by:Stephen Dellinger & Kevin Murphy
May 19, 2015
Stephen D. DellingerShareholderLittler Mendelson, P.C.Charlotte [email protected]
Presented by:
Kevin P. MurphyAssociateLittler Mendelson, P.C.Charlotte [email protected]
BE PREPARED: DRAFTING FOR SUCCESS IN RESTRICTIVE COVENANT LITIGATION
• Consider state law (which varies drastically from jurisdiction to jurisdiction)
• Consider the legitimate interests involved• Tailor to the position at issue • Don’t be greedy!
One Size Does Not Fill All When it Comes to Noncompete Agreements
Plan for Implementation and Make Sure Consideration is Present
• North Carolina allows for offer of employment to suffice for consideration upon hire
• Have a strategy for employees who refuse to sign• Script FAQs/Talking points ahead of roll-out• Consider e-sigs carefully
Contracts Are Works in Progress – Never Consider Them “Done”
• State law constantly changing/evolving• Company’s business and/or geographic scope of
operations may change
COMMON MISTAKES IN EMPLOYEE RESTRICTIVE COVENANTS
Mistake #1: Overbroad Geographic Terms in Non-Compete Provision
• Geographic and Temporal Restrictions will be considered in tandem
• Analysis is very fact specific – area assigned to employee; – area in which employee actually worked/operated;– nature of the business; – nature of employee’s duty and knowledge of employer’s
business operation– Outdoor Lighting Perspectives Franchising, Inc. v. Harders,
747 S.E.2d 256, 263 (N.C. Ct. App. 2013)
• North Carolina courts uphold restrictions nationwide in scope and invalidate provisions limited to a few states
Drafting Tip
• Consider “Russian Doll” format when drafting restrictive covenants – Within (a) 100 miles; (b) 75 miles; (c) 50 miles; (d) 25
miles; and (e) 10 miles of employee’s former office.
Drafting Tip
Avoid Check-off geography forms
• Many managers neglect to check each and every county or state that should be restricted
– Resulting in the restricted area being left BLANK
Employee shall not compete in:____ Mecklenburg County____ Cabarrus County____ Iredell County____ Union County____ Gaston County____ Lincoln County
>
Mistake #2: Overbroad Temporal Terms in Non-Compete Provision
• 5 years or more will almost certainly be unenforceable
• 3-5 years: high risk of being unenforceable– Consider time frame for replacing departed employee
and how long proprietary information remains fresh
• Avoid Backward Looking Terms– For 1-year post-employment, no competition
with customers who did business with us in last 2 years = 3 year restriction
– Farr Associates, Inc. v. Baskin, 138 N.C. App. 276, 280, 530 S.E.2d 878, 881 (2000)
Mistake #3 – Overbroad Restricted Activity in Non-Compete Provision
• Generally, restricted activity should relate to– work performed by employee; and/or – employee’s exposure to confidential, proprietary
information/trade secrets
• Restriction should not prohibit against working for competitor in any capacity – (i.e., the “Custodian Rule”)
• Should not prevent indirect ownership in any form – (“direct or indirect”)
Balance is needed to avoid Janitor/Custodianproblem, while still accomplishing goals
• Too Narrow
– Demand Letter will be ignored as former employee claims not to be doing prohibited duties
• Too Broad
– Litigating will endanger your agreements with other employees
Mistake #3 – Overbroad Restricted Activity in Non-Compete Provision
Mistake #4 – Overbroad Non-Solicitation Clause
• Geography/Time– Remember the “look back” rule
• Previous exposure to prohibited customers– North Carolina courts can go either way
• Prohibited customers must have been with company when employee departed – Exception: prospective customer for which employee
was involved/learned confidential information
Drafting Tip
• For best chance at enforceability, Connect prohibited customers to:
– those employee was responsible for relationship with;
– at time of departure
• These are the ones theemployee is most likely to reach out to anyway
Mistake #5: Lack of Consideration
• Employee does not agree to restrictive covenants at inception of employment
– continued employment for guaranteed period (i.e. departing from at-will);
– a raise, bonus, stock or other change in compensation;– a promotion or some other increase in responsibility; &– additional training– Hejl v. Hood, Hargett & Associates, Inc., 196 N.C. App. 299,
304, 674 S.E.2d 425, 428-29 (2009)
• In North Carolina, continued employment is not sufficient consideration if employee remains at-will
Drafting Tip
• Recite start date in non-compete agreement to remove questions about whether agreement was signed at inception of employment
Mistake #6 – Agreements are not updated with employee transfers or promotions
• Example: consider effect of a geographic provision when employee has been transferred from smaller region to larger region
• Higher the role in the company, the more lenient court will be with broad restrictions
Mistake #7 – Restrictions are not neatly divisible
• North Carolina Blue-pencil rule limits judicial contract reformation to striking divisible portions of agreement
Drafting Tip
Include a provision authorizing the Court to modify the agreement to save it from overbroad or unreasonable restrictions
• Reformation (Rule of Reason States)– The parties intend for the courts to enforce this
covenant after modifying it to the extent necessary to protect the employer’s interests without imposing undue hardship on the employee
• Severability (Blue Pencil - NC)– if one clause or section of the agreement is found to be
unenforceable, the parties intend for the remaining provisions to be enforced as written.
Mistake #8:Contract is Not Assignable
• Non-Assignment clauses– Routine in other contracts, but displace employer
protections with non-competes
• Asset purchase v. Stock Acquisition– Stock Acquisitions
• Buyer steps into shoes of original employer
– Asset Purchase• Buyer has right to enforce non-compete as of the date of sale (if
part of sale), but does not step into shoes of target company
– Covenant Equip. Corp. v. Forklift Pro, Inc., No. 07CVS 21932, 2008 WL 1945973, at *9 (N.C. Super. May 1, 2008)
Mistake #9: No Tolling Provision/Overbroad Tolling Provision
• Without Tolling Provision, restricted period is likely to expire before litigation is over
• Should be tied to period of noncompliance or litigation
Mistake #10: Not Signed or Dated
• Consider mention of non-compete agreements in offer letter
• Include Date on Signature Page
Mistake #11: No Choice of Law or Venue
• State law differs dramatically– agreements are carefully crafted to comply with a
specific state’s laws
• Select Venue as well– Even if state law is chosen,
foreign courts often preferto apply their own law andmay hold that foreign lawviolates their public policy ifit differs from their own
BUT HIRING HIM SEEMED LIKE SUCH A GOOD IDEA AT THE TIME
Clear understanding of what the candidate requires
A. Can she come aboard without exposing the company to risk?
B. Assess costs/benefits if risk exists
C. If risk exists, is there a reason to relocate the employee?• Preemptive lawsuit
Dos and Don’ts for Hiring Someone With a Restrictive Covenant
26
Clear Understanding of New Employer’s RisksA. Damages
B. Attorney’s fees
C. Does former employer sue departing employees
D. Is new employer intending to restrict the candidate with a covenant similar to that of former employer?
Dos and Don’ts for Hiring Someone With a Restrictive Covenant
27
Provide employee and hiring execs with clear instructions/expectations
A. No taking information/property of former employers
B. Necessity of representations to new employer
C. Evolution of employee responsibilities
D. Separating on the best possible terms/no misrepresentations
E. Discerning when the soon-to-be former employer is readying to sue
F. Keeping new employer informed about little things
Dos and Don’ts for Hiring Someone With a Restrictive Covenant
28
Offer letter/employment agreement should include the following:
A. Employee represents that he is not violating any commitment to any previous employer
B. Employee represents that he has not taken any information or property of any former employer
C. Memorialize the employee’s position at the new employer if it minimizes the competitive impact relative to the former employer
i. For X months/1 year
ii. Offer letter only
Dos and Don’ts for Hiring Someone With a Restrictive Covenant
29
Dos and Don’ts for Hiring Someone With a Restrictive Covenant
Circumstances under which new employee should communicate with former employer at the outset
30
Reconciling new employer’s restrictive covenants with avoidance of previous employer’s restrictions
A. Tailor restrictions to be consistent with litigation position
B. Use of standard restrictions may compromise litigation position
Dos and Don’ts for Hiring Someone With a Restrictive Covenant
31
Response to cease and desist lettersA. Reply or not?
B. Carefully crafted reply
C. Don’t leave the reply for the operations folks
Dos and Don’ts for Hiring Someone With a Restrictive Covenant
32
Pre-litigation negotiations
Dos and Don’ts for Hiring Someone With a Restrictive Covenant
33
Dos and Don’ts for Hiring Someone With a Restrictive Covenant
34
Facts, facts, facts….the facts are probably determinative
Dos and Don’ts for Hiring Someone With a Restrictive Covenant
Sometimes (hopefully not often) it may be necessary to cut bait
A. Misrepresentations made by new employee
B. Execution inconsistent with what was strategized
35
LITIGATING RESTRICTIVE COVENANT CASES FOR MAXIMUM SUCCESS
36
Hero v. Villain – Importance of Theme in Covenant Cases
• Cases turn on equity—balancing of competing interests
• Malleable and vague legal standards often get applied against the “bad actor”
• Employee vs. Employer themes
Computer Forensics – Small Upfront Investment/Big Evidentiary Dividends
• E-mail and computer forensic evidence critical in most covenant and trade secret cases
• Know your IT/back-up capabilities/policies/chain of custody so company can quickly obtain and review key evidence
• Phase 1—review of e-mail on servers/back-up
• Phase 2—forensic examination of computers and electronic devices
Credibility – Be Careful with Affidavits and Verified Pleadings in Covenant Cases
• Credibility with the judge/jury is paramount
• Carefully vet affidavits/verified complaints/say minimum possible in sworn statements
• Don’t claim a document is a trade secret when it is on the company website or handed out at a trade show
• Damages v. Injunction (what is real damage v. cost)• Setting example for other employees• Effect on customers—will customers resent you suing
their former favorite sales person and take other business/hate being involved and pull business
• Effect on executive time/company resources• Effect on enforceability of company’s own covenants• Attorneys’ fees—can you get them or will you have to
pay other side’s?
General Strategy Considerations
Questions?
Best Practices for Employment
and Noncompete Agreements
and Protecting Trade Secrets
Stephen D. DellingerShareholder
Littler Mendelson, P.C.Charlotte Office704.972.7010
Kevin P. MurphyAssociate
Littler Mendelson, P.C.Charlotte Office704.972.7044