1 protecting corporate assets how to protect your company’s confidential information, trade...
TRANSCRIPT
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PROTECTING CORPORATE ASSETS
How to protect your company’s confidential information, trade secrets, goodwill and other intangible assets
Presented By:
David M. Cogliano , Esq.CVS [email protected]
Stephen T. Paterniti, Esq.Sarah B. Herlihy, Esq.JACKSON LEWIS [email protected] [email protected]
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What We Will Discuss
• What Assets Need Protection?
• What Tools Do You Have To Protect Those Assets?
• Sample Contract Clauses
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PROTECTABLE INTERESTS
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What Are We Protecting?
• Assets involve more than a company’s real estate and
equipment
• Indeed, many companies have few if any traditional
assets. Instead, their value rests in favorable
contracts, customer and supplier relationships, and
other information about the way the employer does
business
• Employee mobility and technology raise the risk that
such assets will find their way to a competitor
• These assets can and should be protected
515
Does Your Company Have Assets That Need Protection? Think Broadly.
• Goodwill with customers, suppliers, distributors
• “Recipes” – literally or figuratively
• Financial information
• Strategic plans, including planned acquisitions
• “Negative” know-how (knowing what doesn’t work may
be as valuable as knowing what does work)
• Trade secrets, including pre-patent inventions
• Processes, such as manufacturing processes
• Client preferences
• Contract details (pricing, services, expiration dates,
etc.)
• Other confidential information
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HOW DO YOU PROTECT THESE ASSETS?
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What Tools Are Available To In-House Counsel?
Two broad “tool kits” available to protect a company’s
intangible assets:
1.Common law and statute
2.Contracts between the employee and employer
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Good Practices Generally
In addition to the legal tools available, there are certain
practical steps a company should take to protect its
confidential information.Limit access to confidential information, identify information as
confidential (stamp, etc.) and train employees
Secure computers and areas where confidential information is
maintained, change passwords and codes frequently
Manage goodwill to ensure that the relationship is between the
company and the customer, supplier, etc., not an individual employee
Standard in Massachusetts to protect trade secrets is “eternal
vigilance”
Courts are unsympathetic to companies who fail to take
reasonable steps to protect their own confidential
information, or other intangible assets, and then ask the
court to take action.
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Protections Absent A Contract
• Basic tension between an employee’s right to use
his/her skill set and the right of employer to protect
confidential information/goodwill
• Most states favor competition and employee mobility
• Absent a contract, common law generally only restricts
an employee from taking and using a former
employer’s confidential information (and, for some key
employees, breaching a duty of loyalty)
• Statutory protection may also be available (Computer
Fraud and Abuse Act, criminal theft statute, tort statute
for theft of trade secrets)
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Why Have A Contract?
Why aren’t the common law protections enough?
Hypothetical: Chemist working for Company X does not have a
non-compete. This employee is fully aware of Company X’s
distinct and very efficient manufacturing process. The chemist
leaves to join a direct competitor, Company Y. Suddenly,
Company Y has reduced its cost structure, suggesting that it
has increased its efficiency.
Company X typically cannot prevail by arguing that the
chemist “must have” or “inevitably” used Company X’s
confidential information to assist Company Y. It will have to
prove that the chemist did so – a more onerous burden than
proving a breach of a non-compete. In marginal cases, where
there is a close question of whether the information is a trade
secret, or could have been independently obtained, a contract
places Company X in a far stronger position.
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Myths About Restrictive Covenants
•Restrictive covenants aren’t enforceable in any
meaningful way
•Our company doesn’t have any protectable
information
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Types Of Restrictive Covenant Contracts
• Non-Disclosure
• Return employer information (give
everything back)
• Non-Solicitation of employees
• Non-Solicitation of customers
• Non-Compete
13113
General Principles
Use clear and consistent language in policies and
agreements, as needed, such as:
• Offer letters
• Compensation agreements (including sales plans)
• Equity grants
• Severance agreements
• Information provided to third parties provided with
confidential information
• Consideration issues
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Factors
Decide what you really need; agreements should be
tailored to your business and the situation
•Sale of business v. employee hire
•Nature of employee’s job
•Level of employee
•Industry
•Types of information at issue
•Geographic scope of business
•Length of time of restriction
•Extent of restraint in employee’s opportunity to pursue his/her
occupation
•Interference with public interest (e.g., homeland security or
medical device)
•Size of business
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Confidential Information/Trade SecretsConfidential Information and Trade Secrets include but are not limited
to:
•Financial and business information (information pertaining to pricing,
costs, commissions, fees, profits, sales, markets, mailing lists, strategies
and plans for future business, new business, product or other
development, potential acquisitions or divestitures, and new marketing
ideas);
•Product and technical information, such as product formulations, new
and innovative product ideas, methods, procedures, devices, machines,
equipment, data processing programs, software, software codes,
computer models, and research and development projects;
•Any and all information in whatever form relating to any client or
prospective client of the Company, such as the identity of the
Company’s clients, the names of representatives of the Company’s
clients responsible for entering into contracts with the Company, the
amounts paid by such clients to the Company, specific client
preferences, needs and characteristics, contract expiration dates, terms
and conditions, and leads and referrals to prospective clients;
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Confidential Information/Trade Secrets• Personnel information, such as the identity and number of the
Company’s other employees, their salaries, bonuses, benefits, skills,
qualifications, and abilities;
• Any information not included above which Employee knows or
should know is subject to a restriction on disclosure or which
Employee knows or should know is considered by the Company or
the Company’s clients or prospective clients to be confidential,
sensitive, proprietary or a trade secret or is not readily available to
the public; and intellectual property, including inventions and
copyrightable works.
• Confidential information and trade secrets are not generally known
or available to the general public.
• The following is a non-exhaustive list of specific matters which, in
relation to the Company, are acknowledged by Employee to
constitute trade secrets, proprietary and/or confidential information
and materials and must be treated as such by Employee:
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Non-Disclosure
Employee agrees, except as specifically required in the
performance of Employee’s duties on behalf of the
Company or with prior written authorization of the Chief
Executive Officer or Chief Operating Officer of the
Company, Employee will not, while associated with the
Company and for so long thereafter as the pertinent
information or documentation remains confidential,
directly or indirectly use, disclose or disseminate to any
other person, organization or entity or otherwise use any
Confidential Information or Trade Secrets.
18118
Goodwill - General
During the course of employment with the Company
employees may develop relationships with clients of the
Company. The Company pays for the expenses of
salary, benefits, travel, entertainment, and other
expenses in developing such goodwill. As such,
Employee understands and agrees that this goodwill is
intended to inure only to the benefit of the Company; the
goodwill is owned by the Company; and the Company
shall be the sole beneficiary of such goodwill during and
after termination of the employee’s employment with the
Company.
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Goodwill – More DetailedThe Company devotes substantial resources to identifying the needs of,
and to developing and maintaining relationships with, existing and
prospective clients. These clients constitute a substantial part of the
goodwill and value of the Company’s business. While existing and
prospective clients may be secured and/or serviced by the Company’s
employees, they remain at all times clients and prospective clients of the
Company. In servicing the Company’s existing and prospective clients,
among other things, the Company makes available to its employees
specially developed and researched insurance industry data and client-
specific information, as well as an extensive network of support
services. During the course of employment with the Company,
employees may develop relationships with clients of the Company. The
Company pays for the expenses of salary, benefits, travel,
entertainment, and other expenses in developing such goodwill. As
such, Employee understands and agrees that this goodwill is intended to
inure only to the benefit of the Company; the goodwill is owned by the
Company; and the Company shall be the sole beneficiary of such
goodwill during and after termination of the employee’s employment with
the Company.
20120
Non-Solicitation – Employees
Solicitation and Hiring. During the period commencing on (the
“Effective Date”) and expiring the ________ anniversary of the
termination of the Employee’s employment with the Company
for any reason (the “Restricted Period”), the Employee shall not,
either directly or indirectly (including through an affiliate), (a)
solicit or attempt to induce any person who either (i) was an
employee of the Company on the Effective Date ( a “Restricted
Employee”) to terminate his/her employment with the Company
or (b) hire or attempt to hire any Restricted Employee; provided,
that this clause shall not apply to any individual whose
employment with the Company has been terminated for a period
of six months or longer before the date of the termination of the
Employee’s employment with the Company.
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Non-Solicitation – Customers
During the Restricted Period, the Employee shall not,
either directly or indirectly as a stockholder, investor,
partner, employee, consultant or otherwise, solicit
business of the same or similar type being carried on by
the Company or any of its subsidiaries and affiliates, from
any person or entity known by the Employee to be a
customer or prospective customer of the Company or any
of its subsidiaries and affiliates
22122
Non-Compete - Broad
NON-COMPETE AGREEMENT. Employee agrees and covenants that
for a period of two years following the termination of this Agreement,
whether such termination is voluntary or involuntary, Employee will not
directly or indirectly engage in any business competitive with Employer
or solicit company customers. This covenant shall apply to any
geographical area covered by any office of the Company or territory that
the Employee worked in within the last two years. Directly or indirectly
engaging in any competitive business includes, but is not limited to, (i)
engaging in a business as owner, partner, agent, consultant, or
independent contractor (ii) becoming an Employee of any third party that
is engaged in such business, (iii) becoming interested directly or
indirectly in any such business, or (iv) soliciting any customer of
Employer for the benefit of Employee or any third party that is engaged
in such business.
23123
Non-Compete – More Narrow
Employee agrees that while he is employed by the Company
and during the two (2) years immediately following termination of
his employment for any reason Employee shall not, directly or
indirectly, as an individual, proprietor, partner, stockholder,
officer, employee, director, consultant, joint venturer, investor,
lender, or in any other capacity whatsoever, engage in, become
financially interested in, be employed by or have any business
or professional connection with any business that competes with
the Company in the marketing and/or sales of commercial floor
cleaning services and products in ___________________
counties in Massachusetts, and
____________________________ counties in New York.
Provided, however, that Employee may own any securities of
any corporation which is engaged in such business and is
publicly owned and traded.
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Non-Compete – Most Narrow
Limitation of Practice; Non-competition: The parties
agree that Employer's business is local in scope and that
Employer would suffer serious damage and loss of
goodwill if, upon termination or expiration of this
Agreement or any renewal thereof, Employee competed
with Employer by providing veterinary services for clients
who reside within the practice’s trade area or currently
are regular clients of Employer. It is understood that the
restrictions contained in this Agreement are necessitated
in part because of the time, effort, and resources required
to acquire Employer’s business, its continued
development and maintenance, and in the event that
Employee’s relationship with the business is terminated,
the additional time and effort necessary to replace
Employee.
25125
Non-Compete – Most Narrow
Therefore, as a material inducement to Employer to enter
into this Agreement and pay Employee the compensation
and benefits offered, and in exchange for the professional
education, experience, and training to be obtained while
working for Employer under this Agreement, Employee
agrees that during the period of this Agreement and any
renewal thereof, and for a period of two years after
Employee ceases to be employed by Employer for any
reason, Employee will not:
26126
Non-Compete- Most Narrow
(a) render, offer to render or attempt to render veterinary
services for,
(b) serve as an independent contractor for,
(c) own, manage, operate or control,
(d) be employed by, participate in or have an interest in,
or
(e) be connected in any manner with the ownership,
management, operation or control of,
27127
Non-Compete – Most Narrow
Any business or profession, including that of a mobile
practice, engaged in veterinary services similar in scope
to those provided by Employer within a ________air-mile
radius of Employer's practice location(s) during the
twenty-four (24) month period immediately preceding
Employee’s last date of employment.
Employee acknowledges that the following is a non-
exhaustive list of practices/entities covered by this
restriction:________________
28128
Additional Provisions
There are certain provisions that should be considered:•Consideration, describe consideration provided at time of initial hire, consider a clause providing that additional consideration is not needed despite changes in position, compensation, responsibilities, etc. •Consider a tolling provision: time for non-solicit/non-compete is tolled during the period of any breach•Provision clarifying that the agreement supplements, rather than replaces, statutory and common law obligations (e.g., trade secret law)•Provision requiring employee and permitting employer to show agreement to potential subsequent employer•Agreement should apply to subsidiaries/ affiliates/ successors/ assigns•Provision reflecting intent to enforce and “blue pencil” if necessary
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Additional Provisions
• Provision defining the confidential information/trade
secrets at issue
• Provision restricting the jurisdiction/venue for
enforcement (including any claim by employee for
declaratory judgment)
• Consider adding arbitration provision if confidentiality
is a real concern (including right to expedited
discovery and relief)
• Provision permitting a new employer or former
employer to “buy out” of their restrictive covenant (“pay
to play”)
• Provision providing employee with compensation
during the restricted period (“garden leave”)
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Additional Provisions – Remedies
Remedies may also be spelled out in an agreement:
•Irreparable Harm - acknowledges that breach will cause
and entitle employer to seek and obtain injunctive relief
•Attorneys’ Fees - if the employee is found to have
breached the agreement, employee pays the cost of
establishing the breach and otherwise enforcing the
agreement, including the cost of any investigation
•Forfeiture - conditions the receipt of certain
benefits/compensation (particularly deferred
compensation) on the promise of non-competition
•Liquidated damages - may simplify enforcement and
litigation
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HIRING A RESTRICTED EMPLOYEE
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The Flip Side – Considerations When Hiring A Restricted Employee• Employees have common law obligation regarding
former employer’s confidential information, irrespective
of whether they have a restrictive covenant with their
former employer
• Employers need to protect against violation of
restrictive covenants and inadvertent “infection” with a
competitor’s confidential information
• “It’s not the crime – it’s the cover-up” – courts act in
equity when issuing injunctions for violations of
restrictive covenants. Conduct such as hiding
information, destroying documents, deleting files are
bad facts for the former employee/new employer.
33133
Acknowledgment of Obligations ClauseI acknowledge that I have informed the Company of, and
agree to provide to the Company a copy of, any
restrictive covenants my former employer may believe or
claim exists between me and my former employer. I have
also been instructed by the Company not to use,
disclose, upload or otherwise bring to the Company any
of my former employer’s confidential information or trade
secrets.
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ENFORCEMENT, BRIEFLY
35135
Two Sides Of The Argument
Presumably, no employer wants to steal another
company’s legitimate trade secrets, but there is a tension:
•Former employers want to protect their information and
relationships when an employee leaves
BUT
•New employers want to leverage an employee’s “tool
box” of knowledge and the new employee’s “personal
relationships”
36136
Initial Strategy Issues
Former Employer•What is the employer’s
largest concern? Goals?
•Initial fact gathering
critical.
•Identify trade
secrets/confidential
information at issue
•Any “bad” conduct?
New Employer•Taking the “high road”
early on may minimize risk
(e.g., limit work done by
new employee)
•Proper onboarding may
also minimize risk
37137
Legal And Strategy Issues
Initial handling of trade secret or restrictive covenant
issues often focuses on attempts to get leverage through
legal arguments, including:
•Testing the enforceability of the contract, both as to
whether it is a valid contract and whether it is being
enforced too broadly
•Challenging whether there is a legitimate interest at
issue, or whether the goal is to stop legitimate
competition
38138
Consideration
Former Employer• If contract signed at
beginning of
employment,
employment is good
consideration
• Need to address
subsequent changes in
employment as potential
arguments that
consideration lapsed
New Employer• Acquisition may void, as
may other changes in
the employee’s job
39139
Scope Of Contract
Former Employer•Identify legitimate
business interest
•Narrower argument can
be stronger
•Employee not prevented
from making a living
New Employer•Prohibits ordinary
competition
•Information not “secret’
•Relationships/goodwill
owned by employee, not
former employer
•Time/geography too broad
40140
Litigation
Former Employer•TRO v. PI
•Notice or Ex-Parte
•Need for expedited
discovery
New Employer•Agree to some limitation
and seek full hearing (and
discovery)
•Counterclaims
•Segregating employee
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