Protecting Your Customer Lists and Trade Secrets: Confidentiality & Non-Compete Agreements Posted on Sep 29, 2017
From installation companies to manufacturing and distribution companies, every business in the cleantech and renewable energy industry is dependent on cutting edge, proprietary know-how and highly valuable customer lists. As compared to other industries, cleantech is exponentially dependent on these trade secrets. It makes sense that one of the top legal concerns we hear from cleantech and renewable energy businesses is how to prevent employees from learning their proprietary know-how and collecting their customer lists, and then bringing all of that trade secret information to work for a competitor.
Due to the importance of trade secrets in cleantech, it is advisable to have confidentiality agreements that define obligations, expectations, and liabilities with respect to a company’s customer lists and other trade secrets. These agreements should be designed to protect the company against employees taking customer lists and other trade secrets to work for competitors. In states, such as California, that prohibit non-compete agreements, the ability to protect a company’s confidential information is the way employers create limits on their employees' ability to compete post-employment. Many states allow non-competition agreements, which provide even more trade secret protections.
With the proper agreements in place, it is much easier for a company to stop unlawful activity when an ex-employee takes trade secrets to a competitor. Often a cease and desist letter that outlines the terms of the confidentiality agreement and the potential liability for using the past employer’s trade secrets is sufficient to stop the unlawful activity.
The nature of cleantech makes it vital to understand the rules around protecting trade secrets.
Navigating California and Other States’ Laws Prohibiting Non-Competition & Protecting Trade Secrets Is Essential For Both Employers And Employees
“Every individual possesses, as a form of property, the right to pursue any calling, business or profession he may choose; he has right to engage in competitive business for himself and to enter into competition with his former employer, even for business of those who were formerly customers of his former employer . . . ” Quote from the 3rd District Appellate Court in Fortna v. Martin (1958, 3rd Dist.) 158 Cal App2d 634.
In states that prohibit non-compete agreements, companies often use laws that protect confidential information and trade secret rights to prevent competition by ex-employees post-employment.
For instance, in California the general rule is that any contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is void. Thus, California law invalidates provisions in employment contracts prohibiting an employee from working for a competitor after completion of his or her employment or imposing a penalty if he or she does so. It is firmly established by California law that a former employee cannot be compelled to "wipe clean" his or her memory.
Given the strong public policy for freedom to compete in states where non-competes are prohibited, only reasonably limited post-employment restrictions in employment agreements such as those necessary to protect an employer's trade secrets are allowed. This “trade secret exception” is what employers rely on to require employees agree not to disclose their confidential customer lists or other trade secrets or not to solicit those customers after employment ends. Thus, an ex-employee can pursue their own competitive calling post-employment but not if they are benefitting from the employer's time and effort expended to create their own "secret sauce" of proprietary technical know-how and non-publicly available leads, contacts and customer profiles.
This means companies can design their confidentiality agreements to provide covenants not to solicit the company’s customers to the extent they are confidential, proprietary, or trade-secret customer information, but not if the identity of the customers is not confidential and therefore not a trade secret.
In regard to protecting customer lists and information, courts have created a distinction of not protecting customer lists to the extent they embody information which is 'readily ascertainable' through public sources, such as business directories. On the other hand, where the employer has expended time and effort identifying customers with particular needs or characteristics, courts will prohibit former employees from using this information to capture a share of the market. As a general principle, the more difficult information is to obtain, and the more time and resources expended by an employer in gathering it, the more likely a court will find such information constitutes a trade secret.
Thus, for cleantech companies in California and other states where non-competes are prohibited, among other things, a well drafted confidentiality agreement should define “confidential information” to include customer lists and prohibit the use of any confidential information by the employee to directly or indirectly solicit clients and other employees for a reasonable time after the employment relationship ends. The agreement should also prohibit the employee from competing during the term of his or her employment. Lastly, companies should adopt prudent business practices that will ensure customer lists and other confidential information are kept secret to maintain the right to protect them.
From the employee’s perspective, these same rules must be navigated when leaving a job to start a competing business.
The main considerations for employees leaving to start a competing business are determining what qualifies as their prior employer’s “confidential information” and understanding what type of conduct rises to the level of “solicitation.” The former depends mainly on the terms of the confidentiality or employment agreement signed with the past employer. The later requires doing something overt intending to cause an ex-employer’s customers to leave their former employer for their new business. Ultimately, what qualifies as solicitation is a factual determination that varies by situation. If previous clients “go looking” for a competitor that is not “soliciting.” It is generally okay for ex-employees navigating confidentiality and solicitation rules to work with previous clients from their ex-employer, if those clients went looking for them because they knew that they were no longer working at the company.
Also, an employee can typically make a professional announcement that he or she is leaving to start a new job without such activities arising to “soliciting” customers for their new role. In some situations, such as for attorneys, however, the employees must coordinate departing announcements with employers to ensure an orderly transition of the client work due to fiduciary responsibilities to clients. Even when such coordination is not required, this type of announcement provides employees with an opportunity to give out personal contact information to previous clients while providing for a smooth transition to the company’s new representative.
Many of the cases where ex-employees have gone afoul of this type of situation are when the departing employee announces their new affiliation, does not seek to prepare a joint departure statement to ensure an orderly transition, includes solicitation type language in the departure email, and/or performs follow up calls and emails soliciting the customers to leave the prior employer for their new business. It usually takes a lot to rise to the level actionable misappropriation.
From every perspective in the cleantech and renewable energy industry, the proper attention to these rules enables a thriving, competitive industry within the parameters of the law.
We just added Confidentiality Agreements, Non-Compete Agreements and Cease & Desist Letters for Misappropriation of Trade Secrets to our arsenal of legal documents to help our customers navigate these important issues.