Noncompete Agreements as a Device to Protect Trade Secrets

• Author: Joanna H. Kim-Brunetti - Jeffrey K. Riffer - Gregory S. Bombard - Emily J. Friedman
• Pages: 89-122

89

CHAPTER 4

Noncompete

Agreements as a

Device to Protect

Trade Secrets

I. Introduction

A common fact pattern in trade secret litigation is alleged misap-

propriation by insiders: former employees. Trade secret cases often

involve former salesmen, exe cutives, and scientist s whose former

employers allege misappropriated cu stomer lists, strategie s, or prom-

ising research. For employers, trade secret protection is a paradox. For

information to be commercially valuable, its owner must at least share

the information with some employees. The secret formula is hardly

useful if it may only be kept in a locked vault and never accessed by

th e co mp an y.1 On the other hand, once the secret is revealed to an

employee, there is always a risk the employee will reveal it to someone

else, including a competing company. To make matters worse, after an

employee leaves an employer’s employment, it b ecomes very dif ficult

to practically determine whether the employee is respecting his con-

fidentiality obligations to his former employer. By the time a misap-

propriation is revealed, it may be too late to prevent serious harm to

the former emp loyer.

Therefore, when it comes to protecting trade secrets, covenants

not to compete (or “noncompete agreements”) are an invaluable tool.

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Guide to Protecting and Litigating Trade Secrets

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Unlike a nondisclosure agreement (NDA) or the state law of trade

secret protection, a noncompete agreement creates a bright line. Typi-

cally, the restriction provides that the employee may not work for any

business that competes with the employer’s business either during

the course of employment for the employer or for a designated period

of time afterwards. In theor y, that bright line is easier to enforce by

the former employer. The mere act of accepting employment for a

competitor is prohibited, and the employer does not necessarily need

to demonstrate that the employee has misappropriated any secret

information.

The devil, however, is in the details. Noncompete agreements, like

other contracts, are governed primarily by state contract law. Most

states have a significant body of case law and, in many insta nces, stat-

utory law that governs the circumstances under which a noncompete

agreement is enforceable.

Noncompete agreements set up an essential tension of their own.

While they can and do serve t he purpose of protecting an employer’s

trade secrets and other confidential business information, they ca n

also be a restriction on an employee’s fair right to continue in a career

of his choosing. As many states recognize, noncompete agreements

are also a restraint on trade. Therefore, most states impose at least

some restrictions on the use and enforcement of noncompete agree-

ments in an attempt to balance the employer’s interests against the

employee’s.

A full 50- state survey of the treatment of various state laws con-

cerning noncompete agreements is beyond the scope of this chapter.

This chapter focuses on six important jurisdictions to demonstrate

how state law on this point varies significantly. With apologies to our

friends in the remaining forty- four states, this chapter focuses on

states with significant commercial, research, a nd technology hubs

that have taken divergent approaches to enforcement of noncompete

agreements, from those whose public policy expressly favors enforce-

ment of noncompete agreements to California, which famously banned

noncompete agreements altogether.

• Florida— In 1996, Florida enacted a statutory scheme to con-

firm that noncompete agreements would be enforceable in the

state. The statute generally permits enforcement of “reason-

able” restrictions and provides a nonexhaustive list of “safe

harbors” that an enforcing court is directed to consider pre-

sumptively reasonable.

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• New York—This influentia l jurisdiction’s approach to noncom-

pete agreements is governed by the common law. Noncom-

pete agreements are generally exa mined under the “rule of

reason.” If a restriction is reasonable to protect an employer’s

legitimate business interest, then it is enforceable.

• Illinois —Illinois noncompete law is governed by the com-

mon law and involves a highly fact specific inquiry, ultimately

focused on the reasonableness of the restraint to protect the

asserted business interest. Illinois courts expre ssly focus

on the “totality of the circumstances” and no single factor is

dispositive.

• Tex as —Texas law has been historically hostile to noncompete

agreements, but a 1993 statute and recent case law simplified

enforcement of such agreements.

• Massachusetts—Ma ssachusetts historically followed the com-

mon law, which generally permitted enforcement of most

noncompete agreements, so long as the restrictions were

reasonable. However, in 2018, Massachusetts enacted a com-

prehensive Noncompetition Agreement Act, which imposes

detailed restrictions on the circumsta nces under which a

noncompete agreement is enforceable. Massachusetts also

became the first state in the nation to require the payment of

“garden leave” to a former employee subject to a noncompete

agreement.

• California—C alifornia’s 1941 statutory ban on noncompete

agreements has garnered much attention af ter the explosion of

technology companies in Silicon Valley. With some exceptions,

California generally bans t raditional noncompete agreements.

Relevant to this volume, a judicial exception to the statutory

restriction allows for noncompete agreements to protect trade

secrets in some circumstances.

While the various jurisdictions ex amined in this chapter vary i n

significant ways, enforceability of noncompete agreements generally

centers around a few key questions:

1. Is the restriction designed to protect a legitimate business

interest like confidential information or goodwill?

2. Are the geographic and temporal restr ictions imposed rea-

sonable to achieve the protection?

3. Is the covenant supported by adequate consideration?

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