by James Hyer
Millions of dollars are lost each year through the theft of trade secrets that companies labor tirelessly to develop. One effective tool that may be utilized by companies to safeguard against “commercial piracy” is a noncompete agreement. If properly drafted, a noncompete agreement can prevent significant financial losses attributable to exploitation of private proprietary information or unfair competition by former employees.
As these agreements are often contested by former employees and the courts often take a strong position against upholding noncompete agreements, it is imperative that employers draft agreements that will be enforced by a court. Within New York State, three elements are usually required for a noncompeteagreement to be enforceable:
• the provisions regarding the time and geographic area within which the employee must not compete must be necessary to protect the employer’s legitimate interests;
• the restriction on competition must not be harmful to the public; and
• the employee must not be unduly burdened by the restriction.
In regard to geographic limitation, the definition of a reasonable restriction will vary depending upon the respective industry. When an employer conducts business globally, the geographic limitations will be given less review and may be worldwide. Upon review of the durational provisions of these agreements, the courts will review what length of time the employer’s confidential information will be competitively valuable. When drafting noncompete agreements, a term which recites the job duties, scope of responsibility and geographic reach of the position is suggested as this provision will assist a court in determining the reasonableness of any geographic reach of the requirement.
When considering what is necessary to protect an employer’s legitimate interests, the courts will generally enforce such agreements seeking to protect trade secrets, customer information and prevent unfair competition from former employees of unique or extraordinary abilities. New York State courts do not presuppose that employees possess trade secrets or confidential information; accordingly, the employer must prove the employee has had access to such information. Noncompete agreements should include an acknowledgement by the employee they will have access to trade secrets and confidential information to prevent a future claim to the contrary by the employee.
Under New York law, a trade secret is any formula, pattern, device or compilation of information which is used in one’s business, and which gives the owner an opportunity to obtain an advantage over competitors who do not know or use it. In determining whether information constitutes a trade secret, New York courts consider the following factors:
• the extent to which the information is known outside of the business;
• the extent to which it is known by employees and others involved in the business;
• the extent of measures taken by the business to guard the secrecy of the information;
• the value of the information to the business and its competitors;
• the amount of effort or money expended by the business in developing the information; and
• the ease or difficulty with which the information could be properly acquired or duplicated by others.
In determining if something has trade secret status, the most important consideration is whether the information was secret or if it could have been ascertainable through proper means. The courts generally determine trade secrets to include customer lists, good will of the employer’s business and confidential customer information. The employer’s interest in the trade secret must be clear to justify the restraint of the employee, as the trade secret may have become part of the employee’s general knowledge and experience. To remove any doubt as to what may be considered a trade secret, a good noncompetition agreement will define what is to be considered a trade secret, or otherwise considered to be private proprietary information, and will also recite the employer’s necessity for keeping this information protected.
In certain cases, an employer will be permitted to enforce a noncompete agreement in the event the employer is able to provide evidence that the former employee’s services were unique or extraordinary. The employer must prove the employee’s services were truly special, unique or extraordinary and not merely of high value. The employer must prove that the employee excels at his work and his performance is of high value to his employer. It must also appear the employee’s services are so valuable his replacement would be impossible or the loss of the employee’s services would cause the employer irreparable harm. One key issue is the employee must have had routine communication with upper management in regard to alleged trade secrets. A noncompete agreement involving such an employee should classify that employee as being unique and explain why that employee falls into that category.
Another way in which an employer may strengthen the likelihood of enforcement of a noncompete agreement is to include a provision that provides the employee with post-employment benefits (severance payments, stock options, etc.) upon compliance with the agreement. As such a provision includes the employee’s receipt of consideration for agreement not to compete if the employee voluntarily resigns or is terminated for cause, the agreement will be enforceable without review of reasonableness. Such a provision also provides incentive for the employee not to violate the agreement for fear of loss of the post-employment benefits.
As the lifeblood of most businesses are the trade secrets and employee talent are developed over many years with significant expenditure by employers, non-compete agreements can be a valuable tool for employers but will only be effective if the agreements are enforceable.
James L. Hyer is a partner with Bashian P.C. LLP. He is a member of the New York State Bar Association House of Delegates and of the Westchester County Bar Association board of directors. He can be reached at 914-290-4550 or [email protected]