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PROTECTING CORPORATE ASSETS

How to protect your company’s confidential information, trade secrets, goodwill and other intangible assets

Presented By:

David M. Cogliano , Esq.CVS CaremarkDavid.Cogliano@CVSCaremark.com

Stephen T. Paterniti, Esq.Sarah B. Herlihy, Esq.JACKSON LEWIS LLPPaternis@jacksonlewis.com Sarah.Herlihy@jacksonlewis.com

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What We Will Discuss

• What Assets Need Protection?

• What Tools Do You Have To Protect Those Assets?

• Sample Contract Clauses

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PROTECTABLE INTERESTS

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What Are We Protecting?

• Assets involve more than a company’s real estate and

equipment

• Indeed, many companies have few if any traditional

assets. Instead, their value rests in favorable

contracts, customer and supplier relationships, and

other information about the way the employer does

business

• Employee mobility and technology raise the risk that

such assets will find their way to a competitor

• These assets can and should be protected

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Does Your Company Have Assets That Need Protection? Think Broadly.

• Goodwill with customers, suppliers, distributors

• “Recipes” – literally or figuratively

• Financial information

• Strategic plans, including planned acquisitions

• “Negative” know-how (knowing what doesn’t work may

be as valuable as knowing what does work)

• Trade secrets, including pre-patent inventions

• Processes, such as manufacturing processes

• Client preferences

• Contract details (pricing, services, expiration dates,

etc.)

• Other confidential information

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HOW DO YOU PROTECT THESE ASSETS?

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What Tools Are Available To In-House Counsel?

Two broad “tool kits” available to protect a company’s

intangible assets:

1.Common law and statute

2.Contracts between the employee and employer

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Good Practices Generally

In addition to the legal tools available, there are certain

practical steps a company should take to protect its

confidential information.Limit access to confidential information, identify information as

confidential (stamp, etc.) and train employees

Secure computers and areas where confidential information is

maintained, change passwords and codes frequently

Manage goodwill to ensure that the relationship is between the

company and the customer, supplier, etc., not an individual employee

Standard in Massachusetts to protect trade secrets is “eternal

vigilance”

Courts are unsympathetic to companies who fail to take

reasonable steps to protect their own confidential

information, or other intangible assets, and then ask the

court to take action.

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Protections Absent A Contract

• Basic tension between an employee’s right to use

his/her skill set and the right of employer to protect

confidential information/goodwill

• Most states favor competition and employee mobility

• Absent a contract, common law generally only restricts

an employee from taking and using a former

employer’s confidential information (and, for some key

employees, breaching a duty of loyalty)

• Statutory protection may also be available (Computer

Fraud and Abuse Act, criminal theft statute, tort statute

for theft of trade secrets)

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Why Have A Contract?

Why aren’t the common law protections enough?

Hypothetical: Chemist working for Company X does not have a

non-compete. This employee is fully aware of Company X’s

distinct and very efficient manufacturing process. The chemist

leaves to join a direct competitor, Company Y. Suddenly,

Company Y has reduced its cost structure, suggesting that it

has increased its efficiency.

Company X typically cannot prevail by arguing that the

chemist “must have” or “inevitably” used Company X’s

confidential information to assist Company Y. It will have to

prove that the chemist did so – a more onerous burden than

proving a breach of a non-compete. In marginal cases, where

there is a close question of whether the information is a trade

secret, or could have been independently obtained, a contract

places Company X in a far stronger position.

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Myths About Restrictive Covenants

•Restrictive covenants aren’t enforceable in any

meaningful way

•Our company doesn’t have any protectable

information

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Types Of Restrictive Covenant Contracts

• Non-Disclosure

• Return employer information (give

everything back)

• Non-Solicitation of employees

• Non-Solicitation of customers

• Non-Compete

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General Principles

Use clear and consistent language in policies and

agreements, as needed, such as:

• Offer letters

• Compensation agreements (including sales plans)

• Equity grants

• Severance agreements

• Information provided to third parties provided with

confidential information

• Consideration issues

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Factors

Decide what you really need; agreements should be

tailored to your business and the situation

•Sale of business v. employee hire

•Nature of employee’s job

•Level of employee

•Industry

•Types of information at issue

•Geographic scope of business

•Length of time of restriction

•Extent of restraint in employee’s opportunity to pursue his/her

occupation

•Interference with public interest (e.g., homeland security or

medical device)

•Size of business

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Confidential Information/Trade SecretsConfidential Information and Trade Secrets include but are not limited

to:

•Financial and business information (information pertaining to pricing,

costs, commissions, fees, profits, sales, markets, mailing lists, strategies

and plans for future business, new business, product or other

development, potential acquisitions or divestitures, and new marketing

ideas);

•Product and technical information, such as product formulations, new

and innovative product ideas, methods, procedures, devices, machines,

equipment, data processing programs, software, software codes,

computer models, and research and development projects;

•Any and all information in whatever form relating to any client or

prospective client of the Company, such as the identity of the

Company’s clients, the names of representatives of the Company’s

clients responsible for entering into contracts with the Company, the

amounts paid by such clients to the Company, specific client

preferences, needs and characteristics, contract expiration dates, terms

and conditions, and leads and referrals to prospective clients;

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Confidential Information/Trade Secrets• Personnel information, such as the identity and number of the

Company’s other employees, their salaries, bonuses, benefits, skills,

qualifications, and abilities;

• Any information not included above which Employee knows or

should know is subject to a restriction on disclosure or which

Employee knows or should know is considered by the Company or

the Company’s clients or prospective clients to be confidential,

sensitive, proprietary or a trade secret or is not readily available to

the public; and intellectual property, including inventions and

copyrightable works.

• Confidential information and trade secrets are not generally known

or available to the general public.

• The following is a non-exhaustive list of specific matters which, in

relation to the Company, are acknowledged by Employee to

constitute trade secrets, proprietary and/or confidential information

and materials and must be treated as such by Employee:

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Non-Disclosure

Employee agrees, except as specifically required in the

performance of Employee’s duties on behalf of the

Company or with prior written authorization of the Chief

Executive Officer or Chief Operating Officer of the

Company, Employee will not, while associated with the

Company and for so long thereafter as the pertinent

information or documentation remains confidential,

directly or indirectly use, disclose or disseminate to any

other person, organization or entity or otherwise use any

Confidential Information or Trade Secrets. 

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Goodwill - General

During the course of employment with the Company

employees may develop relationships with clients of the

Company.  The Company pays for the expenses of

salary, benefits, travel, entertainment, and other

expenses in developing such goodwill.  As such,

Employee understands and agrees that this goodwill is

intended to inure only to the benefit of the Company; the

goodwill is owned by the Company; and the Company

shall be the sole beneficiary of such goodwill during and

after termination of the employee’s employment with the

Company.

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Goodwill – More DetailedThe Company devotes substantial resources to identifying the needs of,

and to developing and maintaining relationships with, existing and

prospective clients.  These clients constitute a substantial part of the

goodwill and value of the Company’s business.  While existing and

prospective clients may be secured and/or serviced by the Company’s

employees, they remain at all times clients and prospective clients of the

Company.  In servicing the Company’s existing and prospective clients,

among other things, the Company makes available to its employees

specially developed and researched insurance industry data and client-

specific information, as well as an extensive network of support

services.  During the course of employment with the Company,

employees may develop relationships with clients of the Company.  The

Company pays for the expenses of salary, benefits, travel,

entertainment, and other expenses in developing such goodwill.  As

such, Employee understands and agrees that this goodwill is intended to

inure only to the benefit of the Company; the goodwill is owned by the

Company; and the Company shall be the sole beneficiary of such

goodwill during and after termination of the employee’s employment with

the Company.

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Non-Solicitation – Employees

Solicitation and Hiring. During the period commencing on (the

“Effective Date”) and expiring the ________ anniversary of the

termination of the Employee’s employment with the Company

for any reason (the “Restricted Period”), the Employee shall not,

either directly or indirectly (including through an affiliate), (a)

solicit or attempt to induce any person who either (i) was an

employee of the Company on the Effective Date ( a “Restricted

Employee”) to terminate his/her employment with the Company

or (b) hire or attempt to hire any Restricted Employee; provided,

that this clause shall not apply to any individual whose

employment with the Company has been terminated for a period

of six months or longer before the date of the termination of the

Employee’s employment with the Company.

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Non-Solicitation – Customers

During the Restricted Period, the Employee shall not,

either directly or indirectly as a stockholder, investor,

partner, employee, consultant or otherwise, solicit

business of the same or similar type being carried on by

the Company or any of its subsidiaries and affiliates, from

any person or entity known by the Employee to be a

customer or prospective customer of the Company or any

of its subsidiaries and affiliates 

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Non-Compete - Broad

NON-COMPETE AGREEMENT. Employee agrees and covenants that

for a period of two years following the termination of this Agreement,

whether such termination is voluntary or involuntary, Employee will not

directly or indirectly engage in any business competitive with Employer

or solicit company customers. This covenant shall apply to any

geographical area covered by any office of the Company or territory that

the Employee worked in within the last two years. Directly or indirectly

engaging in any competitive business includes, but is not limited to, (i)

engaging in a business as owner, partner, agent, consultant, or

independent contractor (ii) becoming an Employee of any third party that

is engaged in such business, (iii) becoming interested directly or

indirectly in any such business, or (iv) soliciting any customer of

Employer for the benefit of Employee or any third party that is engaged

in such business.

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Non-Compete – More Narrow

Employee agrees that while he is employed by the Company

and during the two (2) years immediately following termination of

his employment for any reason Employee shall not, directly or

indirectly, as an individual, proprietor, partner, stockholder,

officer, employee, director, consultant, joint venturer, investor,

lender, or in any other capacity whatsoever, engage in, become

financially interested in, be employed by or have any business

or professional connection with any business that competes with

the Company in the marketing and/or sales of commercial floor

cleaning services and products in ___________________

counties in Massachusetts, and

____________________________ counties in New York.

Provided, however, that Employee may own any securities of

any corporation which is engaged in such business and is

publicly owned and traded.

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Non-Compete – Most Narrow

Limitation of Practice; Non-competition: The parties

agree that Employer's business is local in scope and that

Employer would suffer serious damage and loss of

goodwill if, upon termination or expiration of this

Agreement or any renewal thereof, Employee competed

with Employer by providing veterinary services for clients

who reside within the practice’s trade area or currently

are regular clients of Employer. It is understood that the

restrictions contained in this Agreement are necessitated

in part because of the time, effort, and resources required

to acquire Employer’s business, its continued

development and maintenance, and in the event that

Employee’s relationship with the business is terminated,

the additional time and effort necessary to replace

Employee.

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Non-Compete – Most Narrow

Therefore, as a material inducement to Employer to enter

into this Agreement and pay Employee the compensation

and benefits offered, and in exchange for the professional

education, experience, and training to be obtained while

working for Employer under this Agreement, Employee

agrees that during the period of this Agreement and any

renewal thereof, and for a period of two years  after

Employee ceases to be employed by Employer for any

reason, Employee will not:

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Non-Compete- Most Narrow

(a) render, offer to render or attempt to render veterinary

services for,

(b) serve as an independent contractor for,

(c) own, manage, operate or control,

(d) be employed by, participate in or have an interest in,

or

(e) be connected in any manner with the ownership,

management, operation or control of,

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Non-Compete – Most Narrow

Any business or profession, including that of a mobile

practice, engaged in veterinary services similar in scope

to those provided by Employer within a ________air-mile

radius of Employer's practice location(s) during the

twenty-four (24) month period immediately preceding

Employee’s last date of employment.

Employee acknowledges that the following is a non-

exhaustive list of practices/entities covered by this

restriction:________________

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Additional Provisions

There are certain provisions that should be considered:•Consideration, describe consideration provided at time of initial hire, consider a clause providing that additional consideration is not needed despite changes in position, compensation, responsibilities, etc. •Consider a tolling provision: time for non-solicit/non-compete is tolled during the period of any breach•Provision clarifying that the agreement supplements, rather than replaces, statutory and common law obligations (e.g., trade secret law)•Provision requiring employee and permitting employer to show agreement to potential subsequent employer•Agreement should apply to subsidiaries/ affiliates/ successors/ assigns•Provision reflecting intent to enforce and “blue pencil” if necessary

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Additional Provisions

• Provision defining the confidential information/trade

secrets at issue

• Provision restricting the jurisdiction/venue for

enforcement (including any claim by employee for

declaratory judgment)

• Consider adding arbitration provision if confidentiality

is a real concern (including right to expedited

discovery and relief)

• Provision permitting a new employer or former

employer to “buy out” of their restrictive covenant (“pay

to play”)

• Provision providing employee with compensation

during the restricted period (“garden leave”)

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Additional Provisions – Remedies

Remedies may also be spelled out in an agreement:

•Irreparable Harm - acknowledges that breach will cause

and entitle employer to seek and obtain injunctive relief

•Attorneys’ Fees - if the employee is found to have

breached the agreement, employee pays the cost of

establishing the breach and otherwise enforcing the

agreement, including the cost of any investigation

•Forfeiture - conditions the receipt of certain

benefits/compensation (particularly deferred

compensation) on the promise of non-competition

•Liquidated damages - may simplify enforcement and

litigation

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HIRING A RESTRICTED EMPLOYEE

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The Flip Side – Considerations When Hiring A Restricted Employee• Employees have common law obligation regarding

former employer’s confidential information, irrespective

of whether they have a restrictive covenant with their

former employer

• Employers need to protect against violation of

restrictive covenants and inadvertent “infection” with a

competitor’s confidential information

• “It’s not the crime – it’s the cover-up” – courts act in

equity when issuing injunctions for violations of

restrictive covenants. Conduct such as hiding

information, destroying documents, deleting files are

bad facts for the former employee/new employer.

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Acknowledgment of Obligations ClauseI acknowledge that I have informed the Company of, and

agree to provide to the Company a copy of, any

restrictive covenants my former employer may believe or

claim exists between me and my former employer.  I have

also been instructed by the Company not to use,

disclose, upload or otherwise bring to the Company any

of my former employer’s confidential information or trade

secrets.

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ENFORCEMENT, BRIEFLY

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Two Sides Of The Argument

Presumably, no employer wants to steal another

company’s legitimate trade secrets, but there is a tension:

•Former employers want to protect their information and

relationships when an employee leaves

BUT

•New employers want to leverage an employee’s “tool

box” of knowledge and the new employee’s “personal

relationships”

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Initial Strategy Issues

Former Employer•What is the employer’s

largest concern? Goals?

•Initial fact gathering

critical.

•Identify trade

secrets/confidential

information at issue

•Any “bad” conduct?

New Employer•Taking the “high road”

early on may minimize risk

(e.g., limit work done by

new employee)

•Proper onboarding may

also minimize risk

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Legal And Strategy Issues

Initial handling of trade secret or restrictive covenant

issues often focuses on attempts to get leverage through

legal arguments, including:

•Testing the enforceability of the contract, both as to

whether it is a valid contract and whether it is being

enforced too broadly

•Challenging whether there is a legitimate interest at

issue, or whether the goal is to stop legitimate

competition

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Consideration

Former Employer• If contract signed at

beginning of

employment,

employment is good

consideration

• Need to address

subsequent changes in

employment as potential

arguments that

consideration lapsed

New Employer• Acquisition may void, as

may other changes in

the employee’s job

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Scope Of Contract

Former Employer•Identify legitimate

business interest

•Narrower argument can

be stronger

•Employee not prevented

from making a living

New Employer•Prohibits ordinary

competition

•Information not “secret’

•Relationships/goodwill

owned by employee, not

former employer

•Time/geography too broad

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Litigation

Former Employer•TRO v. PI

•Notice or Ex-Parte

•Need for expedited

discovery

New Employer•Agree to some limitation

and seek full hearing (and

discovery)

•Counterclaims

•Segregating employee

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