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Trade Secrets and Non-Solicitation: Additional Arrows in Your Legal Quiver

lesson learned Jul 22, 2020

by Philip E. Goss Jr., Esq.

 

Properly and effectively restricting former employees from competing with your business has always been a three-part operation. A written restrictive covenant, in jurisdictions that allow them, traditionally has been the first line of defense. However, as I outlined last time, such restrictive covenants have come under blistering attack in the past decade. Now, in many jurisdictions, restrictive covenants are not merely unenforceable; they’re also illegal.

In such jurisdictions, the proper use of trade-secret protections and non-solicitation agreements can, in many circumstances, give you the tools you need to protect your economic interests.

Trade-secret protection is legally enforceable in all jurisdictions. In simple terms, a trade secret is any information with independent economic value, which is not generally known or readily ascertainable to the public and which has been protected to maintain its secrecy.

Your method of instruction will not be defined as a trade secret. Likely, neither will your curriculum. The most valuable independent assets in a martial arts school, without a doubt, are your customer/student list and, perhaps to a lesser extent, your written marketing methods, procedures and forms.

With regard to the limited (but very valuable) trade secrets outlined above, you’ll find that you have two categories of employees: those who require access to that information and those who do not. In the operation of your school, there are many reasons certain employees require access to customer lists. They can include following up when a student misses a class, informing students of school news and contacting parents regarding re-enrollment.

If the use of trade-secret information is integral in an employee’s duties, such information can be protected from future disclosure if — and likely only if — you are proactive and protect those interests. Always treat trade secrets as you would cash money, which means restricting access to those individuals who have a real need for such information.

The first part of trade-secret protection is not granting blanket access to said secrets to every single employee. Grant access only when the need for sharing that knowledge arises. Unless you take “reasonable” steps to protect a trade secret, it will not be seen as a trade secret. To that end, you should create a written policy regarding your trade secrets, one that defines what information is considered a trade secret and explains that unauthorized dissemination is absolutely forbidden.

The second part is having dedicated computer passwords for each employee and restricting use of company computers to performance of the individual’s job or when otherwise directed by you. Any violation of these rules, no matter how minor, must be met with immediate and appropriate consequences.

Trade secrets also can be disseminated by non-employees. Examples include being in the due-diligence phase of selling your school, seeking third-party funding and receiving assistance from a third party delivering computer-related services. In such circumstances, a nondisclosure agreement is mandated.

One final note on the issue: The law in many jurisdictions specifically precludes third parties from accepting unauthorized trade secrets. In the event a former employee suddenly quits and starts working for a competitor, an aggressive letter informing the new employer that any use of business information provided by the former employee could place the new employer in legal jeopardy is in order. Your former employee’s value to a competing school may be greatly lessened when the new employer finds out that he or she cannot poach your students with impunity.

The third part of trade-secret protection is using a non-solicitation agreement. Arguably, this is a weak stepsister of the restrictive covenant. I say this because restraint-of-trade arguments are now being successfully used against restrictive covenants, and they can be used against non-solicitation agreements, as well. However, there’s no downside to making a non-solicitation agreement part of your employment agreement.

A non-solicitation agreement is a very basic clause. In short, the employee agrees, in writing, that for a certain timeframe following separation of employment, he or she shall not solicit your customers or employees to leave your school.

In order of strength, restrictive covenants and trade-secret protections are the workhorses that keep former employees in check, followed by non-solicitation agreements. In appropriate circumstances, an employment agreement with all of them is your best bet.

 

To read Part 1 of this column, titled “The Sunset of Restrictive Covenants — and What’s on the Horizon,” see the May/June 2020 issue of MASuccess.

 

To contact attorney Philip E. Goss Jr., send an email [email protected]

 

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