How to effectively protect your IP with a non-compete clause

Losing an employee can mean valuable know-how, trade secrets, code or algorithms walking out the door.

Commentary - If you know what “talent poaching” means, there’s probably a good chance it has happened to you or your business.

Also known as brain drain, talent poaching means a competitor lures valuable or even mission critical employees away from your business, either with a more lucrative positions or benefits. Often, these valuable employees are privy to highly sensitive business intelligence, particularly with regard to trade secrets, which must remain secret, as well as temporarily secret information, such as inventions for which a patent application has not yet been filed or has not yet published. Another sensitive area for many employers is customer databases with customer information, as well as the relationships which the data represents.

The software development industry is particularly prone to this kind of intrigue. Since there aren’t many physical goods needed to create the product, important employees store the means of production in their minds. And losing an employee can mean valuable know-how, trade secrets, code or algorithms walking out the door.

Non-compete clauses arose to combat this corporate mercenary behavior, however, the intricate balance between U.S., state and federal law has made non-compete clauses difficult to enforce.

If not skillfully drafted according to the requirements of each state, non-compete clauses can be unenforceable from one state to another, and may even be unenforceable if the employee remains in the same state as their former employer. In fact, there are so many things that can render a non-compete unenforceable in a court of law, they are considered one of the most difficult agreements to successfully enforce.

For example, enforcement of non-compete clauses varies from state to state and country to country. California for example won’t honor any non-compete unless it falls under one of only three specific exceptions.

However there are steps you can take to strengthen a non-compete clause and defend your company’s valuable trade secrets and know-how.

  • If your non-compete is too vague, it’s useless: Courts are leery of vague or nondescript non-competes. Broadly tailored non-compete clausess will not appear reasonable to the court. Courts balance the rights of employers with employees, so it is important to only include specific clauses that are reasonable in terms of the employee’s knowledge and activities within the company. In some cases, territorial specificity may be important, limiting the clause only for a particular geographic area. Specificity is the key to enforcement.
  • Bring your blue pencil: Certain states have “Blue Pencil” laws which allow for certain parts of a legal document to be enforced, independent of other parts, such that a non-enforceable part of the agreement is severable from the remaining enforceable parts. This means that just because one part of your non-compete may be unenforceable,; it does not mean that the contract in its entirety is void or unenforceable. This level of enforcement selectivity increases the likelihood of enforcement.
  • Know your state’s law and the state laws of your competitors: Knowing your state’s non-compete laws and also the recent court decisions is essential, which means having a lawyer draft the contract that is familiar and experienced in this area. Equally important, is knowing the law in the state in which your competitors reside. Different states interpret these contracts very differently, so do your homework.
  • Use a non-compete very selectively: If you have every employee sign a non-compete regardless of position, responsibility or experience, the court will likely dismiss your case. Courts want to see specificity in all aspects of non-compete clauses, including who you choose to have sign a non-compete. Limiting your selection to the most essential personnel with the most sensitive knowledge is imperative to your successful enforcement; this gives authenticity to the claim.
  • Be reasonable when choosing the non-compete length: Unnecessarily long employment restrictions are a sure way to have your non-compete thrown out. Look at other non-compete cases that were successfully enforced in your state and draft the time accordingly. This is probably the first thing the court will look at, so finding a “reasonable” time frame is paramount (in many states it’s from six months to two years).
  • Use a non-solicitation agreement: Very similar to a non-compete clause, a non-solicitation agreement can be easier to enforce in some states (like California) and provide at least similar protection and in some cases more. Consult a lawyer to see if a non-solicitation clause in your instance can replace a non-compete clause.

One form of non-solicitation agreement is an anti-raiding clause, which prohibits solicitation of fellow employees for a set period of time, and which again may be more enforceable in some states than a non-compete clause.

These guidelines for drafting a non-compete clause will dramatically increase the likelihood of enforcement, although there is certainly no guarantee. Doing your homework and being specific is not only important when drafting a non-compete clause, but also when choosing the lawyer to draft it. In order to create an enforceable non-compete you need to find a veteran lawyer in your industry to draft it up; he or she should have the knowledge and experience you need to create what you want.

While drafting an enforceable non-compete clause may seem like an impossible task, if you are thorough and reasonable - and find a knowledgeable lawyer -, you can usually achieve the protection you want.

It should be noted that nothing in this article constitutes legal advice; please consult a lawyer in your state for specific advice.

Read other commentaries by Dr. Graeser on ZDNet

biography
Dr. D’vorah Graeser is the founder and CEO of Graeser Associates International (GAI), an international healthcare intellectual property firm. Dr. Graeser has been a U.S. Patent Agent for more than 15 years and has extensive experience and expertise in the biomedical field. Her firm specializes in the preparation, filing and prosecution of medical device, biotechnology, pharmaceutical, bioinformatics and medical software patents. The firm also develops customized intellectual property strategies for companies with interest in selling their ideas and products internationally, primarily in the U.S. Europe, China, Brazil and India. For more information about Graeser and Associates International, please visit http://gai-ip.com/.

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