TRADE SECRETS CONTRACTS:
Non-Solicitation and Non-Competition Clauses
by Joelle Steele
Since 1983, I have been selling Trade Secrets contracts and contract templates to companies who wish to protect themselves from the occasional unethical employee who uses confidential information — trade secrets — to start their own business. Because of the kinds of questions that are inevitably asked by the people who purchase these contracts, I thought that I should explain the three terms: trade secrets, non-solicitation, and non-competition, as they are similar and related, but are not exactly the same. So here is a brief explanation of each:
TRADE SECRETS. This is a collection of clauses that defines trade secrets, that body of information that an employer owns and that benefits his or her business, including but not limited to client lists and pricing structures, as well as specific or unique techniques developed by the company. In a trade secrets agreement, an employee is prohibited from using the company’s trade secrets in his or her own business or while working for another company.
NON-SOLICITATION. These clauses generally state that during an 18-month period beginning upon termination of employment, the former employee will not solicit clients or employees of their former employer or allow themselves to be solicited by a client or employee of their former employer in order to perform services that are similar to or the same as those of the former employer.
Non-solicitation prohibits the use of trade secrets to start a business or to become employed by a client of the former employer to perform the same services as were provided by the former employer. If an employee leaves an employer and then starts the same kind of business without using the pricing structure or the clients of the former employer as a starting base for that new business, then it is a fair and level playing field — or as fair as it can possibly be under the circumstances, those being that the former employee cannot help knowing what they do about a type of business that they learned, probably in large part, from their former employer.
NON-COMPETITION. Also called non-compete clauses, these prohibit an employee from working at their own business that is the same kind of business as that of the former employer and that is in the same geographical area as that of the former employer. They also prohibit the former employee from working with another former employee of the same company in a business that is the same as that of the former employer.
ENFORCEMENT. Non-solicitation and non-competition clauses are not enforceable in many states. Yet I am frequently asked by someone who has bought one of my Trade Secrets Agreements why I don’t include the non-competition clause in addition to the non-solicitation clauses so that the employer has full protection. Some have even suggested that I should add a clause to one of my Landscape Maintenance Agreements that prohibits the client from soliciting an employee of the landscape company.
I deliberately omit the non-competition clauses because I believe, like so many states do, that it restricts employees' rights to work and support themselves by using their skills in the trade of their choice. I also believe, like these states do, that no employee would willingly sign away these rights, and that if they do, it is because they believe it is the only way to get the job that they need, thus making it "passive coercion" which, according to my experts, would ultimately make the agreement unenforceable anyway.
CONFIDENTIAL & PROPRIETARY INFORMATION. This brings up the question of how much confidential and proprietary information — how many trade secrets that are unique only to that company — an employee really has about the clients and pricing structure, those things the employee could potentially use that would adversely affect (cause damages to) their former employer. Some employees have very little pricing information but may have close associations with the decision-makers at the client level. On the other hand, other employees, such as salespeople, usually know pricing inside and out and have only a superficial relationship with the clients, usually based on the initial sale only. So, you'll have to determine whether an employee will have sufficient privileged information to start their own business. They probably won't. Will that deter them from starting a business? Probably not.
I share an employer's concerns about losing clients to a former employee, but the real issue surrounding this problem is why an employee is so easily seduced into working directly for a client or soliciting a former employer's clients in the first place. Most people do not want to be self-employed, and when they become self-employed it is usually out of desperation. They want to be paid well enough to keep a nice roof over their heads, have food on the table, have health insurance, etc., and they are not getting that from their employers for whatever reason. They see very big — albeit unrealistic — dollar signs when they think of being self-employed.
Many employees do not succeed at being self-employed simply because they have little to no business background and sort of fly by the seat of their pants. But their former employers often lose a client or two or more in the process. Now, if the former employee used confidential or proprietary information of the former employer to get a client, and if it can be proven that they used their knowledge of the former employer's pricing methods to outbid or if they used the home phone number or personal E-mail address of the president of the client's company to get to that person for the purpose of soliciting, the former employer might be able to make a legal issue out of it, depending on what state they are in. But, the cost to litigate would exceed, in most cases, the cost of the loss, and the employer would likely lose anyway as it would be such a difficult, if not impossible, case to prove.
CLIENT SOLICITATION. The same problem exists with employees being solicited by their employer's client. If an employee's needs are being met by the employer, and if the employer is treating the employee fairly in all ways, the employee should not really be all that interested in leaving. But if the employee does want to leave and start their own business, couldn't this also be because they do not see or understand what is involved in doing so? Maybe they see their employer driving a fancy car, living in a nice house, sending the kids to college, etc., and think, "If I could have that one big client all to myself I'd be making $45 an hour and I could afford my own health insurance."
They might think differently about this if they could see where that money actually goes, and if they weren't so sure it wasn't all going right into their employer's pocket. The way an employee thinks is rarely the way an employer thinks. And many employers think that laws are slanted unfairly towards the employees and they therefore try to protect themselves from their employees instead of addressing potential problems before they occur and making it more attractive for an employee to stay than to leave.
Actually, the laws are not slanted towards employees at all. Employers and employees are both very equally represented under the law. The problem lies in educating employers on what the laws are and how to manage their employees effectively. In recent years, it has become exceedingly difficult to do this because so many business owners no longer have a business education. Many don't even bother to hire an attorney or a CPA when they start their businesses. Of course, there is no law that says they have to, and that's just fine. But they often do pay the consequences in the long run, and unfortunately so do their employees.
So, to sum it all up, if you want to protect your company from an unethical employee, treat them like gold and have them sign a trade secrets contract. And hope for the best.