Unfair competition is a commonly used term that can describe a variety of unlawful business practices. With regard to the employee-employer relationship, unfair competition generally pertains to the following types of misconduct: (1) misappropriation of an employer’s trade secrets or confidential information by an employee; (2) breach of a restrictive covenant agreement entered into between an employer and an employee; and (3) breach of the employee’s duty of loyalty to the employer.
Employers in New York are often concerned about protecting trade secrets, confidential information and customer relationships from employees who leave their employment to work for a competitor. Because non-competition agreements are generally disfavored in New York, it is recommended that the employer, in order to put itself in the best position to avail itself of the foregoing causes of action against unscrupulous employees and competitors, and to protect the confidential information, trade secrets and customer relationships it worked so hard to develop, engage in the following practices from pre-hiring through post-employment.
Employer First Must Get Its House in Order. The employer must take an inventory of information that it deems confidential, ensure that such information is, in fact, treated as confidential and that its trade secrets are in fact secret. In order to claim that an employee is unlawfully misappropriating “confidential information,” it is imperative that the employer, in the first instance, be able to demonstrate that it has protocols in place to ensure the confidentiality of its information. Examples of such protocols include: (1) controlling access to the confidential information through locked file cabinets, passwords, and keeping highly sensitive information (i.e., customer lists), on restricted computers and the like; (2) being able to demonstrate the cost to develop customer lists, contacts, and other confidential information; (3) establishing agreements with customers to address unauthorized disclosure of protected information; (4) designating documents as confidential through the use of confidential stamps or designation; (5) establishing a line of “need to know” persons with regard to company business information; (6) using memoranda/emails to reinforce confidentiality internally (i.e., have employee confirm receipt of confidential information); (7) controlling how and where employees are allowed to maintain confidential information—make sure no extra copies are allowed and include “confidential” electronic headers on all confidential information that is being distributed to employees via email; (8) using printer and copier logs to identify the information being printed if possible; and (9) being mindful of what is included on the employer’s website as it will be difficult to claim something is confidential if it is contained on a website.
The Offer Letter. The employer should provide an offer letter that contains key provisions to bolster the enforceability of its own restrictive covenants. The offer letter should, at a minimum, advise the employee of the following: (1) that the employee shall keep in confidence (during the term of employment and afterwards) all confidential information pertaining to the employer and learned by the employee in connection with his/her employment with the employer; (2) that the employee represents he/she is not subject to any non-competition term or any other restriction that would prevent the employee from fulfilling his/her full duties of employment with the employer; (3) upon termination or resignation of employment, the employee will be required to return all documents, materials, or other property containing any confidential information, whether such documents, materials or other property were furnished to the employee by the employer, one of its clients or created by the employee; (4) that the employee is expected to fully comply with all legal obligations he or she owes to his former employer; (5) that the offer is being extended to the employee because the employer believes the employee’s skills and abilities would be a valuable asset to the employer and that the employer has no need for, or interest in, the confidential or trade secret information of the former employer; and (6) this offer of employment is conditioned upon assurance that the employee can perform the duties of the position for which the employee is being hired without needing or using any confidential or trade secret information of any prior employer.
Determine Whether Non-Competition Agreement Is Appropriate to Protect Proprietary Interest. The employer next needs to determine whether a non-competition, non-disclosure or other restrictive covenant/agreement is appropriate for the position for which the candidate is being hired. If the answer is yes, then the offer letter should make it clear that the employee’s hiring is conditioned upon the signing of the appropriate non-competition agreement. Non-competition agreements are not onesize-fits-all. They must be narrowly tailored to protect the legitimate proprietary/business interest at issue. Thus, when drafting the non-competition agreement the employer must first determine the proprietary interest it is trying to protect. The most common proprietary interests employers seek to protect are confidential information (including customer lists and customer contact information), customer goodwill, skills that required specialized training and/or positions that are truly unique or extraordinary. Once the legitimate proprietary/business interest is identified, it is time to draft the agreement where less is almost always more. The following considerations should be given before drafting the substantive provisions of the non-competition agreement. (1) What are the geographic limits of the employee that the employer is looking to restrain (for instance, if employee’s sales territory is only in New York City, consideration should be given to limiting the geographic scope of the agreement to New York City). (2) What is the time limitation on the interest being protected (for instance, if it is confidential information the employer is concerned about, such as pricing, how long before it goes stale)? If it is goodwill that the employer is seeking to protect, how long will it take to reestablish the relationship through another employee? If the position is unique or extra-ordinary, how long will it take to train a replacement or how long until the information or technology possessed by the former employee turns stale? (3) What is the scope of the activity being restrained? The employer needs to determine how this employee can be most narrowly restricted and what it is exactly that the employer does not want the employee to do transaction-wise (i.e., should the restriction be limited to a specific product, service or business line?).
Substantive Provisions to Consider Including in Agreement. Once careful thought is given to the proprietary/business interest the employer wishes to protect, it is time to consider the substantive restraints that should be put in the agreement. The following are the most common substantive restraints contained in non-competition agreements in New York. (1) Non-disclosure provisions: Almost every agreement contains a provision that seeks to protect the employee from disclosing the employer’s confidential information. So long as the employer takes the steps to keep its confidential information confidential (as outlined in the beginning of this article) courts very often have no issue in enforcing these provisions contained in an agreement. (2) Non-solicitation of customer provision: If the employer seeks to protect customer goodwill, then these non-solicitation provisions are very common. However, they must be narrow and should be limited to the customers the employee serviced and/or about whom the employee had confidential information. While a prohibition on soliciting customers for 1-2 years may be reasonable, 3-4 years might not be. (3) Non-solicitation of employee provision: It is very common to have these provisions as well to avoid situations where an employee leaves and tries to raid the employer’s employees. These provisions are generally enforceable so long as they are reasonable in time and scope. (4) Outright non-compete provision: These provisions seek to stop an employee from going to work for any competitor. Period. These provisions are much more difficult to enforce and should only be reserved for those rare instances where that employee is very high-level and has knowledge of top-secret information that could cause the employer truly irreparable harm should the employee leave to work for a competitor. As with the other restraints, the temporal and geographic scope must be as narrowly limited as possible. (5) Most recently, employers are seeking to restrain employees from continuing to engage with the contacts made during employment on social media such as on LinkedIn. For instance, some employers are including provisions that require employees to disconnect from contacts and customers on LinkedIn that were generated while employed with the employer.
Termination of Employment. Should employment come to an end, it is recommended that the employer take the following steps: (1) Retrieve and preserve company property, documents and information. The employer wants to make certain that the employee no longer has access to the company computer systems and email. It is essential that the employee’s emails are checked to make certain the employee did not forward any company information to personal emails or a competitor’s emails. If you do suspect the employee has engaged in disloyal conduct, it critical that the employer preserve the employee’s computer and take it out of circulation at least until a forensic mirror image is taken of the computer. (2) Preserve copier and printer access records, copier and printer logs, expense records, phone records, and building and security logs. (3) Be prepared to make arrangements to have information on the employee's home computer deleted under the employer's supervision. (4) If possible, have an exit interview, try to ascertain the employee’s plans, reiterate postemployment obligations and include post-employment obligations in a document issued to the employee, enclosing the non-competition agreement. (5) Coordinate very carefully with customers, business contacts and co-workers regarding the employee’s departure. An employer should be careful not to defame the employee. (6) If the employer is inclined to provide a severance agreement, make sure it does not have an integration clause, which would potentially void any prior non-competition, non-solicitation or confidentiality agreements. (7) Consider sending a letter to the employee and future employer (if, and only if, the employee has gone to a prohibited competitor) reminding the employee of post-employment obligations and include a courtesy copy of the employee’s non-competition agreement so the future employer is aware of the employee’s obligations to their former employer. However, be careful to avoid assumptions or unfounded allegations in order to avoid a tortious interference with contract claim or defamation claim. The employer simply wants to seek assurances that the former employee and new employer are in compliance with the obligations each owes to the former employer.
If the employer finds itself in the position of having to avail itself of the various legal causes of action available in New York to protect its proprietary interests and confidential information, following the protocols discussed in this article will give the employer the best chance of succeeding in an environment where non-competition agreements are often difficult to enforce.
Guy Allen is a shareholder of Littler Mendelson in New York.
Reprinted with permission from the October 10, 2017 edition of the New York Law Journal© 2017 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 - firstname.lastname@example.org.