1. www.duanemorris.com ©2010 Duane Morris LLP. All Rights Reserved. Duane Morris is a registered service mark of Duane Morris LLP. Duane Morris – Firm and Affiliate Offices | New York | London | Singapore | Los Angeles | Chicago | Houston | Hanoi | Philadelphia | San Diego | San Francisco | Baltimore | Boston | Washington, D.C. Las Vegas | Atlanta | Miami | Pittsburgh | Newark | Boca Raton | Wilmington | Cherry Hill | Princeton | Lake Tahoe | Ho Chi Minh City | Duane Morris LLP – A Delaware limited liability partnership DM2\2307568.1 DELVACCA PRESENTS PROTECTING YOUR BUSINESS: CUTTING EDGE ISSUES RELATIVE TO NON-COMPETES, NON-SOLICITATION CLAUSES AND CONFIDENTIALITY PROVISIONS  May 6, 2010 *This Outline should not be construed as legal advice or as pertaining to specific factual situations DM2/2307568.1 Presented by Duane Morris

2. www.duanemorris.com 1 A.AGREEMENTS TO PROTECT AGAINST UNFAIR COMPETITION 1.Covenants Against Competition 2.Non-Solicitation Agreements a.Non-Solicitation of Customers/Potential Customers b.Non-Solicitation of Employees 3.Trade Secret/Confidentiality Agreements 4.Assignment of Intellectual Property Rights

3. www.duanemorris.com 2 B.COVENANTS AGAINST COMPETITION 1.Governed by state laws which can vary considerably 2.Tension between protection of corporate assets and restraint of trade 3.Tension between desire to recruit entrepreneurial talent and desire to prevent free agency

4. www.duanemorris.com 3 C.TYPES OF COVENANTS AGAINST COMPETITION 1.Prohibit all work for a competitor 2.Prohibit competitive activity only, including as an employee, consultant, agent, owner or otherwise 3.Prohibit only certain activities in competition with the employer

5. www.duanemorris.com 4 D.REQUIREMENTS FOR ENFORCEABILITY OF COVENANTS AGAINST COMPETITION 1.The covenant must be ancillary to the employment relationship (or to sale of business) 2.Covenant not to compete will be enforced only to the extent reasonably necessary to protect the legitimate business interests of the employer, such as: a.Confidential information/trade secrets b.Customer relationships or customer goodwill acquired through efforts of employee c.Specialized training and skills obtained from employer

6. www.duanemorris.com 5 D.REQUIREMENTS FOR ENFORCEABILITY OF COVENANTS AGAINST COMPETITION 3.The covenant must be supported by adequate consideration a.Commencement of employment b.Promotion or beneficial change in benefits or compensation or employment status c.Potential to realize future benefits d.Separation benefits i.Less clear ii.Potential concern – is there really protectable interest this late in the game?

7. www.duanemorris.com 6 D.REQUIREMENTS FOR ENFORCEABILITY OF COVENANTS AGAINST COMPETITION 4.Not adequate new consideration: a.Raise to which employee already is entitled b.Bonus that is guaranteed c.Profit sharing plan offered to all other employees d.Removal of unlawful restriction e.Continued employment i.PA – No ii.NJ – Probably

8. www.duanemorris.com 7 D.REQUIREMENTS FOR ENFORCEABILITY OF COVENANTS AGAINST COMPETITION 5.The covenant must be reasonable in temporal scope/duration a.Less than 1 year—usually reasonable b.More than 2 years—usually unreasonable c.Between 1 and 2 years—depends on case/court

9. www.duanemorris.com 8 D.REQUIREMENTS FOR ENFORCEABILITY OF COVENANTS AGAINST COMPETITION 5.The covenant must be reasonable in temporal scope/duration (continued) d.Blue pencil language helpful but not determinative i.May not apply if court believes bad faith on part of employer ii.May not be available or fully available in some states, such as M aryland and North Carolina

10. www.duanemorris.com 9 D.REQUIREMENTS FOR ENFORCEABILITY OF COVENANTS AGAINST COMPETITION 6.The covenant must be reasonable in geographic scope a.Geographic scope should be no greater than reasonably necessary to protect the company’s legitimate business interests i.Salesperson: current, and perhaps prior, region ii.Executive: scope of company’s business over which she has influence and authority

11. www.duanemorris.com 10 D.REQUIREMENTS FOR ENFORCEABILITY OF COVENANTS AGAINST COMPETITION 6.The covenant must be reasonable in geographic scope (continued) b.Worldwide economic reality and worldwide covenants i.If court approves worldwide restriction, court likely to require narrower substantive and temporal scope ii.Narrowing language critical (but not ironclad protection)

12. www.duanemorris.com 11 D.REQUIREMENTS FOR ENFORCEABILITY OF COVENANTS AGAINST COMPETITION 7.Other issues a.Unenforceable per se in California b.Potentially actionable to try to enforce unlawful covenant in California, New Jersey and other states c.Applying covenants to all employees undermines argument that protectable interest where in fact it exists d.Covenants in handbooks—not clear agreement and if you argue agreement, cuts both ways

13. www.duanemorris.com 12 D.REQUIREMENTS FOR ENFORCEABILITY OF COVENANTS AGAINST COMPETITION 7.Other issues (continued) e.Forfeiture provisions i.Don’t prohibit competition ii.However, result in loss of deferred benefits, if competition

14. www.duanemorris.com 13 E.NON-SOLICITATION AGREEMENTS 1.General Purpose: Non-solicitation agreements are less intrusive than non-competition agreements but can provide significant protection for customer or employee relationships

15. www.duanemorris.com 14 E.NON-SOLICITATION AGREEMENTS 2.Customers – persons or entities for whom the company performed services or to whom the company sold or licensed its products during the X months preceding the cessation of employee’s employment. Issues: a.Apply only to customers with whom some involvement on part of employee? b.Prohibit solicitation only or cover unsolicited business too?

16. www.duanemorris.com 15 E.NON-SOLICITATION AGREEMENTS 3.Prospective customers – persons or entities whose business was solicited by the company during the X months preceding cessation of employee’s employment. Issues: a.Apply only to prospective customers with whom some involvement on part of employee? b.Prohibit solicitation only or cover unsolicited business too?

17. www.duanemorris.com 16 E.NON-SOLICITATION AGREEMENTS 4.Prohibit the solicitation of employees a.Preclude employee from encouraging a person employed by the company to terminate such employment or employing or establishing a business relationship with any person who was employed by the company during the X month period prior to employee’s termination of employment.

18. www.duanemorris.com 17 E.NON-SOLICITATION AGREEMENTS 4.Prohibit the solicitation of employees (continued) b.Issues: i.Do not limit to “at time of termination” since allows for plan to evade ii.Apply company-wide or restrict to location, relationships etc?

19. www.duanemorris.com 18 F.REQUIREMENTS OF ENFORCEABILITY OF NON-SOLICITATION AGREEMENTS 1.Non-solicitation of customers or employees provisions generally are subject to the same reasonableness requirements as non-competition agreements. 2.However, the geographic location of the customers or employees may supply the geographic scope of this restriction if none is provided in the agreement 3.Plus, courts less hostile to them because don’t prohibit competition per se

20. www.duanemorris.com 19 G.CONFIDENTIALITY AGREEMENTS 1.Purpose a.Protect against use or disclosure of employer’s confidential information b.Define which information is confidential i.Include, but do not limit to, trade secrets ii.Customize carefully iii.Specific issue: whether to include customers and employees iv.Special protection for trade secrets may be available under state law

21. www.duanemorris.com 20 G.CONFIDENTIALITY AGREEMENTS 2.Scope a.Typically protect against the use or disclosure of information that provides the employer with a competitive advantage and is not known or readily ascertainable in the industry b.May also include the obligation to return all company property, including information, upon termination

22. www.duanemorris.com 21 G.CONFIDENTIALITY AGREEMENTS 3.Requirements for Enforceability a.Need not meet the same reasonableness requirements of covenants against competition or non-solicitation agreements in most states. i.PA: no ii.WI: yes b.Should you limit time frame? i.Legal ii.Practical

23. www.duanemorris.com 22 H.Pennsylvania Uniform Trade Secrets Act 1.A trade secret is defined in the PA UTSA as: Information, including a formula, drawing, pattern, compilation including a customer list, program, device, method, technique or process that: a.Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and b.Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

24. www.duanemorris.com 23 H.Pennsylvania Uniform Trade Secrets Act 2.For information to be protected as a trade secret, it must be known only by its owner and those authorized to know by its owner. 3.A claim for trade secret misappropriation arises when one acquires, uses, or discloses the information by improper means, which involves a breach of contract or confidential relationship or other wrongful or commercially unethical conduct.

25. www.duanemorris.com 24 I.ASSIGNMENT OF INTELLECTUAL PROPERTY RIGHTS 1.Employees a.Employer owns copyright but not patent rights b.Agreement should confirm copyright and assign patent rights 2.For independent contractors a.Independent contractor owns copyrights and patent rights absent assignment b.Agreement should include assignment of both patent rights and copyrights

26. www.duanemorris.com 25 K.ENFORCEABILITY ISSUES Tools to Enforce Restrictive Covenants 1.Choice of law provision 2.Forum selection clause 3.Consent to injunctive relief

27. www.duanemorris.com 26 K.ENFORCEABILITY ISSUES Tools to Enforce Restrictive Covenants (continued) 4.Blue pencil provision 5.Consent to personal jurisdiction 6.Assignment provision

28. www.duanemorris.com 27 K.ENFORCEABILITY ISSUES Creating Financial Incentives 1.Benefits that vest over time 2.Forfeiture clauses 3.Claw back provisions 4.Garden leave

29. www.duanemorris.com 28 K.ENFORCEABILITY ISSUES Legal Limitations 1.Public policy issues a.Lawyers – generally prohibited b.Doctors – ok unless enforcement will restrict the public access to medical professionals

30. www.duanemorris.com 29 K.ENFORCEABILITY ISSUES Legal Limitations (continued) c.Incompetent or laid off employees. See Insulation Corp. v. Brobston, 667 A.2d 729 (Pa. Super 1995) (holding that former employer could not enforce non-compete against salesperson terminated for failing to achieve sales goals – because employer deemed salesperson “worthless” for its non- interests, employer could not prohibit salesperson from working for others) d.Employees terminated for misconduct

31. www.duanemorris.com 30 L.LITIGATION When Push Comes to Shove - Litigation 1.Demand letter a.Former employee b.New or prospective employer 2.Risks in sending demand letter a.Tortious interference with contract – accurate statement of restrictive covenant is privileged b.Lawsuit filed seeking declaratory judgment of non- liability

32. www.duanemorris.com 31 L.LITIGATION Litigating the Injunction Case 1.Fast-paced intense litigation 2.Requires concentrated expenditure of resources 3.Case will turn on obtaining a preliminary injunction

33. www.duanemorris.com 32 L.LITIGATION Injunctive Relief 1.To obtain a preliminary injunction, a plaintiff must prove that: a.there is a strong likelihood of success on the merits; b.irreparable harm will result which cannot be compensated in damages; c.granting the injunction prevent greater injury than the harm that will result from granting it; and d.the injunctive relief will restore the parties to the status that existed prior to the breach

34. www.duanemorris.com 33 L.LITIGATION Litigating the Damages Case 1.Slower paced and may be less costly 2.Difficulty of proving damages 3.May deter questionable behavior

35. www.duanemorris.com 34 M.BEST PRACTICES 1.Acknowledgement by employee in employment application, offer letter and/or employment agreement with the company that he/she has no restrictions on employment (i.e., not restricted by non-compete, non-solicitation) and will not use or disclose confidential information of prior employer

36. www.duanemorris.com 35 M.BEST PRACTICES 2.Get documents signed at time of hire, promotion or transfer 3.Custom tailor agreements 4.Include enforcement tools (choice of law, forum selection, assignment provision, etc.)

37. www.duanemorris.com 36 M.BEST PRACTICES 5.Make agreements consistent with policies 6.Exit interview 7.Return of company property upon termination/ certification 8.Identify confidential information 9.Limit access to confidential information and trade secrets 10.Train supervisors not to inquire about confidential information

38. www.duanemorris.com 37 N.PITFALLS 1.Whoops! – the unsigned contract, or missing exhibits 2.Unclean hands (i.e., failure to pay employee) 3.The company’s own hiring practices 4.Inconsistent enforcement history 5.Failure to safeguard confidential information or trade secrets 6.The company does not have rights to enforce the covenant 7.Restrictive covenants so onerous that qualified applicants don’t accept offer

39. ©2010 Duane Morris LLP. All Rights Reserved. Duane Morris is a registered service mark of Duane Morris LLP. Duane Morris – Firm and Affiliate Offices | New York | London | Singapore | Los Angeles | Chicago | Houston | Hanoi | Philadelphia | San Diego | San Francisco | Baltimore | Boston | Washington, D.C. Las Vegas | Atlanta | Miami | Pittsburgh | Newark | Boca Raton | Wilmington | Cherry Hill | Princeton | Lake Tahoe | Ho Chi Minh City | Duane Morris LLP – A Delaware limited liability partnership DELVACCA thanks Duane Morris for sponsoring this session