Stolen business information equals lost livelihood

May 1, 2002 By    

The success and growth of your business depends to a significant degree on the creative efforts of your employees or co-workers and on the possession of ideas, methods and other information that are better than those of your competitors.

Employers spend time and money on improving techniques, developing successful marketing methods, improving services to and relations with customers. They secure improved supplier sources and related activities. It is important that you and your company retain the pool of information so developed and that its confidential nature be preserved.

Leaks to and use of such information by competitors or others jeopardize the common interests of all employees and your company. While no one wishes to restrict the pursuit of new careers by former employees, this common concern becomes even more important when an employee leaves.

We’ve all seen instances where former employees have used important information developed by their former employer and his or her staff. Whether you are an owner or an employee, you should recognize that it is not fair and likely illegal for a former employee to profit from proprietary information at the expense of your former business. In either capacity – owner or employee – you unfairly suffer “lost livelihood.”

You probably know the kind of information that should be protected, if you reflect for a moment. Obvious examples include customer and potential customer lists, customer buying habits, supplier and prospective supplier lists, sales, costs and other unpublished financial data, payroll information, long-range plans for marketing and promotional.

As a general rule, in order for this information to be legally entitled to the protection afforded by agreements and laws, the confidentiality of such information must be maintained. That is, it must not be publicly disseminated.

There are several types of agreements governing post-employment activities that a lawyer might propose. The laws covering these agreements vary by jurisdiction. In a few jurisdictions the most restrictive agreement is not enforceable by statute if entered into in connection with employment – as opposed to being given by a seller to a buyer of his or her business. (This column focuses on agreements entered into in connection with employment and not in connection with a sale of a business).

Issues may also exist if no payment is made to the employee for signing the agreement, or if the agreement is not signed prior to beginning employment and is not a pre-condition of employment. For all these reasons, it is imperative to consult with your lawyer.

The most restrictive type of agreement in terms of post-employment activities is commonly referred to as a “noncompete” or “non-competition agreement.” It prohibits a former employee from engaging in the same business as the former employer if conducted within a specified distance from the former employer’s location.

These agreements must be limited to a specified period of time. The non-competition restrictions apply even if the former employer’s confidential information is not used by the former employee.

The competitive restrictions placed on the former employee must be reasonable in relationship to what is necessary to protect the former employer’s business. If the time limit or territory is deemed unreasonable, the courts will not enforce the non-competition agreement. Or the court may limit its application to a reasonable duration and territory, if the agreement so provides.

The territory should not exceed the trade area of the former employer’s business. In the propane business, the prohibitions often are 50 miles from the former employer’s location and two to three years’ duration. Longer time periods have been upheld, however.

Generally, courts do not favor post-employment non-competition agreements, but most jurisdictions will enforce them if they are reasonable in scope. Still, many lawyers include a separate item called a “non-solicitation” or “anti-piracy” agreement.

This agreement allows the former employee to engage in the employer’s business – even within the employer’s trade area – so long as the former employee does not solicit the customers of the former employer for a specified period of time (one to three years). Such agreements also usually include a prohibition on soliciting the former co-employees to work for the new employer.

There also is a simple confidentiality agreement that covers the general types of information considered confidential by the employer and therefore off limits to the employee after his or her employment ends. This type of agreement can have the same effect as the non-solicitation agreement, but is often more palatable to the courts.

The confidentiality agreement permits the former employee to solicit the former employer’s customers so long as that confidential information is not utilized. Proving the use of the former employer’s confidential information can be problematic, however.

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