For many small business owners, terms such as “noncompete agreements,” “confidentiality provisions,” “restrictive covenants,” “trade secret protections” and “nonsolicitation clauses” may seem to belong to the realm of large corporations or high-tech firms.
Understandably, small-business owners may not appreciate the effectiveness of these sorts of measures in protecting their own interests, or they may feel they divert too many scarce resources to attorneys and litigation. However, the truth is that businesses of all sizes, from the smallest business with a handful of employees, to the largest companies with thousands of employees, can take simple and cost-effective steps to use these tools to protect their valuable business interests and make their business interests more valuable.
For example, every business has a legitimate ownership — or proprietary — interest in its customer goodwill, that is, the value of its customer relationships. Typically, businesses will hire and pay employees either to develop existing customer relationships or to generate new customers and new relationships. The important point is that in most cases, the law recognizes that the customer relationship belongs to the company, not the employee, since the company is paying the employee to develop the relationship.
Similarly, the law recognizes that certain types of customer information, such as contact information, pricing, preferences and sales data, also are subject to protection as valuable business assets or trade secrets — if the company takes appropriate measures to protect the information.
Typically, problems arise when existing employees jump ship, or defect, to go to work for another company, or start their own business, and they attempt to take away or use their former company’s customer relationships, goodwill, contact information and confidential information in their new venture. Businesses should consider what steps they can take to protect their valuable assets in the event of such an employee defection.
Here are some of the measures every business can implement to protect valuable business interests:
• Confidentiality agreements define the information that a business deems to be confidential, establish that employees will be granted access to the confidential information under specific terms, prohibit the use or disclosure of the confidential information and require the return of all confidential information upon termination of employment.
• Nonsolicitation agreements prohibit a defecting employee from soliciting business from the company’s customers for a specific period of time. They also can be used to prohibit a defecting employee from soliciting the company’s remaining employees.
• Noncompete agreements prohibit a defecting employee from working for a competing company or engaging in competitive activity for a specific period of time within a specific geographic area. Businesses often use confidentiality, nonsolicitation and noncompete agreements in combinations with each other.
• Security policies can be implemented to govern the use of a company’s computer systems, telephones, email and data systems.
• An employee termination or resignation often presents a tempting window of opportunity to download, transfer, email or otherwise misappropriate confidential information and trade secrets. Businesses can prevent or minimize the risk of lost information by implementing appropriate IT protective measures and forensic examinations.
• Businesses can take measures to keep confidential information confidential, such as securing physical environments, implementing password access protections and information firewalls and protecting access to network, computer and data systems.
By implementing some or all of these measures, a business of any size can protect its valuable business interests and assets. In sum, you can use these measures to:
• Enhance the value of your business if you think you will sell it someday. Potential buyers will want to know that your key employees will not leave and take customers in the event of a sale.
• Qualify your confidential information for trade secret protection. Under applicable law, in order for information to qualify as a “trade secret,” and therefore be entitled to special protections, you must take steps to safeguard that information and treat it, in fact, as confidential.
• Protect your customer relationships and goodwill. In the absence of contractual safeguards, your defecting employees may be able to solicit and take away customer relationships and goodwill.
• Generate customer confidence. Your customers will be more confident in working with you if they know that their own confidential and financial information is being protected.
• Protect your investment in training and generating customer goodwill through your employees. The safeguards outlined above will help you protect all the time, money and resources you put into training your employees and introducing them to your customers.
• Clarify employee expectations. By implementing clear policies and contractual provisions expressly prohibiting certain activity, your employees will know up front what conduct is permissible.
In short, the law recognizes that a company has protectable business and proprietary interests in a bundle of valuable assets — such as customer goodwill, confidential information and trade secrets. You can safeguard these interests, and make them more valuable, if you use these strategies for protection.
Eric Uhl is a Partner in the New England office of Fisher & Phillips LLP in Portland. His practice includes all areas of employment law and business related litigation, and he has represented management before federal and state courts throughout the country.