Post-Employment Restrictive Covenants

Apr 08, 2009

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 One: An Overview of Post-Employment Restrictions
In the high stakes world of drug licensing, development, and sales, a company’s trade secrets and the goodwill it develops with healthcare professionals and patients can be the difference between a blockbuster and a failure. When R&D employees leave a company, they may take with them critical information regarding promising research, clinical trials, pipeline products, and funding for new projects. Employees who leave a company to work for a competitor can severely damage their former employer if they misuse its trade secrets or goodwill. In particular, sales employees have intimate knowledge of product pricing, comparative performance data, and the preferences and needs of key customers. And the industry’s lengthy development and approval processes means that trade secrets remain valuable for many years.

Fortunately, there are several legal tools that employers can use to protect trade secrets and customer goodwill. Often, the most effective is an agreement between employer and employee that places post-employment restrictions on the employee:

  • Non-competition restrictions limit an employee’s ability to work for or with a competitive business for a period of time after his/her employment ends
  • Non-solicitation restrictions limit an employee’s ability to solicit his/her former employer’s customers/vendors/suppliers/etc. for a period of time after his/her employment ends
  • No-hiring restrictions limit an employee’s ability to hire or recruit his/her former employer’s remaining employees for a period of time after his/her employment ends

In the current economy, where employees often jump from employer to employer, and confidential information can be passed to a competitor with one click of a button, prudent companies will consider requiring employees to sign post-employment restrictions as appropriate for their particular business.  Employers who do not actively pursue such agreements may not only be jeopardizing the security of their confidential information, they could also be sacrificing a competitive advantage.

However, it is usually not the best practice to demand that all employees sign blanket agreements containing post-employment restrictions.  Courts are well aware that when they enforce post-employment restrictions, they are limiting—if not eliminating—an individual’s ability to find employment.  Thus, courts will conduct review on a case-by-case basis, and consider a number of factors before enforcing an agreement containing post—employment restrictions on an employee’s activities.

The first and perhaps most critical factor that a court will analyze is whether the employer has a legitimate business interest to protect. Such an interest must exist; the courts will not permit a post-employment restriction to be used simply to prevent valid competition. Simply put, as an employer, you must have something worth protecting to warrant post-employment restrictions on an employee.  The two most common, protectable interests are trade secrets and goodwill.

Trade Secrets
All companies have information that they consider to be confidential or secret, but simply calling something a “secret” does not make it so when it comes to post-employment restrictions. To support such restrictions, employers should:

  1. Identify specific information to which the restricted employees had access
  2. Ensure that the information is valuable (i.e., that it is actually worth protecting)
  3. Verify that the company took other measures to protect the information

These three steps may seem simple and straightforward, but many courts have refused to enforce post-employment restrictions because employers were not diligent in following them. For example, many companies have gone to court to enforce post-employment restrictions based on a former employee’s knowledge of the alleged secret identities of the company’s customers—only to leave red-faced after the former employee’s attorney pointed out to the court that the company listed all of its customers on its public Web site. 

Goodwill
Goodwill is a company’s positive reputation or relationship with its customers and potential customers. Companies generate and maintain goodwill through repeated business interactions and long term relationships with customers.  Employees subject to appropriate post-employment restrictions cannot misappropriate their employer’s goodwill to benefit a new employer.     

If your company maintains and can identify specific, valuable information and takes steps keep that information secret, you should strongly consider requiring employees who have access to that information to sign agreements containing post-employment restrictions.  You should also considering requiring such agreements if your company has developed significant goodwill with its customers, and certain employees work closely with those customers.

Having a protectable interest is just the first step to developing and maintaining enforceable post-employment restrictions.  To maximize the ability to protect that interest, a company must ensure that any post-employment restrictions in place are  reasonable, tailored to the employee’s specific position and supported by consideration.

We will tackle these issues next week and show you how to navigate the traps for the unwary when drafting and implementing agreements with post-employment restrictions.