NON-COMPETES: SHOULD YOU HAVE THEM, AND WHAT TO DO WHEN FACED WITH ONE? Jonathan A. Keselenko Partner Foley Hoag LLP February 6, 2008

What is at stake?  Every Day, Your Intellectual Property Walks Out the Door  Employee Mobility –Competition  Ability to Hire

Recent Phenomena  Non-Disclosure (NDAs) and Non-Competition Agreements increasingly prevalent  Upside and Downside  Substantial Increase in Litigation of Issues Involving Enforcement of Restrictive Agents

Recent Phenomena (Continued)  Other causes of the increase in litigation:  Managers, rather than Human Resources department, identifying new talent  Human Resources has less control over process (what is said and done before official offer made)  It’s an electronic world  Companies willing and able to scrutinize departing employees’ computers to assess their pre-termination conduct

General Legal Landscape  At-will Employees Can Change Employers Freely  Can Plan to Compete  Can Take Active Steps to Do So While Employed  Caveat: not on your dime/time!

Types of Restrictive Agreements  Nondisclosure/Inventions Agreements  Noncompetition Agreements  Nonsolicitation Agreements  Customers  Employees  Suppliers

Enforceability of Non-Competes  Not Automatic  Must Be Necessary to Protect Legitimate Business Interests and Not to Protect From Ordinary Competition  Reasonable in Time and Geographic Scope

Interests  Protection of Customer Good Will, Relationships  Protection of Trade Secrets/Confidential Information

What Information is Protectable?  Customer Information  Manufacturing Processes and Methods  Business/Financial Information  Sales Figures  Marketing Forecasts  Future Plans  Computer Programs and Data Compilations

What is Not Protectable?  General Knowledge/Skills/Abilities  Publicly Available Information  Information Resulting From Reverse Engineering

Tips for Maximizing Protection:  Develop Comprehensive Program to Protect Trade Secrets and Other Information  Confidentiality Policy  Educate Employees About Policy  Restrict access to information  Label confidential documents (electronic too) “Confidential. Do Not Copy, Do Not Distribute”

Tips for Maximizing Protection (Continued):  Focus Your Agreement on Protecting Your Information  Specify the kinds of information that are confidential  Specific is better than generic  Spell out what is “competition”

Tips for Maximizing Protection (Continued):  Common Mistake: The “Naked” Non-Compete or “One Size Fits All” Approach  Swinging for the Fences Often Results in Strike- outs: Tailor Your Agreement to Your Interests  Make sure You Have Consideration  Inception of employment is best  If not, tie to other benefits

Tips for Maximizing Protection (Continued)  Act Quickly/Aggressively to Protect Your Rights  Investigate Employee’s Actions  Letters to Former Employee, New Employer  Litigation

Tips for Maximizing Protection (Continued)  Consider State of Employment  State laws very widely  The California Problem  Options

Menu of Litigation Options  Immediate Request for Injunction  Expedited Discovery  Arbitration?

Hiring Employees With Non-Competes  The other side of the coin – risks  Have practice of inquiring about getting existing agreements  Study the risks  Agreements  Trade Secret laws  Duty of Loyalty

Hiring Employee With Non- Compete…(Continued)  Just Because There Is A Non-Compete Doesn’t Mean No Hire:  Competitors?  Legitimate Interest?  Other Positions?  Weigh Risk

Hiring Employee With Non- Compete…(Continued)  Document expectations/restrictions  Employee warranties

Effectively Managing The Hiring Process  Departing employees sometimes do stupid things  Outline parameters for communication about new employment  Not on company time  Not with use of company equipment  Best advice to employee: assume every key stroke on every computer will be seen by your former employer

Effectively Managing The Hiring Process (Continued)  Managing managers who recruit/start hiring process:  Trainings on protecting your company’s intellectual property/confidential information should include a discussion of how this goes both ways, so that in the enthusiasm to lure friends/former coworkers from other places, employees do not get the company into trouble  Advise about parameters relating to solicitation  Do not inform of plan to depart; wait until termination is effective before communicating with customers

Effectively Managing The Hiring Process (Continued)  If information is taken (customer list, etc.), investigate former employer’s efforts to protect the information  Do not forget written agreements: scrutinize language in agreements

Hiring Employers Have Some Recourse Against Overly Aggressive Former Employers  Recent significant case: Brooks Automation, Inc. v. Blueshift Technologies, Inc., et al.  Plaintiff sought to enforce a non-competition agreement against a former employee and his new employer  Court refused to enforce the agreement, granted defendant’s Chapter 93A (unfair competition) counterclaim, ordered plaintiff to pay defendants’ attorneys’ fees as a penalty for initiating the action

Hiring Employers Have Some Recourse Against Overly Aggressive Former Employers (Continued)  Court held that plaintiff company had no reasonable basis to believe its suit would succeed  Plaintiff company acted with a purpose other than adjudicating its claims: to prevent the defendant company from entering a contract with a 3 rd party  The plaintiff company filed a frivolous lawsuit, and willfully violated Chapter 93A  The court trebled the damage award to $627,900, plus attorneys’ fees

Should Non-Competes Be Illegal?  Proposals in Massachusetts  The California Model

Questions/Discussion Jonathan A. Keselenko, Esquire Foley Hoag LLP 155 Seaport Boulevard Boston, MA Phone: (617) Fax: (617)