Trade practices to keep your company safe
Business has entered a hypercompetitive era, in which aggressive competitors with a quick-strike mentality will take any opportunity to disrupt another company’s competitive advantage. In this turbulent environment, non-compete agreements and trade secret laws are essential tools for businesses that want to protect themselves against unfair competition.
Like any tools, non-compete agreements and trade secret laws must be used correctly or they can do more harm than good. For example, one Las Vegas equipment rental company failed to include an assignability clause in its non-compete agreement. The company was sold, and a key employee left the company to join a competitor. The employee took his former employer’s customer list and began soliciting old customers on behalf of his new employer. The former employer was unable to enforce its non-compete agreement because it did not include a key provision, the assignability of the non-compete agreement itself.
A (properly drafted) non-compete agreement is a “restrictive covenant” and is generally part of an employment contract or employee manual. A typical non-compete agreement prohibits an employee from competing with his or her employer for a specific period of time in a specific geographic region. For example, a doctor might be prohibited from practicing medicine within a five-mile radius of his employer’s medical clinic for two years. Non-compete agreements must be reasonably limited in their geographic scope and duration. One business was unable to enforce its non-compete agreement, which prohibited a former employee from competing within 50 miles of any of its stores or any location targeted for corporate expansion. The court found that this geographic scope was unreasonable, and therefore the non-compete agreement was unenforceable. However, the reasonableness of a non-compete agreement depends on the specific circumstances of each employer. For example, one Nevada court enforced a non-compete agreement that restricted an employee from competing with his employer anywhere in the United States because the employee resigned and formed his own company to compete with his former employer in the exact locations where the former employer offered its services.
A second tool employers should use to protect their businesses is Nevada’s Uniform Trade Secrets Act. Whereas a non-compete agreement must be affirmatively accepted by an employee to be legally binding, Nevada’s trade secret laws are binding automatically. These statutes impose civil and criminal liability for theft of trade secrets, which can include client lists, pricing information, formulas, prototypes, business methods or techniques, etc., as long as the information derives economic value from being a secret.
In addition to deriving economic value from the secret, a company must also make reasonable efforts to maintain the information’s secrecy. For example, a business may lose the protection of trade secret law for its customer list if the list is stored in a generally accessible file cabinet and the business’s salespeople are allowed to take the list off the company’s premises.
There are many things a business can do to demonstrate reasonable efforts to maintain secrecy: (1) label the information as “confidential” or “private,” (2) store the information behind a lock (physical or electronic or both), (3) avoid unnecessary disclosures of information, for example, by checking company brochures or websites to prevent inadvertent disclosures of secret information, (4) implement and maintain confidentiality policies and procedures for employees, (5) prohibit the removal of secrets from company premises, (6) prohibit copying of confidential information, and (7) vigilantly pursue departing employees who had access to trade secrets, if necessary, through legal action.
Finally, in the event of a violation of a non-compete agreement or the disclosure of a trade secret, an employer should immediately contact an experienced employment law attorney. Such an attorney can often obtain a court order prohibiting violations or disclosures. An employer should retain the best attorney available, as obtaining a restraining order or injunction is much like going to trial, except instead of having years to prepare for litigation, the attorney has a matter of days or even hours. And when a business’s competitive advantage is on the line, there isn’t a moment to lose.
Kenneth K. Ching, is Of Council at the law firm of Dickinson Wright, PLCC.
Heather Ashbridge, who started with Nevada State Development Corporation in 2008, previously served in several roles with the organization, including assistant vice president and loan officer. She is based in NSDC’s Reno office.