What Every Employer Should Know:
Non-Competition Agreements and Trade Secrets

By Curtis W. Molloy, Esq.

In most states, an employer is allowed to enter into non-competition agreements with its employees in order to protect the employer from unfair competition when the employment relationship ends.

In California, however, non-competition agreements are illegal. Fortunately, there are two exceptions to this law. First, the agreements are allowed when a business owner sells his or her interest in a company (or a partnership). Second, an employer is allowed to enter a non-competition agreement in order to protect its valid trade secrets.

Generally, a trade secret is information that exists in a usable form (formula, pattern, compilation, program, device, method, technique, or process) that derives independent economic value from not being generally known to those who can obtain economic value from its disclosure, and that is subject to efforts to maintain secrecy. Courts generally evaluate whether an alleged trade secret is generally known in the trade and whether the company that possesses the trade secret has a provable competitive edge over companies that do not possess the secret. In other words, the trade secret information must have value to a business competitor.

“The employer must take steps to protect its trade secrets in order to prevent a former employee from using a trade secret and from competing unfairly.”

Specifically, trade secrets include customer lists, pricing information, manufacturing techniques, product designs, software and formulas such as the formula for Coca-Cola. Customer lists are commonly litigated trade secrets. An employer can enforce a non-competition agreement against a former employee (and his/her new employer) in order to prevent the former employee from using its confidential customer list provided that the employer has taken steps to ensure the secrecy of the list. However, courts generally limit the duration of non-competition agreements to no more than one year from the date employment ends.

The employer must take steps to protect its trade secrets in order to prevent a former employee from using a trade secret and from competing unfairly. The employer should utilize appropriate agreements such as “non-competition,” “non-disclosure,” “confidentiality,” and/or “employee invention” agreements; prepare written company policies that identify trade secrets; limit access to trade secrets; and outline procedures to maintain the secrecy of trade secrets.

In the event that you need further information or guidance regarding the protection of your valuable trade secrets and to prevent former employees and their new employers from competing unfairly, please do not hesitate to contact our office.

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