An overview of restrictive covenants for employers. Considerations for drafting and reviewing non-compete agreements.

1. Restrictive Covenants and Trade
Secrets
by: David Kight
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2. Introduction
 Overview of Non-Competes
 Litigating Non-Competes
 Drafting Do’s and Don’ts
 Considerations for
Enforcement/Defense
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3. Non-Competes Generally
 Typically designed to address
 Solicitation and servicing of clients
 Solicitation and hiring of employees
 Competition in designated areas
 Confidential Information
 Trade Secrets
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4. The Cold Hard Facts
 Non-Competes cannot
stop competition.
 Non-Competes are
generally enforceable
where they are
reasonable in most
states.
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5. Typical Protections?
 Customer Contacts
 Trade Secrets
 Under both Kansas and Missouri
law, restrictive covenants which
have as their primary protection,
these issues can be enforceable.
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6. Caution: State Law Issues
 State law defines the limits
of employee covenants.
 Just because an
agreement works in
Kansas, doesn’t
necessarily mean it will
work in Nebraska or
Missouri.
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7. Caution: State Law Issues
 Controlled Rain, Inc. v. Sanders, 2006 WL 1222772 (Neb. App.
2006) In this case, the employer had a non-compete agreement
with two key paragraphs: a) a non-solicit agreement; and b) a 100
mile radius non-compete agreement.
 The court found that the non-solicit paragraph was enforceable,
but concluded that the 100 mile radius non-compete was not
enforceable under Nebraska law. The court held that the
employment agreement was not a collection of severable
provisions, but rather was an integrated agreement for which it
was seeking reformation. The Court refused to enforce the
agreement citing a prior Nebraska Supreme Court opinion which
held that covenant not to compete could only be valid if it
restricts a former employee from working for or soliciting the
former employer’s clients or accounts.
 This agreement could have been enforced – at least in part – in
Kansas and Missouri.
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8. Covenant Not to Compete
 This is the most restrictive type of covenant an employee and
employer can sign. Covenants not to compete typically bar a
former employee from engaging in competition with his former
employer for a period of time and in a particular geographic
region.
 Typical language is: “Employee will not directly or indirectly
perform services for any business which performs services
materially similar or competitive with those provided by the
company for a period of xx months in the following geographic
area…”
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9. Non-Solicit as to Customers
 The analysis for a court is different because the former
employee is more free to compete in the open market with a no-
solicit/no-raid agreement. Because the employee is free to work
for anyone (including themselves) there is much less chance
that enforcement of a no-solicit/no-raid agreement would prevent
a person from working altogether. Also referred to as a no-
raiding clause.
 Typical language: “I agree that for two (2) years following my
employment I will not solicit divert or take away any of the
Company’s customers, clients or accounts...”
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10. Employee Non-Solicitation
 These covenants seek to prevent a former employee from soliciting or
hiring the former employer’s employees. Employers seek these provisions
to prevent employee raiding by competitors. Many employees who leave
their employers may want to take an employee with them to their new
employer. These provisions are generally enforceable in Kansas.
 Typical language: “I agree that for two (2) years following my employment,
I will not solicit or encourage any employee to leave the Company’s
employ…”
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11. Non-Disclosure Agreement
 The least restrictive covenant is the non-disclosure agreement.
Rather than preventing competition or solicitation of clients, this
covenant seeks to ensure that the employee does not disclose the
employer’s confidential information or trade secrets after the employee
leaves the employer. Actually enforceable in California.
 Typical language: “I agree that I shall not disclose, misuse,
misappropriate any confidential information or trade secrets except as
required in the scope of my employment…”
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12. Common Confidentiality Provisions
 Acknowledgement of Employee’s Receipt of
Confidential Information or Trade Secrets.
 Agreement to Return all Such Information.
 Agreement not to Disclose any Such
Information.
 Reasonable Liquidated Damage Clauses
Related to Breach of Confidentiality
Provision.
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13. Client Compensation Agreement
 In Varney Business Services, Inc. v. Pottroff, 275
Kan. 20, 59 P.3rd 1003 (Kan. 2002), the Kansas
Supreme Court was asked to review an agreement
between an accounting business corporation and a
former accountant. The agreement provided that
any signatory to the agreement that left the firm
would agree to compensate the firm for any of its
clients that it serviced over the next five (5) years.
 The Supreme Court held the contract
enforceable.
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14. Deferred Compensation Forfeiture Agreement
 Some employees are offered deferred
compensation (either bonuses, or retirement funds)
that are part of their typical benefits plan.
 As part of those plans, some employers have
language which provide that benefits would be
forfeited and terminated in the event the employee
began competing against the employer.
 The type of agreement – profit sharing, bonus plan,
retirement plan, etc. – may ultimately play a role in
how courts evaluate the agreement.
 Kansas has not yet ruled upon this issue but
Missouri (approve) and Iowa (disapprove) have.
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15. Trade Secrets
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16. Uniform Trade Secrets Act
 Both Kansas and Missouri have trade
secrets laws.
 Both provide independent protection to
employers from disclosure of
information which qualifies as a trade
secret.
 Just because you don’t have a non-
compete doesn’t mean you can protect
trade secrets.
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17. An example of this.
 The Kansas Uniform Trade Secrets Act creates an
independent legal duty regarding trade secrets
which is different from any legal duty owed
pursuant to a restrictive covenant. All West Pet
Supply Co. v. Hill's Pet Products Div., Colgate-
Palmolive Co.,847 F.Supp. 858 (D.Kan.,1994)
 “[T]he contractual duty of confidentiality on the part
of Hill's is independent of its statutory duty under
the Uniform Trade Secrets Act not to use or
disclose information that falls within the definition of
a trade secret.” Id. at 861
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18. Drafting Do’s and Dont’s
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19. Before You Start Drafting
 Ask
 What are you fearful of?
 What information do you want to protect?
 Other than the agreement, what else are
you doing? (What does the handbook
say?)
 What protocols do you have in place for
signing, and exit interviews?
 Think about how the agreement fits
with their overall protection plan.
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20. Keys to an Enforceable Contract
 Protects Legitimate Interests
 Trade Secrets
 Customer Contacts
 Reasonable Time
 (i.e. Not Forever)
 Reasonable geography
 (i.e. Not The World)
 Consideration
 What did you give to get?
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21. Extras to Consider
 Liquidated Damages (Reasonable)
 Attorney’s Fees for Prevailing
 Waiver of Bond for Injunction***
 Severability Clause
 Extension of covenant during breach
 Extension of covenant during litigation
 Assignment clause for successors
 At will employment reaffirmation
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22. Considerations for Enforcement / Defense
 Do the terms of the agreement prohibit the
specific acts in question?
 Is the former employee truly competing – same
type of business, same customers?
 Does the agreement prevent general
competition or is it centered on protectable
interests such as customer contacts,
confidential information or trade secrets?
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23. Considerations for Enforcement / Defense
 Is the information which is at issue truly
confidential and if so, what can be said about
efforts to safeguard it?
 Has the enforcing party breached – in a
significant way – the agreement?
 If there are geographic restrictions, how
reasonable are they in comparison to the area
of service or the employee’s area of service?
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24. Considerations for Enforcement Defense
 If there are time limitations, how reasonable are
they given the type of relationship the employer
has with its customers?
 Has there been any modification or alteration of
the agreement which could impact its
enforcement?
 What has been the history – if any – of the
employer’s enforcement of the agreement or
similar agreements?
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25. Considerations for Enforcement / Defense
 Does the agreement have a choice of law
provision? If so, would the law of another state
be more favorable?
 Will the state in which the suit is brought (or the
state upon which the contract is governed)
“blue pencil” or cut out portions of the
agreement if the agreement is deemed overly
broad?
 In what context did the agreement arise: sale of
business, employer-employee, independent
contractor, etc?
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26. So, in conclusion…
 The agreements can be enforceable if
they are reasonable.
 The agreement should be tailored to
the client and the position if possible.
 The agreement should be part of an
overall plan of protection.
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