May 1, 2014

The Protection of Employment Information (non-compete & similar provisions)

Reprinted from Atascadero Chamber of Commerce Newsletter, May 2014

By Gordon Bosserman

In California, non competition agreements that take effect after the termination of employment are generally not enforceable by an employer. There is an exception to this rule, but it is limited to the sale of the employee’s stock or a partnership interest in a business. Be aware, however, that an employer cannot issue a few shares of stock to an employee and buy it back at his or her termination and claim that a non compete agreement made with the sale of stock is effective. This exception is really limited to the sale of a business by one of its owners who also happens to be an employee. On the other hand, employees may also be officers or directors of an employer. As such, they have additional duties requiring the protection of the employer’s property information.

An employer may protect the use of its information by existing employees. With today’s ubiquitous use of social media, a balance must be struck, however, between the employer’s right to protect its business interests and the employee’s right of privacy and/or his or her right to complain about working conditions.

An employer may legitimately restrict a former employee’s use of the employer’s “trade secrets.” However, in order for something to be considered a “trade secret,” it must meet a three part test: 1) it must be shown to have been closely guarded (genuine restrictions on its use or access to it), 2) that it was developed by the employer at some considerable cost, and 3) that it is not something that is available to the public.

The Coca Cola formula is something that most people would agree is a trade secret. However, many other bits of information may also meet the test, such as, for example, an employer’s customer list, research, a list of the employer’s vendors, buying habits, pricing, business plans and the compensation paid to its key employees, may be considered trade secrets or confidential business information if it meets the three pronged test. It is important to properly identify what it is that is considered protectable business information, because something that does not qualify as a “trade secret” may nevertheless be legally protectable. Thus, for example, while the patients of a medical or dental practice are not the property of the practice, their identities and contact information may be. An employee who is terminated or resigns may send out an announcement of the formation of a new business (even a competing one) and how to contact him or her, or his or her employment with a new employer (even an competitor) so long as it is a dignified and non-disparaging announcement and not a solicitation; and, so long as the employee did not use his or her former employer’s protectable business information to prepare the list of addressees.

Typically, employers seek to bolster the determination and protection of a trade secret or some other form of confidential information with a broadly worded provision in their employee handbook. However, they need to be careful that such a provision is not so broad as to impinge on the employee’s right of privacy or right to organize. In addition, the employer may want to have a separate agreement regarding the protection of trade secret and confidential information so as to eliminate a claim by the employee that the handbook promise is illusory (because it can be changed by the employer without the employee’s consent) or that it changed the employee’s status from that of an “at will” employee.

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