Legally Speaking: Don't Steal My Recipe--Protecting What Makes Your Business Successful from Competitors
As the owner of a construction-related business, you probably don't think of yourself as owning proprietary technologies, secret formulas or technical information that you need to protect (or that you can protect) from your competitors. While it is true that construction in general, and roofing contracting in particular, is not "rocket science," you may have more to protect than you think.
In the recent past, changes in both state statutory and common law broaden the protections available to business owners from departing employees and other third parties who have had access to your confidential business information. While you do not have a "secret sauce," patent or device that makes your business successful, if you think about it, you have many other assets you have developed over the years that would be damaging to your business if they were taken from you and used by your competitors. This article is intended to remind you of the assets that make your business successful and to describe various ways in which they may be safeguarded.
Protectable AssetsWhat makes your business competitive? Most likely, over the years you have developed a good working relationship with a variety of customers and referral sources. You may have developed special pricing agreements with your best customers and referral sources that are not known to those outside of your company. You may have also developed relationships with material suppliers and other vendors in which you have negotiated special cost arrangements and/or distributorship agreements. As business managers you have probably incorporated marketing planning into your business and strategic goals to expand your business and increase your revenues and profitability.
While your lower-level employees have no need to know this information and are not given access to it, if you have minority partners, management personnel or key sales people, these people may have been given access to these types of business assets and could cause harm to your company if they were to leave, voluntarily or otherwise, and use this information in their next job with your local competitor. Although you may not currently think of them as such, these types of business assets are your "trade secrets" and can be protected.
The Uniform Trade Secret ActMany states have adopted the Uniform Trade Secret Act or a version of it that has been modified in some way by a specific state statute. The goal of the UTSA is to protect business owners from misappropriation of trade secrets by former employees. A business owner's right to sue a departing employee or competitor from using your trade secrets does not require that your former employee had signed a non-competition or non-disclosure agreement.
The definition of "trade secrets" is quite broad under the UTSA. It applies not only to business formulas, devices, methods or processes, but it also has been interpreted by case law to include customer lists, customer information, cost structures as well as marketing and strategic business planning information. Generally, a trade secret is protected under the UTSA if a business owner can establish four basic elements. Those elements include proving that the information (1) has economic value to the company; (2) is information not generally known to the public; (3) is information that is not readily ascertainable by the public; and that (4) the business owner has maintained reasonable efforts to maintain its secrecy.
If one of your key employees leaves your business and uses your trade secrets against you in competition, you can prevent the use of that information by way of a court-ordered injunction. You will likely be successful in prohibiting the use of that information by your former employee or his new employer if you can establish that the information taken fits with the definition of a trade secret. For example, if you can prove you have maintained customer lists, specific costs structures and marketing plans that your employees knew were confidential and that you took reasonable efforts to protect, the court will likely find that the information is a protectable trade secret. It is important that any information that you determine to be your "trade secrets" be marked as confidential and be provided to only those employees who require access to it to perform their job duties. You should have written policies in place that any employees provided with access to this information are prohibited from disclosing it to any third parties and are not allowed to remove it from your business, unless it is absolutely necessary.
While the UTSA will not prevent your former employees or business competitors from competing against you fairly, and while our free market society encourages competition, the UTSA helps ensure that competition is played out on a level playing field. If you believe that a former employee has misappropriated business assets that you had sought to protect, the UTSA will provide remedies against the threat of unfair competition. In addition to injunctive relief, some states also allow awards of monetary damages and statutory attorney fees for successful claims brought under their state's version of the UTSA. You should consult with your business attorney to adopt a plan to define your trade secrets and to take steps to protect them.
Protection of Business Assets by ContractThere are basically three different types of contractual protections that you can create to protect your business assets' "goodwill." Often times these contractual provisions are contained in employment agreements that you negotiate with key employees. When hiring new management and/or key sales personnel, you should consider the type of employment contract it will require to reasonably protect your business interest. These contracts need not be limited to new hires only. New or enhanced employment contracts are presented to personnel who have been promoted into management positions, or that are presented to existing employees as condition of future employment are also enforceable.
1. Agreements not to compete.Historically, agreements not to compete were held unenforceable as they violated public policy favoring competition. Within the last 20 years or so, this notion has been abandoned by most states. The prevailing rule is that non-competition agreements are enforceable in most states in limited circumstances. Some states have specifically adopted statutes that allow for non-competition agreements while other states have, through case law, allowed the enforceability of non-competition agreements on a limited basis.
Those states allowing non-competition agreements will enforce the agreement to prevent unfair competition. There are four general factors considered by courts in determining whether a non-competition should be enforced, including that the agreement (1) be reasonable in geographic scope; (2) be reasonable in duration; (3) be reasonably narrow; and (4) protects the legitimate business interest of the employer.
In order to be reasonable in a geographic scope, your non-competition agreement should prevent your employee from competing against you within the territory in which you are actually engaged in business. For example, if 90 percent of your work is performed in a three county area, a non-competition agreement that prevents your former employee from now working anywhere in your state will not be upheld. If the court finds that the geographic scope used in a non-competition agreement exceeds the bounds of your actual business territory, the court can reduce the geographic territory or strike your contract in its entirety.
In terms of duration, courts often find that non-competition agreements that prevent competition during the term of your employee's tenure with you and for a period of one to three years after that employee leaves are typically reasonable. Time periods longer than one to three years are sometimes enforced, depending on many factors, including the amount of proprietary information the employee has learned during his employment with your company, the level of competition within your territory and conduct of the employee when leaving your company.
Unfortunately, another significant factor in determining reasonable duration is often times the personal preference of the Judge hearing your case. Some Judges are frankly not in favor of non-competition agreements and will limit them as narrowly as possible. Other Judges take the view that the parties are free to enter into contracts at their own election, and so long as the non-competition agreement is negotiated at arms length, the court will enforce its terms as written.
In terms of the "narrowness" of the agreement, you should be careful to have your agreement tailored to protect your particular type of business only. Obviously, if you have an employee sign an employment agreement that prevents them from working in a field that you are not engaged in, it will be deemed unreasonable and not enforced. For example, if you are a residential roofing contractor and require your employee to sign a non-competition agreement that prevents him from working in the commercial roofing industry, the court will likely find that agreement unreasonable and will either limit it to residential roofing business only, or will strike your agreement entirely.
Finally, courts will look at the legitimate business interest you are seeking to protect. Courts are not in favor of holding low-level employees to non-compete agreements. Such employees are not provided access to information that they could take to a new employer that could be used to unfairly compete against you. Non-competition agreements are appropriately enforced against higher level management and sales personnel who have access to your business planning and pricing strategies, as well as your key customers and referrals. There is a legitimate business interest to protect the disclosure of special information provided to only key personnel.