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: 

 limit an employee’s   ability to work for or with a competitive business for a period of time   after his/her employment ends

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 

 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.


 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:

  Identify specific information to which the restricted employees had access

Ensure that the information is valuable (i.e., that it is actually worth protecting)

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 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.  

Articles

News Analysis

A company’s trade secrets and the goodwill it has developed can mean the difference between a blockbuster and a failure. Here’s what you should know and do to properly negotiate post-employment agreements.

Post-Employment Restrictive Covenants

Pfizer made a tactical move on Tuesday to show that the company is planning to hold onto much of Wyeth’s talented pool of scientists upon the completion of the companies’ megamerger. In a press release, the Pfizer unveiled the first stages of its integration plan, which involves the creation of two distinct research groups led by the two companies’ R&D heads.

"Creating two distinct but complementary research organizations, led by the top scientist from each company, will provide sharper focus, less bureaucracy, and clearer accountability in drug discovery," Pfizer CEO Jeffrey Kindler stated. "I am honored that world-class scientists like Drs. [Mikael] Dolsten, [Emilio] Emini, and [Menelas] Pangalos will be joining the outstanding scientists at Pfizer. As we continue our integration planning, I look forward to welcoming many more distinguished Wyeth scientists to our organization." 

 The move briefly silenced Pfizer critics who worried that Wyeth’s talent would get lost in the Pfizer machine-much like Walter-Lambert and Pharmacia when acquired by Pfizer. 
 “In the past, [Pfizer] did buy companies for one or two products,” said Pfizer spokesperson Ray Kerins. “In this case, we are looking at the overall depth and breadth Wyeth brings to bear in areas such as vaccines, consumer health, and nutritionals.”

 The new operating structure will feature one R&D division with two very specific research groups below it. The Pharmatherapeutic Research Group will be led by Martin Mackay, current head of Pfizer’s research and development. Mikael Dolsten, currently president of Wyeth’s research team, will be in charge of the Biotherapeutics Research Group. 

 Along with the research restructuring, Pfizer announced that it will focus on specific therapeutic areas, including pain, Alzheimer’s, and oncology. Each area will have a chief scientific officer responsible for moving the research forward.


 In January, Pfizer launched a new business unit structure that separated its commercialization teams into different groups based on category. It’s uncertain whether or not Pfizer was considering the Wyeth purchase when it implemented the restructuring plan. Either way, there don’t seem to be many growing pains. 

 A major part of the earlier plan was the movement of Pfizer’s development unit into its commercial units to help curb late-stage failures or having non-viable drugs go deep into in the development process before being shelved. “There was a very distinct rationale for that,” Kerins said. “You want to make sure that development has an earlier chance to look at what research is doing to make sure that there is a market for it, that the physicians are interested in it, and that it addresses unmet needs.”

 Pfizer’s commercial units are now divided into two teams. The first team handles biopharmaceuticals, primary care, specialty care, emerging markets, oncology, and established products. This team is led by Ian Read, Pfizer’s president of worldwide pharmaceutical operations. The second team consists of Pfizer’s diversified businesses, including animal health, consumer health, nutritional health, and capsugel (capsule products and services). Cavan Redmond, Wyeth’s president of consumer healthcare, will run that group.

 It’s unknown whether Pfizer will integrate Wyeth’s “

” strategy of drug development, in which an experimental compound is not moved to Phase III until it has been tested rigorously in Phase II against a much larger group of patients. The goal of this program was to decrease failure rate of drugs that make it to the final phase. Unfortunately, Wyeth’s strategy never really had a chance to be tested. 

 As for the drugs that don’t clear the commercial team, Pfizer stated on Tuesday that if development does not want a molecule, the research division has the right to out-license it. An estimated 100 molecules are currently being reviewed for potential out-licensing deals.

 “Today is the first time the public is getting a look at who will be the leaders in the new Pfizer,” Kerins said. “[Kindler’s] goal is that we hit the ground running on day one. It’s very important that the actual integration and startup time are as limited as humanly possible.”  

Just two months after the purchase of Wyeth, Pfizer breaks its research division into two-one for large molecules and vaccines, and another for small molecules-with Wyeth and Pfizer execs at the helms.

Pharmaceutical Executive-04-09-2009

Post-Employment Restrictive Covenants

Pfizer Begins Wyeth Integration with New Research Structure