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Employee Covenants: Be Careful What You Request. You May Just Get It.

By Mark W. Weisman

More is not always better when it comes to drafting noncompetition, nonsolicitation agreements, and confidentiality agreements.

A common mistake made when drafting such agreements is to ask for greater restrictions than necessary.  If a two-year restriction against competition and or solicitation is good, isn’t a three-year restriction even better?  Isn’t all of the information that is important to a business’s success, really confidential and shouldn’t an employee be prohibited from using it once he leaves?  In many cases, the answer to all of these questions is no!

Employers should consider seeking the least onerous restrictions that are consistent with their interests.  In most cases, it is unrealistic to think that a noncompetition or nonsolicitation agreement longer than two years is better protection than a shorter one.  This is so for two reasons.  First, if a customer’s loyalty cannot be secured by limiting a former employee’s dealings with that customer for two years, that loyalty is not likely to be secured by a lengthier restricted period.  Second, courts are accustomed to two-year covenants as presumptively appropriate, and  a longer restrictive period invites closer court scrutiny; a court might well void the agreement as over broad as written and choose not to “blue pencil” the agreement to shorten the period of the restriction.

Information that an employer considers important in the conduct of its business (e.g., prices, profit margins, discount rates) are not necessarily either trade secrets or information that courts will permit employers to protect as “confidential information.”  A “trade secret” is commonly defined by reference to the Uniform Trade Secret Act, which most states have adopted.  Under this act, to constitute a trade secret information must meet a two-prong test:  (a) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by other persons who can obtain economic value from its disclosure or use; and (b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.  This definition clearly does not include all information that a company considers a trade secret.  Further, information that an employee learns in the course of doing his or her job, information that is publicly available (even if it requires some effort to obtain or would not have been divulged to him, except for his employment) is not readily protectable under either designation.  Employees do not, as some courts have said, have to undergo a prefrontal lobotomy as the price of changing jobs.  

Too often, efforts to enforce noncompetition, nonsolicitation and confidentiality agreements become ensnarled in allegations that the restrictions are over broad and exceed a company’s legitimate interests.  Companies should keep these considerations in mind when drafting such agreements.