Employee non-disclosure and non-competition agreements (NDA/non-competes) are important safeguards against the misappropriation of a company’s trade secrets and other confidential business information. Such agreements can play a critical role in a company’s intellectual property protection program. Too often though, a company will use the same form agreement for years even though its legal value may have eroded due to changes in the law or changes in the company’s business. The following are some things to consider in determining whether it may be time to update your company’s NDA/non-compete.
Has Your Company Grown?
Smaller companies that begin as close-knit, highly invested groups often first consider using an employee form NDA/non-compete when the first “outside” employees are hired. Often this first round of hires is mainly administrative, has limited (if any) access to critical company trade secrets, and therefore does not pose the type of threat from which an NDA/non-compete is designed to protect the company. It is not uncommon for these companies to use a fairly non-restrictive, general standard-form agreement at first and to continue to use the same form even after the company begins hiring additional, more specialized employees with greater access to (and knowledge of) the company’s trade secrets. It is only after one of these newer, higher-level employees defects with critical business information in hand that the company comes to realize its NDA/non-compete should have been more comprehensive and more restrictive.
Has Your Company’s Business Changed?
Similarly, it is not uncommon for a company’s development of new products, business methods, or marketing channels to outpace the protection afforded by its NDA/non-compete. The owner of a small software products company recently learned the hard way that his company’s NDA/non-compete would pose little obstacle to a key employee who had defected to a competitor. The form agreement did very clearly and specifically prevent the employee from engaging in “…the business of providing security software to accounting firms.” The problem? The company was no longer in the business of providing security software to accounting firms. In fact, the company had, for the last several years, only developed commercial websites for online retailers. The employee, therefore, was not restricted by the terms of the company’s NDA/non-compete from joining another commercial retail website development firm.
Does Your Company Have More to Protect Now than it did in the Past?
Beyond the more obvious misalignment between a company’s business and the protection afforded by its NDA/non-compete described above is the more gradual misalignment that occurs as a company slowly, but surely, develops more critical trade secrets to protect. A company that starts as a reseller, or that engages heavily in shadowing the moves of its competitors at the start, may need to eventually give greater consideration to the value of the technologies and business methods it develops as the company grows and evolves. It is not uncommon for the protections afforded by a company’s NDA/non-compete to seriously lag behind the company’s need to protect the valuable trade secrets and other critical business data it gains over time.
Has Your Company Added Employees or Contractors in Other Jurisdictions?
Companies that expand to multiple states often mistakenly continue to use the same NDA/non-compete with employees in all of the states in which it does business. The NDA/non-compete typically originated in the company’s home state and the company simply continued using the same form agreement as it expanded to new states. The enforceability of these agreements, however, varies from state to state. Some businesses find out too late that an NDA/non-compete that was enforceable in its home state might not hold up in one or more of the other states to which it has expanded over time.
Has Your Company Updated its Agreement Since the Enactment of the Federal Defend Trade Secrets Act?
The federal Defend Trade Secrets Act, enacted in May 2016, contains provisions providing advantages for companies that include certain notice provisions in their employee confidentiality agreements. Such advantages include the right to sue for punitive damages and attorney’s fees in actions brought under the Act. If your company has not taken advantage of these new protections, it may wish to consider doing so.
Is it Time to Update Your Company’s Agreement?
To discuss how we may assist you with creating or updating your company’s non-disclosure/non-competition agreement, or with other aspects of your company’s intellectual property protection program, please contact us.♦
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