William W. Bowser, Editor; Scott A. Holt and Adria B. Martinelli, Associate Editor
Young, Conaway, Stargatt & Taylor

Vol. 13, No. 6
June 2008

COVENANT NOT TO COMPETE

Trade secret litigation rises as economy tanks

Scott A. Holt

Recession seems imminent, leading to a downturn in business and the inevitable layoffs that requires. But the looming recession also means more activity in other areas. Many experts believe the current recession will increase the workload for intellectual property lawyers, including enforcement of noncompetition and nondisclosure agreements. The view is that during economic downturns, companies are more likely to pursue litigation against former employees who violate noncompete and confidentiality agreements as they increase efforts to protect their assets.

Not too narrow, not too broad, but just right

Now is the time to review the measures you need to institute to protect your business interests. Key employees should have enforceable noncompete and confidentiality agreements in place to prevent them from posing a threat if they leave your company.

Nationwide, the trend is for the courts to demand that a noncompete be specifically tailored to protect the company's legitimate business interests. Noncompetes that are overly broad because they don't fit the employee's situation will be found invalid. But one state's version of "overly broad" will allow an industrywide ban on competing, while another state will allow only a small geographic ban. It's hard enough to get noncompetes right in a single state, but when you're faced with making them enforceable in several states, it gets exponentially harder.

To better ensure enforcement of your agreements in more than one state, you should include a requirement that any claims be litigated in a state that enforces noncompetes. Some states, such as California, won't enforce noncompete agreements, while other states, including Georgia, Texas, and Illinois, are reluctant to uphold them in their entirety. Delaware continues to be a favorite forum for enforcement of noncompete and confidentiality agreements because of its business-friendly environment and accessibility to the courts.

It's also important to implement proper screening measures to make sure that new hires aren't subject to noncompete agreements that will ensnare your company in trade secret litigation. Ask all applicants whether they had confidentiality or noncompete agreements with their former employer so you can take preventive steps before they begin working for you.

Bottom line

There's no better time than the present to make certain your agreements protecting trade secrets and unfair competition are enforceable. Have your legal counsel review your confidentiality and noncompete agreements to ensure the appropriate protections are in place before an employee leaves. And always inquire whether a job candidate has an agreement with a former employer that restricts what he can do in his next job.

Copyright 2008 M. Lee Smith Publishers LLC

DELAWARE EMPLOYMENT LAW LETTER does not attempt to offer solutions to individual problems but rather to provide information about current developments in Delaware employment law. Questions about individual problems should be addressed to the employment law attorney of your choice.