Drafting Notes Non-Compete Agreements This presentation represents the general disposition of current state law towards non- competes. The laws very from.

Drafting Notes

Non-Compete Agreements

This presentation represents the general disposition of current state law towards non-competes. The laws very from state to state and application of laws is fact-specific. The information in this presentation should not be relied upon as legal advice for any particular restriction or fact situation.

Non-Compete Agreements in Colorado

• C.R.S. § 8-2-113 (1) renders many non-compete agreements void on their face.

“It shall be unlawful to use force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation at any place he sees fit.”

Non-Competes in Colorado

• C.R.S. § 8-2-113 (2) - Careful drafting can focus on one or more of the following exceptions:

1.Any contract for the purchase and sale of a business or the assets of a business;

• Construed liberally! Useful for new companies. See Nat’l Propane Corp. v. Miller, 18 P.3d 782 (Colo.App. 2000).

Non-Competes in Colorado

2.Any contract for the protection of trade secrets;

• Clearly emphasize in language that the purpose is to prohibit the use of trade secret information by a competitor.

3.Any contractual provision providing for recovery of the expense of educating and training an employee who has served an employer for a period of less than two years; and

Non-Competes in Colorado

4.Any contract for executive or management personnel, officers, and employees who constitute professional staff to executive and management personnel.

• Supervisory roles and significant responsibility. DISH Network Corp. v. Altomari, 224 P.3d 362 (Colo.App. 2009).

• Legal, engineering, scientific and medical personnel together with their junior professional assistants. Boulder Medical Center v. Moore, 651 P.2d 464, 465 (Colo.App. 1992).

LIKELY UNENFORCEABLE IN COLORADO

Scenario: Company that provides online marketing services; Non-Compete Agreement with entry-level employee.

• “Non-Competition. In consideration for employment, Employee agrees that during the period beginning on the initial date of Employee’s employment and ending three (3) years after termination of Employee’s employment for any reason, Employee shall not participate (whether as an employee, consultant, proprietor, partner, director or otherwise) in any business or enterprise, that engages in or is considering, planning or preparing to engage in online marketing or online publishing. Employee recognizes that there is no geographic limitation to this clause because of the international nature of the Company’s businesses.”

Enforceability Issues1.Non-competes in Colorado are not generally enforceable against

low-level employees (unless protecting specific trade secrets or made in connection with the sale of a business). The employee must be an executive or management personnel.

2.Duration: Colorado Ct. of Appeals held that 3 years post-termination was an unreasonable duration for the non-compete in Reed Mill & Lumber Co., Inc. v. Jensen.

3.Geographic Scope: “No geographic limitation” will likely not be considered reasonable.

4.Overbroad Covenant: Covenant needs to be narrowly tailored so that it protects the valid interests of the employer without unduly restricting the employee’s ability to make a living.*

*Source: www.ottenjohnson.com

MORE LIKELY TO BE ENFORCEABLE IN COLORADO

Scenario: Company that provides online marketing services; Non-Compete Agreement with Executive.

• “Non-Competition. In consideration for employment, Executive agrees that during the period beginning on the initial date of Executive’s employment and ending three (3) years two (2) years after termination of Employee’s employment for any reason, Employee shall not participate (whether as an employee, consultant, proprietor, partner, director or otherwise) in any business or enterprise, that engages in or is considering, planning or preparing to engage in online marketing or online publishing the core business of leveraging proprietary consumer research data to conduct digital marketing for luxury brands. Employee recognizes that there is no geographic limitation to this clause because of the international nature of the Company’s businesses the geographic scope of this covenant not to compete shall include all states of the United States in which Company has offices”.

LIKELY UNENFORCEABLE IN CALIFORNIAScenario: Software Development Company; Engineer.

• Covenant Not to Compete. During the period of my relationship with the Company, whether as an employee, consultant, officer, director and/or advisor, and for a period of one (1) year thereafter (the "Restricted Period"), I will not engage in, be employed by, perform services for, participate in the ownership, management, control or operation of, or otherwise be connected with or participate in, either directly or indirectly, any Competing Business or activity that is in any way competitive with the business or proposed business of the Company. I agree that this restriction is reasonable for my relationship with the Company, but further agree that should a court exercising jurisdiction with respect to this Agreement find any such restriction invalid or unenforceable due to unreasonableness, either in period of time, geographical area, or otherwise, then in that event, such restriction is to be interpreted and enforced to the maximum extent which such court deems reasonable. "Competing Business" means any business who offers products or services that are similar to or otherwise directly or indirectly competitive with the products or services of the Company.

Enforceability Issues

1. Covenants not to compete are generally invalid except in limited circumstances. (California Business and Professions Code Section 16600)

2. Blue-pencil clauses are not permitted. “A clause that is invalid under Section 16600 is illegal and California courts have deemed the writing of illegal covenants unacceptable.”*

3. An individual selling a business (including goodwill) may agree to be subject to a non-compete. Various types of transactions (e.g., merger, asset purchase, and stock purchase) are included.

*Source: Enforceability of Covenants Not to Complete in California by Dan Woods and Tim Rusche, White and Case, Los Angeles

LIKELY ENFORCEABLE IN CALIFORNIAScenario: Owner sold a 2/3 interest in a business

manufacturing portable toilets and entered into the clause below as part of the transaction.

• Owner agrees that for five (5) years he will not become involved in any business activity within the United States, Puerto Rico, the Virgin Islands and Canada which is directly competitive with any aspect of the business of Company as presently conducted, and as said business may evolve in the ordinary course between the effective date of this clause and its termination. For the purposes of this Agreement, 'competitive business' shall mean any business in the fields of modular building structures, sanitation or sanitation products.”**

** Based on Monogram Industries, Inc. vs. SAR Industries, Inc., 64 Cal. App. 3d 692, (1976)

ALTERNATIVES TO NON-COMPETE PROVISIONS

•Non-solicitation clause

• Trade secret protection

General Overview

TRADE SECRET NEWS

IF WE ARE REPORTING ON IT, IT AIN’T A SECRET NO MORE.

If the Jacksonville’s Mascot can get away with an Ebola joke, why can’t we?

Oh yeah – he didn’t get away with it.

MAN STEALS DRONE MANUAL

§ 1831. Economic espionage.(a) In general. Whoever, intending or knowing that the offense will benefit any foreign government, foreign instrumentality, or foreign agent, knowingly –

(1) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains a trade secret;

(2) without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, send, emails, communicates, or conveys a trade secret;

(3) receives, buys, or possesses a trade secret, knowing the same to have been stolen or appropriated, obtained, or converted without authorization;

(4) attempts to commit any offense described in any of paragraphs (1) through (3); or

(5) conspires with one or more other persons to commit any offense described in any of paragraphs (1) through (3), and one or more of such persons do any act to effect the object of the conspiracy,

PENALTIES FOR ESPIONAGE

INDIVIDUALS

Individuals shall, except as provided in subsection (b), be fined not more than $500,000 or imprisoned not more than 15 years, or both.

ORGANIZATIONS

Any organization that commits any offense described in subsection (a) shall be fined not more than $10,000,000.

§ 1832. Theft of a trade secret.(a) Whoever, with intent to convert a trade secret, that is related to or included in a product that is produced for or placed in interstate or foreign commerce, to the economic benefit of anyone other than the owner thereof, and intending or knowing that the offense will, injure any owner of that trade secret, knowingly –

(1) steals, or without authorization appropriates, takes, carries away, or conceals, or by fraud, artifice, or deception obtains such information;

(2) without authorization copies, duplicates, sketches, draws, photographs, downloads, uploads, alters, destroys, photocopies, replicates, transmits, delivers, sends, mails, communicates, or conveys such information;

(3) receives, buys, or possesses such information, knowing the same to have been stolen or appropriates, obtained, or converted without authorization;

(4) attempts to commit any offense described in paragraphs (1) through (3); or

(5) conspires with one or more other persons to commit any offense described in paragraphs (1) through (3), and one or more of such persons do any act to effect the object of the conspiracy,

PENALTIES FOR THEFT OF TRADE SECRETS

INDIVIDUALS

Shall, except as provided in subsection (b), be fined under this title or imprisoned not more than 10 years, or both.

ORGANIZATIONS

Any organization that commits any offense described in subsection (a) shall be fined not more than $5,000,000.

Reporting live from the courthouse steps

We could not afford a green screen.

CHEMIST STEALS PAINT FORMULA

HALLIBURTON SECRETS LOCKED DOWN

STALE SECRETS ARE NOT “TRADE SECRETS”

• Applied Indust. Materials Corp. v. Brantjes, 891 F.Supp. 432, 438-39 (N.D. Ill. 1994)(profit and finanical data more than three years old not protected as trade secret)

• In re Agent Orange Product Liability Litigation, 104 F.R.D. 559, 575 (E.D.N.Y. 1985(important factor in determining potential for harm is whether the secret is stale or current).

• United States v. IBM Corp, 67 F.R.D. 40,47-49 (S.D.N.Y. 1975)(declining to protect financial data that is more than three years old).

• Prairie Island Indian Community v. Minnesota Dep’t of Public Safety, 658 N.W.2d 876 (Minn.App. 2003)(holding data too old to qualify as a valuable trade secret).

• Rosenblatt v. Northwest Airlines, Inc., 54 F.R.D. 21, 23 (S.D.N.Y. 1971)(no need to protect the “secret” as the information was over a year old).

• Hecht v. Pro-Football, Inc., 46 F.R.D. 605, 606-07(D.D.C. 1969)(financial information up to three years old not entitled to confidentiality and court’s protection).

STALE DATA IS NOT VALUABLE

• To prevail, the plaintiff must demonstrate not only that the information was kept secret, but the plaintiff must show that the data has current value to the owner, and to others.

• The older the financial data, the less likely a court will find value sufficient to warrant an injunction or money damages.

HEY WAIT A MINUTE! DID THEY JUST SAY THAT IF YOU ARE OLD, YOU HAVE NO VALUE?

TRADE SECRET NEWS

IF WE ARE REPORTING ON IT, IT AIN’T A SECRET NO MORE.