Trade Secret Litigation -- New Challenges when Using the Employment Contract to Protect Trade Secrets, Confidential Information, and Competitive Advantage

Profession:Finnegan, Henderson, Farabow, Garrett & Dunner, LLP

By York M. Faulkner and John M. Williamson

Originally published in IP Litigator, April 2001

Two recent California decisions invite caution when implementing contractual postemployment restrictions with existing employees. Twin rulings in D'Sa v. Playhut, Inc. [2000 Cal. App. LEXIS 982 (2000)] and Latona v. Aetna U.S. Healthcare, Inc. [82 F.Supp. 2d 1089 (C.D. Cal. 1999) forewarn that hardball negotiating tactics over legally suspect covenants not to compete may not only defeat the intended contractual protection of trade secrets, but also expose employers to liability for wrongful termination.

Employers pursue aggressive postemployment restrictions in the hope that their trade secrets will be protected and their competitive advantage will be preserved. A typical package agreement will include a covenant not to compete, a promise not to solicit customers, and a promise not to use or disclose confidential information and trade secrets.

The promises are typically secured from new employees as part of a take-it-or-leave-it job offer, and the new hires rarely question or challenge the trade secret and confidentiality contracts imposed by their employers. As Roger Milgrim reports in his treatise, "[w]here an enterprise has an established employment contract program its continued implementation is likely to proceed smoothly" [Milgrim on Trade Secrets 6.01[3][a] (1998)]. However, Milgrim warns that a host of complications may arise when an employer approaches its existing, less compliant employees with a new secrecy agreement. In this type of situation,

The contracts may be viewed as an assault on the integrity and loyalty of long-time employees.

The contracts may inspire "larcenous thoughts" in otherwise loyal employees.

The contracts must be bargained for with creative consideration such as a new benefits package or additional leave time [Id.].

Additionally, employers are now facing a significant hurdle to instituting the package agreements: employees who simply refuse to sign the agreements. The Latona and D'Sa decisions demonstrate that spurned employers would do well to temper their reaction to such refusals, even with at-will employees who decline the contract. The employers in both cases fired an existing at-will employee who had refused to sign package agreements containing a covenant not to compete. The aggrieved employees responded with lawsuits for wrongful termination, alleging that the noncompete provisions of the agreements were...

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