Q: I own a business and employ salespeople who service customers I have cultivated over many years. How can I protect my business from customer poaching by employees who leave my company to work for themselves or for other companies? Can my list of customers, and the products and services my company has provided, be considered a “trade secret” that can be guarded?
A: A basic means of protecting your business from poaching by former employees can be in the form of a “non-compete” or “non-solicitation” agreement in an employment contract. These are sometimes called “restrictive covenants.” They contain language restricting the employee’s ability to go into competition against and/or poach customers. There is also a “non-disclosure” covenant, which prohibits your employee from using or disclosing inside information about your business garnered through the employee’s performance of his or her job.
As a business owner, you may have heard that non-compete agreements are unenforceable because they are anti-competitive. This is a myth.
While a desire to restrict competition, standing alone, is not a legitimate business interest that can be protected under the law, restrictive covenants are enforceable to the extent they are reasonable in scope and protect a legitimate business interest, the most common being an employer’s customer relationships and its trade secrets or confidential information.
Therefore, for example, a court is likely to enforce a non-solicitation covenant that prohibits a salesperson who has had personal contact with his employer’s customers from taking another job in the same business and selling to the same customers, this time for the new employer. The same is true of a non-compete covenant that prohibits a chemist, who knows the old employer’s trade secret formulas, from taking a similar job with a competitor. But the less clear the connection between the terms of the covenant and the protection of an employer’s legitimate business interest, the less likely the covenant will be enforced.
In most states, including Pennsylvania and New Jersey, courts may narrow the scope of covenants to balance employer protection with the former employee’s right to work in his or her field. This process is known as “blue-penciling.” For example, if an agreement calls for a two- year ban on competition but the court believes one year is sufficient to reasonably protect the employer, the court can “blue pencil” the two-year restriction and order enforcement for one year only.
Legal protection of a business’ trade secrets is a timely topic in New Jersey. Legislation known as the New Jersey Trade Secrets Act awaits Gov. Chris Christie’s signature after receiving final legislative approval on Dec. 5 and will, for the first time, establish statutory protection for holders of trade secrets in the state. Currently, trade secret protection in New Jersey is based on “common law,” a collection of individual case rulings that provide precedents, which a judge must analyze and apply. This has resulted in varied and amorphous definitions of “trade secret” and inconsistent application of prior decisions, creating uncertainty for businesses. Hopefully, New Jersey will soon join 46 other states that have enacted statutes to protect trade secrets.
In sum, non-compete agreements and other restrictive covenants are important tools to protect an employer’s legitimate interests, but cannot be used by employers solely to stifle competition and scare employees into remaining with their employer. These cases are always fact-sensitive and laws vary from state to state, so consult a qualified attorney to guide you about your specific situation.
DISCLAIMER: Information provided in “Ask the Lawyer” is for general informational and educational purposes only. It does not constitute legal advice, and may not be used and relied upon as a substitute for legal advice regarding a specific legal issue or problem. Transmission of the information is not intended to create, and receipt does not constitute, a lawyer-client relationship. Legal advice should be obtained from a qualified attorney licensed to practice in the jurisdiction where that legal advice is sought.
Thomas A. Muccifori is a longtime Moorestown resident, vice president and shareholder with Archer & Greiner P.C., where he chairs the Employment Competition & Information Protection Group, New Jersey’s only legal practice group dedicated solely to the drafting, negotiation, counseling and litigation of non-disclosure, non-solicitation and non-compete agreements.