Do You Know What Your Restrictive Covenant Restricts?

When preparing employment agreements, businesses often want to include provisions that restrict employees in their use of company information, contact with customers, or choice of next employer.  These restrictions, called restrictive covenants, serve very distinct purposes and it is important to keep the purpose of each in mind when preparing employment agreements.  For example, although a non-disclosure agreement might prevent an employee from disclosing confidential business information to a competitor, it would not necessarily preclude the employee from jumping ship to work for that same competitor.

As a case in point, the federal district court in Massachusetts recently granted a preliminary injunction to a large medical device manufacturer enforcing the terms of a non-disclosure agreement with a former employee, but denied the manufacturer’s request for an injunction barring the employee from working at a competing business.  Boston Scientific Corp. v. Lee (D. Ma. May 14, 2014).  The employee, Dr. Lee, had signed an employment agreement with Boston Scientific Corporation that prohibited Dr. Lee from disclosing Boston Scientific’s proprietary information.  The agreement also required Dr. Lee to return all documents containing Boston Scientific’s proprietary information upon the termination of his employment.  The parties, however, did not sign a non-competition agreement.  After Dr. Lee left Boston Scientific to join one of the company’s alleged competitors, Boston Scientific filed for a preliminary injunction enjoining Dr. Lee from (1) disclosing its proprietary information and (2) working at the competitor.

Although the court found Boston Scientific was entitled to an injunction enjoining Dr. Lee from disclosing any of its proprietary information, it held the non-disclosure and confidential information provisions of his employment agreement could not be transformed into covenants not to compete.  So, in the absence of a non-competition agreement, the court declined to grant an injunction restraining Dr. Lee’s employment.

Interestingly, this decision coincides with bills pending in the Massachusetts legislature that propose significant limitations on the use of non-competition agreements in the state.  Whether this legislation will become law, and what form it will take if it does, is still unclear.  A blog post on this topic will therefore have to wait for another day – so stay tuned.

Safeguarding Trade Secrets and Proprietary Information

Most states, including Maine, have statutes protecting trade secrets.  These statutes provide an important measure of protection to employers wishing to safeguard their proprietary information.   For employers, the issue of trade secrets often arises when an employee leaves to join a competitor or strike out on their own.  The concern is that, upon leaving, the employee will abscond with the employer’s information and use or disclose the information without the employer’s consent.  To help prevent this kind of misappropriation, employers should be sure that they have adequate policies in place governing the treatment of trade secret information.

As a case in point, in Dana Limited v. American Axle and Manufacturing Holdings (W.D. Mich. 2013), an employer sued two employees who had left to join a competitor.  Prior to leaving, the employees downloaded several of the employer’s files onto their personal computers and storage devices.  The employer claimed, among other things, that the employees misappropriated its trade secrets by downloading the files onto their devices.

The court disagreed, however, and found that there was insufficient evidence to show that the employees acquired the employer’s files through improper means.  In reaching this conclusion, the court noted that the employer did not have a policy that prohibited employees from storing company information on personal computers and storage devices.  Because there was no such prohibition, the employer could not show that the employees acquired the information through either theft, bribery, misrepresentation, or some other improper means.

Although the Dana case highlights the importance of having established policies in the first place, it also serves as a useful reminder to periodically review them to ensure they are up to date.