Part 4: Post-Employment Restrictive Covenants

Apr 29, 2009
By Pharmaceutical Executive

In this four-part series, we will discuss the importance and use of post-employment restrictions in the pharmaceutical and biotech industries.  Each part of the series will address a topic of interest, including:  

  • An overview of post-employment restrictions  
  • Tips on how to draft agreements containing post-employment restrictions to maximize the protection they can provide for your trade secrets and goodwill
  • How to enforce post-employment restrictions against former employees and their new employers (who are often direct competitors)
  • Alternatives to certain post-employment restrictions, such as trade secret statutes and, unfair competition laws

Part 4: Other Tools Employers Can Use to Protect Their Trade Secrets

In prior weeks, we have discussed how employers can use agreements containing restrictions on employees’ post-employment activities to protect trade secrets and customer goodwill, there are other means available to employers, including: 

  • Common law claims of inevitable disclosure and breach of fiduciary duty;
  • State statutory claims for theft of trade secrets and unfair or deceptive trade practices; and
  • Federal statutory claims, such as the Economic Espionage Act of 1996 and the Computer Fraud and Abuse Act.

Employers who do not have agreements containing restrictions on employees’ post-employment activities, or whose agreements are insufficient, may still be able to protect their trade secrets and/or goodwill by bringing one or more of these claims.

Common Law Claims
Inevitable Disclosure. To state a claim based on the inevitable disclosure doctrine an employer must show that a former employee: (1) had access to confidential information; (2) is working for or is about to commence working for a competitor of the former employer; and (3) the employee’s new duties and responsibilities will inevitably lead to the disclosure of confidential information. 

Most inevitable disclosure cases follow a familiar path.  An employer brings suit to prohibit its former employee from beginning or continuing to work for one of its competitors.  The former employee may or may not have signed an agreement containing post-employment restrictions and actual misappropriation of trade secrets may or may not have occurred.  Despite this, it is argued that the former employee is working for a competitor in a position identical to or very similar to his or her previous position and that it is impossible for him/her not to disclose or make use of the confidential information previously learned at the original employer. 

Some states permit an inevitable disclosure claim, while others will not.  While such a claim may have a viable way to protect trade secrets in the absence of a formal agreement restricting an employee’s post-employment activities it will require a great deal of specific information to be successful.

Breach of Fiduciary Duty. Most jurisdictions recognize that employees owe a fiduciary duty to their employers.  If an employee breaches that duty by misappropriating trade secrets and/or goodwill or diverting business opportunities to a third party (i.e. future employer), his/her employer may be able to bring a claim for breach of fiduciary duty.

In the majority of claims, an employer will have to establish that:

  1. it placed trust and confidence in the employee;
  2. the employee violated that trust and confidence in some manner (e.g., by disclosing trade secrets to competitor or by diverting business opportunities away from the employer and to a third party); and
  3. the employee’s actions damaged the employer.

Thus, employers will not be able to bring a breach of fiduciary duty claim simply to prevent a former employee from working for a competitor or calling on customers.  However, a breach of fiduciary duty claim can be a powerful tool if there is evidence that the former employee stole trade secrets or diverted business opportunities while still employed.

State Statutory Claims
Uniform Trade Secrets Act. Most states have adopted the Uniform Trade Secrets Act (“UTSA”), which prohibits the improper acquisition or disclosure of a trade secret.  The UTSA includes detailed definitions of “trade secret,” and what it means to acquire and/or disclose a trade secret improperly. 

The UTSA is a powerful tool that many employers use when there is evidence that a former employee misappropriated trade secrets during his/her employment or as his/her employment terminated.  Under the UTSA, a claim can be made not only against the former employee, but also against the former employee’s new employer if there is evidence that the new employer knew or had reason to know that its acquisition of the trade secret was improper.

Unfair or Deceptive Trade Practices. Some states maintain statutes that prohibit companies from engaging in unfair and deceptive trade practices.  While many were initially designed for consumer protection, they are also used when one company acquires another company’s trade secrets or goodwill in an unfair or deceptive manner.  An example of this would be conspiring with a company’s employee to leave the company and take trade secrets/goodwill.

These statutes are powerful tools as they allow the aggrieved company to bring a claim against another entity (often a competitor) and because they often provide for an award of multiple damages and attorneys fees following a successful claim.

Federal Statutory Claims
Though uncommon, there are certain federal statutes protecting trade secrets.  The Economic Espionage Act of 1996 makes stealing, copying or the receipt of a trade secret with the intent to harm the owner and benefit another person or entity a crime punishable by a lengthy prison term and a significant fine.  The Computer Fraud and Abuse Act provides for severe criminal penalties and substantial monetary sanctions in certain circumstances involving the use of computer systems to steal trade secrets.

In the pharmaceutical and biotech industries trade secrets and goodwill are a company’s lifeblood.  Post-employment covenants and related restrictions must be considered vital rather than “nice to haves” for certain employees.  Although developing and enforcing these agreements can require navigating a tricky landscape, it can be done.  In following the steps and guidelines laid out in this series of articles, every company can (and should) take the time and effort to protect their assets.