Trade Secrets and Non-compete Agreements
When employees have access to confidential information, customer relationships and other protectible interests, employers want to protect those interests. To do so, they turn to trade secrets laws and non-competition agreements.
Trade secret laws protect most confidential information from misappropriation. Non-competition agreements prevent employees from competing unfarily against their former employers using the relationships, training, confidential information or other advantages they obtained from the job.
The problem with non-competition agreements is that employers can write them as broad as they want, thereby extracting restrictions far broader than needed to protect their business interests. In addition, employees often sign non-competition agreements without questioning them or appreciating the harm they can do.
Employment Law Partners has decades of experience litigating trade secret and non-competition agreements. We help employees negotiate to avoid or limit non-compete restrictions and defend them from breach of contract claims. We also help employers write and enforce reasonable restrictions to protect valuable trade secrets and other protectible interests.
What are Trade Secrets?
Trade secrets are a type of proprietary information that have inherent economic value because they are not generally known or readily ascertainable by others, and which the owner takes reasonable measures to keep secret.
The theft or unauthorized disclosure of trade secrets can result in legal action. In Ohio, the Uniform Trade Secrets Act (UTSA) and the federal Defend Trade Secrets Act (DTSA) provide remedies for trade secret misappropriation.
Trade secret protection does not, however, prevent independent discovery or reverse engineering of the secret by others.It also does not cover information that becomes publicly available other than through misappropriation.
What are Non-competition Agreements?
A non-competition agreement is a contract between an employee and an employer where the employee agrees not to compete with the employer in a specified period, location, or manner. It can either be an integral clause within an employment contract or an individual contract in and of itself.
Are Non-Competition Agreements Enforceable?
Historically, courts did not enforce non-competition agreements because they viewed them as restraints on trade. Today, however, courts enforce them, within limits. The limits on the enforcement of a non-competition agreement rests on three primary factors:
- The employer's ability to prove that it has a legitimate business interest that necessitates the employee's competition restriction.
- The restriction must be no greater than necessary to protect this legitimate business interest.
- The non-competition agreement must be backed by "consideration," meaning the employee receives something of value in return.
Each case depends on its unique circumstances. Judges have the responsibility to balance the need to protect the employer's business interest and the employee's right to earn a livelihood.
Examples of Legitimate Business Interests
Restraints protecting legitimate business interests usually revolve around relationships, information, or knowledge that the employees gains from the employment. For example, employers have a legitimate interest in protecting their trade secrets. As such, courts almost always enforce non-competition agreements to protect trade secret information.
Legitimate interests can include public information if compiled it in a way that is not publicly available. For example, if an employer provides employees with customer lists that include contact information for key personnel gathered over time, courts will typically enforce an agreement preventing the employee from leveraging this information for a competing business.
Legitimate business interests have their limits, though. An employer usually will not have an interest in preventing an employee from using the same skills and experiences that they brought to the employer in the first place.
Negotiating a Non-Competition Agreement
If an employer is forcing a non-competition agreement on you, we almost always recommend that you say “no.” It has little to no benefit for you. Therefore, reject it and propose working without it.
If the employer insists on a non-compete and you need the job, then negotiate. Negotiating a non-competition agreement has two objectives. One is to limit the harm to your career from the agreement. The other is to avoid entering into the agreement at all, if possible.
To limit the harm from the agreement, propose reductions in and exceptions to the restrictions. If the non-compete limits competition within a five mile radius for two years, counter with two miles and one year. If the non-compete prevents you from taking customers with you from a business, propose an exception for the customers you bring to the business in the first place.
In addition, if the non-competition agreement will prevent you from finding any new employment, which can happen if your skills are specialized, then propose severance pay for a termination without cause.
If the employer rejects your proposals, you can ask why and seek ways to address the employer’s concerns that let you work in the future. The worst that can happen is the employer refuses to budge and conditions the job on signing the non-compete, in which case you no worse off than when you made your counteroffer.
Importantly, a counteroffer, legally speaking, rejects the employer’s proposal. As a result, you cannot be bound by a non-compete after making a counteroffer unless the employer accepts it. If the employer rejects it, the employer must again propose the same agreement, or a compromise agreement, before you have an offer you can accept and thereby enter a binding agreement. If the employer drops the bargaining ball after your counteroffer, you may be able to avoid a non-compete altogether.
Once you negotiate the best deal you can, evaluate whether the employer's restrictions remain unreasonable. If so, seriously consider other employment. Place yourself in the shoes of your future self, when you are leaving this employment and need to find the next job. Consider how hard it would be to land this job with that restriction. If it would prevent you from new employment, walk away. Your future self will thank you.
Lawsuit for Overly Restrictive Agreements
If you sign a non-competition agreement that unduly restricts your employment beyond what's necessary to protect your employer’s legitimate interest, you can file a lawsuit and ask the court to make it reasonable. While an unreasonable restriction does not render the non-competition agreement null, Ohio courts can modify it to make it reasonable. This means a court can, for example, reduce a three year restriction to two years, or a 25 mile radius to 12. This, however, still leaves the agreement in place, although with more reasonable restrictions.
Before you engage in litigation, get a quote from an attorney as to how much it will cost. Non-competition litigation is expensive. As a result, you could invest tens of thousands of dollars in a lawsuit to get out of a non-compete but be left with an agreement that prevents you from working when and where you want.
The Risks of Breaching a Non-Competition Agreement
Another path taken by employees is to ignore the restrictions. Normally this amounts to a "breach" of the contract. Breaching a valid non-competition agreement can lead to an employer filing a lawsuit for an injunction and monetary damages. An injunction can prevent you from working for your new employer. Monetary damages can reach millions of dollars.
Furthermore, an employer filing suit against a former employee for breach of a non-compete agreement can also sue the new employer. The claim against the new employer is for "tortious interference" with the non-competition agreement between the old employer and the employee. When sued, new employers often terminate the new employee’s employment to limit their liability in the lawsuit.
Non-competition agreements carry significant costs. Avoid them as best as you can. It's essential to take the time to understand and negotiate these agreements at the start of employment. When faced with such an agreement, remember that your freedom to find other work and the compensation you receive should be appropriately balanced.
If you have an opportunity and an existing non-competition agreement stands in your way, call us.
Trade Secrets and Non-compete Agreements Articles