Protecting business information through confidentiality and noncompete agreements

Protecting confidential information

The type of information that you're trying to keep secret, and how many employees have access to it, will play a role in deciding how you choose to handle confidentiality issues.

There are some basic steps you can take to protect your business's information. Some of these steps may seem too drastic for your purposes. Use only those that you feel are necessary and that will achieve a degree of security with which you are comfortable. These are also good steps to take in developing your confidentiality policy:

• Explain to employees the need to protect certain types of information.
• Define as much as possible the type of information that you are trying to protect.
• Prohibit the dissemination of confidential information.
• Educate employees on the kind of situations in which they might unwittingly reveal confidential information.
• Explain the penalties for violating the company's policy.
• Make employees sign a noncompete agreement when they are hired.
• Remind employees that work product belongs to the business, not to individual employees.
• Set up procedures for identifying and safeguarding company proprietary information (for example, establish passwords for computers).
• Be prepared to prosecute the theft of secrets.

How to create an effective confidentiality policy

If you decide to have a confidentiality policy, you need to specify exactly what you're protecting and what you consider confidential in order to prevent current or former employees from later claiming that they did not realize that the information they were using, sharing, etc., was protected.

The clause following is an example specifying what is considered confidential for purposes of nondisclosure.

Example: The term “Confidential Information” means information, not generally known, previously acquired by XYZ Corporation and/or which may be acquired by the employee and/or XYZ Corporation during the period of the employee's employment by XYZ Corporation, relating to products (whether existing or under development), the business activities of XYZ Corporation, technology, or its inventions.

Consideration may be required. Consideration is a legal term that refers to the “thing of value” that passes between parties to a contract. In the case of an applicant, getting the job might be considered adequate consideration. If the employee has been working on a project and you decide that the employee's research or work is confidential, consideration might be continuation of employment or a bonus of some kind.

Warning: For the agreement to be binding, the bonus or other consideration must be enough to reasonably compensate the employee for what he or she is giving up by signing the agreement. A $250 bonus, for example, may not be enough.

The examples below demonstrate how to build the consideration for the employee into the agreement or policy.

Example

• Example 1: In consideration of my employment by the XYZ Corporation and of the further continuation of such employment, and of the salary or wages paid to me in connection with such employment and for other good and valuable consideration, I agree as follows:
• Example 2: In consideration of the above nondisclosure and noncompete agreement and in an effort to avoid possible conflicts and unethical actions, XYZ Corporation employees are required to read and confirm that they are familiar with these policies and that they have no knowledge of any violations of these policies.

Including remedies and damages statements. If you're concerned enough about confidentiality in your business to have a policy, you'll want to give that policy some teeth. Make it clear to employees what the repercussions are for violating your confidentiality policy.

The example below may help you devise a set of remedies or damages that you will want to collect if you have to enforce your policy.

Example: The employee agrees to pay liquidated damages in the amount of $___________ for any proven or admitted violation of the covenant not to compete contained in this agreement/policy.

Be aware that noncompete agreements, whether as a part of a policy or as a separate document, are difficult to enforce. Before asking employees to sign or before trying to enforce such an agreement, consult an attorney.

When and how you should use noncompete agreements

A noncompete agreement is either a separate agreement or a clause in an employment contract that prohibits an employee from working in a related business in your area for a certain length of time. Noncompete agreements are used to prevent an employee from using your business's confidential information.

The challenge lies in deciding if noncompete agreements are right for your business and which employees should sign them. While some consider noncompete agreements an effective way to protect the business's time, money, and resources, such agreements are difficult to enforce and are not looked favorably upon by many states' courts because they restrict an individual's choice of employment.

If you do decide to use noncompete agreements, not all your employees may need to sign one. The janitor, for example, may not have access to any sensitive information, so there's no need for this type of employee to sign such an agreement.

Employees who should be asked to sign noncompete or nondisclosure agreements are:

• all employees who are engaged in or related to research or product development work
• all engineers and drafting employees engaged in design or engineering work including, for example, tool room engineers, plant engineers, manufacturing trainees, etc.
• all employees engaged in the service of machines, apparatus, appliances, and similar products made or sold by your business
• manufacturing, maintenance, and production department heads, if applicable, who have substantial supervisory authority over the manufacture or production of products, apparatus, machines, and the like made by your business
• all employees who may reasonably be expected to do creative work relative to trade names, advertising, broadcasting, sales promotion material, and the like
• all sales/service employees who are likely to encounter customer problems, suggest solutions, etc.
• all clerical and office employees whose position and responsibilities require complete direct accounting for or processing of details relating to any experimental, inventive, or creative work
• all employees who have sufficient information about your business to be able to start up a similar business that would compete with you

Warning: Be careful not to create an employment contract when you have an employee sign a noncompete agreement. You can make the signing of a noncompete agreement part of your terms of employment without creating an employment contract. It's important not to make it seem that by signing the noncompete agreement, an employee can expect to be employed forever. A noncompete agreement should apply only to one specific aspect of an employment relationship — the confidential information related to your business.

Creating an enforceable noncompete agreement

Noncompete agreements can be hard to enforce because many courts perceive them as attempts to limit an individual's ability to obtain employment. For that reason, most courts will insist that a noncompete agreement be reasonably limited in geographic scope and duration.

Tools to Use: The Business Tools contain some sample language that you might want to consider incorporating into a noncompete agreement.

To help ensure that your noncompete clause or agreement is enforceable:

• Have your agreement drafted by your attorney. If you ever have to enforce this document, it will be closely scrutinized by the courts.
• Make sure that it follows applicable state law.
• Be sure there is sufficient consideration (i.e., compensation) given to the employee for signing the agreement.
  • If the agreement is part of the hiring process, giving the employee the job is sufficient consideration for agreeing to refrain from competing later on.
  • If the agreement is signed later on, the promise of a raise or a promotion is probably sufficient. Even the promise of continued employment may be enough consideration if you are prepared to show that you would have fired the employee for failing to sign the agreement.
• Have it drawn as narrowly as possible. Generally, only those restrictions that are reasonably necessary to protect a company's legitimate or "protectable" interests will be upheld.
• Define the company's legitimate or protectable interest. Be specific in terms of equipment, information, technology, strategy, sales prospects, and other pertinent proprietary information. Even though you specify it, it will be up to the courts to determine if it is confidential.
• Reasonably relate the restrictions to what the company seeks to protect. If the time and geographic restrictions, for example, are too long or too broad, the agreement will not be enforceable.
• Structure the agreement with an eye toward partial enforcement. Even if a court finds the restrictions too broad, you can include a clause saying that if one part of the agreement is held invalid, the remainder of it should still be enforced. This may give you some protection, even though it is not everything you required in the agreement.
• Do not selectively utilize or enforce such agreements. Make all similarly situated employees sign them, and make sure all employees comply with the agreements they sign.