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N ON -C OMPETE A GREEMENTS Protecting Customer Goodwill and Confidential Information with Non-Competition Agreements: Are They Even Worth the Paper Theyre Printed on? W ORCESTER | W ESTBOROUGH | B OSTON M IRICK, OC ONNELL, D E M ALLIE & L OUGEE, LLP September 22, 2010 By: Bob Kilroy M ARLBOROUGH B USINESS I NNOVATION S UMMIT

R OAD M AP Prized Assets: Confidential Information and Customer Goodwill Tools to protect 1.Non-Disclosure Agreements 2.Assignment of Developments Agreements 3.Non-Solicitation Agreements 4.Non-Compete Agreements 5.Inevitable Disclosure Doctrine

R OAD M AP ( CONTINUED ) How the courts in Massachusetts view these restrictive covenant agreements Drafting tips to increase likelihood of enforceability

G OALS Better understanding of the legal landscape regarding non-compete agreements (attempt to remove the frustration factor) Action steps to increase likelihood of enforceability Better protection of trade secrets, confidential & proprietary information & customer goodwill

A W AR S TORY

N ON -D ISCLOSURE A GREEMENTS Key Questions Who should be required to sign? All employees or a subset? What should be covered? How long should the Non-Disclosure obligation last? What if your employees have not signed a Non- Disclosure Agreement? Are you still protected?

C ASE L AW & S TATUTORY P ROTECTION M.G.L. c. 93, §§ 42, 42A:Authorizes up to double damages for theft of trade secrets. M.G.L. c. 266, § 60A:Criminal sanctions for knowingly receiving stolen trade secrets (State prison for up to 5 years, up to $500 fine) M.G.L. c. 266, § 30:Criminal sanctions for stealing trade secrets (State prison for up to 5 years, up to $25,000 fine)

C ASE L AW & S TATUTORY P ROTECTION ( CONTINUED ) MA Supreme Judicial Court: Employees have an implied obligation not to use trade secrets or other confidential information for the benefit of themselves or a competitor, if it would be to the detriment of the former employer.

A SSIGNMENT OF D EVELOPMENTS A GREEMENTS Designed to protect intellectual property Obligates the employee to disclose inventions Requires assignment of inventions to the company

A SSIGNMENT OF D EVELOPMENTS A GREEMENTS ( CONTINUED ) Key Questions: Who should be required to sign? What about developments already in-the-works when hired? What about inventions shortly after departure?

N ON -S OLICITATION P ROVISIONS Customer Non-Solicit Duration of restrictions? Which customers Employee Non-Solicit No Hire vs. Non-Solicit Duration of restriction? Reach back clause Should all employees sign?

N ON -C OMPETE A GREEMENTS The Basics Enforceability varies greatly by State (e.g., CA, TX, GA, VA) Must be limited to protection of legitimate business interests Trade Secrets Confidential Information Customer Goodwill

N ON -C OMPETE A GREEMENTS ( CONTINUED ) The Basics (continued) Must be reasonable in duration and geographic scope Must offer valid consideration to employee when signing

N ON -C OMPETE A GREEMENTS IN M ASSACHUSETTS What constitutes valid consideration? Can at-will employees be required to sign? What if you didnt require signing at time of hire, but want to do so now? What happens if an employee is promoted? What if an employee receives a pay raise? What if an employee has a material change in job duties?

N ON -C OMPETE A GREEMENTS IN M ASSACHUSETTS ( CONTINUED ) For how long after employment ends should a former employee be restricted from competing? Can you restrict him/her worldwide? Customer-based vs. Geographic-based Restriction What if the Court finds that your Non-Compete is overboard? Invalidate, Blue Pencil or Modify?

N ON -C OMPETE A GREEMENTS IN M ASSACHUSETTS ( CONTINUED ) Should all employees be required to sign? What if an employee refuses to sign? Play hardball? Negotiate a less restrictive agreement? Pay to keep the employee on the beach?

N ON -C OMPETE A GREEMENTS IN M ASSACHUSETTS ( CONTINUED ) The danger of selective enforcement The costs of careless drafting Will the Agreement survive a merger? What if an employee jumps ship to a competitor, but never signed a Non-Compete Agreement?

I NEVITABLE D ISCLOSURE D OCTRINE Established, but not firmly established, in Massachusetts Need near-identical job duties and responsibilities Typically need to show that employee cannot be trusted. He/she will inevitably rely upon, use or disclose the employers confidential information.

K EY C OMPONENTS OF A C OMPREHENSIVE A GREEMENT 1.ID protectable interest (Customer Goodwill, Confidential Information) 2.Access contingent on entering into Agreement 3.Broadly define Confidential Information

K EY C OMPONENTS OF A C OMPREHENSIVE A GREEMENT ( CONTINUED ) 4.Assignment of Developments Duty to disclose Presumption of ownership by Co. Assignment to Co. Carve-out for pre-existing inventions State specific language (CA, DE, WA, IL, KS, MN, NC, UT) 5.Non-Disclosure provisions Indefinite May not take/rely upon/use/disclose

K EY C OMPONENTS OF A C OMPREHENSIVE A GREEMENT ( CONTINUED ) 6.Non-Compete provisions Reasonable geographic & durational scope Customer-based scope Tailored to the individual 7.Non-Solicitation of Customers Proper scope & duration Tied to direct contact and/or customers for whom the employee had access to Confidential Information

K EY C OMPONENTS OF A C OMPREHENSIVE A GREEMENT ( CONTINUED ) 8.Non-Solicitation of Employees Specify duration Reach back clause 9.Return of company property provision 10.Affirm the At-Will relationship 11.Assignability provision 12.Right to Injunctive Relief Arbitration Clause? 13.Choice of Law & Venue

STATUS OF LEGISLATIVE EFFORTS TO ERADICATE OR RESTRICT NON-COMPETE AGREEMENTS IN MASSACHUSETTS

L EGISLATIVE P ROPOSAL Efforts are dead for now, but are expected to be revived Key Provisions Being Pursued: Not valid for employees with average gross income of <$75K Must provide copy at least 7 days prior to start of employment or with offer letter, whichever is earlier

L EGISLATIVE P ROPOSAL ( CONTINUED ) Key Provisions Being Pursued (continued) If signed after start of employment, need additional consideration – at least 10% of annual compensation Limited to duration of 1 year, except for garden leave (greater of 50% of base salary or $50K) 6 months is presumptively reasonable

L EGISLATIVE P ROPOSAL ( CONTINUED ) Key Provisions Being Pursued (continued) Mandatory awarding of attorneys fees to employee if court declines to enforce or alters the restriction in a material respect, or if court determines bad faith by the employer Discretionary awarding of attorneys fees if court enforces as is and finds employee acted in bad faith Massachusetts Choice of Law for residents and those working in Massachusetts when terminated

Q UESTIONS ?