X

Thank you for sharing!

Your article was successfully shared with the contacts you provided.
There has been a plethora of news reports about the exodus of jobs from the United States to overseas markets where skilled workers at low wages are plentiful, and businesses can operate with little or no U.S.-style regulation. Lawmakers and labor unions have begun to battle this trend, proposing legislation aimed at keeping manufacturing and other jobs in the United States. In fact, one estimate suggests that several million U.S. jobs are expected to move offshore in the next 12 years. All this, then, leads to the inevitable question: What will the U.S. workforce look like 12 years from now, assuming that these jobs move offshore? One lawyer’s prediction (mine) is that it will resemble a giant brain: The U.S. will, effectively, function as the “knowledge base” for the world economy. Workers who innovate, consult and efficiently strategically manage will be at the heart of this new economy; and any and all positions that can be outsourced — from manufacturing to printing to data entry to design — will succumb to the lowest bidder, if you will, and be the source of development of offshore economies. If we fast-forward 12 years, what do we potentially see? Companies, particularly high-tech companies in New Jersey, with a plethora of skilled “knowledge workers.” What these workers’ contribution to the company is — whether by way of patentable invention, know-how, design, formula, process or methodology — intellectual property. And it is here, at the crossroads of intellectual property law and employment law, that trade secrets take center stage. JURISDICTIONAL VARIATIONS Needless to say, there is no uniform definition of, or law relating to, the protection of trade secrets. Federal law, for example, is implicated through the Economic Espionage Act of 1996. This provision creates federal trade secret rights, and contains hefty criminal penalties — up to $10,000,000 if theft benefits foreign government, instrumentality or agent; up to $5,000,000 if theft benefits anyone other than the owner. Trade secret protection is addressed by individual states in a variety of ways. Some states have adopted their own, modified version of the Uniform Trade Secrets Act. The UTSA was enacted as a failsafe, if you will, to protect inventions and other intellectual property for which patent protection is either not sought, or, for some reason, not obtained. It was, by historical note, a product of a recognition that many businesses simply do not or cannot obtain a patent for the property, requiring some other avenue to obtain protection of commercially valuable information that is not subject to public disclosure. As a result, then, the UTSA, and the various state adaptations of the act, are recognition of the importance of this alternate, viable avenue of protection for proprietary rights. The UTSA defines a trade secret as “information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) 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 (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” Misappropriation is defined as “(i) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (ii) disclosure or use of a trade secret of another without express or implied consent by a person who (1) used improper means to acquire knowledge of the trade secret; or (2) at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was [intended to remain confidential]; or (3) before a material change of his [or her] position, knew or had reason to know that it was a trade secret.” PROTECTING TRADE SECRETS WITHIN AN ORGANIZATION Companies often employ a layered approach in their efforts to develop and implement a trade secret protection program. Security precautions — actually limiting access to the property at issue — combined with carefully-tailored employee secrecy and other employment agreements (including nonsolicitation and noncompete agreements; and similar, and even more extensive such restrictions in stock option agreements, severance agreements, and other documents more broadly under the umbrella of “employee benefits”) aid in developing a multifaceted, interdisciplinary approach to the safeguarding of this often business-critical information. These protective measures, however, on the one hand, must be carefully balanced against antitrust and state unfair competition statutes and often well-developed common law proscribing federal and state unfair competition – both statutory via the antitrust and federal unfair competition laws under the Lanham Trademark Act, and some very well-developed state unfair competition law. Forty-one states and the District of Columbia have adopted the UTSA. States in which trade-secret statutes are not modeled after the UTSA include Alabama and Massachusetts. New Jersey, New York, Pennsylvania, Tennessee, Texas and Wyoming protect trade secrets under state common law. For an illustration of the manner in which New Jersey courts address these issues, see Ingersoll-Rand Co. v. Ciavatta, 110 N.J. 609 (1988); Johnson v. Benjamin Moore, 347 N.J. Super. 71 (2002); Campbell Soup v. ConAgra, 801 F. Supp. 1298 (D.N.J. 1991); and Raven v. A. Klein & Co., Inc., 195 N.J. Super. 209 (App. Div. 1984). EMPLOYMENT AGREEMENTS A comprehensive employment agreement is recommended for a “knowledge worker” who will either: (1) have access to proprietary and confidential information; or (2) invent, create or design as a salient feature of her position with the company. The decision from an intellectual property perspective is an easy one — a company should do whatever it can via any type of agreement, to safeguard its “crown jewels” — intellectual property that may provide a significant advantage over competitors. But there is often some degree of tension here — the employer is not always comfortable with asking an employee to sign these agreements for fear she will scare away potential or current employees. It is against this backdrop that Maw v. Advanced Clinical Communications, Inc. et al., 359 N.J. Super. 420 (App. Div. 2003), was decided. The case adds yet another layer of uncertainty to the predictability of these agreements’ enforcement, particularly in the context of existing employees. The plaintiff, Karol Maw, was employed by a clinical communications company as a graphic designer. She did not sign a noncompete agreement with the employer when she started working there in 1997. In January 2001, the employer decided to require all employees above a certain level in the company to sign employment agreements that restricted the type of employment these employees could accept for the two years immediately following the termination of their employment with the company. The agreement prohibited working for a competitor, soliciting the company’s employees for a third party and becoming an employee of a customer of the company during this two-year period. Maw objected to the noncompete provision in the agreement as it was written. She suggested certain revisions, including limiting the duration of the noncompete period. The employer refused to make any changes to the noncompete language. Maw refused to sign the agreement. The company then terminated her employment, stating that failure to sign the agreement constituted noncompliance with company policy. Maw sued her employer, claiming that the noncompete agreement violated public policy. The trial court disagreed, and dismissed her claim. She appealed. And here’s where it gets interesting: The appellate court reversed, being the first court in the state of New Jersey to hold that an employee’s refusal to sign a noncompete agreement may, in fact, establish a cause of action for violation of public policy in the state of New Jersey. But, notably, the authority for this proposition did not come from other New Jersey cases. Instead, this New Jersey court followed the ruling of a 2000 California case, D’Sa v. Playhut, Inc.,85 Cal. App.4th 927, 102Cal. Rptr.2d 495, 497 (Ct. App. 2000). There, an appeals court held that an employer cannot lawfully make the signing of a noncompete agreement a condition of continued employment. But this is not the end of the story. The Maw ruling does not mean that the plaintiff has won this case, or that the agreement at issue was defective. It does, however, mean that she has an opportunity to conduct discovery and to continue this case against her employer. It means that the court has put its imprimatur on the viability of such a claim. And that this issue is now, officially, in play. While this leaves some uncertainty, it does tell us a few things: For noncompete agreements to be enforceable — or, as here, for the request that they be executed not be considered enough to state a prima facie case under CEPA — it is best that they be executed at the outset of employment. And while under N.J. law, continued employment can suffice as legally sufficient consideration, it might make sense to provide direct compensation tied directly to the execution of the restrictive covenants. Because, at the end of the day, it appears, at least in New Jersey, public policy issues will likely take center stage. RESTRICTIVE COVENANTS Restrictive covenants — provisions that restrict a person’s conduct — have been the subject of much debate in New Jersey and throughout the U.S. When is a noncompete agreement enforceable? When is a nonsolicitation provision sufficiently narrowly tailored as to protect both the employer’s legitimate interest in its customer relationships and marketing plans, while still allowing the employee to use her knowledge and skill base to earn a living? And when is it appropriate to require an assignment of intellectual property rights for works conceived after employment? First, a word to the wise about restrictive covenants: There are no hard and fast rules about specific language that, without a doubt, will be enforceable in any particular jurisdiction. This means that agreements should be prepared with careful thought about (a) the access of the particular employee involved; (b) the “protectable interests” involved — i.e., what property the employer is attempting to protect; and (c) statutory provisions and relevant case law in a particular jurisdiction. Fundamentally, courts around the country look to see (a) whether in fact there are any actual “trade secrets” involved — property that gives one company a measurable competitive advantage over another, and (b) whether the actions taken by the employer to protect that property are commensurate with the access that employee has to the trade secrets, and the damage that could potentially be done were the restrictive covenant not enforced, making room for the need to leave the employee with a way to make a living using the general skill and knowledge acquired through her years of experience in the particular industry involved. The stated purpose of a noncompete provision — language that restricts an employee from working for a competitive enterprise — is to prevent the possibility of inevitable disclosure of company trade secrets that cannot be properly protected by nondisclosure and nonsolicitation language alone. There are states, California for instance, where such provisions are void ab initio and the court will simply throw out the document and will not “blue pencil” or otherwise modify the document. Other states, such as Florida, have statutorily defined parameters for when such a provision is enforceable. In New Jersey, noncompete agreements are enforceable where “reasonable,” and it is because of this requirement that there is a need for thoughtful and creative lawyering. One size does not fit all. What is “reasonable” in one context may not be in another. For example, if the business at issue is a hair salon, geographic restrictions may be necessary to ensure that the individual is only restricted from competing in the small areas from which a certain salon attracts a majority of customers. And if the concern is that an employee will go from one hair salon to another, with customers of the former in tow, then a relatively short time frame — even a few months — may be sufficient to ensure that the customers would need a hair cut during the noncompete period and therefore not be likely to jump directly from one salon to another. But what about a toy company? Assume that the employee at issue is the vice-president of sales and handles the toy company’s major accounts at Target and Kohl’s. Then a geographic restriction may not make sense because this employee only dealt with two customers, whose business is nationwide — and because of the depth of the relationship, a longer noncompete period may be necessary to protect what may be a very long-standing and valuable relationship of the previous employer. In a perfect world, the employee would be told — prior to leaving another position — the scope of the restrictions to which she will have to agree at the new job, and have the opportunity to consult with counsel and review the specific terms of the document before she begins the new job. The noncompete provision should include restrictions on specific activities, particularly tied to the types of activities in which the employee was involved on behalf of the former employer; should provide that the employee is able to earn sufficient income from activities of noncompetitive employers; and that she understand and accepts the restrictions. The agreement should also require that the employee notify the previous employer of each employment and consulting position she obtains during the noncompetition period. NONSOLICITATION Although often lumped together under the rubric of “noncompete agreements,” nonsolicitation provisions differ in that they specifically prevent the solicitation of certain customers of the previous employer. Again, as with noncompete agreements, such provisions are enforceable where reasonable — here again the question is what is reasonable under the circumstances — considering the business of the employer and position of the employee within the organization? These provisions customarily provide that during the nonsolicitation period, the employee will not directly or indirectly solicit, influence, entice or encourage any person who at such time is, or who at any time in the one-year period prior to such time had been, an employee, consultant, supplier, vendor, contractor, customer or potential customer of the former employer to cease or curtail his or her relationship with the employer. NONDISCLOSURE This is the baseline provision — specifically prohibiting disclosure of proprietary information. It generally requires the employee acknowledge access to confidential information of the employer which she shall maintain as confidential and proprietary during and after the termination of the employment relationship. Importantly, the employee should be advised specifically what information constitutes trade secrets of the company, and that such property provides the new employer with a significant advantage over its competitors. ‘HOLDOVER’ PROVISIONS Employment agreements involving knowledge workers often contain a clause that provides for the employer’s ownership of inventions conceived not only during, but after termination of employment. In such an instance, the courts again will focus on the “reasonableness” of the provision in the context of the particular employee involved and her position at the company. Was she in an inventive capacity? Is the later invention within the scope of her employment, or related to matters on which she was working while with the company? Was it a likely by-product of the company’s existing products and plans? In Ingersoll-Rand Co. v. Ciavatta, 110 N.J. 609 (1988), a “holdover” provision was held unreasonable, and thus unenforceable, where (1) no employer trade secrets were used to develop the invention at issue, and (2) the invention was not related to the employee’s work for the previous employer. Reasonableness is determined by looking at facts and circumstances, analogous to the court’s review of restrictive covenants requiring such a clause. To be enforceable, the provision must be (1) be no greater than necessary to protect the employer’s legitimate interest; (2) not unduly harsh or oppressive; and (3) not injurious to the public. Significantly, not everything to which an employee is exposed warrants protection by a restrictive covenant. Customer lists, electronic and paper documents, including forms used by an employer, and intellectual property-related documents; member lists, mailing lists and other contact information; processes, procedures and plans of the organization, including business development and marketing leads and information, are generally protectable interests. The employee’s general knowledge about a particular subject matter and skill in performing a job is not. ‘INEVITABLE DISCLOSURE’ The principle behind the inevitable disclosure doctrine is that an employee with knowledge of a former employer’s trade secrets would “inevitably” disclose them to the new employer since the nature of the new job would lead to such disclosures, given that the organizations were competitors. This doctrine has been advanced around the country – particularly where there is no written agreement or the enforceability of a restrictive covenant is at issue — with varying degrees of success. See e.g., Pepsico, Inc. v. Redmond, 54 F. 3d 1262 (7th Cir. 1995), (under Illinois law, a former employee of Pepsico enjoined from working for rival division of The Quaker Oats Company under the theory of inevitable misappropriation). In determining whether there will be an “inevitable disclosure,” courts often consider the following: Will the employee be in the exact same position as with the former employer? Are there product launches and other significant matters such that an employee simply cannot — no matter how much good faith is exercised — compartmentalize his mind to not disclose the information? Are they heavily involved in research and development such that they will know what works and what doesn’t (potentially saving the new employer millions in future expenses)? Do they know where the former employer has market presence and where the new employer can go without conflict? In such cases, requiring a period of noncompetition which removes the employee from the scene for a period of time may be required to prevent the transfer of valuable commercial information from one employer to another. PREVENTING ‘INTERFERENCE’ CLAIMS Importantly, in connection with any employment agreement, the employee should be required to attest that no obligations to any previous employer or any third party will be breached by her work for the new company, and that the information she provides to the new employer is of her own free will and has not been solicited. Be thoughtful in developing an effective trade secret protection program. As lawyers, we tend to focus on agreements — “get them to sign an agreement and it will all be wrapped up,” we might say. Not quite. None of these agreements work in isolation without an effective plan in place and an effective protocol that may include (1) marking documents and other proprietary information “confidential” (be careful not to mark everything confidential, as it may dilute importance); (2) limiting access on a “need to know” basis; (3) security measures; (4) employee education to ensure protocol is followed; (5) consistent post-employment procedures (changes to the system and access codes upon termination); terminate access to company facilities, computer and e-mail; exit interview — reinforce exiting employee’s duty with respect to the company’s trade secrets; find out as much as possible about where they will be working and what her duties will be); and (6) notify the new employer of obligations to the previous employer. Carefully keep track of who has signed what agreement so it is not on termination that we first learn an employee received a noncompete agreement, but never returned it. Connect all of this to human-resources procedures to ensure that the entire organization is working in unison toward one goal: the control and protection of the crown jewels, which in more and more companies in New Jersey, and throughout the industrialized world, means one thing: intellectual property. Mitchell is a shareholder with Miller Mitchell in Princeton, N.J., and chair of the firm’s technology, intellectual property, new media and entertainment law practice.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

 
 

ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.