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Employers commonly have employees sign unfair competition agreements, which is a catch-all term for non-solicitation agreements, non-compete agreements, or similar confidentiality agreements. The intent is to limit unfair competition or prevent the theft of trade secrets.
The key phrase is “unfair” competition. To enforce an agreement in court, an employer bears the burden of proving that the agreement was reasonable and was needed to protect against unfair competition.
Scope
Most employers already battle with competing businesses, and the employee’s right to work for a competitor (anywhere, at any point in the future) cannot be restricted. However, employees can be restricted from:
- Breaching confidentiality, like downloading customer lists or stealing trade secrets;
- Soliciting customers with whom the employee worked, since a company who paid an employee to build customer relationships has a right to protect that relationship; or
- Breaching the duty of loyalty, such as using company equipment or resources to compete against the employer.
Regulatory citations
- None
Key definitions
- Trade secrets: Any information that has economic value, or any information that a company would not want a competitor to know.
Summary of requirements
Duty of loyalty. The “duty of loyalty” is commonly recognized by courts. However, this duty is not without boundaries. For example, an employee could start a new business in competition with the current employer. However, if the employer is soliciting customers from the employer or using the employer’s time or resources to advance his business, this would be a breach of the duty of loyalty. Even without this breach, the employer could terminate the individual. However, the employer would not have grounds for legal action, such as an injunction.
What are trade secrets? Trade secrets are not limited to things like the secret formula for a soft drink. The term includes any information that has economic value, or any information that a company would not want a competitor to know. This includes things like customer lists or procedures used to create a product that are not generally known. Nearly every employer has trade secrets that it would like to protect — and should take steps to protect.
Trade secrets must be guarded. To demonstrate that information is a trade secret, and is worth protecting through legal action, the employer must show that it took reasonable steps to guard that information. If the information is available to all employees on a company intranet, the employer would likely face a considerable challenge in showing that the data is a trade secret. Otherwise, why would it share that information with individuals who do not need to know it?
On the other hand, even the simple step of keeping the information in a locked filing cabinet can demonstrate that the company’s intent was to protect that information on a “need to know” basis.
Similarly, protecting electronic information via password access can show reasonable efforts to protect the data. Part of the reason for these security measures is that the manner in which an employee obtained the information is a consideration when enforcing an unfair competition agreement. If an employee obtained data by hacking into a computer system, the employer should have a lesser burden in showing an unfair breach.
Protectable interest. Unfair competition agreements may hinge on whether the company has a protectable interest. Obviously, trade secrets (whether a secret formula or a list of customers) would be an “interest” that a company desires to protect. As hinted above, even a close relationship with a customer, developed over a period of time when the company was paying the employee to develop that relationship, can be a protectable interest.
Of course, an unfair competition agreement is commonly signed at the time of hire, and the company might not have a specific protectable interest in mind at that point, like a particular customer. Therefore, these agreements are somewhat “open” in how they are written. When (or if) the company needs to enforce the agreement, the employer will have to show that the employee violated the duty of loyalty or unfairly used the protectable interest.
Reasonable in duration and scope. Unfair competition agreements must also be reasonable in duration and geographic scope. An agreement that restricts a former employee from working for any competitor with the state for one year would likely be excessive, since it would interfere with the former employee’s ability to earn a living. However, an agreement that prohibits the employee from contacting customers with whom the employee developed business relationships for one year might be reasonable.
Each case is unique, so enforcing the agreement will require the employer to show that it had a protectable interest that was reasonably guarded, and that the employee used that information in a manner that would result in unfair competition or would cause economic damage to the employer.