An issue that often arises is an employee, upon terminating his or her employment, attempting to solicit his former employer’s customers. An employee can plan to go into competition with his employer and may even take active steps to do so while still employed. However, an employee may not use his employer’s confidential information to do so.

A recent decision highlights the perils and remedies of trade secret misappropriation. Under Massachusetts law, trade secrets can include anything tangible or intangible or electronically kept or stored which evidences or records a secret scientific, technical, merchandising, production or management information, design, process, procedure, formula, invention or improvement. While the recent decision by the 1st Circuit Court of Appeals highlights the perils of misappropriating a trade secret in the context of a physical product, trade secret protections extend far beyond physical products to proprietary business information such as customer lists. Confidential information such as customer lists, which companies invest time and money in developing, are protected under Massachusetts law.

The key factor in determining the existence of a trade secret is confidentiality. Factors in determining the confidential nature of business information include:

–          The extent to which the information is known outside the business

–          The extent to which it is known by employees and others involved in the business

–          The extent of measures taken by an employer to guard the secrecy of the information

–          The value of the information to the employer and to his or her competitors

–          The amount of effort or money expended by the employer in developing the information

–          The ease or difficulty with which the information could be properly acquired or duplicated by others

A list of customers is a trade secret and if a former employee utilizes such a list they can be found liable for misappropriation of trade secrets. If you or your company has been the victim of a former employee utilizing your confidential and proprietary information to strike out on their own, an attorney can help you protect your trade secrets and recover damages including lost profits. 

On July 14, 2012, a new law went into effect in New Hampshire that will have consequences for any Massachusetts employer that extends into its northern neighbor.  Unfortunately, due to the vague wording of the law, extra caution is warranted.  This law changes how an employer may impose a covenant not to compete or a “non-piracy” agreement.

In short, the new RSA 275:70 states:

Prior to or concurrent with making an offer of change in job classification or an offer of employment, every employer shall  provide a copy of any non-compete or non-piracy agreement that is part of the employment agreement to the employee or potential employee.  Any contract that is not in compliance with this section shall be void and unenforceable.

That is the full text of the law.  Here are some of the problems with the law:

1)      It does not define a “non-compete” agreement.  While most employers contemplate the standard agreement that a departing employee not engage in competitive conduct for a period of years, in a particular field, for particular employers, in a particular area, it is uncertain if it also affects contemporaneous competition.  Contemporaneous competition is usually barred by the duty of loyalty: a newspaper writer cannot freelance for other publications; a real estate agent cannot sell her brother’s house on the side and take a commission; etc.  Whether the new law covers contemporaneous competition remains to be seen.

 

2)      It does not define “non-piracy” agreement.  To further complicate matters, that is an uncommon phrase.  It may relate to non-disclosure of trade secrets, such as use of client lists.  It may relate to non-solicitation of employees, customers, or vendors when taking a new position.  It may relate to assignments of copyrights and patent interests for works and inventions created during the employment.

 

3)      It does not define “change in job classification”.  Promotions, demotions, transfers, light duty/full duty assignments, reorganizations and other internal moves could all be considered changes in job classification.

 

4)      It does not contemplate whether prior non-compete or non-piracy agreements survive a change in job classification.  Thus, if an employee signed such agreements validly at the start of the employment, new agreements may need to be executed with every promotion.

5)      It does not address currently existing non-compete or non-piracy agreements.  Presumably it applies prospectively, as it is unworkable to obtain valid agreements from current employees whose job classifications will not be changes.

 

6)      It does not address the scenario where the geographic scope of a Massachusetts employee’s non-compete agreement extends into New Hampshire.  For example, if a journalist worked for a newspaper in Essex County, yet had a 20 mile non-compete agreement, it is unclear if that agreement, if not made at the offer of employment in Massachusetts, would be enforced in southern New Hampshire.

While “continued employment” is frequently cited as the consideration for any agreement during the course of employment that changes the terms: hour reassignments, arbitration agreements, duty modifications, etc., for New Hampshire non-compete and non-piracy agreements that is no longer the case.  The only valid consideration is the job offer or the classification change.

If you are an employer that uses non-compete or non-piracy type agreements, you should speak with an employment attorney.